-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DoYLy/xlDdG4YFWwjMWcrxZyBt1nDjXMsFx6XVIl6eOn9uL5PZ3DjhS2IRty+agi aoiuoI9NkPtI4fN4V7CBuQ== 0000819694-97-000004.txt : 19970401 0000819694-97-000004.hdr.sgml : 19970401 ACCESSION NUMBER: 0000819694-97-000004 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEOPLES TELEPHONE COMPANY INC CENTRAL INDEX KEY: 0000819694 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 132626435 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-12443 FILM NUMBER: 97571637 BUSINESS ADDRESS: STREET 1: 2300 NORTHWEST 89TH PL CITY: MIAMI STATE: FL ZIP: 33172 BUSINESS PHONE: 3055939667 MAIL ADDRESS: STREET 1: 2300 NORTHWEST 89TH PLACE CITY: MIAMI STATE: FL ZIP: 33172 10-K405 1 PEOPLES TELEPHONE COMPANY, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 Commission File Number: 0-16479 PEOPLES TELEPHONE COMPANY, INC. (Exact Name of registrant as specified in its charter) NEW YORK 13-2626435 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2300 NORTHWEST 89TH PLACE, MIAMI, FLORIDA 33172 (Address of principal executive offices) (Zip Code) Registrant's telephone number: (305) 593-9667 Securities registered pursuant to Section 12(g) of the Act: Name of each exchange Title of each class on which registered Common Stock Par Value $.01 per share American Stock Exchange, Inc. Securities registered pursuant to Section 12(b) of the Act: (Title of class) None Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. X Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 21, 1997, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $57,693,562. As of March 21, 1997, there were 16,194,684 shares of the registrant's Common stock outstanding. Documents incorporated by reference: None Part I Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995 In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), Peoples Telephone Company, Inc ("Peoples" or the "Company") is hereby providing cautionary statements identifying important factors that could cause the Company's actual results to differ materially from those projected in forward-looking statements (as such term is defined in the Reform Act) made by or on behalf of the Company herein or orally, whether in presentation, in response to questions or otherwise. Any statements that express, or involve discussions as to expectation, beliefs, plans, targets, objectives, assumptions or future events or performance (often, but not always, through the use of words or phrases such as "will result," "are expected to," "will continue," "is anticipated," "estimated," "should", "projection" and "outlook") are not historical facts and may be forward-looking and, accordingly, such statements involve estimates, assumptions, and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements. Such uncertainties include, among others, the following: (i) the impact of competition, especially in a deregulated environment; (ii) uncertainties with respect to the implementation and effect of the Telecom Act (as defined hereafter); (iii) the ongoing ability of the Company to deploy its public pay telephones in favorable locations; (iv) the Company's ability to continue to implement operational improvements; and (v) other factors which are described in further detail in the Company's filings with the Securities and Exchange Commission. The Company cautions that the factors described above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of such factors. Further, management cannot assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. ITEM 1. BUSINESS Glossary Billed Party Preference is a plan that would automatically route "0+" dialed non-coin calls from pay telephones to the "billed party's (ie: cardholder, called party of a collect call) preferred carrier, thereby bypassing the opportunity for the pre-subscribed carrier of the public pay telephone provider to handle and receive revenues from the call. 2 Dial-Around Compensation is compensation paid to competitive public pay telephone providers for the use of their public pay telephones to access operator service providers or interexchange carriers other than the primary operator service providers selected by the owner of the public pay telephone. The FCC ruled on May 8, 1992 that competitive public pay telephone providers would receive $6.00 per telephone per month as compensation for interstate "dial-around" calls. This flat rate system was made effective in June 1992. The per telephone/per month system was then replaced by a flat rate per call payment system of $0.25 a call for calls delivered to AT&T Corp. ("AT&T") and Sprint Corporation ("Sprint"), pursuant to the FCC's grant of waivers for these two companies during 1995. The remaining interexchange carriers continued to pay their respective pro-rata shares of the flat $6.00 per telephone per month payment. Effective November 6, 1996, and pursuant to recent FCC orders issued under the Telecom Act, the $6.00/per phone/per month compensation has been replaced by compensation of $45.85/per phone/per month in compensation. The increase is due to the increased number of access code calls and the inclusion of 1-800 subscriber calls as compensable dial-around calls. This flat rate compensation will be effective through October 6, 1997, at which time the compensation will be on a $0.35/call basis or such other rate negotiated with the carrier(s) for dial-around calling. Beginning October 7, 1998, the charge will be assessed in an amount equivalent to the local coin calling rate for each payphone, or such other rate negotiated with the carrier(s). These industry-wide dial-around payment mechanisms are subject to modification on a company specific basis under individual contractual arrangements with the carrier(s), such as the Company's current operator service agreement with AT&T, as well as under prospective FCC rulings and further implementation of the Telecom Act. FCC is the Federal Communications Commission, which regulates the interstate provision of telecommunications. Interexchange carrier ("IXC") is a telecommunications provider of transmission services between exchanges, typically referred to as long-distance or toll telephone service. Local access and transport area ("LATA") is a geographic area established for the administration of telephone service to differentiate between local service versus long distance service. InterLATA calls are calls between LATAs. IntraLATA calls are calls originated and terminated in the same LATA. LEC is a local exchange carrier, which is a company providing local telephone services. Non-coin calls are calling card, credit card, collect and third-party billed calls. Operator service provider is a company providing automated and/or live operator service related to long distance calls. Property Owners or location owners are the owners or operators of: (i) the locations, such as convenience stores, service stations, grocery stores, hospitals, hotels, shopping centers, truck stops and airports, at which public pay telephones are installed; and (ii) correctional facilities at which inmate telephones are located. Public Switched Network is the traditional domestic public pay telephone network, including local, intraLATA and interLATA facilities used to carry, switch and connect telephone calls between the calling and called parties. 3 RBOCs are the Regional Bell Operating Companies, which were formed as a result of the stipulated break-up of the Bell System under the modification of final judgement ("MFJ") entered in U.S. v. AT&T. Telecommunications Act of 1996 (the "Telecom Act") means the comprehensive legislative amendments to the Communications Act of 1934, adopted by Congress and signed into law by President Clinton on February 8, 1996, including Section 276 which specifically addresses the pay telephone services such as those provided by the Company and discussed herein. General The Company is one of the largest independent operators of public pay telephones in the United States, on the basis of number of public pay telephones in service. Since installing its first public pay telephone in 1985, the Company's core public pay telephone business has grown to an installed base, as of December 31, 1996, of approximately 38,500 public pay telephones in 41 states and the District of Columbia. The Company owns, operates, services and maintains a system of independent public pay telephones and inmate telephones. Its public pay telephone business generates revenues from coin calls and non-coin calls such as calling card, credit card, collect and third-party billed calls made from its telephones. The Company has historically grown through acquisitions of public pay telephones from independent operators. Since 1990, the Company has acquired over 33,000 public pay telephones from 27 independent public pay telephone operators. The Company, in the past, has utilized its size and experience in integrating acquisitions to continue expanding its public pay telephone business and it may do so again. However, in 1995 and 1996 the Company did not acquire additional public pay telephones from external sources although it may consider attractive acquisition opportunities as and when they arise in the future. Currently, the Company is focusing on improving its existing pay telephone operations with the intention of increasing its cash flow, improving operating efficiency, increasing balanced internally generated growth and returning to profitability. The Company grows internally by entering into contracts for the installation of public pay telephones in locations where the Company believes there will be significant demand for public pay telephone service, such as convenience stores, grocery stores, service stations, shopping centers, hotels, restaurants, airports and truck stops. The Company's nationwide presence in the public pay telephone market makes it an attractive supplier of public pay telephone services for companies whose operations are regional or national. The Company is seeking to achieve balanced internal growth by increasing the number of public pay telephones with both (i) local and regional accounts and (ii) large national corporate accounts. The Company believes that substantially all of its public pay telephones, including its acquired public pay telephones, are in high traffic locations. Management believes that the Company's long-term industry experience, nationwide presence and superior level of field and customer service are primary competitive strengths of the Company. As a high volume consumer of long-distance telephone service, the Company has been able to negotiate favorable terms and conditions from operator and long-distance telephone service providers such as AT&T, MCI Communications, Inc. ("MCI"), Sprint and WorldCom Inc. ("WorldCom"). In addition, due to its large size, the Company realizes economies of scale from its field service, collection and other selling and administrative expenses compared to smaller companies in the industry. 4 In late 1994, the Company adopted a new strategic plan to focus on its core public pay telephone business and to sell certain non-strategic businesses. The sale of these non-strategic businesses took place in 1995. See "Business-Prepaid Calling Cards/International Telephone Centers/Discontinued Operations" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." During 1996, E. Craig Sanders joined the Company as a director, President and Chief Executive Officer and Neil N. Snyder, III joined as Executive Vice President and Chief Operating Officer. During the first quarter of 1997, David A. Arvizu was named Senior Vice President of Sales and Marketing for local and regional accounts. See Note 19 of "Notes to Consolidated Financial Statements" for business segment information. Public Pay Telephone Industry Overview Based on information compiled largely from the "Statistics of Telecommunications Common Carriers" filed with the FCC, there were approximately 2 million public pay telephones in the U.S. as of December 31, 1996. Of this total, approximately 350,000 are operated by independent pay telephone companies with the balance by the various local and long distance telephone companies. Using these figures, the Company's embedded base represents approximately 2% of the total national pay telephone base. The telecommunications marketplace through 1995 was principally shaped by the 1984 ruling of the United States District Court for the District of Columbia in the well-documented antitrust divestiture case, United States v. American Telephone & Telegraph Company (the "AT&T Divestiture"). The AT&T Divestiture created various business opportunities in the telecommunications industry and helped to pave the way for FCC rulings in 1985 that authorized independent public pay telephone equipment to be connected to the public switched network and operated competitively. Subsequent to the 1985 FCC rulings, virtually all state jurisdictions have authorized the provision of pay telephone services and attendant operator and inmate services within their territories. In 1990, the Congress passed the Telephone Operator Services Consumer Information Act of 1990 ("TOSCIA"), which established the mandate that pay telephone providers adopt a series of operational measures designed to provide information and "open access" for consumers seeking to place calls at public pay telephones nationwide. TOSCIA specifically required that pay telephone providers afford open access to carrier access code (1-800/950/10XXX) dialing and 1-800 toll free calls made by consumers from pay telephones. The Act also required the FCC to consider fair compensation to pay telephone providers for the access given on such calls. The various state and FCC regulatory rulings implementing competition in the pay telephone business, both before and after Congress' enactment of TOSCIA, created an operating environment in which competitive pay telephone providers, such as the Company, were discriminated against vis-a-vis their main competitors, LEC pay telephone operations, in terms of line expenses and access to various LEC services integral to the competitive provision of pay telephone services. For example, LECs were permitted to subsidize their pay telephone operations from their regulated local exchange telephone company operations. This cross-subsidization resulted in "below cost" end user rates for local coin calls. State regulators applied these rates to competitive pay telephone providers, even though they could not subsidize their pay telephone operations as the LECs were able to do. 5 On February 8, 1996, President Clinton signed into law the Telecom Act, representing the first major revision of the national communications laws in over 60 years. The new law gave broad powers to the FCC to preside over the development of competitive telecommunications markets, including local exchange, long distance and public pay telephone services. The significant public pay telephone provisions of the new law are designed to create parity among public pay telephone service providers and to address fundamental regulatory inequities that have long plagued the public communications industry. Specific public pay telephone provisions of the Telecom Act required the FCC to adopt rules within nine months of enactment that would: (i) create a standard regulatory scheme for all public pay telephone providers, including the RBOC public pay telephone operations; (ii) require removal by the RBOCs of their public pay telephone operations from their regulated books of account; (iii) prescribe certain safe- guards to eliminate future discrimination or subsidization of RBOC public pay telephones; (iv) require "fair compensation" to all public pay telephone providers for all calls using public pay telephones (except for 911 emergencies and Telecommunications Relay Services for the hearing impaired); (v) provide the right for all pay telephone service providers, subject to existing and future contractual rights with the Location Owner, to select the provider for both intraLATA and interLATA network services; (vi) evaluate whether and how "public interest" pay telephones (which are public pay telephones that would not normally be place in a location under purely competitive conditions but may be required for public policy reasons) should be maintained; and, ( vii) preempt state requirements that are inconsistent with these provisions. In response to these requirements, the FCC conducted extensive comment proceedings and issued two lengthy and detailed orders in September 1996 and November 1996, implementing the statutory mandates of Section 276 of the Telecom Act (the "Order" or "Orders"). These Orders have been appealed by a variety of parties, and these appeals have been consolidated in an action pending before the United States Court of Appeals for the District of Columbia. The final outcome of these proceedings, and other ongoing or anticipated regulatory actions at both the state and federal level, will significantly impact the industry and the operations of the Company in the foreseeable future. The Company is unable to predict the outcome of such appeal or whether all or a part of the Orders will be modified, affirmed or otherwise affected. See "Business-Regulation". Business Strategy The Company's vision is to be the recognized quality public access leader at all times. This strategy was developed for the uncertain telecommunications landscape which is the current competitive environment. The Company's ongoing business objectives are to focus on its core public pay and inmate telephone businesses, to grow operating cash flow by continuing to expand its base of telephones, to lower operational expenses and to improve the Company's service quality. The Company expects to implement these objectives by focusing on balanced growth, operational excellence, strategic partnering and continuing regulatory leadership. The Company believes that a clear vision of the role of independent pay telephone providers in the new competitive telecom landscape is of utmost importance. The Company must look beyond its traditional segment to the role an independent pay telephone provider plays in the larger local service market. The Company believes it adds value to new entrants in the local service market through its local traffic aggregation and operational synergies. 6 The Company's growth plan includes the following elements: Internal Growth. The Company is seeking to achieve internal growth by increasing the number of public pay telephones that the Company owns, operates or services at local, regional and large national accounts. As part of this process, the Company is developing an aggressive multi-channel sales organization as a complement to its direct sales efforts. The Company believes that its nationwide presence makes it an especially attractive supplier of public pay telephone services for regional and national accounts. Offering these accounts a consolidated and consistent service level and reducing the time and burden involved when dealing with multiple providers has proven to be of real value. The primary focus of the Company's marketing efforts has been, and continues to be, accounts in high foot traffic locations which currently include regional and national companies such as Albertsons, Dominick's Finer Foods, Emro Marketing Company, a subsidiary of Marathon Oil, McDonald's, Safeway Stores, and Southland (7- Eleven). Acquisitions. Through 1994, the Company historically grew primarily through the acquisition of public pay telephones from independent operators. As noted elsewhere herein, in 1995 and 1996 the Company did not make any acquisitions for a number of reasons including the rising and uneconomical cost of acquisitions and an uncertain regulatory environment. In the future, however, as a result of anticipated improved economics from the Telecom Act, the Company may from time to time pursue acquisitions on terms the Company considers beneficial. Marketing Partners. The Company believes there is significant value and benefit to entering into marketing partnerships with a select number of major companies which parallel the Company in management philosophy and business objectives in order to take advantage of certain synergies in operations along with regional, national or other volume aggregation opportunities. The Company believes that it is an attractive strategic partner for fully integrated telecom providers that do not have pay telephone route management resources. As a result, the Company is evaluating partnering opportunities with a select number of such providers. Regulatory Leadership. The Company remains committed to providing strong regulatory leadership at both federal and state levels in the rapidly changing landscape of the public communications industry. The Company believes that the benefit from this ongoing involvement with the formulation and implementation of key governmental regulations for payphone services is most significant to achieving the Company's strategic business objectives. The Company further believes that, as a specific result of this demonstrated regulatory leadership, the manner in which the payphone provisions of the Telecom Act are being implemented by regulators will lead to an improved industry operating environment with special benefit to the Company, although there can be no assurances of this. The Company's operational excellence plan includes the following: Establishment/Achievement of Operating Standards. The Company has conducted an overall review of its operating procedures and policies and has instituted new standards and goals to be met by its operations personnel in order to more fully utilize and increase its operating infrastructure effectiveness. These targets include, among others, improved reliability and responsiveness, reduced install time and reduced repair time. 7 Cost of Operations Savings. The Company has developed a plan to increase economies of scale and maximize operating efficiencies. Such efforts include focus on more efficient route management, prompt delivery of repair parts and central inventory management, among others, all of which should further increase productivity. Additionally, as a high volume consumer of long-distance service the Company has been able to negotiate favorable terms from operator and long-distance service providers such as AT&T, MCI, Sprint and WorldCom. The Company's "smart" pay telephones, management information systems and trained service and support staff permit the achievement of savings in the cost of telephone repair and maintenance. In addition, the Company believes that as its plans are implemented, it can realize additional economies of scale in field service, collection and other selling and administrative functions. Superior Level of Customer Care. The Company is committed to providing the highest quality service in the industry and establishing strong relationships with its customers. To provide a superior level of customer service, the Company uses "smart" microprocessor-equipped telephones, a sophisticated management information system and a highly trained service and support staff. The Company's advanced telephone technology allows for exact records of telephone activity, which allow for easy verification of revenue and rapid response (typically within 24 hours) to equipment malfunctions. As one of the country's largest independent public pay telephone providers, the Company is in a competitive position to service regional and national corporate accounts, in contrast to smaller competitors or LECs which currently operate only in their specific geographic regions. Fair Pricing. The Company pursues a pricing strategy of fair and reasonable pricing for all calls made from its public pay telephones. In connection with this strategy, the Company continues to utilize major national facilities based carriers such as AT&T and Sprint for the provision of operator services from the Company's public pay telephones. The Company believes that this pricing strategy enhances its competitiveness and reduces the tendency of pay telephone users to access dial-around providers. There can be no assurance, however, that the Company's strategy will be sufficient to restore profitability or that the strategy will not be adversely affected by future regulatory action. Public Pay Telephones As of December 31, 1996, the Company's public pay telephone system consisted of approximately 38,500 public pay telephones located in 41 states and the District of Columbia. In 1994, 1995 and 1996, public pay telephones represented approximately $115.0 million, $112.2 million and $107.0 million of the Company's revenues, respectively. 8 The following chart sets forth the locations of the Company's public pay telephones by state as of December 31, 1996:
Public Pay State Telephones ---------- ---------- Florida 8,482 New York 5,938 California 3,691 Texas 2,090 Maryland 1,971 Virginia 1,948 Pennsylvania 1,475 Tennessee 1,491 Georgia 1,425 Louisiana 1,400 Ohio 1,307 North Carolina 1,163 South Carolina 778 Other States 5,350 -------- Total 38,509 ========
The Company's core public pay telephone business primarily generates revenues from coin and non-coin calls. Coin calls are made by depositing coinage into the pay telephone and placing the call. Non-coin calls include calling card, credit card, collect and third-party billed calls made from its telephones. Coin Calls Substantially all of the Company's public pay telephones accept coins as payment for local or long- distance calls and can also be used to place local or long-distance non-coin calls. The Company's public pay telephones generate coin revenues primarily from local calls. In all of the territories in which the Company's public pay telephones are located, the Company charges the same rates for local coin calls as the LEC. In most territories that charge is $.25, although a growing number of jurisdictions have increased or are considering an increase in that charge to $.35. However, there can be no assurances as to the timing of any such increases. Whereas local coin calls have traditionally been provided for an unlimited call duration, a number of jurisdictions have also begun to allow call timing (i.e. deposit of an additional $.25 after three minutes). The Company pays local line and usage charges to the LECs for the underlying transmission service provided for each of the Company's installed public pay telephones. These line and usage charges cover basic service to the telephone as well as the transport and completion of local coin calls. 9 Non-coin Calls The Company receives revenues from non-coin calls made from its public pay telephones. Non-coin calls include credit card calls, calling card calls, collect calls and third-party billed calls. The services needed to complete a non-coin call include providing an automated or live operator 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, determining the charge for the call and billing and collecting the applicable charge. In all jurisdictions, the Company has the right to select the operator service provider for interLATA and interstate traffic on its public pay telephones. In a number of jurisdictions permitting public pay telephone services, the Company has been required to use the LEC for local and intraLATA services. The Telecom Act, however, has preempted and thereby eliminated most of these requirements prospectively and the Company is now authorized to select the provider for all 0+/0- revenue generating calls dialed from its public pay telephones. The Company currently sub-contracts a small segment of its operator service from other companies on a "private-label" basis: customers are connected to the sub-contractors' operators, who identify themselves as "PTC Services." In the alternative, the Company selects a third-party operator service provider to handle the calls. Currently, the Company primarily uses the operator services of AT&T, Sprint and other smaller operator service providers. The Company considers a variety of factors prior to deciding which operator service company to select. These factors include financial and other contractual arrangements between the Company and the operator service providers, the location of the public pay telephones, the types of calls made from the location, the profitability of each type of call under each calling alternative, the requirements of the Property Owners and applicable regulatory restrictions. The Company has initiated a process of consolidating its traffic with fewer operator services providers to obtain the most beneficial commission and service arrangements, and believes this consolidation initiative will result in a positive impact to the Company although there can be no assurance of this. Currently, AT&T, Sprint and other operator service providers handle 0+/0- calls and pay the Company a commission for each call completed by the selected operator service provider except in jurisdictions where the Company is prohibited contractually or otherwise from selecting the operator service provider, or where the Company acts as its own operator service provider. The Company may also install an automated operator system that allows its telephones to collect and store billing information and forward calls to the called party. At locations where the automated operator system is installed, the caller has the option to complete the call through the automated system, the Company's selected operator service provider or an operator service provider accessed by the caller. The FCC has the authority to regulate the amount public pay telephone operators may charge for interstate calls. However, currently no formal rate regulations exist. The FCC is currently considering adopting a rate ceiling or rate disclosure requirements for interstate calls, which could be implemented in 1997, although there can be no assurance as to the timing or substance of any FCC rulings in this regard. See "Business-Regulation." The Company also receives additional interstate revenue from long distance carriers pursuant to FCC regulations as "dial-around compensation" for non-coin calls made from its public pay telephones. A "dial- around" call is made by using an access code to reach an interexchange carrier other than the one designated by the public pay telephone owner or by dialing a 1-800 "toll free" number. Dial-around compensation to independent public pay telephone operators for interstate calls was originally fixed by the FCC at $6.00 per telephone, per month. Similarly, state regulatory authorities in Florida, Georgia and South Carolina have implemented intrastate dial-around compensation programs for independent public pay telephones in those states. AT&T and Sprint were authorized in 1995 to pay their federal portions of dial-around compensation through a $.25 per call flat rate payment in lieu of the flat monthly rate payment amounts assigned by the FCC. Effective November 6, 1996, and pursuant to the Orders issued under the Telecom Act, the $6.00/per phone/per month compensation and corresponding state amounts have been replaced by compensation 10 of $45.85/per phone/per month. This flat rate compensation will be effective through October 6, 1997, at which time the compensation will be imposed on a $0.35/call basis or such other rate negotiated with the carrier(s) for dial-around calling. Beginning October 7, 1998, dial-around compensation will be assessed in an amount equivalent to the local coin calling rate for each payphone, or such other rate negotiated with the carrier(s). The November 8, 1996 Order implementing Section 276 of the Telecom Act is currently on appeal to the United States Court of Appeals for the District of Columbia and there can be no assurances as to the final outcome of such proceedings. See "Business-Regulation." Operating Expenses The Company pays monthly access charges to the LECs for interconnection to the Public Switched Network for local calls. These charges are computed, depending on the LEC, on either a flat monthly rate or a fixed monthly charge plus a per message or usage rate based on the time of the call. Additionally, the Company pays the LECs a fee, based on usage, for intraLATA non-coin paid long-distance calls. The Company also typically shares commissions paid by the long-distance carriers with the Property Owners. Once accessed to the Public Switched Network, the Company is also responsible for the associated billing, collection, bad-debt and validation costs when it is acting as the operator service provider. As previously noted, the Company currently is using AT&T and Sprint as its primary national providers of operator services, where none of these costs applies directly to the Company. The Telecom Act has opened virtually all markets to competition in the telecommunications industry and the Company believes that the future effect will be to lower certain costs of the Company such as line charges and usage rates for local interconnection, although there can be no assurances as to the specific timing or amount of such reduction. Internal Growth Placement of Public Pay Telephones. The Company seeks to install its public pay telephones in locations where it believes there will be significant demand for public telephone service, such as convenience stores, grocery stores, service stations, shopping centers, hotels, restaurants, airports and truck stops. In evaluating locations, the Company generally conducts a site survey to examine geographical factors, population density, traffic patterns, historical information (to the extent available) and other factors in determining whether to install a public pay telephone. The Company has focused its efforts to date on securing telephone locations from local and regional accounts and large national accounts which can provide a large number of quality locations. The Company installs its public pay telephone equipment pursuant to agreements ("Property Agreements") with the Property Owners. The Company's typical Property Agreement has a three to five-year term and provides the Company with the option to renew for an additional three to five years. Each agreement provides for a revenue sharing arrangement between the Company and the Property Owner based on the revenue generated from the public pay telephone. The percentage of revenue paid to a Property Owner is generally fixed for the period of the contract. The Company estimates that the average cost of installing a new public pay telephone, including site selection, hardware and labor, is approximately $1,900. 11 The Company is obligated to repair, maintain and service the public pay telephone equipment installed pursuant to the Property Agreements. Through its computer system, the Company generally is able to determine possible malfunctions before they are reported and usually repairs such malfunctions within 24 hours. Generally, the failure of the Company to remedy a default within 30 days after notice gives the Property Owner the right to terminate the Property Agreement. The Company can generally terminate a Property Agreement on 30 days' prior notice to the Property Owner if the public pay telephone does not generate sufficient total revenue for two consecutive months. Marketing. Although the Company's past growth in its core public pay telephone business was primarily driven by acquisitions through 1994, the Company is currently focusing on internal growth by increasing the number of public pay telephones that the Company owns, operates or services at both local and regional accounts and large national accounts. An aggressive multi-channel sales organization is currently being developed by the Company as a complement to this process. The Company believes that its nationwide presence makes it an especially attractive supplier of public pay telephone services for regional and national corporate accounts where the Company serves as a single provider, offering these accounts a consistent level of service and reducing the time and burden of dealing with multiple providers. The primary focus of the Company's marketing efforts has been, and continues to be, regional and national corporate accounts, which currently include Albertsons, Dominick's Finer Foods, Emro Marketing Company, a subsidiary of Marathon Oil, McDonald's, Safeway Stores and Southland (7-Eleven). As one of the country's largest independent public pay telephone providers, the Company believes it is in a strong position to service regional and national accounts, in contrast to smaller competitors or LECs, which currently operate only in their specific geographic regions. In contrast to the limited resources of the smaller independent public pay telephone operators, the Company's "smart" pay telephones, sophisticated management information systems, and highly trained national service and support staff allow the Company to maintain a high level of service and react quickly to repair damaged equipment. The Company's size and cost structure allow it to offer attractive commissions to Property Owners that are competitive with other independent operators or the LECs although the industry has become substantially more competitive with regard to commissions. Based upon the new Telecom Act, the Company believes that there will be additional changes in this competitive public payphone environment, which may create both opportunities and risks for the Company, the ultimate outcome of which cannot be predicted with any assurance. Acquisitions Through 1994, the Company's core public pay telephone business grew primarily through acquisition of other public pay telephone companies. The company's acquisition of public pay telephones for amounts in excess of $500,000 from 1990 through 1994 included approximately 32,350 telephones from 17 companies. Through 1994, the Company generally was able to acquire public pay telephones at attractive prices because smaller operators frequently lacked the economies of scale that the Company enjoyed. However, in 1995 and 1996, the rising cost of acquisitions coupled with the uncertainty of the then pending Telecom Act and related FCC rulings, made acquisitions less attractive. The Company's current strategy is to focus on balanced growth, operational excellence, strategic partnering and continuing regulatory leaderships. As part of this, the Company expects to grow its core business internally through increased sales efforts designed to both re-sign current quality accounts and add substantial new ones. Additionally, especially in light of anticipated economic benefit from the Telecom Act, the Company does evaluate acquisition opportunities and may from time to time pursue an acquisition if management believes such an acquisition would be beneficial to the Company. 12 Competition The Company believes the principal competitive factors in the public pay telephone business are: (i) commission payments to the Property Owners; (ii) the ability to serve accounts with locations in several LATAs or states; (iii) the quality of service provided to the Property Owners and the users of the telephones; and (iv) responsiveness to customer service needs. In the public pay telephone business, the Company principally competes with the LECs, a number of independent providers of public pay telephone services, major operator service providers and interexchange carriers. Some of these independent companies have increased in size by following an acquisition strategy and many of these companies compete for the most favorable public pay telephone contracts and sites. Most LECs and interexchange carriers with which the Company competes have substantially greater financial, marketing and other resources than the Company. In addition, many LECs, faced with competition from independent public pay telephone companies, have increased their compensation arrangements with Property Owners by offering more favorable commission schedules. As a result of the passage of the Telecom Act, under certain circumstances the LECs will be allowed to begin providing services outside of their monopoly franchise territories in a more deregulated mode and other companies may also compete against the LECs for in-territory local business. The potential for competition from other new entrants in the payphone industry exists as well. These possibilities present both business opportunities and risks for the Company including, but not necessarily limited to, potential lower interconnection costs due to the advent of competition in the local service business and/or improved revenues as a result of the adoption of compensation for all calls. The risks include increased competition from the LECs and any new entrants and the chance that the FCC-established compensation system will not be adequate or will not be implemented due to court challenges. Telephone Systems Management and Service The Company has internally developed a computer software system which interfaces with microprocessors in the Company's public pay telephones. The Company's computer system polls the public pay telephones each night to determine the amount of coin revenue in each telephone and to diagnose possible operational problems at the telephones. Polling enables the Company to accurately diagnose service problems in order to maintain its operation and to collect coins. Based on the results of each night's polling, the Company determines which telephones require collection or service. Each of the Company's collectors generally remove from 20 to 25 sealed coin boxes each day, depending upon the number of public pay telephones within the collector's specified collection route. Once the route is completed, the collector returns to one of the Company's coin collection rooms located at its executive office or one of its regional offices, where the seal on the coin box is removed and the coins are electronically counted. The actual amount in each coin box is automatically recorded and compared to the expected amount determined by polling the public pay telephone on the previous night. The Company maintains a staff of approximately 356 field service telephone technicians located throughout the states in which the Company's public pay telephones are installed. The Company has imposed a high standard of service and maintenance in order to ensure that the public pay telephones are operating properly and generating maximum revenue. Through its computer system, the 13 Company generally is able to determine malfunctions before they are reported and is able, in most cases, to repair such malfunctions within 24 hours. The most typical payphone malfunctions or problems are caused by vandalism and theft. On average, less than 2% of the Company's public pay telephones are out of service or are not operating properly at any one time. For accounting purposes, telephone repair costs are expensed by the Company as incurred. The Company is also continuously monitoring and reviewing the latest technology in the industry to prevent tampering, vandalism, fraud and theft at public pay telephones. The Company's management systems allow the Company to decentralize its operations by giving the field operations access to more information, thus allowing for quicker response time and reducing the time a phone is out of service. The Company has continued its refurbishment program to improve the condition of its installed public pay telephone base. In connection with this program, the Company created its own repair center located at its headquarters. This repair center has assisted in lowering the Company's repair costs and providing a steadier supply of repaired equipment back to the field. Telephone Equipment Suppliers The Company purchases its public pay telephones from independent manufacturers. The Company's public pay telephones use microprocessors that provide voice synthesized calling instructions and the capability to detect and count coins deposited during each call. These "smart" public pay telephones also provide pay information to the caller at certain intervals regarding the time remaining on each call and the need for an additional deposit. As of December 31, 1996, approximately 33,000 or 86%, of the public pay telephones that the Company operates were manufactured by Intellicall, Inc. ("Intellicall"). The Company also operates public pay telephones manufactured by Elcotel, Inc. ("Elcotel"). The Company believes that it can purchase public pay telephones from Elcotel or other public pay telephone manufacturers on terms similar to those in effect with Intellicall. The Company has a non-exclusive arrangement with Intellicall whereby the software and engineering schematics to repair the Intellicall telephones are held in escrow, to protect the Company against the bankruptcy of, the cessation of business operations by, or the failure to provide system support maintenance by, Intellicall. Therefore, the Company believes that the loss of Intellicall as a manufacturer of the Company's public pay telephones would not have a material adverse effect on its business. Billing and Collection The Company uses Zero Plus Dialing, Inc. ("ZPDI"), a third-party billing and collection clearinghouse, to process and collect non-coin telephone revenues for calls generated at certain public pay telephones and all correctional phones, and handled by the Company's contracted operator service providers and interexchange carriers. The Company forwards the call records to ZPDI, which then sends the records to the appropriate LEC for billing and collection. The LEC includes the rated calls on LEC customer's monthly telephone bills. The LEC forwards the proceeds from the billed and collected call records to ZPDI, less the billing and collection fees charged by the LEC and a reserve for uncollectibles. ZPDI remits the proceeds to the Company, less the ZPDI processing fee. The entire billing and collection cycle generally takes between 60 and 120 days after the call record is submitted to ZPDI. 14 Inmate Telecommunications General In December 1994, the Company's Board of Directors approved the divestiture of its inmate telephone operation because of increasing commissions and declining margins in the inmate telephone business. Accordingly, the Company's inmate telephone business was designated and accounted for as a discontinued operation at December 31, 1994. In September 1995, the Company decided to retain the remaining inmate operations. This decision was a result of the Company's belief that the remaining operations could contribute to the cash flow and operating results of the Company for a variety of reasons, including the 1995 sale of the Company's less attractive inmate telephone operations and the current geographic grouping of facilities served by the Company. As a result, the inmate operations were reclassified and included in continuing operations. The goals of the inmate telephone operations include (a) increased penetration of geographic areas where its currently does business; (b) expansion into additional geographic areas, as appropriate; (c) development of products and services tailored to the specific needs of county and city jail facilities; and (d) implementation of efforts to reduce its direct costs including, but not limited, to teleco charges and bad debt. The Company is operating the remaining inmate telephone operations and is implementing its targeted growth strategy for the division. As of December 31, 1996, the Company operated approximately 1,700 telephone lines in over 120 correctional facilities in 11 states. In 1994, 1995 and 1996, inmate telephones represented approximately $42.9 million, $26.0 million and $17.9 million of the Company's revenues, respectively. The following chart sets forth the state by state breakdown of locations served by the Company's inmate division, based on the number of in-service lines, as of December 31, 1996:
No. of State Lines --------- ----------- Texas 549 Colorado 222 Ohio 216 Georgia 168 Nevada 155 Other States 420 --------- ----------- Total 1,730 ===========
Historically, revenues for the average inmate telephone have been substantially higher than for a public pay telephone due to higher usage rates and the fact that inmates may only make collect calls, which have the highest revenue per call after person-to-person calls. Furthermore, maintenance and related labor costs for inmate telephones are lower than for public pay telephones due to the use of automated operator services and the lack of coin collecting and coin mechanism repairs. 15 Operations Within correctional facilities, the Company currently utilizes automated operator calling systems from a number of providers. All of these systems limit inmates to collect calls. In facilities with more than 50 inmates, the Company generally installs its proprietary prison pay telephone system. This calling system is a configuration of proprietary software based on an integrated microcomputer platform and basic telecommunications hardware. The system is programmed to record the details of each call (i.e., the number dialed, the "bill to" number and the length of call). The call detail is polled (extracted) from each system on a daily basis into the system's centralized billing center. The Company then rates the calls according to the Company's state and federal tariffs and according to any contractually agreed upon rates, and then bills the calls in the manner described in "Public Pay Telephones-Billing and Collection." The Company's proprietary prison pay telephone system provides extensive anti-fraud, call monitoring and surveillance capabilities for the correctional facilities where its inmate systems are installed. These include reports of frequently called numbers, calls of longer than normal duration and calls by more than one inmate to the same number. Upon request, the Company will provide the facility with the specific call detail. Service The systems in each facility are provided and installed at no cost to the governmental agency. The Company shares a percentage of the revenues it receives with the governmental agency. The Company generally provides all service-related activities. Service issues are reported to the Company's Technical Support Center through a 24-hour, toll-free (800) number. Service is typically restored on a major outage within 12 hours. Competition In the inmate telephone business, the Company competes with approximately 20 independent providers of inmate telephone systems, the LECs and interexchange carriers. The Company believes that the principal competitive factors in the inmate telephone market are rates of commissions paid to the correctional facilities, system features and functionality, service and the ability to customize inmate call processing systems to the specifications and needs of the correctional facility. The Company competes for business primarily on local, county and state levels. The cost of market entry and the complexity of the bid process increases proportionally with respect to the size of the correctional facility. While the local and county markets are somewhat fragmented with many service providers, state correctional facilities are generally bid on a single statewide contract basis. Depending on the type of facility and the particular state, the Company must direct its marketing efforts to municipal purchasing officers, enforcement or jail administrators or to the independent contractors that operate the facility. The Company currently provides no inmate services to federal facilities. During 1996, competitive pressures in the inmate telephone business resulted in an erosion in margins on new contracts and appeared to limit the prospects for long-term growth and profitability. The Company believes that a growth strategy focused on servicing local and county facilities may provide some insulation from further erosion of margins involved in larger state and federal bids. In addition, an FCC ruling removing RBOC inmate operations from the regulated rate base, coupled with the provisions of the Telecom Act, may improve the potential for the inmate telephone business although there can be no assurances of this. 16 Other Operations Long-distance Reseller The Company has developed a program involving the aggregation and resale of certain operator ("0+"/"0-") services and transmission ("1+") services to other independent pay telephone providers. The Company is able to arbitrage these services to smaller payphone companies based upon the favorable higher volume terms and conditions under which the Company is able to obtain the services from the underlying local and interexchange carriers. Network and operator services which the Company presently is authorized to resell either directly or through agency agreements include those of AT&T, BellSouth Telecommunications, Inc., GTE Corp. and Ameritech Corp. The Company is committed to developing alternate distribution channels for both carrier services and a full range of other public communications support services which the Company believes it is uniquely suited to provide. The Company believes this area of the business will provide future revenues that will assist in the Company's return to profitability, although there can be no assurances that such a positive impact will occur. Prepaid Calling Card/International Telephone Centers/Discontinued Operations In December 1994, as part of its initiative to return its focus to its core public pay telephone business, the Company's Board of Directors approved the sale of the Company's prepaid calling card, international telephone center and cellular operations. The sales of these units occurred in 1995. For additional information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." Regulation The Company's operations are significantly influenced by the regulation of public pay telephone, inmate telephone, long-distance reseller and other telecommunications services. Authority for regulation of these services has traditionally been vested concurrently with the FCC and the various state public utility commissions. Regulatory jurisdiction has generally been determined by the interstate or intrastate character of the subject service, and the degree of regulatory oversight varies among jurisdictions. While most matters affecting the Company's operations fall within the administrative purview of these regulatory agencies, state and federal legislatures and the federal district court administering the AT&T Divestiture consent decree have also been involved in establishing certain rules governing aspects of the Company's operations. Section 276 of the Telecom Act (see "Business - Public Pay Telephone Industry Overview") vests broad new authority in the FCC, with regard to the regulation (or forebearance from regulation) of public pay telephone services. The FCC has adopted the Orders implementing Section 276. As an outgrowth of the Telecom Act, the Company believes there will be an expansion of the FCC's role in shaping overall regulatory requirements for the public pay telephone industry. Specifically, pursuant to Section 276 of the Telecom Act, the rules adopted by the FCC under the new payphone provisions of the Telecom Act will preempt any inconsistent payphone regulation by a state authority. Moreover, with the FCC's adoption of regulations to implement Section 276, there will be no effective ongoing role of the AT&T Divestiture court for any purpose relevant or material to the Company's operations. Although this expected restructuring of the traditional jurisdictional and regulatory authorities for public pay telephone service comports with the best current information available to the Company, a final determination must await the outcome of the pending federal court appeals and further FCC implementation actions. In the event the Order is declared invalid, in whole or in part, particularly as to dial-around compensation, the Company would be materially and adversely affected. 17 State Regulation State regulatory commissions have historically been responsible for regulating the rates, terms and conditions of intrastate public pay telephone and inmate telephone services. This has generally involved the setting of rate ceilings on service provided to end users of the payphone; establishing rates paid by competitive public pay telephone providers to the LEC's for lines and local/intraLATA services; imposing mandatory service and operational requirements and, in several cases, establishing an intrastate "dial-around" compensation or "set use fee" mechanism for payphone providers. These existing state regulatory rules are subject to significant revision at the state level, and the Company believes, although there can no assurances, that federal preemption of some aspects of these state regulations may occur on a prospective basis pursuant to the terms of the Telecom Act and the regulations adopted thereunder by the FCC. Moreover, state proceedings are now underway in virtually all jurisdictions addressing (i) tariff filings by the LECs to implement the requirements of Section 276 and the FCC rulings thereunder; and (ii) reviewing and revising state pay telephone rules to conform to the new federal requirements. To date, the degree to which state agencies regulate the types of services offered by the Company varies widely, from certain states which do not require any certification or authorization to operate within their borders, to other states that have prohibited non-LEC public pay telephone services entirely. In most states which permit such services, approval to operate in the state involves the submission of a certification application and an agreement by the Company to comply with the rules, regulations and reporting requirements of the state. The Company has directly or through contractual partners obtained the requisite regulatory approvals to provide public pay telephone, and where applicable, inmate telephone services, in all states in which the Company currently provides such services. All states except Connecticut have authorized pay telephone competition, and Connecticut is currently under an FCC decree to authorize payphone competition within its jurisdiction. A number of states such as Illinois, Iowa, Michigan, Wisconsin and Wyoming have increased their rate for local coin calls to $.35 and an increasing number of states are considering similar action. The Company cannot predict when or if such increases will be enacted by those states and how such action may ultimately be affected by the FCC's decision to deregulate such rates. The Company is also affected by state regulation of operator services, either directly with respect to operator services provided by the Company or indirectly through the impact upon the operator services providers utilized by the Company. Typically, state regulatory bodies have adopted intrastate provisions that are similar or identical to the regulations adopted by the FCC pursuant to the Telephone Operator Consumer Services Improvement Act of 1990 ("TOCSIA"). These regulations address "branding", "posting" and "unblocking" requirements for public pay telephones, to which a significant number of states have also added rate regulation in the form of rate "ceilings", reporting requirements and restrictions on the handling of certain call categories (i.e., "0-"/"0+" intraLATA). The Company, or its designated carrier(s), have obtained the required intrastate operator service authorizations, including, where applicable, certificates of public convenience and necessity and approval or acceptance of tariffs in all jurisdictions in which the Company provides service. As with the future regulation of public pay telephone and inmate services, the scope and application of state regulatory requirements to operator services provided in a public pay telephone context remain uncertain, pending full and final implementation of Section 276 of the Telecom Act by the FCC. 18 Federal Regulation Until recently, regulation of the public pay telephone and inmate telephone businesses at the federal level has not been as detailed or comprehensive as the state regulatory regimes described in the preceding section. The FCC, since first authorizing the registration and interconnection of "instrument implemented" public pay telephones in 1984, has primarily addressed issues of basic interconnection to the Public Switched Network for the provision of interstate telecommunications services from payphones, implementation of the provisions of TOCSIA involving "branding", "posting", "rate quoting", and "unblocking" access code dialing to all operator services providers from public pay telephones, establishment of "dial-around" compensation for interstate carrier access code calls from public pay telephones and the handling of general consumer complaints with regard to public pay telephone services. However, the Company believes that the passage of the Telecom Act and, specifically, Section 276 of the Act, marks a significant change in the form and scope of prospective federal regulation, or the forbearance from such regulation, for public pay telephone service and hence for providers of the service, including the Company. The Telecom Act defines "payphone service" to mean "the provision of public or semi-public pay telephones, the provision of inmate telephone service in correctional institutions, and any ancillary service." Section 276 of the Telecom Act charged the FCC with implementing rules that would: (i) create a standard regulatory scheme for all public pay telephone providers, including the RBOC public pay telephone operations; (ii) require removal by the RBOCs of their public pay telephone operations from their regulated books of account; (iii) prescribe certain safeguards to eliminate future discrimination or subsidization of RBOC public pay telephones; (iv) require "fair compensation" to all public pay telephone providers for all calls using public pay telephones (except for 911 emergencies and Telecommunications Relay Services for the hearing impaired); (v) provide the right for all pay telephone service providers, subject to existing and future contractual rights with the Location Owner, to select the provider for both intraLATA and interLATA network services; (vi) evaluate whether and how "public interest" pay telephones (which are public pay telephones that would not normally be placed in a location under purely competitive conditions but may be required for public policy reasons) should be maintained; and, ( vii) preempt state requirements that are inconsistent with these provisions. 19 The FCC responded to Section 276's charge on November 8, 1996, when it issued its Final Order on reconsideration setting forth and affirming regulations set forth in the FCC's Report and Order dated September 20, 1996. In implementing Section 276, these orders establish, among other things, an interim dial-around compensation scheme for independent public payphone providers for both access code and 1-800 subscriber calls at a flat rate of $45.85 per pay telephone per month beginning November 6, 1996. This flat rate will be effective through October 6, 1997, at which time, compensation will begin on a per call basis at a rate of $0.35 per call or such other rate as may be negotiated by the pay telephone provider and the carriers. Effective October 1998, the compensation rate will track the local coin rate at each phone or such alternative rate as may be negotiated with the carrier(s). To further ensure that pay telephone providers are properly compensated, the FCC set forth a plan for the deregulation of local calling rates by October 6, 1997. Under the plan, local coin calling rates will be set by market forces rather than prospective regulation. The Order allows individual states to order deregulation prior to the October 1997 deadline or request a modification or exemption from deregulation upon a detailed showing in support of such request by the state. Although neither the Company nor the industry can predict exactly what will happen in such a deregulated environment, industry trends indicate that there should be a move by the public telephone operators toward increased local coin calling rates in states where deregulation is implemented. This trend is evidenced by the fact that five states (Iowa, Nebraska, Wyoming, Michigan, and South Dakota) have deregulated local coin calling rates and four of those five states now have market driven local coin calling rates of $0.35. In addition, Illinois and Wisconsin, although still under regulation, have also increased their local coin calling rates to $0.35 through approval of rate/tariff applications filed by pay telephone operators in such states. In order to discontinue the traditional interstate and intrastate payphone subsidies for LEC pay telephones from the regulated rate base operation of the LECs and eliminate future discrimination or subsidies in favor of RBOC pay telephone services, the FCC mandated nonstructural separations for all LEC pay telephone operations by April 15, 1997. LECs are also required to file interconnection plans with the FCC that discuss the manner in which compliance with the nondiscrimination and anti-cross subsidization requirements will be effectuated. As a further anti-discrimination measure, the Order specifically requires LECs to provide "coin lines" and associated services to all pay telephone providers on a basis equal to that provided by the LECs to their own pay telephone operations. Additional regulations under the Order include a provision authorizing independent pay telephone providers to select the intraLATA carrier and operator service provider ("OSP") of choice. This provision serves to preempt any state regulation requiring an independent pay telephone provider to send such calls to the LEC. For public safety reasons, 0- emergency calls must be routed to the LEC if a state requirement exists, but the states are not at liberty to require non-emergency 0- calls to be handled by the LEC. The Order also permits RBOCs to select the interLATA carrier and operator service provider to service their pay telephone operations. Such carrier selection is contingent upon FCC approval of each individual RBOC Comparably Efficient Plan. Finally, the Order states the neither the RBOCs nor anyone else may interfere with an enforceable agreement between a location provider and a pay telephone provider or carrier, regardless of the date of the contract. The Company has supported the introduction and passage of this payphone section of the Telecom Act, as well as the compensation aspects of the FCC rulings, and anticipates that the framework established by these new laws and regulations will address many of the fundamental regulatory/competitive problems that have plagued the public communications industry from its inception. While 20 the Company believes that the Telecom Act could lead to enhanced financial performance by the Company, there can be no certainty of such an impact occurring, and the magnitude or timing of such impact, if any, remains subject to significant conjecture pending implementation of the FCC rules mandated by the Telecom Act, and the final outcome of the pending federal court appeal seeking to overturn aspects of the FCC rules. See "Business - Public Pay Telephone Industry Overview." In addition, while the Company believes the enactment and implementation of the payphone provisions of the Telecom Act will result in an overall improvement to the competitive environment in which the Company operates, the Company also recognizes the potential for increased competitive pressures from the RBOCs or other LECs that may be more aggressive in the largely deregulated mode provided for under the Telecom Act. The specific provisions of the FCC's rules addressing the selection of a long distance carrier for the RBOC payphones, the adequacy of the transfer valuation assigned to the RBOC payphone operations upon their removal from regulated rate base accounts and whether the precise "non-structural" safeguards applicable to the RBOCs and LECs are effective in eliminating cross subsidies and discrimination, will all significantly impact the level and scope of competition faced by the Company in the public pay telephone market in the future. Apart from the FCC proceedings to implement the provisions of the Telecom Act and the federal court appeals of the FCC's ruling, there remain pending other FCC matters that potentially affect the Company and its operations. On April 9, 1992, the FCC proposed a new access plan for operator assisted interstate calls dialed on a "0+" basis. Currently "0+" calls are sent directly from the payphone through the LEC network to the operator service provider selected by the host location. Under the proposed access plan, known as "Billed Party Preference" ("BPP"), "0+" calls would be sent instead to the operator service provider chosen by the party paying for the call. The BPP environment allows a telephone user making a 0+ call to bill a call to the user's pre- established carrier at the user's home or office, thereby bypassing the opportunity for the pre-subscribed carrier at the public pay telephone to handle and receive revenues from the call and for the Company to earn a commission on the call. The FCC has tentatively concluded that a nationwide BPP system for interstate operator assisted calls is in the public interest. However, substantial opposition to the BPP proposal has developed and the FCC has taken no final action to date. If this system were to be enacted, the Company could experience a reduction in the revenues it now receives on these calls and would, accordingly, be unable to pay commissions to location owners for the traffic. The FCC has requested and received public comment on the basic BPP proposal and on the issue of what compensation mechanisms for payphone providers would be necessary in a BPP environment. The proposal remains under consideration by the FCC, and the outcome is uncertain and will be influenced by implementation of the Telecom Act. In addition, the American Public Communications Council ("APCC"), of which the Company is a member, along with other telecommunications companies and trade associations, has filed with the FCC for implementation of a "rate ceiling" on interstate "0+" calls from public pay telephones as an alternative to the BPP proposal. Because the Company currently utilizes major carriers as the primary interstate operator service providers from the Company's public pay telephone base nationwide, implementation of a "rate ceiling" regulatory regime by the FCC does not appear to represent a serious financial risk to the Company. However, 21 as with the underlying BPP proposal, the "rate ceiling" alternative is pending before the FCC, and the outcome remains uncertain, and will be influenced by implementation of the Telecom Act. Employees As of December 31, 1996, the Company had approximately 461 employees, approximately 105 of whom were executive, administrative, accounting, sales or clerical personnel and approximately 356 of whom were installers, maintenance and repair personnel and coin collectors. ITEM 2. PROPERTIES The Company's headquarters facility, which is owned by the Company, consists of a 68,000 square-foot building located at 2300 N.W. 89th Place, Miami, Florida. The Company maintains 22 service facilities which are linked to the Company's headquarters by computer. The Company considers its current facilities adequate for its business purposes. ITEM 3. LEGAL PROCEEDINGS In December 1995, Cellular World, Inc. filed a complaint in Dade County Circuit Court against the Company and its subsidiary, PTC Cellular, Inc., alleging wrongful interference with Cellular World's advantageous business relationship with Alamo Rent-A-Car and alleged misappropriation of trade secrets concerning Cellular World's proprietary cellular car phone rental system equipment. Cellular World is seeking damages alleged to exceed $10.0 million. The Company believes the complaint is without merit and intends to vigorously contest and defend the action. Formal discovery is underway and no trial date has been set. Based upon the current status of the litigation, the Company is unable to predict the final outcome of the litigation. The Company is also subject to various ordinary and routine legal proceedings arising out of the conduct of its business. The Company does not believe that the ultimate disposition of these proceedings will have a material adverse effect on its financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 22 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Price Range of Common Stock Effective November 13, 1996, the Common Stock of the Company, began trading on the American Stock Exchange under the symbol "PHO". Previously, the Company's stock was traded on the NASDAQ's National Market System and the SmallCap Market. The following table sets forth the high and low closing sales prices or the high and low bid prices per share of Common Stock as reported on the respective exchange and quotation systems for the periods indicated. Bid quotations represent prices between dealers and do not reflect mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.
High Low ------- ------- Year ended December 31, 1996: First Quarter.......................... 2.81 1.69 Second Quarter......................... 4.25 2.31 Third Quarter.......................... 4.13 2.38 Fourth Quarter......................... 4.50 2.75 High Low Year ended December 31, 1995: First Quarter.......................... $5.38 $4.00 Second Quarter......................... 5.13 3.88 Third Quarter.......................... 5.06 3.50 Fourth Quarter......................... 4.00 2.13
As of March 21, 1997, the Company had 506 shareholders of record. Dividend Policy The Company has never declared or paid cash dividends on its Common Stock. The Company presently intends to retain all earnings for the operation and development of its business and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. In addition, the Company's credit agreement precludes the Company from purchasing, redeeming or retiring any of its capital stock without the prior written consent of its lenders or from paying dividends in excess of 25% of the Company's net income. The payment of dividends by the Company also is limited by provisions of the $100.0 million 12 1/4% Senior Notes due 2002 and by the Series C Cumulative Convertible Preferred Stock. Any future determination as to the payment of cash dividends will depend on a number of factors including future earnings, capital requirements, the financial condition and prospects of the Company and any restrictions under credit agreements existing from time to time, as well as such other factors as the Board of Directors may deem relevant. There can be no assurance that the Company will pay any dividends in the future. 23 ITEM 6. SELECTED FINANCIAL DATA The selected financial data should be read in conjunction with the consolidated financial statements of the Company and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Annual Report. Continuing operations consist primarily of the public pay and inmate telephone businesses. Certain amounts for the prior years have been reclassified to conform with the current year presentation.
Year Ended December 31, 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (in thousands, except per share data) Consolidated Statement of Operations Data: Total revenues.................... $124,957 $138,391 $159,442 $117,005 $73,400 Costs and expenses: Telephone charges............... 39,091 48,716 67,656 39,409 22,888 Commissions..................... 33,942 34,740 32,693 24,012 15,121 Field service and collection.... 20,204 23,382 21,334 13,760 10,013 Depreciation and amortization.. 23,965 22,061 21,674 15,031 10,037 Selling, general and administrative................ 12,367 11,859 14,580 8,998 7,310 Loss from impairment of inmate assets................. - 4,740 - - - Other........................... (950) 6,177 - - - -------- --------- -------- -------- ------- Total costs and expenses......... 128,619 151,675 157,937 101,210 65,369 -------- --------- -------- -------- ------- Operating (loss) profit......... (3,662) (13,284) 1,505 15,795 8,031 Other income and expenses: Interest........................ 12,875 10,355 7,516 3,065 2,640 Loss from operations of prepaid calling card and international telephone centers............. - - 1,816 1,730 - Gain (loss) on disposal of prepaid calling card and international telephone centers (545) 566 3,690 - - -------- --------- -------- -------- ------- Total other income and expenses, net............................. 12,330 10,921 13,022 4,795 2,640 -------- --------- -------- -------- ------- (Loss)income from continuing operations before income taxes and extraordinary item.......... (15,992) (24,205) (11,517) 11,000 5,391 Benefit from (provision for) income taxes................... - 1,738 4,405 (4,144) (1,943) --------- -------- -------- ------- ------- Net(loss) income from continuing operations before extraordinary item............................ (15,992) (22,467) (7,112) 6,856 3,448 Loss from discontinued operations. - (12,066) (11,281) (1,514) (192) Extraordinary item, net........... - (3,327) - - - -------- --------- -------- -------- ------- Net(loss) income..................$(15,992) $(37,860)$(18,393) $5,342 $3,256 ======== ======== ======== ====== ====== (Loss)income per common and common equivalent share from continuing operations...........$ (1.05) $ (1.43) $ (.45) $ .47 $ .30 ======== ======== ======== ====== ====== Net (loss) income per common and common equivalent share.....$ (1.05) $ (2.38) $ (1.17) $ .37 $ .28 ======== ======== ======== ====== ====== Net (loss) income per common share assuming full dilution....$ (1.05) $ (2.38) $ (1.17) $ .37 $ .28 ======== ======== ======== ====== ====== Weighted average number of outstanding shares of Common stock: Primary........................... 16,188 16,091 15,713 14,479 11,633 Fully diluted..................... 16,188 16,091 15,713 14,517 11,686 EBITDA(2).........................$ 20,848 $ 8,211 $17,673 $29,096 $18,068
24
December 31, ----------------------------------------------- 1996 1995 (1) 1994(1) 1993(1) 1992(1) -------- --------- --------- -------- -------- (In thousands) Balance Sheet Data: Working capital (deficit)...... $ 376 $(3,700) $ (2,421) $ 673 $ 690 Total assets................... 140,870 160,071 190,591 173,342 79,257 Total long-term debt and preferred stock(3)........... 116,309 116,463 98,301 75,262 32,376 Shareholders' equity........... (4,294) 14,288 48,715 65,333 27,604
______________ (1) The selected financial data presented, as of and for each of the years in the five-year period ended December 31, 1996, have been derived from the consolidated financial statements of the Company. The consolidated financial statements for the years ended December 31, 1996 and 1995 were audited by Ernst & Young LLP, independent certified public accountants. The consolidated financial statements for the three years ended December 31, 1994, were audited by Price Waterhouse LLP. (2) EBITDA represents net earnings before interest, income taxes, depreciation and amortization. EBITDA is not presented as an alternative to operating results or cash flow from operations as determined by generally accepted accounting principles ("GAAP"), but rather to provide additional information related to the ability of the Company to meet current trade obligations and debt service requirements. (3) Total long-term debt and preferred stock includes the long-term portion of the Company's notes payable, capital lease obligations and the Series C Cumulative Convertible Preferred Stock and preferred stock dividends payable. 25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis compares the year ended December 31, 1996 to the year ended December 31, 1995 and the year ended December 31, 1995 to the year ended December 31, 1994, and should be read in conjunction with the audited consolidated financial statements and notes thereto appearing elsewhere in this Annual Report. The following discussion contains forward-looking statements. The Company's actual results could differ materially from those discussed in such forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this Form 10-K. See Item 1, "Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995." Overview In December 1994, in an effort to return the Company's focus to its core public pay telephone business, the Company's Board of Directors approved the divestiture of its inmate telephone, prepaid calling card business and international telephone centers and cellular telephone operations. During 1995, the Company sold its prepaid calling card business and international telephone center operations for $6.3 million and $2.0 million, respectively. For financial accounting purposes, the operating results of the prepaid calling card business and international telephone centers have been segregated and reported as a separate component of continuing operations (see Note 16 to the accompanying consolidated financial statements). On October 9, 1995, the Company sold a portion of its inmate telephone operations for approximately $1.7 million (see Note 1 to the accompanying consolidated financial statements). During the third quarter of 1995, the Company decided to retain the remaining portion of its inmate telephone operations. This decision is a result of the Company's belief that the remaining operations can contribute to the cash flow and operating results of the Company. The accompanying consolidated financial statements present the inmate telephone operations as part of continuing operations. On November 13, 1995, the Company sold its cellular telephone operations for approximately $6.0 million (see Note 17 to the accompanying consolidated financial statements). The results of operations and loss on disposal are included in the consolidated financial statements as discontinued operations. 26 The financial results discussed below relate to continuing operations which consist primarily of the public pay and inmate telephone businesses.
Percent Period-to-Period Increase (Decrease) Percentage of Total Revenues -------------------- Year Ended December 31, 1996 1995 ----------------------------- Compared Compared 1996 1995 1994 to 1995 to 1994 ------- ------- ------- ----------- --------- Revenues Coin calls............... 61.9% 56.6% 49.8% (1.2)% (1.3)% Non-coin calls........... 38.1 43.3 48.9 (20.6) (23.2) Service and other........ - 0.1 1.0 (100.0) (92.4) Gain on sale of assets... - - 0.3 - (100.0) ------- ------- ------- Total revenues......... 100.0 100.0 100.0 (9.7) (13.2) Costs and expenses Telephone charges........ 31.3 35.2 42.4 (19.8) (28.0) Commissions............. 27.1 25.1 20.5 (2.3) 6.3 Field service and collection............ 16.2 16.9 13.4 (13.6) 9.6 Depreciation and amortization.......... 19.2 15.9 13.6 8.6 1.8 Selling, general and administrative........ 9.9 8.6 9.2 4.3 (18.7) Loss from impairment of inmate assets...... - 3.4 - (100.0) (100.0) Other ................ (0.8) 4.5 - (115.4) (100.0) ------- ------- ------- Total costs and expenses... 102.9 109.6 99.1 (15.2) (4.0) Operating loss (profit).... (2.9) (9.6) 0.9 (72.4) (982.7) Other income and expenses: Interest ............... 10.3 7.5 4.7 (25.3) 37.8 Loss from operations of prepaid calling card and international telephone centers..... - - 1.1 - (100.0) (Gain) loss on disposal of prepaid calling card and international telephone centers..... (0.4) 0.4 2.3 (196.3) (84.7) ------- ------- ------- Total other income and expenses, net......... 9.9 7.9 8.1 (12.9) (16.1) ------- ------- ------- (Loss) income from continuing operations before income taxes and extraordinary item.................... (12.8) (17.5) (7.2) (33.9) 110.2 Benefit from (provision for) income taxes....... - 1.3 2.7 (100.0) 39.5 ------- ------- ------- Net (loss) income from continuing operations before extraordinary item (12.8)% (16.2)% (4.5)% (28.8) (215.9) ======= ======= ======= EBITDA..................... 16.7 % 5.9 % 11.1 % 153.9 (53.5)
Revenues The Company primarily derives its revenues from coin and non-coin calls. Coin revenue represented approximately 61.9%, 56.6% and 49.8% of total revenues from continuing operations for the years ended December 31, 1996, 1995 and 1994, respectively. Coin revenue is generated exclusively from calls made by depositing coins in the Company's public pay telephones. Coin revenue decreased 1.2% to $77.4 million in 1996 as compared to 1995. The Company's average installed public pay telephone base was approximately 38,400 phones and approximately 39,200 phones for the years ended December 31, 1996 and 1995, respectively. Coin revenue on a per phone basis increased by approximately 1.0% for the year ended December 31, 1996, as compared to 1995. 27 The Company believes that this increase can be attributed, in part, to emphasis on maintenance programs which have improved the up-time of the Company's phones, the implementation and promotion of new coin calling programs and the Company's continued efforts to remove low revenue phones. Coin revenue decreased by 1.2% to approximately $78.4 million in 1995 as compared to $79.4 million in 1994. Although the Company's installed public pay telephone base increased to an average of 39,200 phones in 1995 compared to 38,000 phones in 1994, coin revenue on a per phone basis decreased approximately 4.3% in 1995 when compared to 1994. While the Company is currently experiencing positive trends in coin revenue on a per phone basis, the Company believes that the number of coin calls made at its public pay telephones may remain flat or decrease over time. The Company believes that, among other things, the decrease will primarily result from the increased usage of alternative methods of calling such as prepaid calling cards and wireless technologies and the operation of more public pay telephones in closer proximity to the Company's telephones. The Company also believes that these decreases may be offset, over time, by increases in local coin call rates as a result of potential regulatory changes, although there can be no assurances. On November 8, 1996, the Federal Communications Commission (the "FCC") issued its final order on reconsideration (the "Order") setting forth and affirming regulations implementing Section 276 of the Federal Telecommunications Act of 1996, previously issued on September 20, 1996. As a result of an appeal of the Order, the ultimate implementation and details of the Order are subject to the outcome of an action pending before the United States Court of Appeals for the District of Columbia. See "Business - Public Pay Telephone Industry Overview" and "Business - Regulation". The regulations in the Order, among other things, set forth a plan for the deregulation of local coin calling rates by October 1997. The Order allows states to request modification or exemption from such deregulation upon a detailed showing in support of such request by the state. Although neither the Company nor the industry can predict exactly what will happen in such a deregulated environment, trends indicate that there should be a move by the public pay telephone operators toward increased local coin calling rates in states where deregulation is implemented. This trend is evidenced by the fact that five states (Iowa, Nebraska, Wyoming, Michigan and South Dakota) have deregulated local coin calling rates and four of those five states now have market based local coin calling rates of $0.35. In addition, Illinois and Wisconsin, although still under regulation, have also increased their local coin calling rates to $0.35 through approval of rate/tariff applications filed by pay telephone operators in such states. Non-coin revenue is derived from calling card calls, credit card calls, collect calls and third-party billed calls placed from the Company's public pay telephones and inmate telephones. During the second quarter of 1995, the Company signed a contract with AT&T to act as its primary national operator service provider. Prior to the execution of this agreement, non-coin calls were routed through the Company's private label operator service program. The Company uses its private label operator service or a third-party operator service provider based on which service the Company believes nets it the highest gross margin from the call. The Company records as revenue the total amount the end user pays for the call (net of taxes) when the call is completed through the Company's private label operator service. In contrast, when the call is completed through the third-party operator service provider, the Company records as revenue the amount it receives from the third-party operator service provider which represents a negotiated percentage of the total amount the caller pays for the call. In May 1996, AT&T began paying a specified per call amount for interLATA (800) dial-around calls as opposed to a percentage of the revenue generated by those calls. The Company estimates that the impact on non-coin revenue of the change in the compensation structure under the AT&T contract was approximately $3.7 million for the year ended December 31, 1996. 28 In addition to the change in compensation under the AT&T contract, the Company is continuing to experience a shift in call traffic from 0+ calls, for which the Company receives a percentage of the revenue generated by those calls, to access code calls for which the Company receives a flat rate per phone or per call compensation amount. Due to aggressive advertising campaigns by long-distance companies promoting the use of access code calls, the Company believes that the decrease in non-coin revenue due to the changes in call traffic patterns is likely to continue. The Company believes that this decrease in non-coin revenue will be offset by changes in the amount of compensation received by the Company for such calls, as required under the FCC Order. Under the Order, in addition to the change in compensation received by the Company for access code calls, the Company will also begin receiving compensation for (800) subscriber calls. The Order mandates dial-around compensation to public pay telephone providers for both access code and (800) subscriber calls at a flat-rate of $45.85 per pay telephone per month beginning November 6, 1996. This flat rate will be effective through October 6, 1997, at which time, compensation will begin on a per call basis at a rate of $0.35 per call or such other rate negotiated by the pay telephone provider and the carriers. The Company estimates the impact of this flat-rate compensation on the Company's earnings before interest, taxes, depreciation and amortization, subject to possible changes resulting from the appeal of the Order, to be in excess of $12 million on an annualized basis. Non-coin revenue represented approximately 38.1%, 43.3.% and 48.9% of total revenues from continuing operations in 1996, 1995, and 1994, respectively. Revenue from non-coin calls decreased by 20.6% to $47.6 million, compared to 1995. Non-coin revenue decreased by approximately 23.2% to $59.9 million in 1995 as compared to 1994. These decreases are primary attributable to: (i) the method of recording revenue for certain non-coin calls as a result of the change to AT&T as the Company's primary national operator service provider; (ii) the change in the Company's compensation structure under the AT&T contract; and (iii) the decrease in the number of inmate telephone lines operated by the Company. During 1996, 1995 and 1994, the Company operated approximately 2,000, 3,000 and 4,000 inmate telephone lines, respectively. Operating Expenses Operating expenses include telephone charges, commissions, field service and collection expenses and selling, general and administrative expenses. Telephone charges consist of local line charges paid to LECs which include costs of basic service and transport of local coin calls, long-distance transmission charges and network costs and billing, collection and validation costs. Commissions represent payments to Property Owners for revenues generated by public pay telephones located on their properties. Field service and collection expenses represent the costs of servicing and maintaining the telephones on an ongoing basis, costs of collecting coin from the telephones and other related operational costs. Selling, general and administrative expenses primarily consist of payroll and related costs, legal and other professional fees, promotion and advertising expenses, property, gross receipt and certain other taxes, corporate travel and entertainment and various other expenses. Total operating expenses were approximately 84.5%, 85.8% and 85.5% of total revenues from continuing operations for the years ended December 31, 1996, 1995 and 1994, respectively. The switch by the Company to a third-party operator service resulted in a decreased revenue base due to the method of recording revenue for calls made through that service as compared to calls placed through the Company's private label operator service program (see above). As a result, certain operating expenses as a percentage of revenues increased in 1996 compared to the same periods in 1995 and 1994. 29 Telephone charges decreased as a percentage of total revenues from continuing operations to 31.3% for the year ended December 31, 1996, compared to 35.2% for the same period in 1995. Telephone charges were approximately 42.4% of total revenue for 1994. The decrease in telephone charges is primarily a result of regulatory changes and competition within the local intraLATA service market which began in the third quarter of 1995. Telephone charges for 1995 include approximately $1.0 million of additional bad debt reserves related to both the inmate and pay telephone operations. In addition to the items previously noted, the decrease in telephone charges for the years ended December 31, 1996 and 1995 can also be attributed to a decline in the number of calls placed through the Company's private label operator service program. The Company paid the costs incurred to transmit, bill, collect and validate the call when the call was completed through its private label operator services. In contrast, the Company incurred no such costs when a third-party operator service provider completed the call. Telephone charges for 1995 include a reduction of interexchange carrier expenses related to the settlement with a service provider for certain billing errors and underpayment of operator service revenue of approximately $1.3 million which was partially off set by the $1.0 million of bad debt reserves noted above. In addition, telephone charges for 1994 include a charge of approximately $1.6 million related to reserves for refund claims due from certain vendors and approximately $0.6 million of one time income adjustments for a signing bonus and volume discounts. Commissions as a percentage of total revenues from continuing operations were approximately 27.2%, 25.1% and 20.5% for the years ended December 31, 1996, 1995 and 1994, respectively. The increase in commissions as a percentage of revenues in 1996 and 1995 was primarily attributable to: (i) the reduced revenue base due to the method of recording revenue for certain non-coin calls as a result of the change to AT&T as the Company's primary national operator service provider; (ii) higher commission rates paid in connection with the Atlanta Hartsfield International Airport account; (iii) higher commission rates for new and renewed contracts due to increasing competition in the public pay telephone and inmate telephone markets. Field service and collection expenses as a percentage of total revenues from continuing operations was 16.2% in 1996, 16.9% in 1995 and 13.4% in 1994. As expected, field service and collection expenses as a percentage of revenue from continuing operations remained relatively consistent in 1996 as compared to 1995. The 1995 increase in field service and collection expense as compared to 1994 was primarily attributable to: (i) the reduction in revenue as a result of the Company's switch to a third-party operator service provider; (ii) approximately $1.7 million recorded for inventory obsolescence reserves; and, (iii) expenses incurred by the Company for a refurbishing program undertaken to improve the condition of the Company's public pay telephones. The Company currently expects that field service and collection expenses, will remain relatively constant or may decrease slightly over the next twelve months, as a percentage of revenues. Selling, general and administrative expenses remained relatively consistent at $12.4 million and $11.9 million for the years ended December 31, 1996 and 1995, versus $14.6 million in 1994. The decrease in selling, general and administrative expenses in 1995 was primarily attributable to the cost reduction plan and reengineering efforts commenced by the Company in 1994. In 1994, selling, general and administrative expenses included approximately $1.6 million in non-recurring charges which included, among other things, amounts incurred for settling disputes and claims, severance costs, lease termination charges, and costs related to a terminated merger. 30 Depreciation Depreciation is based on the cost of the telephones, booths, pedestals and other enclosures, related installation costs and line interconnection charges and is calculated on a straight-line method using five-year and ten- year useful lives for inmate and public pay telephone equipment, respectively. Amortization is primarily based on acquisition costs, including location contracts, goodwill and non-competition provisions, and is calculated on a straight-line method using estimated useful lives ranging from five to twenty years. Depreciation and amortization increased to $24.0 million in 1996 from $22.1 million in 1995 and $21.7 million in 1994. The increase in depreciation and amortization is primarily attributable to the revision of the depreciation and amortization policy for certain inmate assets beginning January 1, 1996. Based on increased competition and certain other changes within the inmate telephone industry, the Company reduced the useful lives of various inmate assets to five years. As a result of this change in accounting estimate, depreciation and amortization expense increased approximately $1.3 million for the year ended December 31, 1996. Provision for Impairment of Inmate Assets During the third quarter of 1995, the Company made a decision to retain the remaining portion of its inmate telephone operations. The Company's 1994 results included approximately $4.0 million for the anticipated loss on disposal and $0.1 million for the anticipated operating losses from January 1, 1995 through disposition. The inmate division's actual operating losses for the period it was accounted for as discontinued operations were $0.1 million. In 1995, the $4.0 million accrual for loss on disposal was reversed in discontinued operations and recorded in continuing operations as an impairment of assets. Also included in the 1995 results of operations is approximately $0.4 million for the loss on disposal of a portion of the inmate telephone business and a $0.4 million write-off of intangible assets associated with contracts not renewed by the Company. No such items were recorded in 1996. Other Other expense for the year ended December 31, 1996 includes approximately $0.6 million of severance obligations incurred under employment agreements with certain key executives offset by amounts received in connection with the settlement of outstanding litigation. In 1995, other expenses included approximately $0.9 million incurred in connection with the settlement of a lawsuit brought by two shareholders against the Company, approximately $0.6 million of losses for the Company's equity interest in an unconsolidated affiliate, approximately $1.4 million for the settlement of an employment contract with a former officer and approximately $3.2 million of reserves for potentially uncollectible loans receivable from certain officers (see Note 18 to the accompanying consolidated financial statements). No such expenses were incurred in 1994. Operating (Loss) Profit Operating (loss) profit for the years ended December 31, 1996, 1995 and 1994 were approximately $(3.7) million, $(13.3) million and $1.5 million, respectively. Interest Interest expense increased approximately $2.5 million to $12.9 million in 1996 as compared to 1995. Interest expense in 1994 was approximately $7.5 million. This increase in 1996 and 1995 is primarily attributable to the higher interest rate on the Company's $100.0 million of Senior Notes as compared with the rates in effect on the Company's line of credit outstanding for 1994 and the first half of 1995 and the inclusion of interest expense in continuing operations previously allocated to the Company's operations. 31 (Gain) Loss on Disposal of Prepaid Calling Card and International Telephone Centers The year ended December 31, 1996 includes a gain on disposal of prepaid calling card and international telephone centers of approximately $0.3 million received in connection with the sale of the Company's international telephone center operations and approximately $0.3 million recognized in connection with the merger of Global Link Teleco Corporation and Global Telecommunications Solutions, Inc. (see Note 16 to the accompanying consolidated financial statements). In 1995, loss on disposal of prepaid calling card and international telephone centers includes the write-off of approximately $1.1 million of accounts receivable related to the Company's prepaid calling card business offset by $0.5 million received in connection with the Company's sale of its international telephone center operations. Provision for Income Taxes The Company's benefit from income taxes decreased approximately $1.7 million for the year ended December 31, 1996, compared to the same period in 1995. This decrease is primarily attributable to the fact that for 1996, the Company recorded valuation allowances for 100% of the deferred tax assets generated from operating losses. The Company records valuation allowances for deferred tax assets which may not be realized in future periods. The Company recorded deferred tax assets and deferred tax asset valuation allowances of approximately $7.4 million for the year ended December 31, 1996. During 1995, the Company recorded approximately $1.7 million in income tax benefits. Approximately $1.5 million of these tax benefits relate to the provision for impairment of inmate assets which, in 1995, was reversed in discontinued operations and recorded in continuing operations. This benefit was previously reflected in discontinued operations and recorded in December 1994. During 1995, the Company recorded deferred tax asset valuation allowances of approximately $12.0 million. Net (Loss) Income from Continuing Operations before Extraordinary Item The Company had a net loss from continuing operations before extraordinary item of approximately $16.0 million in 1996 compared to a net loss from continuing operations before extraordinary item of approximately $22.5 million in 1995 and net loss from continuing operations before extraordinary item of approximately $7.1 million in 1994. Extraordinary Loss As a result of debt modifications during 1995, the Company recorded extraordinary losses from the write-off of deferred financing costs associated with the early extinguishment of debt of approximately $5.0 million, before the related income tax benefit of approximately $1.7 million. There were no such transactions in 1996 or 1994. 32 Earnings Before Interest, Taxes, Depreciation and Amortization EBITDA is not presented as an alternative to operating results or cash flow from operations as determined by Generally Accepted Accounting Principles ("GAAP"), but rather to provide additional information related to the ability of the Company to meet current trade obligations and debt service requirements. EBITDA should not be considered in isolation from, or construed as having greater importance than, GAAP operating income or cash flows from operations as a measure of an entity's performance. EBITDA was approximately $20.8 million for the year ended December 31, 1996 an increase of approximately $12.6 million as compared to 1995. The increase in EBITDA as compared to the prior year is primarily a result of certain one time income and expense items recorded in 1995. This variance is related to the following: (i) a $4.7 million provision for the impairment of assets of the inmate telephone business; (ii) approximately $3.2 million of reserves related to officer loans receivables; (iii) approximately $1.4 million related to the settlement of an officer employment agreement; (iv) the write-off of approximately $1.1 million of accounts receivable related to the prepaid calling card business; (v) approximately $0.9 million for the settlement of the shareholders' lawsuit; (vi) adjustments recorded for bad debt and inventory obsolescence as discussed above; and, (vii) the increase in commission expenses offset by decreases in telephone charges noted above. EBITDA from continuing operations decreased by $9.5 million in 1995 to $8.2 million compared to 1994. The decrease was primarily attributed to approximately $3.8 million of non-recurring charges which include the $1.4 million of non-recurring telephone charges and the $1.7 million of non-recurring charges in selling, general and administrative expenses discussed above. EBITDA also included approximately $1.8 million of losses related to the operations of the prepaid calling card and international telephone center business and a provision of approximately $3.7 million for the estimated impairment of asset value and losses from January 1, 1995 through the divestiture date. The calculation of EBITDA does not reflect adjustments for interest, depreciation and amortization included within the Loss from operations of prepaid calling card and international telephone centers and the Loss on disposal of prepaid calling card and international telephone centers as presented in the accompanying financial statements. Liquidity and Capital Resources During the year ended December 31, 1996, the Company financed its operations from operating cash flow and net proceeds received in July 1995 from the issuance of $100.0 million of Senior Notes due 2002 (the "Senior Notes") and $15.0 million of Cumulative Convertible Preferred Stock (the "Preferred Stock"). The Company's operating cash flow was $5.3 million compared to $10.8 million in 1995 and $(0.9) million in 1994. The Company's working capital was approximately $0.4 million, with a current ratio of 1.0 to 1, at December 31, 1996. This is compared to a working capital deficit of $3.7 million and a current ratio of .87 to 1 at December 31, 1995. The change in the Company's working capital is primarily a result of increases in certain accounts receivable balances related to the new FCC dial- around compensation and other non-coin revenues. 33 In an effort to extend its debt maturities to reflect the long-term nature of its assets and to provide increased operational and financial flexibility to take advantage of growth opportunities in its core public pay telephone business, the Company completed a private placement of Senior Notes and Preferred Stock in July 1995. In addition to the above transactions, the Company entered into a new $40.0 million revolving credit facility (the "New Credit Facility"). Proceeds from the sale of the Senior Notes, together with the proceeds from the sale of the Preferred Stock, were used to repay the prior credit facility and various other obligations of the Company. During April 1996, the Company amended the New Credit Facility reducing the amount available to borrow to $10.0 million and the financial covenants, among other things. In March 1997, the Company executed a third amendment to the new Credit Facility with the Bank increasing the amount available to $20.0 million and modifying certain of the financial covenants. All outstanding balances are due in full in 2002, and interest is payable monthly for loans based on prime rate and quarterly for loans based on the LIBOR rate. As of December 31, 1996, the Company was in compliance with the financial covenants and had no amounts borrowed under the new Credit Facility. In March 1997, the Company's shareholders approved an increase to the number of authorized shares of the Company's Common Stock to 75 million shares. Based upon current expectations, the Company believes that cash flow from operations, together with amounts which may be borrowed under the amended credit facility, will be adequate for it to meet its working capital requirements, pursue its business strategy and service its obligations with respect to the Senior Notes, although there can be no assurance that it will be able to do so. Discontinued Operations During December 1994, the Company's Board of Directors approved the divestiture of its cellular telephone rental operations. In the December 31, 1994 consolidated financial statements, the Company recorded a provision for the estimated losses of the cellular telephone business from January 1, 1994 through the anticipated divestiture date. On November 13, 1995, the Company sold its cellular telephone operations to Shared Technologies Cellular, Inc. ("STC") for approximately $6.0 million. The assets were sold for $0.3 million in cash, a $2.0 million promissory note bearing interest at 8.0% with principal and interest payable semiannually through 2000, shares of STC Common Stock, a $2.5 million potential revenue earn out and payment of approximately $1.2 million of PTCC's liabilities by STC. For financial accounting purposes, the $2.5 million potential earn out will be recognized as received. This transaction has resulted in a loss of approximately $14.6 million which has been recorded as a loss on disposal in the accompanying statements of operations for the year ended December 31, 1995. The difference between the actual loss and the estimated loss on disposal resulted from, among other things, changes in market conditions, disputes over liabilities for cellular cloning charges, decreased revenue attributable to PIN numbers introduced by the cellular carriers to prevent cloning and a delay in creating a new phone technology to deal with PIN numbers and other matters (see Note 17 to the accompanying consolidated financial statements). 34 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements and Schedules PAGE NUMBERS Reports of Independent Certified Public Accountants............................. 36-38 Consolidated Balance Sheets for December 31, 1996 and 1995............................... 39 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994............. 40 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994............................................ 41-42 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994............ 43-44 Notes to Consolidated Financial Statements................ 45-66 SCHEDULES: II - Valuation and Qualifying Accounts and Reserves....... 67 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 35 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders' Peoples Telephone Company, Inc. We have audited the consolidated balance sheets of Peoples Telephone Company, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the two years in the period ended December 31, 1996. Our audit also included the financial statement schedule for the years ended December 31, 1996 and 1995 listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Peoples Telephone Company, Inc. at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule for the years ended December 31, 1996 and 1995, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Miami, Florida March 3, 1997, except the third paragraph of Note 6, as to which the date is March 26, 1997. 36 Report of Independent Certified Public Accountants To the Board of Directors and Shareholders' of Peoples Telephone Company, Inc. In our opinion, the consolidated financial statements as of December 31, 1994 and for the year ended December 31, 1994 listed in the accompanying index present fairly, in all material respects, the financial position of Peoples Telephone Company, Inc. and its subsidiaries (the Company) at December 31, 1994 and the results of their operations and their cash flows for the year ended December 31, 1994, 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. We have not audited the consolidated financial statements of Peoples Telephone Company, Inc. and its subsidiaries for any period subsequent to December 31, 1994. The accompanying financial statements as of December 31, 1994 and for the year ended December 31, 1994 have been prepared assuming the Company will continue as a going concern. The Company's failure to make an April 1995 payment due on a promissory note and the restatement of the Company's first quarter 1994 financial statements on Form 10-Q has caused a default under the Company's revolving line of credit and under the Company's mortgage note agreement. The Company obtained from the lenders a waiver of default related to its first quarter 1994 restatement and subject to certain conditions being met by the Company by June 30, 1995, obtained a waiver of default arising from its failure to make the April 1995 payment on a promissory note. With respect to its mortgage note agreement, the Company obtained a waiver subject to the condition that on or before the earlier of one day after the closing of the Senior Note offering or August 31, 1995 the mortgage note and all other obligations owed the mortgage lender be paid in full. In the event the conditions are not satisfied by their prescribed dates, the waivers would be withdrawn, an event of default under the revolving line of credit and the mortgage note agreement would exist and the lenders would have the right to call the loans. Also, should the Company satisfy the aforementioned conditions by the prescribed dates, the Company's remaining balance of its revolving line of credit is due in full on May 31, 1996. The Company is in the process of offering under an exemption from the registration requirements of the Securities Act of 1933, $100 million of Senior Notes due 2002; the proceeds of which, if such offering is successful, together with a proposed $40 million credit agreement, will be used to repay the outstanding balance of the other line of credit, the promissory notes and the mortgage note. As a result, a substantial doubt arises about the Company's ability to continue as a going concern. The accompanying financial statements as of December 31, 1994 and for the year ended December 31, 1994 do not include any adjustments that might result from the outcome of this uncertainty. A complaint has been filed against the Company and certain officers on May 25, 1994 and amended May 26, 1995, which alleges violation of certain federal securities laws through the issuance of false and misleading statements 37 regarding a failed merger. The complaint seeks class action certification as well as compensatory damages. In addition the aforementioned promissory note holder has asserted certain other claims against the Company. At the present time, the litigation matters are in the preliminary stage and management, on the advice of legal counsel, is presently unable to predict the ultimate outcome of the litigation. Accordingly, no provision for any liability that may result upon adjudication has been made in the accompanying financial statements as of December 31, 1994 and for the year ended December 31, 1994. PRICE WATERHOUSE LLP Miami, Florida March 28, 1995, except as to the second paragraph of Note 18 (except for the statements related to Messrs. Rubin, Hanft and Frank resignations), and the matters discussed in the second and third paragraphs of this report, which are as of May 31, 1995. 38
PEOPLES TELEPHONE COMPANY, INC. CONSOLIDATED BALANCE SHEETS (in thousands) December 31, ------------------------ Assets 1996 1995 -------- ---------- Current assets Cash and cash equivalents.......................... $ 12,556 $ 12,366 Accounts receivable, net of allowance for doubtful accounts of $4,361 in 1996 and $5,108 in 1995..... 11,598 7,500 Inventory.......................................... 2,412 1,990 Prepaid expenses and other current assets......... 2,665 3,764 --------- --------- Total current assets........................... 29,231 25,620 Property and equipment, net.......................... 65,067 78,201 Location contracts, net.............................. 27,465 29,270 Goodwill, net........................................ 5,660 8,904 Intangible assets, net............................... 1,768 2,620 Deferred income taxes................................ 3,407 3,407 Investment in unconsolidated affiliate............... 1,662 3,736 Other assets, net.................................... 6,610 8,313 --------- --------- Total assets.................................... $140,870 $160,071 ======== ======== Liabilities and Shareholders' Equity Current liabilities Notes payable and current maturities of long-term debt.............................................. $ 548 $ 506 Current portion of obligations under capital leases 952 1,156 Accounts payable and accrued expenses.............. 19,240 19,603 Accrued interest payable........................... 5,697 5,603 Income and other taxes payable..................... 2,418 2,452 --------- --------- Total current liabilities....................... 28,855 29,320 Notes payable and long-term debt..................... 100,657 101,259 Obligations under capital leases..................... 573 1,318 --------- --------- Total liabilities............................... 130,085 131,897 --------- --------- Commitments and contingencies (Notes 14 and 15)...... - - Preferred Stock Cumulative convertible preferred stock Series C, $.01 par value; 160 shares authorized; 150 shares issued and outstanding, $100 per share liquidation value............................................ 13,556 13,413 Preferred stock dividends payable ................. 1,523 473 --------- --------- Total preferred stock.......................... 15,079 13,886 Shareholders' equity Preferred stock; $.01 par value; 4,140 shares authorized; none issued and outstanding........... - - Convertible preferred stock; Series B, $.01 par value; 600 shares authorized; none issued and outstanding. - - Common stock; $.01 par value; 25,000 shares authorized; 16,195 in 1996 and 16,108 in 1995 shares issued and outstanding......................................... 162 161 Capital in excess of par value....................... 60,453 61,573 Accumulated deficit ................................. (63,438) (47,446) Unrealized loss on investments....................... (1,471) - --------- --------- Total shareholders' equity........................ (4,294) 14,288 --------- --------- Total liabilities and shareholders' equity........ $140,870 $160,071 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 39
PEOPLES TELEPHONE COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) For the year ended December 31, ----------------------------- 1996 1995 1994 ------- -------- --------- Revenues Coin calls .................................. $ 77,389 $ 78,353 $ 79,392 Non-coin calls............................... 47,568 59,916 77,994 Service and other............................ - 122 1,615 Gain on sale of asset........................ - - 441 -------- -------- --------- Total revenues............................ 124,957 138,391 159,442 Costs and expenses Telephone charges............................ 39,091 48,716 67,656 Commissions.................................. 33,942 34,740 32,693 Field service and collection................. 20,204 23,382 21,334 Depreciation and amortization................ 23,965 22,061 21,674 Selling, general and administrative.......... 12,367 11,859 14,580 Loss from impairment of inmate assets........ - 4,740 - Other........................................ (950) 6,177 - -------- -------- --------- Total costs and expenses................. 128,619 151,675 157,937 -------- -------- --------- Operating (loss) profit...................... (3,662) (13,284) 1,505 Other (income) and expenses: Interest..................................... 12,875 10,355 7,516 Loss from operations of prepaid calling card and international telephone centers... - - 1,816 (Gain) loss on disposal of prepaid calling card and international telephone centers........ (545) 566 3,690 -------- -------- --------- Total other income and expenses........... 12,330 10,921 13,022 -------- -------- --------- Loss from continuing operations before income taxes and extraordinary item... (15,992) (24,205) (11,517) Benefit from income taxes ..................... - 1,738 4,405 -------- -------- --------- Net loss from continuing operations before extraordinary item......................... (15,992) (22,467) (7,112) -------- -------- --------- Discontinued operations Loss from operations, net of income tax benefit of $2,293........................ - - (3,961) Loss on disposition, including an income tax provision of $(1,521) in 1995 and $(1,885) in 1994 ................................. - (12,066) (7,320) -------- -------- --------- Loss from discontinued operations.......... - (12,066) (11,281) Extraordinary loss from extinguishment of debt, net of income tax benefit of $1,737........ - (3,327) - -------- -------- --------- Net loss.................................... $(15,992) $(37,860) $(18,393) ======== ========= ========= Primary and fully diluted earnings per share Loss from continuing operations................ $ (1.05) $ (1.43) $ (.45) Loss from discontinued operations.............. - ( .75) (.72) Extraordinary loss, net........................ - (.20) - -------- -------- --------- Net loss..................................... $ (1.05) $ (2.38) $ (1.17) ========= ========= ========= Weighted average common and common equivalent shares outstanding................ 16,188 16,091 15,713 ========= ========= ========= Weighted average common shares outstanding assuming full dilution....................... 16,188 16,091 15,713 ========= ========= ==-======
The accompanying notes are an integral part of these consolidated financial statements. 40
PEOPLES TELEPHONE COMPANY, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE PERIOD FROM JANUARY 1, 1994 THROUGH DECEMBER 31, 1996 (in thousands, except per share data) Retained Capital Earnings Common in Excess (Accumulated Stock Par Value Deficit) --------- ----------- ------------ Balance at January 1, 1994................ $ 155 $ 56,371 $ 8,807 ========= =========== ========== Exercise of 150 warrants at $3.17 per share................................ 2 473 - Exercise of 177 options at $2.67- $7.83 per share.......................... 2 829 - Cancellation of 54 shares relating to prior acquisitions.................... (1) (499) - Tax adjustment related to exercising options.................................. - 255 - Adjustment for issuance of warrants to a bank................................ - 2,520 - Officer and director notes receivable............................... - (1,806) - Net loss for the year..................... - - (18,393) --------- ------------ ---------- Balance at December 31, 1994.............. $ 158 $ 58,143 $ (9,586) ========= ============ ========== Exercise of 93 options at $2.00- $3.59 per share.......................... 1 306 - Issuance of 224 shares for prior acquisitions............................. 2 1,302 - Series C preferred stock dividends accrued.................................. - (473) - Preferred stock issuance cost and warrant accretion........................ - (69) - Issuance of 275 preferred stock warrants................................. - 558 - Write-off of Officer and Director notes receivable......................... - 1,806 - Net loss for the year..................... - - (37,860) ---------- ----------- --------- Balance at December 31, 1995.............. $ 161 $ 61,573 $(47,446) ========= ============ ========= Issuance of 22 shares for prior acquisitions............................. 1 74 - Series C preferred stock dividends accrued.................................. - (1,050) - Preferred stock issuance cost and warrant accretion........................ - (144) - Unrealized loss on investments............ - - - Net loss for the year..................... - - (15,992) --------- ------------ ---------- Balance at December 31, 1996.............. $ 162 $ 60,453 $ (63,438) ========= =========== ==========
Unrealized Loss on Investments Total ------------- -------- Balance at January 1, 1994............... $ - $ 65,333 ========= ========= Exercise of 150 warrants at $3.17 per share............................... - 475 Exercise of 177 options at $2.67- $7.83 per share......................... - 831 Cancellation of 54 shares relating to prior acquisitions................... - (500) Tax adjustment related to exercising options................................. - 255 Adjustment for issuance of warrants to a bank............................... - 2,520 Officer and director notes receivable.............................. - (1,806) Net loss for the year.................... - (18,393) ---------- ---------- Balance at December 31, 1994............. $ - $ 48,715 ========== ========== Exercise of 93 options at $2.00- $3.59 per share......................... - 307 Issuance of 224 shares for prior acquisitions............................ - 1,304 Series C preferred stock dividends accrued................................. - (473) Preferred stock issuance cost and warrant accretion....................... - (69) Issuance of 275 preferred stock warrants................................ - 558 Write-off of Officer and Director notes receivable........................ - 1,806 Net loss for the year.................... - (37,860) ---------- ----------- Balance at December 31, 1995............. $ - $ 14,288 ========= =========== Issuance of 22 shares for prior acquisitions............................ - 75 Series C preferred stock dividends accrued................................. - (1,050) Preferred stock issuance cost and warrant accretion....................... - (144) Unrealized loss on investments........... (1,471) (1,471) Net loss for the year.................... - (15,992) --------- ----------- Balance at December 31, 1996............. $ (1,471) $ (4,294) ========= ===========
The accompanying notes are an integral part of these consolidated financial statements. 42
PEOPLES TELEPHONE COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the year ended December 31, -------------------------------- 1996 1995 1994 -------- --------- ----------- Cash flows from operating activities Net loss..................................... $(15,992) $(37,860) $(18,393) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization............. 23,965 22,061 21,674 Amortization of deferred financing costs.. 906 390 848 Deferred income taxes..................... - (1,954) (4,405) Extraordinary loss on debt extinguishment. - 5,064 - Equity in losses of unconsolidated affiliate................................. - 621 - (Gain) loss on disposition of assets, net. (545) 15,906 8,585 Write-off of officer and director receivables.............................. - 3,555 - Changes in operating assets and liabilities, excluding the effect of acquisitions: Decrease (increase) in accounts receivable, net.................................... (3,981) 7,335 (736) Decrease (increase) in inventory........ (623) 1,004 (1,039) Decrease (increase) in prepaid expenses and other current assets............... (407) 1,156 (93) Decrease (increase) in other assets..... 636 2,694 (4,871) Increase (decrease) in accounts payable and accrued expenses.................. 1,249 (6,859) (2,579) Increase in accrued interest payable.... 94 4,542 528 (Decrease) increase in income and other taxes payable......................... (34) (239) 1,909 Decrease in minority interest........... - - (275) Net effect of discontinued operations and assets held for sale.............. - (6,579) (2,030) -------- -------- --------- Net cash provided by (used in) operating activities.................. 5,268 10,837 (877) -------- -------- --------- Cash flows from investing activities Property and equipment additions............. (2,138) (5,189) (10,992) Proceeds from property and equipment sales... 2,229 3,595 3,049 Payments for acquisitions and certain contracts.................................. (3,436) (1,505) (16,162) Increase in investment in unconsolidated affiliate.................................. - 127 - Contributions to joint ventures.............. - - (211) -------- -------- --------- Net cash used in investing activities........ (3,345) (2,972) (24,316) -------- -------- --------- Cash flows from financing activities Borrowings under long-term debt.............. - 101,600 31,252 Principal payments on long-term debt......... (560) (110,487) (116) Principal payments under capital lease obligations................................ (1,173) (3,384) (2,309) Debt issuance costs.......................... - (5,100) - Exercise of stock options and warrants....... - 307 1,306 Officer and director notes receivable........ - - (1,806) Proceeds from stock offering................. - 15,000 - Proceeds from the issuance of stock warrants. - 100 - Issuance costs associated with stock offering - (1,198) - -------- -------- --------- Net cash (used in) provided by financing activities................................. (1,733) (3,162) 28,327 -------- -------- --------- Net increase in cash and cash equivalents...... 190 4,703 3,134 Cash and cash equivalents at beginning of year. 12,366 7,663 4,529 -------- -------- --------- Cash and cash equivalents at end of year....... $ 12,556 $ 12,366 $ 7,663 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 43
PEOPLES TELEPHONE COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (in thousands) Supplemental disclosures of cash flow information For the year ended December 31, ----------------------------- 1996 1995 1994 -------- ------- -------- Cash paid during the year for: Interest................................ $ 12,643 $ 7,357 $ 4,784 ======== ======= ======== Income taxes............................ $ 158 $ 242 $ 201 ======== ======= ========
Supplemental disclosure of non-cash investing and financing activities During 1994, the Company purchased certain net assets of several corporations for a combination of cash, the Company's Common stock and the issuance of notes payable. There were no acquisitions in 1996 or 1995. However, the Company issued shares of its Common stock in 1996 and 1995 related to previous acquisitions. A summary of these transactions is as follows (in thousands):
For the year ended December 31, ----------------------------- 1996 1995 1994 -------- ------- -------- Fair value of net assets acquired......... $ - $ - $ 22,882 Fair value of Common stock issued and issuable................................ 75 1,304 (1,718) Principal amount of note payables issued and other liabilities................... - - (6,687) -------- ------- -------- Net amount paid........................... $ 75 $1,304 $ 14,477 ======== ======= ========
During the years ended December 31, 1996, 1995 and 1994, the Company acquired fixed assets of approximately $0.2 million, $1.2 million and $2.5 million, respectively, by incurring capital lease obligations for the same amounts. The accompanying notes are an integral part of these consolidated financial statements. 44 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - GENERAL Description of business Peoples Telephone Company, Inc. (the "Company") owns, operates, services and maintains public pay and inmate telephone systems connected to the network of regulated telephone companies at various third party property owner locations and correctional facilities throughout the United States. In connection with the pay telephone systems, the Company also derives revenue from routing calls to operator service companies. Changes in business In December 1994, in an effort to return the Company's focus to its core public pay telephone business, the Company's Board of Directors approved the divestiture of its inmate telephone, prepaid calling card and international telephone centers and cellular telephone operations. During 1995, the Company sold its prepaid calling card business and international telephone center operations for $6.3 million and $2.0 million, respectively (see Note 16). During the third quarter of 1995, the Company decided to retain the remaining portion of its inmate telephone operations. This decision is a result of the Company's belief that the remaining operations can contribute to the cash flow and operating results of the Company. The accompanying consolidated statements of operations and of cash flows for the three years ended December 31, 1996, 1995 and 1994 present the inmate telephone operations as part of continuing operations. On October 9, 1995, the Company sold a portion of its inmate telephone operations for approximately $1.7 million. The net loss on sale of approximately $0.4 million is included in the Loss from impairment of inmate assets in the accompanying consolidated statement of operations in 1995. The Company's 1994 results included approximately $4.0 million for the anticipated loss on disposal and $0.1 million for the anticipated operating losses from January 1, 1995 through disposition of the inmate telephone operations. The inmate division's actual operating losses in 1995 for the period it was accounted for as a discontinued operation were $0.1 million. The $4.0 million accrual for the loss on disposal has been reversed in discontinued operations and recorded as an impairment of assets in continuing operations in the accompanying consolidated statement of operations for the year ended December 31, 1995. Also included in the loss for impairment of inmate assets in 1995 is the write-off of approximately $0.4 million of intangible assets associated with location contracts not renewed by the Company. On November 13, 1995, the Company sold its cellular telephone operations for approximately $6.0 million (see Note 17). 45 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Principles of consolidation The accompanying consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The divestiture of the Company's prepaid calling card and international telephone centers and their results of operations have been segregated and are reported as a separate component of income from continuing operations (see Note 16). The divestiture of the Company's cellular telephone operations has been accounted for as discontinued operations. Accordingly, operating results and cash flows for the business have been segregated and reported as discontinued operations in the accompanying consolidated statements of operations and cash flows (see Note 17). Acquisitions and joint ventures During March 1994, the Company acquired certain assets of Emro Marketing Company for a purchase price of $1.7 million in cash. The assets acquired included approximately 1,045 pay telephones. During June 1994, the Company acquired certain assets of the Atlantic Telco Joint Venture for approximately $11.5 million in cash. The Atlantic Telco Joint Venture owned and operated approximately 3,300 pay telephones and related location contracts. These phones are located primarily in Maryland and Virginia. During July 1994, the Company acquired certain assets of Telecorp Funding, Inc. for approximately $1.9 million in cash and the Company's Common stock. The assets acquired included approximately 600 public pay phones and related location contracts located primarily in New York City. The Company issued additional shares of its Common stock in 1996 and 1995 related to the asset purchase agreement. During October 1994, the Company acquired Telecoin Communications, Ltd. for approximately $7.3 million in cash, assumption of liabilities and issuance of the Company's Common stock. The assets acquired included approximately 2,155 pay telephones and their related location contracts. These phones are located primarily in Ohio and Pennsylvania. The Company issued additional shares of its Common stock in 1996 and 1995 related to the asset purchase agreement. All 1994 acquisitions were accounted for as purchases. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Recognition of revenue Revenue is recognized when earned. Coin call and non-coin call (alternate operator service and store and forward) revenues are recognized at the time the call is made. Revenue from service contracts is recognized on a straight-line basis over the term of the contract. 46 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents The Company defines cash and cash equivalents as those highly liquid investments purchased with an original maturity of three months or less. Property and equipment Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets commencing when the equipment is installed or placed in service. Installed telephones and related equipment includes installation and other costs which are capitalized and amortized over the estimated useful lives of the equipment. The costs associated with maintenance, repair and refurbishment of telephone equipment are charged to expense as incurred. Effective January 1, 1996, the Company revised its depreciation and amortization policy for certain fixed and intangible assets used in the inmate telephone operations. Based on increased competition and certain other changes within the inmate telephone industry, the Company reduced the useful lives of various assets to five years. This change in accounting estimate resulted in an increase in depreciation and amortization expense and net loss of approximately $1.3 million or $.08 per common share for the year ended December 31, 1996. The capitalized cost of equipment and vehicles under capital leases is amortized over the lesser of the lease term or the asset's estimated useful life, and is included in depreciation and amortization expense in the consolidated statements of operations. Inventories Inventories, which consist primarily of replacement parts, are carried at the lower of cost or market, with cost being determined on the first-in, first-out basis. Intangible assets Location contracts and intangible assets primarily result from business combinations and signing bonuses paid to property owners and include acquisition costs allocated to location owner contracts, agreements not to compete, and other identifiable intangible assets. These assets are amortized on a straight-line basis over the estimated life (3 to 10 years). Accumulated amortization at December 31, 1996 and 1995 was approximately $21.6 million and $15.1 million, respectively. 47 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Goodwill arising from acquisitions is amortized on a straight-line basis over the periods to be benefited or 20 years, whichever is less. Accumulated amortization at December 31, 1996 and 1995 was approximately $4.4 million and $2.8 million, respectively. The carrying value of intangible assets is periodically reviewed by the Company and impairments, if any, are recognized when the expected future undiscounted cash flows derived from such intangible assets are less than their carrying value. During the first quarter of 1996, the Company adopted Statement No. 121 ("SFAS 121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The effect of adoption did not have a material impact on the financial results of the Company for the year ended December 31, 1996. Investments Investments in which the Company has an ownership interest of at least 20 percent but not more than 50 percent are accounted for under the equity method. Investments of less than 20 percent are generally accounted for under the cost method. The Company's investment in Global Telecommunications Solutions, Inc. ("GTS") is accounted for in accordance with Statement No. 115 ("SFAS 115"), Accounting for Certain Investments in Debt and Equity Securities. Investments in debt and equity securities, other than those accounted for under the equity method, are reported at fair value with unrealized gains or losses, net of tax, recorded as a separate component of Shareholders' Equity (see Note 16). Other assets Other Assets include primarily deferred financing costs, long-term deposits and a note receivable from a third party which purchased assets from the Company. The deferred financing costs are amortized over the term of the debt on a straight line basis. At December 31, 1996 and 1995, accumulated amortization of the deferred financing costs was approximately $1.2 million, and $0.3 million, respectively. Other (income) expense Other (income) expense is comprised of amounts recorded in connection with settlements of employment contracts with former officers, the Company's equity interest in the operating results of an unconsolidated affiliate and amounts related to the resolution of outstanding litigation. 48 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income taxes Deferred income taxes are recognized for temporary differences between the tax and financial reporting bases of the Company's assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the tax assets will not be realized. Stock Options In October 1995, the FASB issued Statement No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation, which requires companies to either recognize expense for stock-based awards based on their fair value on the date of grant or provide footnote disclosures regarding the impact of such changes. The Company adopted the provisions of SFAS 123 on January 1, 1996, but will continue to account for options issued to employees or directors under the Company's non-qualified stock option plans in accordance with Accounting Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees. The exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant; therefore, no compensation expense is recognized under APB 25. Earnings per share Primary earnings per share amounts are computed based upon the weighted average number of common and common equivalent shares outstanding, assuming proceeds from the assumed exercise of options were used to purchase common shares outstanding at the average market price during the period, unless such exercise is antidilutive. Fully diluted earnings per share assumes that the proceeds were used to purchase common shares outstanding at the higher of the market value per share at the end of each period or the average market value during the period, unless such exercise is antidilutive (see Note 12). Reclassification Certain amounts for the prior years have been reclassified to conform with the current year presentation. NOTE 3 - ACCOUNTS RECEIVABLE Accounts receivable at December 31, 1996 and 1995, consist primarily of amounts currently due from a billing and collection clearinghouse for non-coin calls placed through the Company's public pay and inmate telephones and commissions from various operator service companies which have been selected to handle non-coin calls not placed through the Company's automated operator system. Pursuant to the Company's agreement with the billing and collection clearinghouse, the collections from LECs are deposited into a trust account and then distributed directly to the Company. The balance due from one billing and collection clearinghouse was approximately $4.0 million and $4.6 million at December 31, 1996 and 1995, respectively. The balance due from one operator service Company was approximately $3.5 million and $2.1 million at December 31, 1996 and 1995, respectively. 49
PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment is summarized as follows (in thousands): Estimated December 31, useful lives 1996 1995 (in years) -------- -------- ------------ Installed telephones and related equipment.... $111,276 $106,031 5-10 Telephones and related equipment pending installation................................ 6,481 9,644 5-10 Land.......................................... 950 950 Building and improvements..................... 4,362 4,357 25 Furniture, fixtures and office equipment...... 7,488 7,273 5-7 Vehicles and equipment under capital leases... 3,910 4,619 4 Other......................................... 1,034 1,193 5 ------- ------- 135,501 134,067 Less accumulated depreciation and amortization, including $2,198 and $1,689 for capital leases...................................... (70,434) (55,866) ------- ------- $ 65,067 $ 78,201 ========= ========
Depreciation expense for the periods ended December 31, 1996, 1995 and 1994 was $15.8 million, $14.7 million and $15.3 million, respectively. During 1995, the Company recorded obsolescence reserves of approximately $1.7 million for telephone and related equipment pending installation which is included in Field service and collection expenses in the accompanying consolidated statements of operations. The majority of the Company's assets are security for long-term bank debt (see Note 6). The Company has entered into various noncancellable leases which are classified as capital leases. Future minimum lease payments under the capitalized lease obligations, including imputed interest, are as follows (in thousands): For the year ending December 31, 1997................................. $ 1,088 1998................................. 501 1999................................. 87 2000................................. 38 2001................................. 10 -------- 1,724 Less amount representing imputed interest............................ (183) -------- Present value of obligations under capital leases...................... 1,541 Less current interest payable........ (16) Less current portion................ (952) -------- $ 573 ======== 50
PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following (in thousands): December 31, --------------------- 1996 1995 -------- --------- Telecommunication charges..................... $ 3,473 $ 5,165 Commissions................................... 7,879 4,503 Employee costs................................ 2,023 1,644 Other......................................... 5,865 8,291 -------- -------- $ 19,240 $ 19,603 ======== ========
NOTE 6 - NOTES PAYABLE AND LONG TERM DEBT Notes payable and long-term debt consist of the following (in thousands): December 31, --------------------- 1996 1995 -------- --------- $100 million Senior Notes due 2002 with a stated interest rate of 12 1/4%............................... $100,000 $100,000 $40 million revolving line of credit with interest rates ranging from the Bank's prime rate plus 1.5% to LIBOR plus 3.0%..................................... - - $10 million revolving line of credit with interest rate at the Bank's prime rate plus 2%. At December 31, 1996, the Bank's prime rate was 8.25% ....................... - - Various notes payable acquired through the acquisition of Telecoin Communications, Ltd. with interest rates ranging from prime plus 1.25% to prime plus 1.5% and maturity dates ranging from due on demand to October 1998....... 1,205 1,745 Other.................................................. - 20 -------- --------- 101,205 101,765 Less current maturities ............................... (548) (506) --------- --------- $100,657 $101,259 ======== =========
51 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During July 1995, the Company completed the sale of $100.0 million of Senior Notes due 2002 (the "Senior Notes") and the issuance of 150,000 shares of Series C Cumulative Convertible Preferred Stock (the "Preferred Stock") for $15.0 million (see Note 7). The Senior Notes bear interest at 12 1/4% per annum, payable semiannually beginning January 15, 1996. The Senior Notes are senior unsecured obligations of the Company and are redeemable at the option of the Company, in whole or in part, on or after July 15, 2000, at pre-established redemption prices together with accrued and unpaid interest to the redemption date. The Company paid approximately $5.1 million in issuance costs which was deferred and is being amortized over the term of the debt. Simultaneously with the sale of the Senior Notes and issuance of the Preferred Stock, the Company executed the Fourth Amended and Restated Loan and Security Agreement (the "Loan Agreement") with Creditanstalt Bankverein (the "Bank"). The Loan Agreement provided for a new $40.0 million credit facility bearing interest at rates ranging from the Bank's prime rate plus 1 1/2% to LIBOR plus 3%. During April 1996, the Company amended the Fourth Amended Loan and Security Agreement (the "Amendment") with the Bank. The Amendment, among other things, decreased the facility to $10.0 million and reduced the requirement of the financial covenants. The amended credit facility bears interest at the Bank's prime rate plus 2% and requires all outstanding principal balances to be repaid in September 1997. At the same time, the Company decreased to $5.25 the exercise price of the warrants held by Creditanstalt American Corporation to acquire Common Stock or Series B Preferred Stock of the Company that had not already been repriced. The Loan Agreement is secured by substantially all of the Company's assets and contains certain restrictive covenants which, among other things, require the Company to maintain certain net worth and cash flow levels and places certain restrictions on the payment of dividends. At December 31, 1996, the Company was in compliance with the amended covenants and had no amounts borrowed under the facility. During March 1997, the Company executed an amendment increasing the credit facility to $20.0 million. The interest rate on balances outstanding under the credit facility vary based upon the leverage ratio maintained by the Company. All outstanding principal balances are due in full in 2002, and interest is payable monthly for loans based on the prime rate and quarterly for loans based on the LIBOR rate. A commitment fee of 1/2 of 1% is charged on the aggregate daily unused balance of the credit facility under the Loan Agreement. The Loan Agreement is secured by substantially all of the Company's assets and contains certain restrictive covenants which, among other things, require the Company to maintain certain cash flow levels and interest coverage ratios and places certain restrictions on the payment of dividends. As a result of various 1995 amendments to its credit facilities, the Company recorded extraordinary losses of $5.0 million for the write off of deferred financing costs associated with the early extinguishment of debt, before the income tax benefit of approximately $1.7 million. 52
PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future maturities of the notes payable and long-term debt, based on amounts outstanding as of December 31, 1996, are as follows (in thousands): 1997............................................... $ 548 1998............................................... 657 1999............................................... - 2000............................................... - 2001............................................... - Thereafter 100,000 -------- $101,205 ========
NOTE 7 - PREFERRED STOCK In March 1997, the Company's shareholders approved an increase to the Company's authorized Preferred Stock to 5 million shares. In connection with the refinancing discussed above, the Company issued 150,000 shares of Series C Cumulative Convertible Preferred Stock to UBS Partners, Inc., a wholly-owned subsidiary of Union Bank of Switzerland, for $15.0 million. The Preferred Stock cumulates dividends at an annual rate of 7%. The dividends are payable in cash or, at the Company's option during the first three years, will cumulate. The Preferred Stock is immediately convertible into shares of Common stock of the Company at an initial conversion price of $5.25 per share and is mandatorily redeemable by the Company in July 2005. The liquidation value and annual dividends are $100 per share and $7 per share, respectively. Pursuant to the terms of the Preferred Stock, the holders are entitled to elect two of the six members of the Company's Board of Directors and have voting rights equal to those of Common Shareholders. The Company paid issuance costs of approximately $1.2 million. In connection with the sale of the Preferred Stock, the Company issued warrants to purchase 275,000 shares of Common stock of the Company to a third party which assisted with the transaction for approximately $100,000. The warrants are exercisable at $5.25 per share through the year 2005 and are recorded at a value of approximately $0.6 million. Issuance costs and the value of the warrants are recorded as a reduction of the preferred stock balance and are accreted using the effective interest method through capital in excess of par value over the term of the Preferred Stock. NOTE 8 - SHAREHOLDERS' EQUITY In March 1997, the Company's shareholders approved an increase to the number of authorized shares of the Company's Common Stock to 75 million shares. The Company has a sufficient number of authorized common shares available to issue upon the conversion of the outstanding preferred stock, warrants and stock options. In 1994, 1993, 1992 and 1990, under the terms of the Company's loan agreement, as amended, the Company granted its lender warrants to purchase 250,000, 300,000, 150,000, and 900,000 shares of common or preferred stock, respectively. The exercise price of 900,000 of these shares is $3.17 per share and the remaining 700,000 shares is $5.25 per share. The Company's lender exercised its right to purchase 150,000, 450,000 and 300,000 shares of Common stock at $3.17 per share during 1994, 1993 and 1992, respectively. All warrants expire in the year 2000. 53 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company's preferred stock may be issued from time to time at the discretion of the Board of Directors without shareholder approval. The Board of Directors is authorized to issue these shares in different series and, with respect to each series, to determine the dividend rate, provisions regarding redemption, conversion, liquidation preference and other rights and privileges. NOTE 9 - STOCK OPTION PLANS The Company maintains four non-qualified stock option plans covering primarily employees and directors. The Company continues to account for its stock options issued under APB 25. Under APB 25 because the exercise price of the underlying stock option equals the market price of the common stock on the date of grant no compensation expense is recognized. The Company elected not to apply the fair value accounting methodology prescribed by SFAS 123, since this statement requires the use of option valuation models that were not developed for use in valuing employee stock options. Instead, the Company has provided the additional required information related to outstanding stock options below. The 1987 Non-Qualified Stock Option Plan and 1994 Stock Incentive Plan cover substantially all employees and provide for the issuance of options to purchase up to 2,100,000 shares and 100,000 shares of the Company's Common Stock, respectively. The 1987 and 1993 Non-Employee Director Stock Option Plans allow for the issuance of options for the purchase of 750,000 shares and 315,000 shares, respectively. Options are issued to non-employee members of the Company's Board of Directors for their service. In addition, prior to February of 1995, the Company, from time to time, issued options to purchase shares of the Company's Common Stock outside of the established stock option plans. The grant of these options have been approved by the Company's shareholders. Options to purchase shares of the Company's Common Stock are issuable at the discretion of committees appointed by the Board of Directors which determine the specific terms of options granted. Currently, options vest at rates of 10%, 33% and 100% per year from the date of issuance and may expire after 5 to 10 years of continued employment or within 30 days of the termination or resignation of the employee or director. The following table summarizes information related to the Company's stock options activity for the years ended December 31 (in thousands, except for per share data):
1996 1995 1994 -------------------- -------------------- -------------------- Number Wtd. Avg. Number Wtd. Avg. Number Wtd. Avg. of Shares Ex. Price of Shares Ex. Price of Shares Ex. Price --------- --------- --------- --------- --------- --------- Outstanding beginning at year......... 2,272 $6.42 2,794 $6.33 1,803 $5.85 Granted....... 283(1) 2.92 200 3.68 1,198 7.29 Exercised..... - - (93) 3.27 (177) 4.69 Canceled...... (846) 5.90 (629) 5.59 (30) 8.36 --------- --------- --------- Outstanding end of year.. 1,709 6.05 2,272 6.42 2,794 6.33 ======== ======== ======== Exercisable end of year.. 1,645 6.09 2,055 6.39 1,975 6.19 ======== ======== ========
- --------- (1) The Company is contractually obligated to issue an additional 700,000 options to certain key executives. To date these options have not been issued. 54 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The exercise prices for options outstanding as of December 31, 1996 ranged from $2.00 to $11.38. The weighted average contractual life of those options is approximately 2.7 years. The fair value of options granted during 1996 and 1995 were estimated using a binomial valuation model. The binomial option pricing models were developed for use in estimating the fair value of traded options that are fully transferrable with no vesting restrictions. The valuation models require the input of highly subjective assumptions including expected stock price volatility and are extremely sensitive to variations in the assumptions used. Since the Company's stock options do not possess the same characteristics as options for which the valuation models use was intended and small variations in the input assumptions used may produce materially different option valuations, management does not believe that the use of existing valuation models provides a reliable single measure of the fair value of the Company's stock options. The following weighted-average assumptions were used in calculating the fair values of options granted in 1996 and 1995, respectively: risk free interest rates of 6.36% and 6.06%; dividend yields of 0%; volatility factors of 0.706 and 0.846; and weighted average expected life of the options of 4.0 years and 3.3 years. Pro forma net income and earnings per share information is provided in accordance with SFAS 123 as if the Company's stock options were accounted for under the fair value method. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting period. The following table sets forth pro forma net loss and earnings per share for the years ended December 31: (in thousands, except for per share data)
1996 1995 --------- --------- Pro forma net loss................................. $(16,311) $(38,213) Pro forma earnings per share....................... Primary...................................... $ (1.07) $ (2.40) Fully Diluted................................ $ (1.07) $ (2.40)
The effect on pro forma net loss and earnings per share of applying SFAS 123 is not necessarily indicative of pro forma net loss and earnings per share for future periods until the new fair value method is applied to all non-vested awards. 55 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - EMPLOYEE SAVINGS PLAN During November 1990, the Company established a savings plan under the provisions of section 401(k) of the Internal Revenue Code (the "Plan"), which covers substantially all employees. The Company's contributions to the Plan are discretionary. Employees participating in the Plan vest in amounts contributed by the Company over a period of 7 years. The Company matches 25% of employee contributions to a maximum of 6% of employee earnings each plan year. The Company's contributions totaled approximately $0.1 million, for the years ended December 31, 1996, 1995 and 1994. NOTE 11 - INCOME TAXES The components of the provision for income taxes are as follows (in thousands):
For the year ended December 31, ------------------------ 1996 1995 1994 ------ ------ ------- Currently payable: Federal................................ $ - $ - $ - State.................................. - 107 82 Deferred................................. - (1,845) (4,487) ----- -------- -------- $ - $(1,738) $(4,405) ===== ======== ========
A tax benefit of $0.3 million attributable to the exercise of employee stock options was credited to shareholders' equity during 1994. 56
PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A reconciliation between the Company's effective income tax rate and federal income tax statutory rate is as follows: For the year ended December 31, --------------------------- 1996 1995 1994 ------- ------ ------- Statutory tax rate............................. (34.0)% (34.0)% (34.0)% Change in valuation allowance.................. 37.5 29.3 - Non-deductible expenses........................ - 1.0 (2.7) State taxes and other, net..................... (3.5) (3.5) (1.5) ------- ------ ------- 0% (7.2)% (38.2)% ======= ======= ========
The significant temporary differences included in the net deferred tax asset as of December 31, 1996 and 1995 are as follows (in thousands): December 31, ---------------------- 1996 1995 --------- --------- Deferred tax assets: Net operating loss carryforward ................... $ 23,604 $ 20,185 Alternative Minimum Tax Credit carryforward....... 218 218 Other.............................................. 9,754 9,343 -------- --------- Total gross deferred tax assets.................... 33,576 29,746 Less-valuation allowance........................... 19,406 12,023 -------- --------- Total tax assets................................... 14,170 17,723 -------- --------- Deferred tax liabilities: Difference between book and tax bases of fixed assets............................................ (9,289) (13,313) Other.............................................. (1,474) (1,003) -------- --------- Total deferred tax liabilities..................... (10,763) (14,316) -------- --------- Net deferred tax assets........................... $ 3,407 $ 3,407 ======== ========
At December 31, 1996, the Company has tax net operating loss carry forwards of approximately $74.5 million, which expire in various amounts in the years 2002 to 2011. Approximately $3.2 million of these net operating loss carryforwards relate to business acquisitions for which annual utilization will be limited to approximately $0.3 million, with further limitation if future ownership changes occur. In addition, these loss carryforwards can only be utilized against future taxable income, if any, generated by these acquired companies as if these companies continued to file separate income tax returns. During 1996, the deferred tax asset valuation allowance against net operating losses increased to $19.4 million. Realization of deferred tax assets is dependent upon sufficient future taxable income during the periods that temporary differences and carryforwards are expected to be available to reduce taxable income. Based upon past earnings history, trends, regulatory changes, expiration dates of net operating loss carryforwards and tax planning strategies that could be implemented, if necessary, the Company believes it will be able to realize its $3.4 million of deferred tax assets. In addition, the Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets, which may not be realized due to the expiration of its operating loss carryforwards. 57
PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - EARNINGS PER SHARE For the years ended December 31, 1996, 1995 and 1994, the treasury stock method was used to determine the dilutive effect of the options and warrants on earnings per share data. Net loss from continuing operations per share and the weighted average number of shares outstanding used in the computations are summarized as follows (in thousands, except per share data): December 31, 1996 December 31, 1995 December 31, 1994 Fully Fully Fully Primary Diluted Primary Diluted Primary Diluted -------- --------- --------- --------- ------- -------- Net loss from continuing operations $(15,992) $(15,992) $(22,467) $(22,467) $(7,112) $(7,112) Deduct: Cumulative preferred stock dividend requirement 1,050 1,050 473 473 - - -------- --------- --------- --------- ------- -------- Loss for per share computations $(17,042) $(17,042) $(22,940) $(22,940) $(7,112) $(7,112) ========= ========= ========= ========= ======== ======== Number of shares: Weighted average common shares outstanding 16,188 16,188 16,091 16,091 15,713 15,713 Add: Net additional shares issuable(1) - - - - - - -------- --------- --------- --------- ------- -------- Weighted average shares used in the per share compu- tations...... 16,188 16,188 16,091 16,091 15,713 15,713 ========= ========= ========= ========= ======== ======== $ (1.05) $ (1.05) $ (1.43) $ (1.43) $ (.45) $ (.45) ========= ========= ========= ========= ======== ========
_________________ 1. Assumes exercise of outstanding Common stock equivalents (options and warrants) at the beginning of the period, net of 20% limitation, if applicable, on the assumed repurchase of stock. 58 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS The fair market value of financial instruments held by the Company at December 31, 1996 are based on a variety of factors and assumptions and may not necessarily be representative of the actual gains or losses that will be realized in the future and do not include expenses that could be incurred in an actual sale or settlement. Long-Term Debt The fair value of the Company's Senior Notes was estimated by obtaining quoted market prices. The carrying amount of the Company's Senior Notes at December 31, 1996 and 1995 was approximately $100.0 million. The fair value of the Company's Senior Notes as of the same dates were $105.0 million and $80.0 million, respectively. The fair value of the Company's credit facility is assumed to be equal to its carrying value. At December 31, 1996 and 1995 there were no amounts outstanding under the credit facility. Preferred Stock The Company's Preferred Stock does not have a quoted market price and the Company does not believe it is practicable to estimate a fair value different from the security's carrying value of approximately $13.6 million because of features unique to this security including, but not limited to, the right to appoint two directors and super majority voting requirements. The amounts due upon redemption equal $15.0 million plus accumulated dividends. NOTE 14 - LEASES The Company leases office and warehouse space under various noncancellable operating lease agreements expiring through 1999. Rental expense under such leases aggregated approximately $0.7 million, $0.8 million and $0.7 million for the years ended December 31, 1996, 1995 and 1994, respectively. The Company received approximately $0.2 million in sub-leasing income in both 1996 and 1995 and allocated approximately $0.2 million in 1995 and 1994 for rent expense to its cellular telephone operations. Under a sub-leasing agreement with a third party, the Company will receive $0.1 million in 1997. 59
PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Future minimum payments under the above rental agreements as of December 31, 1996 are as follows (in thousands): For the year ending December 31, ----------------------------------------- 1997.......................... $ 263 1998.......................... 61 1999.......................... 16 2000.......................... - 2001.......................... - --------- $ 340 =========
NOTE 15 - COMMITMENTS AND CONTINGENCIES In July 1996, litigation with Bell South Telecommunications, Inc. was amicably resolved to the satisfaction of the parties. During July 1995, the Company reached an agreement in principle for the settlement (the "Proposed Settlement") of a lawsuit seeking class action certification brought by two shareholders against the Company and certain of its officers and directors in the United States District Court, Southern District of Florida, alleging the violation of certain federal securities laws. The Company's share of the Proposed Settlement of approximately $0.9 million was recorded in the accompanying Consolidated Statements of Operations for the year ended December 31, 1995. The Proposed Settlement was approved by the United States District Court during January 1996. During April 1995, the Company settled a dispute with one of its vendors which resulted in a reduction of the amounts owed. Accounts payable and telephone charges were reduced during the first quarter of 1995 by approximately $1.3 million to reflect this settlement. In addition to the aforementioned litigation, the Company is a party to certain legal actions arising in the normal course of business. In the opinion of management, the ultimate outcome of such litigation will not have a material effect on the financial position, results of operations or cash flows of the Company. The Company has employment contracts with certain officers which expire through December 31, 1999. The contracts provide for increases in annual base salary, contingent upon the profitability of the Company, as well as bonus and stock option provisions. NOTE 16 - PREPAID CALLING CARD AND INTERNATIONAL TELEPHONE CENTERS In December 1994, in an effort to return its focus to its core public pay telephone business, the Company's Board of Directors approved the sales of the Company's prepaid calling card and international telephone center operations. 60 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During February 1995, the Company sold its prepaid calling card business to Global Link Teleco Corporation ("Global Link") for approximately $6.3 million of cash, promissory notes and shares of common stock of Global Link. Accordingly, a provision for losses from January 1, 1995 through February 15, 1995, the divestiture date, of approximately $0.3 million has been included in loss on disposal for the period ended December 31, 1994. Under the terms of the sale agreement, Global Link, on behalf of the Company, was responsible for the collection of receivables which arose prior to the sale of the Company's prepaid calling card business. As a result of Global Link's unsuccessful attempt to collect approximately $1.1 million of such receivables, the Company has included the write off of these amounts in the Loss on disposal of prepaid calling card and international telephone centers during the year ended December 31, 1995. On March 1, 1996, Global Link consummated a merger transaction (the "Merger") with Global Telecommunications Solutions, Inc. ("GTS"). The Company exchanged its outstanding notes and other receivables including accrued interest for shares of GTS Common stock, $0.6 million in cash and $1.5 million of notes receivables with various due dates through September 1997. The Company's 19.99% equity ownership in Global Link was converted in the Merger into GTS shares. For financial accounting purposes approximately $1.0 million of net gains will be deferred until the outstanding receivables are collected. In addition, a gain of approximately $0.3 million was recorded in the first quarter of 1996 related to amounts collected at the time of the transaction. The Company's net investment in Global Link at December 31, 1995 was approximately $3.7 million and is included in Investments in unconsolidated affiliate in the accompanying consolidated balance sheet. As of the Merger date, the fair value of the Company's investment in GTS Common Stock was approximately $3.1 million. The fair value of the Company's investment in GTS common stock at December 31, 1996 was approximately $1.7 which is net of approximately $1.5 million of unrealized investment losses. Prior to the Merger, the Company's investment in Global Link was accounted for using the equity method. The Company's share of the results of operations of Global Link from the divestiture date through December 31, 1995 are included in "Other" in the accompanying consolidated statements of operations. The 1994 results of operations of the prepaid calling card business have been segregated and reported as a separate component of income from continuing operations. During the year ended December 31, 1994, the Company recorded a provision of approximately $3.4 million for the estimated impairment of asset value for its international telephone center. On September 28, 1995, the Company sold its international telephone center operations for $0.5 million in cash and a $1.5 million promissory note. For financial accounting purposes, the recovery of $2.0 million previously written-off will be recognized as the cash is received. Accordingly, a gain of approximately $0.3 million and $0.5 million has been included in (Gain) loss on disposal of prepaid calling card and international telephone centers in the accompanying consolidated statements of operations during the year ended December 31, 1996 and 1995, respectively. 61
PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables set forth the results of operations for the Company's prepaid calling card business and international telephone center which are included in the accompanying consolidated financial statements (in thousands): December 31, ---------------------------- 1996 1995 1994 -------- ------- --------- Revenues.............................. $ - $ - $ 5,149 Loss from operations.................. - - (1,816) Gain (loss) on disposal............... 545 (566) (3,690) -------- ------- --------- Total gain (loss) from operations before income taxes.................. 545 (566) (5,506) Benefit from income taxes............. - - 2,064 -------- ------- --------- Net gain (loss) from operations....... $ 545 $ (566) $ (3,442) ====== ======= =========
The prepaid calling card and international telephone centers had revenues of approximately $0.8 million and net losses of approximately $0.3 million for the year ended December 31, 1995 which were previously accrued for in 1994. NOTE 17 - DISCONTINUED OPERATIONS In December 1994, as part of the effort to return its focus to its core public pay telephone business, the Company's Board of Directors also adopted a formal plan to divest itself of its inmate telephone and cellular telephone operations. In 1994, in connection with the planned divestiture of the cellular telephone operations, the Company recorded a provision for the estimated impairment of asset values and losses through the anticipated divestiture date of approximately $4.8 million, net. This provision included approximately $3.2 million for the estimated operating losses of the cellular telephone operations for the year ended December 31, 1995. The provision was net of an estimated gain on disposition of approximately $1.8 million and included a valuation allowance of approximately $3.4 million against deferred tax assets that may not be realized upon the disposition of the cellular telephone operations. On November 13, 1995, the Company sold its cellular telephone operations to Shared Technologies Cellular, Inc. ("STC") for approximately $6.0 million. The proceeds from the sale were $0.3 million in cash, a $2.0 million promissory note bearing interest at 8.0%, with principal and interest payable semi-annually through 2000, shares of STC Common Stock, a $2.5 million potential revenue earn out, and payment of approximately $1.2 million of PTCC's liabilities. For financial accounting purposes the $2.5 million potential earn out will be recognized as received. This transaction resulted in a loss of approximately $14.6 million which was recorded as a loss on disposal in September 1995. The loss on disposal includes a valuation allowance of approximately $5.5 million to reduce the 62 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS deferred tax assets generated by this transaction to a level which, more likely than not, will be realized. The difference between the actual loss and the estimated loss on disposal resulted from ,among other things, changes in market conditions, disputes over liabilities for cellular cloning charges, decreased revenue attributable to PIN numbers introduced by the cellular carriers to prevent cloning and a delay in creating a new phone technology to deal with PIN numbers and other matters. For the period from January 1, 1995 through the divestiture date, the cellular telephone operations had revenues of approximately $6.8 million and net operating losses of $3.7 million which were previously accrued for in 1994. During the third quarter of 1995, the Company decided to retain the remaining portion of its inmate telephone operations (see Note 1). The accompanying consolidated financial statements present the inmate telephone operations as part of continuing operations. The Company's 1994 results included approximately $4.0 million for the anticipated loss on disposal and $0.1 million for the anticipated operating losses from January 1, 1995 through disposition of the inmate telephone operations. The inmate division's actual operating losses for the period it was accounted for as a discontinued operation, were $0.1 million. The $4.0 million accrual for the loss on disposal has been reversed in discontinued operations and recorded as an impairment of assets in continuing operations in the accompanying consolidated statements of operations for the year ended December 31, 1995. The following combining tables set forth the and results of operations and loss on disposal of the cellular telephone operations as they are included in the consolidated financial statements (in thousands):
For the Years Ended December 31, ----------------------------- 1996 1995 1994 --------- --------- -------- Revenues...................................... $ - $ - $ 11,581 Income (loss) from discontinued operations before income taxes......................... - - (6,253) Loss on disposal.............................. - (14,600) (1,380) --------- --------- -------- Total net loss on discontinued operations before income taxes......................... - - (7,633) (Provision for) benefit from income taxes..... - - (1,113) Minority interest, net........................ - - - --------- --------- -------- Net loss from discontinued operations........ $ - $(14,600) $ (8,746) ========= ========= ========
63 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18 - RELATED PARTY TRANSACTIONS In March 1994, the Company sold certain assets used in the operation of the Company's two telephone centers located in New York City to Global Link. The total purchase price for the transaction was $2.5 million and 10% of the issued and outstanding capital stock of Global Link. The Company recorded a net gain on the sale of approximately $2.0 million. At the time of the transaction, Messrs Bernard M. Frank and Jody Frank, both directors of the Company, were directors and shareholders of Global Link. In addition, Mr. Jeffrey Hanft, an officer and director of the Company, and Mr. Robert D. Rubin, an officer of the Company, were appointed directors of Global Link as a result of this transaction. Since the March 1994 transaction with Global Link, Mr. Bernard M. Frank has resigned as a director of the Company. During February 1995, the Company sold its prepaid calling card business to Global Link for approximately $6.3 million. The Company received $1.0 million in cash, a $5.3 million promissory note due February 1998, bearing interest at 8.5%, payable quarterly, and shares of Common stock of Global Link. As a result of the February 1995 transaction, and because of a drafting error discovered in May 1995 that did not reflect the intentions of the parties, the Company's interest in the outstanding common stock of Global Link was 28.8% instead of 19.99%. To correct this error, the Company agreed with Global Link to reduce its share ownership to the intended 19.99% level. Prior to the February 1995 transaction, Mr. Robert D. Rubin resigned as a director of Global Link. Additionally, Mr. Jeffrey Hanft resigned as a director of Global Link in October 1995, and Mr. Jody Frank resigned as a director of Global Link prior to the March 1996 transaction with GTS (see Note 16). During 1994 and 1995, the Company made loans of approximately $3.6 million to certain officers and directors for, among other things, the repayment of debt previously incurred by them in connection with the exercise of stock options and payment of related income taxes. The officers and directors exercised the Stock Options in December 1993 to purchase the Company's Common Stock for purposes of increasing the Company's shareholders' equity without accessing external capital markets. The officers and directors executed promissory notes for a portion of the amounts due which became payable on March 28, 1996. In addition, during 1994 and 1995, under the terms of employment contracts with certain officers, the Company paid approximately $0.6 million in life insurance policy premiums. Such premiums are required to be reimbursed by such officers upon termination. During the fourth quarter of 1995, the Company recorded a reserve for potential uncollectible loan and insurance amounts of approximately $3.2 million which is included in "Other" in the accompanying consolidated statements of operations. During December 1995, the Company entered into a settlement agreement in connection with the termination of an employment contract and settlement of a claim made by Robert D. Rubin, the Company's former president. As part of the settlement agreement, approximately $1.4 million of severance costs were incurred by the Company and have been recorded in "Other" in the accompanying 1995 consolidated statement of operations. Mr. Rubin repaid approximately $0.4 million of amounts owed the Company as part of the settlement agreement. In February 1996, the Company restructured approximately $0.2 million of outstanding loans to Jody Frank, a director of the Company. In connection with the restructuring, the Company received from Mr. Frank promissory notes with various due dates through 2007 and a stock pledge agreement encumbering 35,000 shares of the Company's Common Stock held by Mr. Frank. 64 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During April 1996, the Company terminated Richard F. Militello, the Company's former Chief Operating Officer, without cause. Pursuant to terms of his employment agreement, Mr. Militello was due a severance payment of approximately $0.5 million. The after tax portion of this amount was offset against certain outstanding loans owed to the Company by Mr. Militello. Approximately $0.2 million of severance costs incurred by the Company in connection with Mr. Militello's termination have been recorded in "Other" in the accompanying 1996 consolidated statement of operations. During October 1996, the Company entered into a separation agreement with Jeffrey Hanft, the Company's former Chairman and Chief Executive Officer. As part of the separation agreement, the Company received a promissory note for amounts owed by Mr. Hanft, which becomes due and payable in 2001. In addition, the Company received from Mr. Hanft a stock pledge agreement encumbering 0.3 million shares of the Company's Common Stock issuable upon exercise of certain employment agreement options. Approximately $0.3 million of severance costs incurred by the Company in connection with the separation agreement have been recorded in "Other" in the accompanying 1996 consolidated statement of operations. 65
PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 19 - BUSINESS SEGMENT INFORMATION: The Company's continuing operations consist of public pay telephones and inmate telephones. Certain business segment information for the years ended December 31, 1996, 1995 and 1994 are as follows (in thousands): 1996 1995 1994 -------- -------- -------- Revenues: Public pay .................. $107,006 $112,240 $114,958 Inmate....................... 17,951 26,029 42,869 Other(1)..................... - 122 1,615 -------- -------- --------- $124,957 $138,391 $159,442 ======== ======== ======== Operating (loss) income: Public pay................... $ (1,938) $ (7,720) $ (641) Inmate....................... (1,724) (4,814) 2,202 Other(1)..................... - (750) (56) -------- -------- --------- $ (3,662) $(13,284) $ 1,505 ======== ======== ======== Corporate (income) expenses(2).. $ (545) $ 566 $ 5,506 Interest expense................ 12,875 10,355 7,516 -------- -------- --------- Consolidated (loss) income from continuing operations before income taxes and extraordinary item......................... $(15,992) $(24,205) $(11,517) ========= ======== ======== Identifiable assets: Public pay................... $105,676 $117,208 $136,657 Inmate....................... 10,677 16,538 25,434 Other(1)..................... - 144 1,625 Corporate assets(3).......... 24,517 26,181 26,875 -------- -------- --------- $140,870 $160,071 $190,591 ======== ======== ======== Depreciation and amortization expense: Public pay................... $ 20,466 $19,180 $ 18,171 Inmate....................... 3,499 2,881 3,337 Other(1)..................... - - 166 -------- -------- --------- $ 23,965 $ 22,061 $ 21,674 ======== ======== ======== Capital expenditures: Public Pay................... $ 6,455 $ 8,386 $ 7,076 Inmate....................... 435 198 2,526 Other(1)..................... - - 55 Corporate expenditures (3)... 203 190 1,861 -------- -------- --------- $ 7,093 $ 8,774 $ 11,518 ======== ======== ========
______________________ (1) "Other" consists primarily of the Company's international operations. (2) Corporate expenses include the results of operations and loss on disposal of the Company's prepaid calling card and international telephone centers, litigation settlement expense, amounts incurred in connection with the settlement of contracts and notes receivable with certain corporate officers and the equity pick-up of Global Link's operating losses. (3) Corporate assets consist primarily of cash and cash equivalents, land, building, building improvements and assets of discontinued operations. Corporate expenditures consist primarily of land, building, building improvements and expenditures related to discontinued operations. Corporate expenditures do not include amounts paid for acquisitions. 66
SCHEDULE II PEOPLES TELEPHONE COMPANY, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (in thousands) Balance Charged to Balance at beginning costs and at end of period expenses Other(1) Deductions(2) of period ------------ ---------- -------- ------------- ---------- Classification - --------------- YEAR ENDED 12/31/96: Allowance for doubtful accounts. $ 5,108 $ 3,411 - 4,158 $ 4,361 ========== ========= ======== ============ ========== Deferred tax asset valuation allowance. $ 12,023 7,383 - - $ 19,406 ========== ========= ======== ============ ========== Accumulated amortization: Location contracts. $ 11,884 5,663 - - $ 17,547 ========== ========= ======== ============ ========== Intangible assets. $ 3,231 854 - - $ 4,085 ========== ========= ======== ============ ========== Goodwill.......... $ 2,795 1,636 - - $ 4,431 ========== ========= ======== ============ ========== YEAR ENDED 12/31/95: Allowance for doubtful accounts $ 6,035 7,386 - 8,313 $ 5,108 ========== ========= ======== ============ ========== Deferred tax asset valuation allowance......... $ - 12,023 - - $ 12,023 ========== ========= ======== ============ ========== Accumulated amortization: Location contracts $ 6,942 5,090 - 148 $ 11,884 ========== ========= ======== ============ ========== Intangible assets $ 2,544 1,142 - 455 $ 3,231 ========== ========= ======== ============ ========== Goodwill.......... $ 2,001 1,082 - 288 $ 2,795 ========== ========= ======== ============ ========== YEAR ENDED 12/31/94: Allowance for doubtful accounts. $ 2,115 11,621 (43) 7,658 $ 6,035 ========== ========= ======== ============ ========== Accumulated amortization: Location contracts $ 3,656 4,120 (93) 741 $ 6,942 ========== ========= ======== ============ ========== Intangible assets. $ 1,849 1,171 (215) 261 $ 2,544 ========== ========= ======== ============ ========== Goodwill.......... $ 551 924 526 - $ 2,001 ========== ========= ======== ============ ==========
_______________ (1) Adjustments represents the allowance for doubtful accounts and accumulated amortization related to the prepaid calling card and international telephone centers which were reclassified to "net assets held for sale" and the inmate and cellular telephone assets which were reclassified to "net assets of discontinued operations." Also, 1994 amounts include a reclassification of $526 from accumulated depreciation. (2) Deductions represent bad debt write-offs and adjustments to accumulated amortization for assets sold. 67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. The information required by this Item 9 is contained in the Company's Current Report on Form 8-K dated December 15, 1995 previously filed with the Securities and Exchange Commission ("SEC") on December 22, 1995 and Current Report on Form 8K/Amendment No. 1 dated December 15, 1995 previously filed with the SEC on January 5, 1996. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following sets forth the name, age and position of each of the directors and executive officers of the Company: Name Age Position - -------------------- --- ----------------------------------- E. Craig Sanders 52 President, Chief Executive Officer, Director Bonnie S. Biumi 34 Chief Financial Officer, Executive Vice President Lawrence T. Ellman 44 Executive Vice President/ President-National Accounts Bruce W. Renard 43 General Counsel and Executive Vice President-Legal and Regulatory Affairs/Carrier Relations Neil N. Snyder, III 50 Chief Operating Officer, Executive Vice President David A. Arvizu 48 Senior Vice President-Sales and Marketing C. Keith Pressley 53 President-Inmate Telecommunications Division Charles J. Delaney (1)(2) 37 Director Jody Frank (1) 45 Director Robert E. Lund (2) 52 Director Justin S. Maccarone (1)(2) 38 Director
(1) Member of the Compensation Committee (2) Member of the Audit Committee The principal occupation of each director and executive officer for at least the last five years is set forth below: E. Craig Sanders has served as President, Chief Executive Officer and a director of the Company since May 1996. From 1995 to 1996, Mr. Sanders was a partner of PSN Ventures, L.L.C., a company which identifies investment opportunities in the telecommunications industry. From 1994 to 1995, Mr. Sanders served as Chairman and Chief Executive Officer of Matrix Telecom, Inc., a 68 privately held long distance company. From 1982 to 1994, Mr. Sanders was an employee of Sprint Corporation, and held the office of Senior Vice President for Product Management from 1991 until 1994. Bonnie S. Biumi joined the Company in July 1994. Since that time she has served as Chief Financial Officer and, since February 1996, has also served as an Executive Vice President. Prior to joining the Company, Ms. Biumi was a Senior Manager with Price Waterhouse LLP in Miami, Florida. Ms. Biumi is a certified public accountant. Lawrence T. Ellman joined the Company in June 1994 as President of its Pay Telephone Division and held that office until February 1996 when he became Executive Vice President -- Sales. Since September 1996, he has served as Executive Vice President/President-National Accounts. From 1990 until joining the Company, Mr. Ellman was President of Atlantic Telco Joint Venture, an independent public telephone operator acquired by the Company in June 1994. For approximately eight years prior thereto, he was Executive Vice President and Chief Financial Officer of American Potomac Distributing Company, a beverage distributor. Bruce W. Renard joined the Company as General Counsel and Vice President - -- Regulatory Affairs in January 1992 and, since February 1996, has served as General Counsel and Executive Vice President -- Legal & Regulatory Affairs/Carrier Relations. From September 1, 1991 to December 31, 1991, Mr. Renard was a sole practitioner specializing in legal and regulatory consulting services to the telecommunications and utility industries. From August 1984 to September 1991, Mr. Renard was a partner with the Florida law firm of Messer, Vickers, Caparello, French and Madsen, managing the utility and telecommunications law sections of the firm. Prior to that time, Mr. Renard served as Associate General Counsel for the Florida Public Service Commission. Neil N. Snyder III joined the Company in September 1996 as Executive Vice President and Chief Operating Officer. Prior to joining the Company, Mr. Snyder served as a career officer in the U.S. Army rising to the rank of Brigadier General. David A. Arvizu joined the Company in March 1997 as Senior Vice President of Sales and Marketing for local and regional markets. From 1994 to 1997 Mr. Arvizu served as Vice President-Western Region of Western Union Financial Services, Inc.. From 1991 to 1994, he was president of a sales, marketing and consulting service for a co-op of independant Pepsi-Cola franchisees. Prior to 1991, Mr. Arvizu spent twenty years in sales and brand management positions with PepsiCo Inc. and General Foods Corp. C. Keith Pressley joined the Company in February 1994 as Vice President of Management Information Systems. He became President of the Inmate Telecommunications Division in June 1996. Prior to joining the Company, he was Director of Information Systems for Smith International, Inc., an oil field services company, since 1991. Charles J. Delaney has served as a director of the Company since July 1995. Mr. Delaney has been President of UBS Capital Corporation, a wholly-owned subsidiary of Union Bank of Switzerland, and an affiliate of UBS Partners ("UBS Capital"), since January 1993 and Managing Director in charge of the Leveraged Finance Group of the Corporate Banking Division of Union Bank of Switzerland since May 1989. Mr. Delaney is also a director of Specialty Foods Corporation, SDW Holding Corporation, Van deKamps Inc. and Cinnabon International, Inc. Jody Frank has served as a director of the Company and its predecessor since September 1986. Since February 1990, he has been a vice president of Shearson Lehman and, after Smith Barney Inc. acquired the assets of Shearson Lehman in 1994, of Smith Barney Inc. Robert E. Lund was elected as a director of the Company in May 1994. He has served as Chief Executive Officer of Intrepid Tech Inc., a technology services company, since December 1996. Mr. Lund served as Chief Executive Officer of the Company from November 1995 until May 1996 and as President from February 1996 until May 1996. From December 1994 through December 1995, Mr. Lund served as President and Chief Executive Officer of S2 Software, Inc., a software company. From February 1993 until October 1994 (when Newtrend, L.P. was sold), Mr. Lund served as Chief Operating Officer of Newtrend, L.P., a provider of software and professional services. From 1990 to 1992, Mr. Lund was Chairman and Chief Executive Officer of International Telecharge, Inc., a telecommunications company. Justin S. Maccarone has served as a director of the Company since June 1996. Mr. Maccarone has been a Managing Director of UBS Capital, LLC since 1993 and, from 1989 to 1993, was a Senior Vice President of GE Capital 69
Corporation. Mr. Maccarone is also a director of American Sports Product Group, Inc., Astor Corporation, Communication Supply Corporation and Cinnabon International, Inc. Ownership and Transactions Reports Under Section 16 of the Securities Exchange Act of 1934, the Company's directors, certain of its officers, and beneficial owners of more than 10% of the outstanding Common Stock are required to file reports with the Securities and Exchange Commission concerning their ownership of and transactions in Common Stock; such persons are also required to furnish the Company with copies of such reports. Based solely upon the reports and related information furnished to the Company, the Company believes that all such filing requirements were complied with in a timely manner during and with respect to 1996, except that for each of Messrs. Frank, Lund and Snyder one report regarding one transaction was filed late. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth, for the fiscal years ended December 31, 1996, 1995 and 1994, the compensation earned by the Company's Chief Executive Officer and each of the four remaining most highly compensated executive officers for the fiscal year ended December 31, 1996. SUMMARY COMPENSATION TABLE Long-Term Compensation Annual Compensation Awards ------------ Name and Shares Principal Underlying All Other Position Year Salary Bonus Options(#) Compensation(1) - ----------- ------- ------- ------- ----------- ---------------- E. Craig Sanders (2) 1996 $212,000 -- 600,000 -- President and Chief Executive Officer Robert E. Lund (3) 1996 161,000 $50,000 60,000 -- 1995 13,962 -- 10,000 -- 1994 -- -- 15,000 -- Bonnie S. Biumi, 1996 169,000 61,000 -- $2,400 Chief Financial 1995 149,994 25,000 -- 2,300 Officer, Executive 1994 66,344 -- 100,000 -- Vice President Lawrence T. Ellman 1996 167,000 43,000 -- -- Executive Vice 1995 149,994 25,000 -- -- President/President 1994 105,000 10,000 45,000 -- - National Accounts Bruce W. Renard, 1996 192,000 65,000(4) -- -- Executive Vice 1995 171,635 25,000 50,000 355 President, Legal & 1994 150,000 -- 20,000 2,000 Regulatory Affairs/ Carrier Relations, General Counsel C. Keith Pressley, 1996 112,000 10,500 -- 1,800 President - Inmate 1995 100,000 -- -- 1,800 Telecommunications 1994 84,000 -- 5,000 -- Division
_________________________ (1) The amounts disclosed in this column include the Company's contributions on behalf of the named executive officer to the Company's 401(k) retirement plan in amounts equal to 25% of the executive officer's yearly participation in the plan. (2) Mr. Sanders joined the Company in May 1996. (3) Mr. Lund served as Chief Executive Officer of the Company from November 1995 until May 1996 and as President from February 1996 until May 1996. (4) Does not reflect bonus earned for role in passage of Telecommunications Act of 1996. Amount has not been determined. 70
The following table sets forth certain information with respect to stock options granted during the year ended December 31, 1996 to the executive officers named in the Summary Compensation Table: OPTION GRANTS IN LAST FISCAL YEAR Potential INDIVIDUAL GRANTS Realizable --------------------------------------------- Value of % of Total Assumed Annual Number of Options Rates of Securities Granted to Exercise or Stock Price Underlying Employees in Base price Expiration Apreciation for Options Fiscal Year ($/share) Date Options Term(1) ---------- ------------- ---------- ---------- ---------------- 5% 10% ---------------- Robert E. Lund 50,000 5.75% $2.50 7/31/01 $34,535 $76,314 10,000 1.15 $2.68 7/15/01 $7,404 $16,362 E. Craig Sanders 100,000 11.49 $2.50 7/31/06 $157,224 $398,436 100,000(2) 11.49 $4.25 7/31/06 $267,280 $677,341 100,000(2) 11.49 $5.25 7/31/06 $330,170 $836,715 100,000(2) 11.49 $6.25 7/31/06 $393,059 $996,089 200,000(2) 22.99 $7.25 7/31/06 $911,897 $2,310,927
_____________________ (1) These amounts represent assumed rates of appreciation which may not necessarily be achieved. The actual gains, if any, are dependent on the market value of the Company's Common Stock at a future date as well as the option holder's continued employment throughout the vesting period. Appreciation reported is net of exercise price. (2) Represents options which the Company is contractually obligated to issue which have not been issued and dated. 71
The following table sets forth certain information as to each exercise of stock options during the year ended December 31, 1996 by the executive officers named in the Summary Compensation Table and the fiscal year end value of unexercised options: AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES Number of Value of Unexercised Unexercised In- Options at the-Money Options Fiscal Year End at Fiscal Year End --------------- ----------------- Shares Acquired on Value Exercisable/ Exercisable/ Name Exercise(s) Realized Unexercisable Unexercisable - --------------- ------------ --------- --------------- ----------------- Robert E. Lund - - 100,000/- $39,600/- Bonnie S. Biumi - - 66,666/33,334 -/- Lawrence T. Ellman - - 30,000/15,000 -/- Bruce W. Renard - - 68,333/16,667 25,000/12,500 E. Craig Sanders - - 200,000/400,000 69,000/- C. Keith Pressley - - 5,000/- -/-
COMPENSATION OF DIRECTORS Currently, all directors receive $500 per person for each board meeting attended telephonically and $1,000 per person for each board meeting attended in person as compensation for serving on the Board of Directors. Upon election (or re-election) by the shareholders of the Company at an annual meeting of shareholders, pursuant to the terms of the Company's 1993 Non-Employee Director Stock Option Plan, each non-employee director of the Company receives an option to purchase 10,000 shares of Common Stock of the Company. Non-employee directors who are chosen to fill a newly created directorship or vacancy in the Board of Directors are also granted an option to purchase 10,000 shares of Common Stock of the Company. The exercise price of any option granted to directors is the fair market value of the Common Stock of the Company on the date the option is granted. All of the directors of the Company are reimbursed for all travel and other expenses incurred in attending meetings. EMPLOYMENT AGREEMENTS The Company is a party to an employment agreement with E. Craig Sanders, the President and Chief Executive Officer of the Company. The employment agreement is for a term commencing May 2, 1996 and ending on December 31, 1998. The agreement provides for a base salary at the annual rate of $300,000, subject to increase upon the review of the Board. The agreement provides for bonus compensation based upon the attainment of performance targets. The agreement provides for the grant of stock options for 600,000 shares of the Company's Common Stock at exercise prices ranging from $2.50 to $7.25 per share, vesting at various dates during the contract term. If the Company terminates Mr. Sanders' employment without cause (except in the circumstances described in the following sentence), the Company will pay Mr. Sanders an amount equal to 200% of his base salary in effect on the date of the termination, as well as provide those fringe benefits enjoyed by him 72 at the date of his termination for a period of two years or, to the extent Mr. Sanders is not eligible to participate in any Company fringe benefit plans, the after tax value of such benefits. If, after a change in control of the Company, Mr. Sanders' employment is terminated by the Company without cause or terminated by Mr. Sanders for good reason, the Company will pay him an amount equal to 200% of the sum of his base salary plus the maximum bonus compensation which he would have been entitled to receive had the Company achieved the performance targets to which bonus compensation is tied for the year of such termination and will continue to provide him with those fringe benefits enjoyed at the date of his termination for a period of two years or, to the extent Mr. Sanders is not eligible to participate in any Company fringe benefit plans, the after tax value of such benefits. In addition, upon a change in control of the Company, all options granted to Mr. Sanders will vest. Robert E. Lund served as Chief Executive Officer from November 1995 until May 1996 under an agreement which provided that Mr. Lund would receive a salary of $27,500 per month, in addition to other benefits and reimbursements, and was terminable by Mr. Lund or the Company upon 30 days notice. The agreement was terminated in May 1996. The Company is a party to an employment agreement with Bonnie S. Biumi, the Chief Financial Officer and an Executive Vice President of the Company. The employment agreement is for a term commencing July 11, 1994 and ending December 31, 1998. The agreement provides for automatic one year extensions thereafter unless either party gives notice that it is not to be extended. The agreement provides for a base salary at the annual rate of $150,000, increasing 10% each year, provided the Company has met certain income targets. The base salary may also be increased annually by merit increases or at any time at the discretion of the Board of Directors. Ms. Biumi may, at the sole discretion of the Company, be granted a bonus. If the Company terminates Ms. Biumi's employment agreement without cause or Ms. Biumi terminates the agreement for certain defined reasons, the Company will pay Ms. Biumi (a) her base salary through the termination date and (b) as severance pay a lump sum amount equal to 200% of Ms. Biumi's annual base salary at the highest rate in effect during the 12 months immediately preceding termination. Upon termination in connection with a change in control of the Company, Ms. Biumi shall receive (a) her base salary through the termination date, (b) all other benefits provided in the employment agreement in connection with a change in control, (c) severance pay equal to 200% of her annual base salary at the highest rate in effect during the 12 months immediately preceding such termination and (d) options granted to Ms. Biumi under the employment agreement will vest. Upon termination of her employment for disability, Ms. Biumi is entitled to 100% of her base salary then in effect for one year and 50% of her base salary for two additional years. The Company is a party to an employment agreement with Lawrence T. Ellman, Executive Vice President/President-National Accounts. The employment agreement is for a term commencing June 22, 1994 and ending December 31, 1997. The agreement provides for a base salary at the annual rate of $150,000, increasing 10% each year with the approval of the Board of Directors, and a minimum annual bonus of $25,000. The Company has no obligation to pay Mr. Ellman benefits upon a termination for cause, disability or death. Upon termination in connection with a change of control of the Company, Mr. Ellman shall receive (a) his base salary through the termination date and (b) severance pay equal to 100% of his annual base salary at the highest rate in effect during the 12 months immediately preceding such termination. The Company is a party to an employment agreement with Bruce W. Renard, the Company's General Counsel and Executive Vice President -- Legal and Regulatory Affairs/Carrier Relations. The employment agreement is for a three year term commencing on January 1, 1995 and ending on December 31, 1997. The agreement provides for payment of a base salary initially fixed at the annual rate of $172,500 with an annual increase of 10%, provided the Company has met certain income targets. If the Company terminates Mr. Renard's employment without cause or Mr. Renard terminates the agreement for certain defined reasons, the Company 73 will pay Mr. Renard (a) his base salary through the date of termination and (b) as severance pay a lump sum amount equal to 100% of Mr. Renard's salary in effect during the 12 months immediately preceding termination. Mr. Renard's employment agreement also provides that upon termination in connection with a change in control, Mr. Renard shall receive (a) his base salary through the termination date, (b) all other benefits provided in the employment agreement in connection with a change in control, (c) as severance pay a lump sum amount equal to 100% of his highest annual base salary in effect during the 12 months immediately preceding the termination and (d) options granted to Mr. Renard under the employment agreement will vest. Mr. Renard's agreement is otherwise similar to that of Ms. Biumi. The employment agreements above restrict the employee from competing with the Company for one year in the areas in which the Company then operates following termination of the agreement. Under Ms. Biumi's and Mr. Renard's agreements, the Company may terminate an employment agreement without further payment if the employee materially breaches his or her obligations and duties under the agreement or is convicted of a felony under certain circumstances or upon the death of the employee. Under Mr. Ellman's agreement, the Company may terminate the agreement without further payment if the employee commits a felony involving serious moral turpitude, refuses to perform his duties, or engages in misconduct injurious to the Company. The Company is a party to a change in control agreement with C. Keith Pressley, President-Inmate Telecommunications Division, an at-will employee of the Company. Upon termination in connection with a change of control of the Company, Mr. Pressley shall receive (a) his base salary through the termination date, (b) severance pay equal to 50% of his annual base salary at the highest rate in effect during the 12 months immediately preceding such termination and (c) all options granted to Mr. Pressley will vest. Compensation Committee Interlocks and Insider Participation Robert E. Lund served as a member of the Compensation Committee of the Board of Directors during 1996 and, from November 29, 1995 through May 1, 1996, served as the Chief Executive Officer of the Company. Compensation Committee member Jody Frank has participated in transactions with the Company since January 1, 1996, which transactions are described below. See "Item 13 - Certain Relationships and Related Transactions." 74
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information concerning the beneficial ownership of the Common Stock of the Company as of March 21, 1997 (except as otherwise indicated) by (i) each person known by the Company to beneficially own more than five percent of the outstanding Common Stock of the Company, (ii) each current director, (iii) each executive officer named in the Summary Compensation Table included elsewhere herein, and (iv) all directors and executive officers of the Company, as a group. Except as otherwise indicated, the persons named in the table have the sole voting and investment power with respect to the shares shown as beneficially owned by them. Amount and Nature Percent Name of Beneficial Owner of Beneficial Ownership(1) of Class - ------------------------ -------------------------- --------- Charles J. Delaney -- -- Jody Frank 234,262(2)(3) 1.44% Robert E. Lund 111,350(2) * Justin S. Maccarone -- -- E. Craig Sanders 200,000(4) 1.22% Bonnie S. Biumi 100,000(4) * Lawrence T. Ellman 45,000(4) * Bruce W. Renard 68,333(4) * C. Keith Pressley 5,000(4) * All directors and executive officers 763,945 4.54% as a group (9 persons) Creditanstalt American Corp. 245 Park Avenue New York, New York 10167 850,000(5)(6) 5.03% KAIM Non-Traditional LP 878,200 5.42% 1800 Avenue of the Stars, Second Floor Los Angeles, California 90067 Heartland Group 790 N. Milwaukee Street Milwaukee, Wisconsin 53202 3,858,100(5) 23.8% UBS Partners, Inc. 299 Park Avenue New York, New York 10171 2,897,143(5)(7) 15.17% Wellington Management Company 75 State Street Boston, Massachusetts 02109 1,946,690(5) 12.02%
_________________________ * Less than one percent. (1) Includes shares of Common Stock issuable upon the exercise of stock options, which are exercisable within 60 days of March 21, 1996. (2) Includes options to purchase shares of Common Stock granted to the following directors: 125,000 to Jody Frank (at an average exercise price of $8.32 per share); and 100,000 to Robert E. Lund (at an average exercise price of $5.44 per share). 75 (3) Includes 40,050 shares of Common Stock in a voting trust of which Jody Frank is the beneficial owner. Also includes 3,812 shares owned by Jody Frank as custodian for Aaron Frank, Rebekah Frank and Lucy Frank, Mr. Frank's minor children. (4) Includes options to purchase 418,333 shares of Common Stock granted to the following executive officers: 200,000 to E. Craig Sanders (at an average exercise price of $3.60 per share); 100,000 to Bonnie S. Biumi (at an average exercise price of $5.69 per share; 45,000 to Lawrence T. Ellman (at an average exercise price of $5.69 per share); 68,333 to Bruce W. Renard (at an average exercise price of $5.84 per share); and 5,000 to C. Keith Pressley (at an average exercise price of $5.13). (5) Information provided by Schedule 13D and/or 13Gs filed by such persons. The Company has not independently verified such information. (6) Represents currently exercisable warrants received in connection with a previous credit facility between the Company and Creditanstalt-Bankverein (of which Creditanstalt American Corporation is a wholly- owned subsidiary) and 150,000 shares of Common Stock obtained upon the exercise of warrants in connection with a previous credit facility. The currently exercisable warrants expire March 12, 2000 and are exercisable for 700,000 shares of Common Stock or the Company's Series B Preferred Stock at a price of $5.25 per share. Each share of Series B Preferred Stock is convertible into one share of Common Stock. See "Certain Relationships and Related Transactions." (7) Includes: (i) options to acquire 40,000 shares of Common Stock of the Company at an average exercise price of $3.91, held for the benefit of UBS Partners by former director Jeffrey Keenan and current directors Charles J. Delaney and Justin S. Maccarone; and (ii) 2,857,143 shares of Common Stock issuable upon conversion of 150,000 shares of Preferred Stock currently outstanding. All of the outstanding Preferred Stock is owned by UBS Partners (a wholly-owned subsidiary of Union Bank of Switzerland). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Since January 1, 1996, the Company has engaged in the following transactions with directors and/or executive officers of the Company, shareholders listed in the Security Ownership Table or with businesses with which they are associated. 1. In February 1995, after obtaining a fairness opinion indicating the proposed sale of the assets for the agreed upon consideration was fair to the Company from a financial point of view and after the transaction was approved by the disinterested members of the Company's Board of Directors, the Company sold substantially all of the assets of its prepaid calling card business to Global Link Teleco Corporation ("Global Link") for approximately $6.3 million. Upon the sale, the Company maintained the right to designate one member of Global Link's Board of Directors. The Company received $1.0 million in cash, a $5.3 million promissory note due February 1998, bearing interest at 8.5%, payable quarterly, and shares of common stock of Global Link. As a result of the February 1995 transactions, the Company's interest in the outstanding common stock of Global Link was 19.99%. At the time of such transaction, Jody Frank was a director and shareholder of Global Link. On March 1, 1996, Global Link consummated a merger transaction (the "Merger") with Global Telecommunications Solutions, Inc. ("GTS"). In connection with the Merger, the Company exchanged its outstanding notes and other receivables including accrued interest and its 19.9% equity ownership in Global Link for shares of GTS common stock, $0.6 million in cash and $1.5 million of notes receivable with various due dates through September 1997. Jody Frank is a shareholder of GTS. 76 2. As disclosed in previous proxy statements, the Company loaned certain funds (the "Company Loans") to Jody Frank, and certain now former executive officers of the Company (the "Borrowers") for the reasons described below. Each of the Company Loans was made following approval by the members of the Board of Directors who were not parties to the transactions as a means to provide the Borrowers with a vehicle to refinance certain commercial bank indebtedness they had incurred to exercise Company stock options and pay related income taxes. The Borrowers exercised the stock options in December 1993 to purchase the Company's Common Stock for purposes of increasing the Company's shareholders' equity without accessing the external capital markets. The Borrowers personally borrowed the funds to exercise the options from a commercial bank and pledged the Company's Common Stock issued upon exercise as collateral for the bank loans ("Bank Loans"). This equity increase in turn was a significant factor in permitting the Company to increase its credit facility from $60.0 million to $125.0 million in February 1994. Commencing in May 1994, as the market price of the stock declined, the bank on several occasions required the Borrowers to pay down the Bank Loans or provide additional collateral. The Borrowers approached the disinterested members of the Company's Board of Directors to seek the Company's assistance in refinancing a portion of their Bank Loans. The Company then advanced the Company Loans, including an aggregate of $213,217 to Mr. Frank, of which $143,217 was to refinance his bank loan and $70,000 was in connection with the payment of personal income taxes related to the phantom gain incurred upon the December 1993 exercise of the stock options mentioned above. In February 1996, the Company agreed to restructure the full principal amount of Mr. Frank's loans plus accrued interest in an aggregate amount of $248,501. In connection with the restructuring, the Company received from Mr. Frank a stock pledge agreement encumbering 35,000 shares of Common Stock of the Company held by Mr. Frank. As restructured, $124.250.50 of Mr. Frank's loans are evidenced by a non-recourse promissory note (which note limits enforcement of the note to the 35,000 pledged shares of Common Stock) bearing interest at the rate of 6.43% annually, and payable in full on February 1, 2001. The remaining $124,250.50 is evidenced by a promissory note bearing interest at the rate of 6.19% annually and payable in five annual installments beginning on February 1, 2002. Except for such restructured loan and related pledge of Common Stock, Mr. Frank has no indebtedness to the Company. 3. In April 1996, the Company amended its credit facility with Creditanstalt-Bankverein to accomplish, among other things, the following: (i) Credistantstalt-Bankverein waived defaults arising under the credit facility; and, (ii) the line of credit under the credit facility was decreased from $40 million to $10 million. At the same time, the Company decreased to $5.25 the exercise price of the warrants held by Credistanstalt American Corporation to acquire Common Stock or Series B Preferred Stock of the Company that had not already been repriced. The warrants repriced in April 1996 consisted of warrants to acquire 150,000, 300,000 and 50,000 shares at exercise prices of $8.00 per share, $9.33 per share and $9.00 per share, respectively. On March 26, 1997, the Company increased its credit facility with Creditanstalt-Bankverein from $10,000,000 to $20,000,000. Since January 1, 1996 the Company has paid Creditanstalt-Bankverein $412,500 in fees as a lender in connection with the Company's credit facilities. 77 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed with, and as a part of, this Annual Report on Form 10-K. 1. Financial Statements. For a complete list of the Financial Statements filed with this Annual Report on Form 10-K, see the Index to Financial Statements and Schedules on Page 35. 2. Financial Statement Schedules. The following Supplementary Schedules are filed with this Annual Report on Form 10-K: See Index to Financial Statements and Schedules on Page 35. 3. Exhibits. (i) See Exhibit Index on Pages 80-82. (b) Reports on Form 8-K. (1) A Current Report on Form 8-K dated October 24, 1996 relating to Item 5. 78
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PEOPLES TELEPHONE COMPANY, INC. Date: March 31, 1997 /s/ E. Craig Sanders E. CRAIG SANDERS Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date - -------------------- --------------------------------- -------------- /s/ E. Craig Sanders President, E. Craig Sanders Chief Executive Officer, Director March 31, 1997 /s/ Bonnie S. Biumi Executive Vice President, Bonnie S. Biumi Chief Financial Officer March 31, 1997 /s/ Teri L. Miller Teri L. Miller Corporate Controller March 31, 1997 /s/ Charles J. Delaney Charles J. Delaney Director March 31, 1997 /s/ Jody Frank Jody Frank Director March 31, 1997 /s/ Robert E. Lund Robert E. Lund Director March 31, 1997 /s/ Justin S. Maccarone Justin S. Maccarone Director March 31, 1997
79 EXHIBIT INDEX I. Exhibits *3.1 Amended and Restated Certificate of Incorporation as amended to the date of filing of this Form 10-K. 3.2 Restated Bylaws adopted on November 30, 1987 (incorporated herein by reference from the Registration Statement on Form 10, File No. 0-16479, filed with the Securities and Exchange Commission (the "SEC") 3.3 Form of Second Amended and Restated Warrant Agreement dated as of February 17, 1994 between the Company and Creditanstalt American Corporation ("CAC") (incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). (File No. 0-16479) 3.4 First Amendment to Second Amended and Restated Warrant Agreement dated October 30, 1995 between the Company and CAC (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995) (File No. 0-16479) 3.5 Second Amendment to Second Amended and Restated Warrant Agreement dated April 4, 1996 between the Company and CAC (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996) (File No. 0-16479) 4.1 Fourth Amended and Restated Loan and Security Agreement dated July 19, 1995 by and among the Company, the lenders named therein and Creditanstalt-Bankverein (incorporated herein by reference to Form 8-K dated July 19, 1995). (File No. 0- 16479) 4.2 Waiver and First Amendment dated November 29, 1995 between the Company and Credistanstalt-Bankverein with regard to the Fourth Amended and Restated Loan and Security Agreement. (incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 3, 1995)(File No. 0-16479) 4.3 Second Amendment dated April 4, 1996 to the Fourth Amended and Restated Loan and Security Agreement between the Company and Creditanstalt-Bankverein. (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the year ended March 31, 1996) (File No. 0- 16479) *4.4 Third Amendment dated March 26, 1997 to the Fourth Amended and Restated Loan and Security Agreement between the Company and Creditanstalt-Bankverein. 4.5 Indenture, dated as of July 15, 1995, between the Company and First Union National Bank of North Carolina (incorporated herein by reference to Form 8-K dated July 19, 1995). (File No. 0-16479) 10.1 Employment Agreement dated June 22, 1994 and related Stock Option Agreement dated July 11, 1994 between the Company and Lawrence T. Ellman (incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995). (File No. 0-16479) 10.2 Employment Agreement dated July 11, 1994 and related Stock Option Agreement dated July 11, 1994, between the Company and Bonnie S. Biumi. (incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994). (File No. 0-16479) 10.3 Employment Agreement dated January 1, 1995 between the Company and Bruce W. Renard (incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended 1994). (File No. 0-16479) 80 10.4 AT&T Commission Agreement dated April 20, 1995 by and between AT&T Communications, Inc. and the Company (incorporated herein by reference to Amendment No. 2 to Form S-3 Registration No. 33-58657). 10.5 Security Purchase Agreement between UBS Capital Corporation; Appian Capital Partners, L.L.C. and the Company dated July 3, 1995 (incorporated herein by reference to Form 8-K dated July 19, 1995). (File No. 0-16479) 10.6 Letter Agreement, dated July 18, 1995, among the Company, UBS Capital Corporation, UBS Partners, Inc. and Appian Capital Partners, L.L.C., amending the Securities Purchase Agreement, dated as of July 3, 1995 among the Company, UBS Capital Corporation and Appian Capital Partners, L.L.C. (incorporated herein by reference to Form 8-K dated July 19, 1995). (File No. 0-16479) 10.7 Form of Stock Purchase Warrant issued on July 19, 1995 to Appian Capital Partners, L.L.C. (incorporated herein by reference to Form 8-K dated July 19, 1995). (File No. 0-16479) 10.8 Form of Contingent Stock Purchase Warrant issued on July 19, 1995 to UBS Partners, Inc. (incorporated herein by reference to Form 8-K dated July 19, 1995). (File No. 0- 16479) 10.9 Registration Rights Agreement dated as of July 19, 1995 between the Company and UBS Partners, Inc. (incorporated herein by reference to Form 8-K dated July 19, 1995). (File No. 0-16479) 10.10 Asset Purchase Agreement dated as of November 1, 1995 between the Company, PTC Cellular, Inc. and Shared Technologies Cellular, Inc. (incorporated herein by reference to Form 8-K dated November 13, 1995). (File No. 0-16479) 10.11 1994 Stock Incentive Plan of the Company (incorporated herein by reference to pages A-1 through A-7 of the Company's 1994 Proxy Statement). (File No. 0-16479) 10.12 1987 Non-Qualified Stock Option Plan (incorporated herein by reference to the Company's Registration Statement on Form S-8 (Registration Statement No. 33-58603) filed on April 13, 1995. (File No. 0-16479) 10.13 1987 Non-Qualified Stock Option Plan for Non-Employee Directors (incorporated herein by reference to the Company's Registration Statement on Form S-8 (Registration Statement No. 33-58603) filed on April 13, 1995. (File No. 0-16479) 10.14 1993 Non-Employee Director Stock Option Plan (incorporated herein by reference to pages A-1 through A-4 of the Company's 1993 Proxy Statement). (File No. 0-16479) *10.15 Amendment dated January 10, 1996 to Employment Agreement between the Company and Bonnie S. Biumi. 10.16 Employment Agreement dated May 2, 1996 between the Company and E. Craig Sanders.(incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the Quarter ended March 31, 1996). (File No. 0-16479) 10.17 Employment Agreement dated August 15, 1996 between the Company and Neil N. Snyder, III. (incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the Quarter ended September 30, 1996). (File No. 0-16479) 81 *10.18 Amendment dated January 27, 1997 to the Employment Agreement between the Company and Lawrence T. Ellman. *10.19 Letter Agreement dated April 30, 1996 between the Company and C. Keith Pressley. *21 List of Subsidiaries *23.1 Consent of Ernst & Young LLP *23.2 Consent of Price Waterhouse LLP *27 Financial Data Schedule (for SEC use only) - -------------- * Filed with this Annual Report on Form 10-K. 82 EX-3 2 Exhibit 3.1 RESTATED CERTIFICATE OF INCORPORATION OF PEOPLES TELEPHONE COMPANY, INC. under Section 807 of the Business Corporation Law Peoples Telephone Company, Inc., a corporation organized and existing under the laws of the State of New York, does hereby certify pursuant to Section 807 of the Business Corporation Law, that: 1. The name of the corporation is Peoples Telephone Company, Inc. (formed under the name of Shirts Unlimited Franchise, Inc.) (the "Corporation"). 2. The Corporation originally filed its Certificate of Incorporation with the New York Department of State on September 5, 1968. 3. This Restated Certificate of Incorporation includes the following amendments: Paragraphs ONE through TEN of the Certificate of Incorporation are amended to refer to the Corporation as the "Corporation." Paragraph SECOND of the Certificate of Incorporation is amended to read as follows: "SECOND: The Corporation may engage in any lawful act or activity for which corporations may be organized under the laws of the State of New York and shall not engage in any act or activity requiring the consent or approval of any state official, department, board agency or other body without such consent or approval first being obtained." Paragraph FOURTH, Section III(c) has been deleted and all of the Sections in Paragraph FOURTH have been (i) renumbered to correspond with the numbering in this Restated Certificate of Incorporation and (ii) amended to change the definition of the Series A Preferred Stock from "Preferred Stock" to "Series A Preferred Stock." Paragraph FOURTH, Sections II(A)(2), II(A)(4)(d), II(A)(5), II(A)(6)(D)(v) and II(A)(6)(b)(ix) of the renumbered Certificate of Incorporation are amended to read as follows: FOURTH: Section II(A)(2): 2. Dividends. (a) The Corporation shall pay dividends on the Series A Preferred Stock at an annual rate of $1,200 per 100 shares (or $12 per share), computed on the basis of a 1 360-day year, 30-day month, and no more. Dividends on the Series A Preferred Stock shall accrue monthly on the first day of each month. Dividend payments shall be made semi-annually in cash on February 1st and August 1st in each year to holders of record on a date not more than forty days preceding the respective semi-annual dividend payment dates, fixed for that purpose by the Board of Directors. The first semi-annual dividend payment shall be payable February 1, 1988 and shall be computed on the above basis from the date of issuance of the Series A Preferred Stock to the respective holders." "FOURTH: Section II(A)(4)(d): (d) Consents in Lieu of Voting. Whenever the vote of the holders of the Series A Preferred Stock is required at a meeting or permitted to be taken for or in connection with any corporate action, the meeting and vote of such holders may be dispensed with upon the written consent of holders of Series A Preferred Stock having all of the outstanding shares." "FOURTH: Section II(A)(5): 5. Liquidation. Repayment of the Purchase Price of each 100 shares of Series A Preferred Stock (but in no event payment of accrued and unpaid dividends) shall be secured by five of the Corporation's operating pay telephones pursuant to security agreements between the Corporation and the holders of the Series A Preferred Stock (the "Security Agreements"). Upon liquidation of the Corporation, the holders of Series A Preferred Stock shall have the rights granted to them pursuant to the Security Agreements. To the extent that a holder of Series A Preferred Stock has not received the equivalent of One Hundred Dollars ($100.00) per share through enforcement of the holder's rights pursuant to the Security Agreement and to the extent there are any accrued and unpaid dividends, the Series A Preferred Stock shall be preferred upon liquidation over the Common Stock and any other class or classes of stock of the Corporation ranking junior in rights and preferences to the Series A Preferred Stock upon liquidation. Holders of shares of Series A Preferred Stock shall be entitled to be paid, after full payment is made on any stock ranking prior to the Series A Preferred Stock as to rights and preferences (but before any distribution is made to the holders of the Common Stock and such junior stock) upon the voluntary or involuntary dissolution, liquidation or winding up of the Corporation. The amount payable on each share of Series A Preferred Stock in the event of the voluntary or involuntary dissolution, liquidation or winding up of the Corporation shall be One Hundred Dollars ($100.00) per share plus an amount equal to all accrued and unpaid dividends (including interest, if any, as provided above) to and including the date of payment and no more less the fair market value of the assets received by the holder of Series A Preferred Stock pursuant the remedies set forth in the Security Agreement. Upon any such liquidation, dissolution or winding up of the Corporation, if its net assets are insufficient to permit the payment in full of the amounts to which the holders of all outstanding shares of Series A Preferred Stock are entitled as provided above, the entire net assets of the Corporation remaining (after full payment is made on any stock ranking prior to the Series A Preferred Stock as to rights and preferences) shall be distributed among the holders of shares of Series A Preferred Stock in 2 amounts proportionate to the full preferential amounts to which they and holders of shares of preferred stock in parity with the Series A Preferred Stock as to rights and preferences are respectively entitled. For the purpose of this Section II(A)(5), the voluntary sale, lease, exchange or transfer, for cash, shares of stock, securities or other consideration, of all or substantially all the Corporation's property or assets to, or its consolidation or merger with, one or more corporations shall not be deemed to be a liquidation, dissolution or winding up of the Corporation, voluntary or involuntary. Notwithstanding the foregoing, if any holder of Series A Preferred Stock converts Series A Preferred Stock to Common Stock pursuant to Section II(A)(6), the right to preferential liquidation rights pursuant to this Section, including, without limitation, the rights pursuant to the Security Agreement, shall be immediately terminated." "FOURTH: Section II(A)(6)(b)(v) (v) If the Corporation issues Common Stock at a price less than the then current exercise price per share as determined and provided in Subsection (vi) below, then the number of shares of Common Stock into which each share of Series A Preferred Stock shall thereafter be convertible shall be determined as follows: the number of shares of Common Stock into which each share of Series A Preferred Stock was convertible immediately prior to the date of issuance of such Common Stock shall be multiplied by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding at the date of the issuance plus the number of additional shares of Common Stock so issued, and the denominator or which shall be the sum of the number of shares of Common Stock outstanding at the date of the issuance plus the number of shares of Common Stock which the aggregate offering price that the total number of shares so offered would purchase at the current exercise price per share. This adjustment shall become effective immediately after the issuance of Common Stock wholly or in part for a consideration other than cash. The amount of the consideration other than cash received by the Corporation shall be deemed to be the fair value of the consideration as determined in good faith by the Board of Directors of the Corporation, which determination shall be conclusive of the fair market value." "FOURTH: Section II(A)(6)(b)(ix): (ix) The Corporation shall pay to the holders of shares of Series A Preferred Stock surrendered for conversion as soon as practicable after the date the shares are surrendered for conversion an amount in cash equal to all dividends scheduled to have been paid in accordance with Section II(A)(2) (including interest, if any, as provided above) to the date of conversion which have not been paid except that if the Corporation may not lawfully under New York Law make the cash payment it shall issue to each holder its obligation to make the payment at the earliest date on which it may lawfully make the payment. Paragraph FIFTH of the Certificate of Incorporation is amended to read as follows: 3 "FIFTH: The Secretary of State of the State of New York is hereby designated as the agent of the Corporation upon whom any process in any action or proceeding against it may be served. The address to which the Secretary of State shall mail a copy of process in any action or proceeding against the Corporation which may be served upon it is: Peoples Telephone Company, Inc., 7879 N.W. 53rd Street, Miami, Florida 33126." Paragraph SEVENTH of the Certificate of Incorporation is amended to read as follows: "SEVENTH: The name and address within the State of New York of the registered agent of the Corporation upon whom process against it may be served are as follows:" Name Address CT Corporation System 1633 Broadway New York, New York 10019 Paragraph TENTH of the Certificate of Incorporation is amended to add the following second paragraph: A director shall not be liable to the Corporation or its shareholders for damages for any breach of duty in his capacity as director unless (i) a judgment or other final adjudication adverse to the director establishes that his acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that he personally gained in fact a financial profit or other advantage to which he was not legally entitled or that his acts violated section 719 of the Business Corporation Law or (ii) the liability of any director for any act or omission which occurred prior to the adoption of this paragraph by the Corporation. 4. This Restated Certificate of Incorporation has been approved by the Board of Directors and the shareholders of the Company at a duly called meeting of the directors and the shareholders and as authorized by Sections 801, 803 and 807 of the Business Corporation Law. 5. The text of the Certificate of Incorporation of the Company, as amended and previously restated, is hereby restated with the amendments described above, effective on the filing date of this instrument with the Secretary of State of New York, to read as follows: FIRST: The name of the Corporation is: PEOPLES TELEPHONE COMPANY, INC. 4 SECOND: The Corporation may engage in any lawful act or activity for which corporations may be organized under the laws of the State of New York and shall not engage in any act or activity requiring the consent or approval of any state official, department, board, agency or other body without such consent or approval first being obtained. THIRD: The city and the county within the State of New York in which the office of the Corporation is to be located are as follows: City County New York New York FOURTH: Capital Stock. The total number of shares of all classes of capital stock which the Corporation shall have the authority to issue and have outstanding is 15,000,000 of which 10,000,000 shall be Common Stock, par value $.01 per share, and 5,000,000 shall be Preferred Stock, par value $.01 per share. The shares may be issued from time to time as authorized by the Board of Directors without further approval of shareholders. The consideration for the issuance of the shares shall be paid in full before their issuance and shall not be less than the par value. Future services shall not constitute payment or part payment for the issuance of shares of the Corporation. The consideration for the shares shall be cash, tangible or intangible property, labor or services actually performed for the Corporation, or any combination of the foregoing. In the absence of actual fraud in the transaction, the value of such property, labor or services as determined by the Board of Directors of the Company, shall be conclusive. Upon payment of such consideration, such shares shall be deemed to be fully paid and nonassessable. I Common Stock. Each share of Common Stock shall have the same relative rights as and be identical in all respects with all the other shares of Common Stock. II Preferred Stock. The Preferred Stock may be issued in series by the Board of Directors from time to time, each series with such dividend rights, voting rights, liquidation preferences, redemption rights, conversion rights and other rights and preferences as the Board of Directors may from time to time provide, as authorized by applicable laws. A. Series A Preferred Stock 1. Designation and Rank. The first series of preferred stock is designated "Series A Preferred Stock", and the number of shares which shall constitute such Series shall be 100,000 shares, par value $.01 per share. All shares of Series A Preferred Stock shall rank equally and be identical in all respects. Except as specifically limited by the terms of Section II(A)(4)(C)(ii) of this Article FOURTH, the Corporation shall not be restricted from issuing additional securities of any kind, including shares of preferred stock of any class, series or designation (including, without limitation, preferred stock ranking in parity as to rights and preferences with the Series A Preferred Stock) now or hereafter authorized. 5 2. Dividends. (a) The Corporation shall pay dividends on the Series A Preferred Stock at an annual rate of $1,200 per 100 shares (or $12 per share), computed on the basis of a 360-day year, 30-day month, and no more. Dividends on the Series A Preferred Stock shall accrue monthly on the first day of each month. Dividend payments shall be made semi-annually in cash on February 1st and August 1st in each year to holders of record on a date not more than forty days preceding the respective semi-annual dividend payment dates, fixed for that purpose by the Board of Directors. The first semi-annual dividend payment shall be payable February 1, 1988 and shall be computed on the above basis from the date of issuance of the Series A Preferred Stock to the respective holders. (b) The Series A Preferred Stock shall be preferred as to the payment of dividends over the Common Stock and any other class or classes of stock of the Corporation ranking junior in rights and preferences to the Series A Preferred Stock. Dividends on the Series A Preferred Stock shall be paid before any dividends (other than dividends payable in Common Stock) on any such junior stock shall be declared and set apart for payment or paid. (c) All dividends payable on the Series A Preferred Stock shall be cumulative. (d) Accruals of dividends shall not bear interest except when the Corporation may legally pay dividends under the New York Business Corporation Law ("New York Law") but does not make such payments as set forth above. In such instances, accrued dividends shall bear interest at a rate of 15% per annum until paid. The Corporation shall give the holders of Series A Preferred Stock 15 days written notice by certified mail, return receipt requested, prior to the payment of any such deferred dividends so that such holders may elect, within 15 days after receipt of such notice, to receive that number of shares of Common Stock of the Corporation that is determined by dividing the amount of the deferred dividends by the current exercise price then in effect as determined in accordance with Section II(A)(6)(b)(vi) and the amount of accrued interest shall be paid in cash. The provisions of this Section II(A)(2)(d) shall not be construed to modify the obligation of the Corporation to pay dividends on the Series A Preferred Stock as set forth above or to serve as the exclusive remedy of the holders of Series A Preferred Stock as set forth above or to serve as the exclusive remedy of the holders of Series A Preferred Stock in the event of nonpayment of dividends. 3. Redemption. (a) Optional Redemption. From and after August 1, 1988, the Corporation, at the option of the Board of Directors may, with funds legally available for such purpose under New York Law, redeem at any time or from time to time the whole or any part of the outstanding shares of Series A Preferred Stock at the following per-share redemption prices: 6 If Redeemed During the 12 Months Ending August 1 Redemption Price ------------------- ---------------- 1989 $150 1990 140 1991 130 1992 120 1993 or thereafter 100 plus an amount equal to all accrued and unpaid dividends (including interest, if any, as provided above) to and including the redemption date. (b) Pro Rata Redemption. If less than all shares of Series A Preferred Stock are redeemed at any time under this Section II(A)(3), shares of Series A Preferred Stock held by each holder of record shall be called for redemption pro rata, according to the number of shares of Series A Preferred Stock held by each holder, subject, however, to adjustments equitably determined by the Corporation to avoid the redemption of fractional shares. (c) Redemption Procedures. Any redemption of any or all of the outstanding shares of Series A Preferred Stock, whether mandatory or optional, shall be effected in accordance with the provisions of this Section II(A)(5)(c). (i) Any such redemption shall be effected by written notice given by certified or registered mail, postage prepaid, not less than thirty days nor more than fifty days prior to the date fixed for redemption to the holders of record of Series A Preferred Stock whose shares are to be redeemed at their respective addresses as they appear on the books of the Corporation. Each notice of redemption shall specify the date fixed for redemption, the redemption price and place of payment, and if less than all outstanding shares of Series A Preferred Stock are to be redeemed, the number of shares of Series A Preferred Stock held by each holder of record which are being called for redemption; (ii) On the date fixed for redemption of shares of Series A Preferred Stock, the Corporation shall, and at any time not more than five days prior to the date, deposit the aggregate amount of the redemption price of the shares called for redemption, except that no deposit shall be required with respect to any a shares which prior to the date of deposit have been converted pursuant to the exercise of any conversion right. The deposit shall be made with a bank, trust company or transfer agent, designated in the notice of such redemption, having a combined capital surplus and undivided profits aggregating at least Fifteen Million Dollars ($15,000,000) and formed under the laws of the United States or any state, in trust for payment to the holders of the shares of Series A Preferred Stock being called for redemption and deliver irrevocable written instructions authorizing the bank or trust company to apply the deposit solely to the redemption of the shares of Series A Preferred Stock called for redemption. Any part of the deposit not required for the redemption because of the exercise of any conversion right of the shares called for redemption shall be released or repaid to the Corporation; (iii) after notice of redemption duly given and the 7 redemption price of the shares being called for redemption deposited, then all shares of Series A Preferred Stock called for redemption shall forthwith (whether or not the date for redemption has occurred or the certificates for the shares have been surrendered) be deemed no longer outstanding for any purpose, and all rights with respect to such shares shall thereupon cease and terminate, except for the right of the holders of the shares to receive, out of such deposit in trust, on the redemption date, the redemption price to which they are entitled, without interest, other than as provided above, and except the right of the holders of such shares to convert the shares at any time prior to the redemption date fixed into shares of Common Stock; (iv) If any holder of shares of Series A Preferred Stock called for redemption shall, after the mailing by the Corporation of notice of redemption and prior to the date fixed for redemption, convert any shares of Series A Preferred Stock, their shares of Series A Preferred Stock (not exceeding, however, the number of shares of Series A Preferred Stock held by the holder which shall have been called for redemption) shall be deemed to constitute shares of Series A Preferred Stock held by the holder which have been called for redemption; (v) In case any certificate for shares of Series A Preferred Stock is surrendered by the holder for payment in connection with redemption of only a portion of the shares represented thereby, the Corporation shall deliver to or upon the order of the holder a certificate or certificates for the number of shares of Series A Preferred Stock represented by the surrendered certificate which are not being redeemed. If any holder of Series A Preferred Stock called for redemption shall not, within six years after deposit by the Corporation of funds for the redemption, claim the amount deposited for redemption, the bank, trust company or transfer agent with which the funds were deposited shall, upon demand, pay over to the Corporation the balance of the amount deposited and the bank, trust company or transfer agent shall thereupon be relieved of all responsibility to the holder, who shall thereafter look solely to the Corporation for payment of the redemption price of his shares. (d) No Reissue. Shares of Series A Preferred Stock which have been converted by the holder or redeemed, purchased or otherwise acquired by the Corporation shall be canceled and may not be reissued. 4. Voting Rights. (a) General. Except as otherwise specifically provided herein or by New York Law, the holders of Series A Preferred Stock shall not be entitled to vote on any matters required or permitted to be submitted to the shareholders of the Corporation for their approval. In each instance the holder shall be entitled to one vote for each share of Series A Preferred Stock held. (b) Class Voting Rights. The holder of Series A Preferred Stock shall be entitled to vote with respect to, and the affirmative vote of the holders of at least two-thirds of the shares of Series A Preferred Stock then outstanding shall be required, to authorize each of the following except in the case of Section (i) below in which case 8 the affirmative vote of all of the shares of Series A Preferred Stock then outstanding shall be required. (i) the cancellation of any accumulated dividends on any shares of Series A Preferred Stock, changes in dividends on any shares of Series A Preferred Stock, changes in dividend or redemption amounts, changes in the rate of conversion or the current exercise price as provided herein, or any changes in the terms hereof which, together with all previous changes, if any, extend the date of payment of any dividend or redemption payment to a period 12 months in excess of the dates for each such payments set forth herein without giving effect to any previous changes; (ii) the payment or declaration of any dividend or distribution on or the redemption, acquisition, whether directly or indirectly by the Corporation or any subsidiary for value, of any Common Stock, or any other class or series of stock which does not rank in parity with or prior to the Series A Preferred Stock as to rights and preferences, excepting the payment of dividends solely in shares of Common Stock, until dividends accumulated on the Series A Preferred Stock in respect of all prior dividend periods are paid in full; (iii) the issuance of any shares of a class or series of stock ranking prior to the Series A Preferred Stock as to rights and preferences; or (iv) the amendment, alteration, or repeal of any of the provisions of Article FOURTH, Section II(A) of the Corporation's Certificate of Incorporation other than as provided in Section II(A)(4)(ii) so as to alter, change, or limit the preferences, rights, or powers of the Series A Preferred Stock. Any amendment of the class voting rights provided in this Section II(A)(4)(b) shall be by the same vote as is provided for the class voting right to be amended. (c) Acquisition of Preferred Stock. So long as any Series A Preferred Stock is outstanding, no Series A Preferred Stock shall be directly or indirectly acquired by the Corporation or any subsidiary except (i) as a result of conversion in accordance with the provisions hereof, (ii) by redemption by the Corporation in accordance with the provisions hereof, or (iii) by purchase ratably from all tendering holders in proportion of the number of shares tendered by them, pursuant to an offer, remaining in effect for at least twenty days, to purchase at a specified price or consideration per share made to all holders of record of Series A Preferred Stock. (d) Consents in Lieu of Voting. Whenever the vote of the holders of the Series A Preferred Stock is required at a meeting or permitted to be taken for or in connection with any corporate action, the meeting and vote of such holders may be dispensed 9 with upon the written consent of holders of Series A Preferred Stock having all of the outstanding shares. 5. Liquidation. Repayment of the Purchase Price of each 100 shares of Series A Preferred Stock (but in no event payment of accrued and unpaid dividends) shall be secured by five of the Corporation's operating pay telephones pursuant to security agreements between the Corporation and the holders of the Series A Preferred Stock (the "Security Agreements"). Upon liquidation of the Corporation, the holders of Series A Preferred Stock shall have the rights granted to them pursuant to the Security Agreements. To the extent that a holder of Series A Preferred Stock has not received the equivalent of One Hundred Dollars ($100.00) per share through enforcement of the holder's rights pursuant to the Security Agreement and to the extent there are any accrued and unpaid dividends, the Series A Preferred Stock shall be preferred upon liquidation over the Common Stock and any other class or classes of stock of the Corporation ranking junior in rights and preferences to the Series A Preferred Stock upon liquidation. Holders of shares of Series A Preferred Stock shall be entitled to be paid, after full payment is made on any stock ranking prior to the Series A Preferred Stock as to rights and preferences (but before any distribution is made to the holders of the Common Stock and such junior stock) upon the voluntary or involuntary dissolution, liquidation or winding up of the Corporation. The amount payable on each share of Series A Preferred Stock in the event of the voluntary or involuntary dissolution, liquidation or winding up of the Corporation shall be One Hundred Dollars ($100.00) per share plus an amount equal to all accrued and unpaid dividends (including interest, if any, as provided above) to and including the date of payment and no more less the fair market value of the assets received by the holder of Series A Preferred Stock pursuant the remedies set forth in the Security Agreement. Upon any such liquidation, dissolution or winding up of the Corporation, if its net assets are insufficient to permit the payment in full of the amounts to which the holders of all outstanding shares of Series A Preferred Stock are entitled as provided above, the entire net assets of the Corporation remaining (after full payment is made on any stock ranking prior to the Series A Preferred Stock as to rights and preferences) shall be distributed among the holders of shares of Series A Preferred Stock in amounts proportionate to the full preferential amounts to which they and holders of shares of preferred stock in parity with the Series A Preferred Stock as to rights and preferences are respectively entitled. For the purpose of this Section II(A)(5), the voluntary sale, lease, exchange or transfer, for cash, shares of stock, securities or other consideration, of all or substantially all the Corporation's property or assets to, or its consolidation or merger with, one or more corporations shall not be deemed to be a liquidation, dissolution or winding up of the Corporation, voluntary or involuntary. Notwithstanding the foregoing, if any holder of Series A Preferred Stock converts Series A Preferred Stock to Common Stock pursuant to Section II(A)(6), the right to preferential liquidation rights pursuant to this Section, including, without limitation, the rights pursuant to the Security Agreement, shall be immediately terminated. 10 6. Conversion Provisions. (a) Subject to the following provisions for adjustment, shares of Series A Preferred Stock shall be convertible at any time at the option of the holder, upon surrender to the transfer agent for the Series A Preferred Stock or the Corporation of the certificate or certificates evidencing the shares to be converted, into fully paid and nonassessable shares of Common Stock of the Corporation at the rate of 25 shares of Common Stock for each share of Series A Preferred Stock surrendered for conversion. The right to convert shares of the Series A Preferred Stock called for redemption shall terminate on the date fixed for redemption provided that the Corporation has complied with Section II(A)(3)(c). (b) The number of shares of Common Stock into which a share of Series A Preferred Stock is convertible shall be subject to adjustment from time to time only as follows: (i) After the date on which shares of Series A Preferred Stock are first issued, if the number of outstanding shares of Common Stock is increased by a dividend declared payable in shares of Common Stock to all holders of Common Stock or by a subdivision of shares of Common Stock, then the number of shares of Common Stock into which a share of Series A Preferred Stock is convertible shall be increased in proportion to the increase in the outstanding shares of Common Stock. This adjustment shall become effective immediately after the opening of business on the day following the date on which the Corporation takes a record of the holders of Common Stock for the purpose of entitling them to receive the dividend or the day upon which such subdivision becomes effective. (ii) After the date on which shares of Series A Preferred Stock are first issued, if the number of outstanding shares of Common Stock, is decreased by a combination of shares of Common Stock, the number of shares of Common Stock into which a share of Series A Preferred Stock is convertible shall be decreased in proportion to such decrease in the outstanding shares of Common Stock. This adjustment shall become effective immediately after the opening of business on the day upon which the combination becomes effective. (iii) For the purpose of making the adjustments referred to in Section (i) and (ii), the books of the Corporation shall control in determining the number of outstanding shares of Common Stock and the number of additional shares issued or decreased in shares as a result of any stock dividend, subdivision or combination. (iv) If the Corporation distributes to all holders of its Common Stock any assets (other than any distribution payable out of retained earnings or any cash dividend), rights to subscribe, evidences of indebtedness or other securities of the 11 Corporation (other than Common Stock), then the number of shares of Common Stock into which each share of Series A Preferred Stock convertible shall be determined as follows: the number of shares of Common Stock into which each share of Series A Preferred Stock was convertible on the date immediately preceding the record date for the distribution shall be multiplied by a fraction, the numerator of which shall be the current exercise price (as determined and provided in Subsection (vi) below) of the Common Stock on the record date and the denominator of which shall be the current exercise price per share less the then fair market value, as determined in a resolution adopted by the Board of Directors, which shall be conclusive evidence of the fair market value of the portion of the assets or evidences of indebtedness or securities distributed or of the subscription rights applicable to one share of Common Stock. This adjustment shall become effective retroactive immediately after the record date for the determination of shareholders entitled to receive the distribution. (v) If the Corporation issues Common Stock at a price less than the then current exercise price per share as determined and provided in Subsection (vi) below, then the number of shares of Common Stock into which each share of Series A Preferred Stock shall thereafter be convertible shall be determined as follows: the number of shares of Common Stock into which each share of Series A Preferred Stock was convertible immediately prior to the date of issuance of such Common Stock shall be multiplied by a fraction, the numerator of which shall be the sum of the number of shares of Common Stock outstanding at the date of the issuance plus the number of additional shares of Common Stock so issued, and the denominator of which shall be the sum of the number of shares of Common Stock outstanding at the date of the issuance plus the number of shares of Common Stock which the aggregate offering price that the total number of shares so offered would purchase at such current exercise price per share. This adjustment shall become effective immediately after the issuance of Common Stock wholly or in part for a consideration other than cash. The amount of the consideration other than cash received by the Corporation shall be deemed to be the fair value of the consideration as determined in good faith by the Board of Directors of the Corporation, which determination shall be conclusive of the fair market value. (vi) For purposes of the computation specified under Subsections (iv) and (v) above, the current exercise price per share of Common Stock shall be deemed to be $4.00 per share adjusted proportionately to reflect any of the adjustments required by Sections (i) and (ii) above and as adjusted pursuant to the provisions of Subsections (iv) and (v) above. (vii) If the Corporation merges or consolidates with or into another corporation or in case of any sale or conveyance to another corporation of all or 12 substantially all the assets of the Corporation or if the Corporation issues by reclassification or recapitalization of Common Stock any shares of the Corporation, the holder of each share of Series A Preferred Stock then outstanding shall have the right thereafter, so long as his conversion rights exist, to convert each share into the kind and amount of shares of stock and other securities and property receivable upon the consolidation, merger, sale, conveyance, reclassification or recapitalization by a holder of the number of shares of Common Stock into which each share might have been converted immediately prior to the consolidation, merger, sale, conveyance, reclassification or recapitalization and shall have no other conversion rights under these provisions; provided, that effective provisions shall be made, in the Articles or Certificate of Incorporation of the resulting or surviving corporation or otherwise, so that the provisions for the protection of the conversion rights of the shares of Series A Preferred Stock shall thereafter be applicable, as nearly as they reasonably may be, to any other shares of stock and other securities and property deliverable upon conversion of the shares of Series A Preferred Stock remaining outstanding or other convertible securities received by the holders in place thereof; and provided further that any resulting or surviving corporation shall expressly assume the obligation to deliver, upon the exercise of the conversion privilege, shares, other securities or property as the holders of the shares of Series A Preferred Stock remaining outstanding or other convertible securities received by the holders in place thereof, shall be entitled to receive pursuant to these provisions, and to make provisions for the protection of the conversion right as provided above. If securities or property other than Common Stock shall be issuable or deliverable upon conversion, then all references in this Subsection (vii) shall be deemed to apply, so far as appropriate and as nearly as may be, to the other securities or property. Provided, however, that in the event of any merger in which the Corporation is not the survivor, each holder of Series A Preferred Stock, at the holder's election exercised in writing within 15 days after the merger, may receive $100 per share cash plus accrued dividends (including interest, if any, as provided above) in lieu of the stock, securities or other property provided for above. (viii) No fractional share of Common Stock shall be issued upon any conversion but, in lieu thereof, there shall be paid to the holder of shares of Series A Preferred Stock surrendered for conversion as soon as practicable after the date the shares are surrendered for conversion an amount in cash equal to the same fraction of the current market price per share of Common Stock, unless the Board of Directors shall determine to adjust fractional shares in some other manner. (ix) The Corporation shall pay to the holders of shares of Series A Preferred Stock surrendered for conversion as soon as practicable after the date the shares are surrendered for conversion an amount in cash equal to all dividends 13 scheduled to have been paid in accordance with Section II(A)(2) (including interest, if any, as provided above) to the date of conversion which have not been paid except that if the Corporation may not lawfully under New York Law make the cash payment it shall issue to each holder its obligation to make the payment at the earliest date on which it may lawfully make the payment. (x) No adjustment in the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible shall be required unless the adjustment would require an increase or decrease of at least 1/25th of a share in the number of shares of Common Stock into which the shares are then convertible; provided, however, than any adjustments which by reason of this Section are not required to be made shall be carried forward and taken into account in any subsequent adjustment. (xi) Whenever any adjustment is required in the shares into which each share of Series A Preferred Stock is convertible, the Corporation shall (a) file with the transfer agent, if any, for the Series A Preferred Stock a statement describing in reasonable detail the adjustment and the method of calculation used and (b) cause a copy of the notice to be mailed to the holders of record of the shares of Series A Preferred Stock. (c) The Corporation shall at all times reserve and keep available out of its authorized but unissued shares the full number of shares into which all shares of Series A Preferred Stock from time to time outstanding are convertible. (d) The Corporation will pay any and all issue and other taxes that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of shares of Series A Preferred Stock. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of Common Stock in a name other than that in which the shares of Series A Preferred Stock converted were registered, and no issuance or delivery shall be made unless and until the person requesting the issuance has paid to the Corporation the amount of any such tax, or has established, to the satisfaction of the Corporation, that such tax has been paid. 7. Notices of Record Date. In case: (a) The Corporation shall take a record of the holders of its Common Stock (or other stock or securities at the time receivable upon the conversion of the Series A Preferred Stock) for the purpose of entitling them to receive any dividend (other than a cash dividend, at a rate no more than 150% of the Corporation's annual dividend rate based upon 14 the last cash dividend paid) or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any securities, or to receive any other right, or (b) Of any capital reorganization of the Company, any reclassification of the capital stock of the Corporation, any consolidation or merger of the Corporation with or into another corporation, except for mergers into the Corporation of subsidiaries whose assets are less than 10% of the total assets of the Corporation and its consolidated subsidiaries, or any conveyance of all or substantially all of the assets of the Corporation to another corporation, or (c) Of any voluntary dissolution, liquidation or winding-up of the Corporation; then, and in each case, the Corporation will mail or cause to be mailed, to each holder of Series A Preferred Stock at the time outstanding a notice specifying, as the case may be, (i) the record date for the dividend, distribution or right, and stating the amount and character of the dividend, distribution or right, or (ii) the date on which the reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any, to be fixed as of which the holders of record of Common Stock (or the stock or securities at the time receivable upon the conversion of the Series A Preferred Stock) shall be entitled to exchange their shares of Common Stock (or the other stock or securities) for securities or other property deliverable upon the reorganization, liquidation or winding-up. The notice shall be mailed at least 20 days prior to the date of the notice. The rights to notice provided in this Section II(A)(7) are in addition to the rights provided in this Certificate. 8. Additional Remedies. In the event of any default in performance of the obligations set forth in Section II(A)(2) or Section II(A)(3), any holder of Series A referred Stock may, in addition to any other remedies provided in this Certificate or by law, bring suit to compel performance of the obligations to each holder. FIFTH: The Secretary of State of the State of New York is hereby designated as the agent of the Corporation upon whom any process in any action or proceeding against it may be served. The address to which the Secretary of State shall mail a copy of process in any action or proceeding against the Corporation which may be served upon it is: c/o Peoples Telephone Company, Inc., 7879 N.W. 15th Street, Miami, Florida 33126. SIXTH: Except as may be otherwise specifically provided in this Certificate of Incorporation, no provision of this Certificate of Incorporation is intended by the Corporation to be construed as limiting, prohibiting, denying or abrogating any of the general or specific powers or rights conferred under the Business Corporation Law upon the Corporation, upon its shareholders, bondholders and security holders and upon its directors, officers or other corporate personnel, including, in particular the power of the Corporation to furnish indemnification to directors and officers in the capacity defined and prescribed by the Business Corporation Law 15 and the defined and prescribed rights of said persons to indemnification as the same are conferred by the Business Corporation Law. SEVENTH: The name and address within the State of New York of the registered agent of the Corporation upon whom process against it may be served are as follows: Name Address CT Corporation System 1633 Broadway New York, New York 10019 EIGHTH: No holder of shares of the Corporation of any class, now or hereafter organized, shall have any preferential or pre-emptive right to subscribe for, purchase or receive any shares of the Corporation of any class, now or hereafter authorized, or any options or warrants for such shares, or any securities convertible into or exchangeable for such shares, which may at any time be issued, or offered for sale by the Corporation. NINTH: No contract or transaction between this Corporation and any of its successors, or between this Corporation and any other corporation, firm, association, or other legal entity shall be invalidated by reason of the fact that the director of the Corporation has a direct or indirect interest, pecuniary or otherwise, in such corporation, firm, association, or legal entity, or because the interested director was present at the meeting of the Board of Directors which acted upon or in reference to such contract or transaction, or because he participated in such action, provided that the interest of each such director shall have been disclosed to or known by the Board and a disinterested majority of the Board shall have nonetheless ratified and approved such contract or transaction. Such interested director or directors may be counted in determining whether a quorum is present for the meeting at which such ratification or approval is given. If the vote of such interested director or directors is, or was necessary for the approval of such contract or transaction, then such contract or transaction shall, with disclosure of the director's or directors' interest, be submitted for the approval or ratification of the shareholders. TENTH: The officers and directors of the Corporation shall be indemnified to the fullest extent provided by law. The right to indemnification and advancement of expenses as otherwise provided by law shall not be exclusive of any other right which any officer or director may have or hereafter acquire under any provisions of the Corporation's Certificate of Incorporation or By-Laws or by any agreement, vote of shareholders or disinterested directors of the Corporation or otherwise, provided that no indemnification may be made to or on behalf of any officer or director if a judgment or other final adjudication adverse to the officer or director establishes that his acts were committed in bad faith or were the result of active and deliberate dishonesty and were material to the cause of action so adjudicated, or that he personally gained in fact a financial profit or other advantage to which he was not legally entitled. 16 A director shall not be liable to the Corporation or its shareholders for damages for any breach of duty in his capacity as director unless (i) a judgment or other final adjudication adverse to the director establishes that his acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that he personally gained in fact a financial profit or other advantage to which he was not legally entitled or that his acts violated section 719 of the Business Corporation Law or (ii) the liability of any director for any act or omission occurred prior to the adoption of this paragraph by the Corporation. IN WITNESS WHEREOF Peoples Telephone Company, Inc. has caused this Restated Certificate of Incorporation to be signed in its name and on its behalf by its president and secretary and each of them has affirmed this Restated Certificate of Incorporation as true and correct under the penalties of perjury on this 10th day of December, 1987. PEOPLES TELEPHONE COMPANY, INC. /s/JEFFREY HANFT, President /s/SUSAN CALVERT, Secretary STATE OF FLORIDA ) ) SS: COUNTY OF DADE ) BEFORE ME, the undersigned authority, personally appeared JEFFREY HANFT and SUSAN CALVERT, to me known to be the President and Secretary, respectively, of PEOPLES TELEPHONE COMPANY, INC., a New York corporation, who acknowledged before me that they have executed the foregoing Certificate in their respective capacity as officers of the said company for the reasons and purposes therein expressed, and that the statements contained in the said Certificate are true and correct. Sworn to and subscribed before me at Miami, Florida this 10th day of December, 1987. /s/ LaVonne L. Sanders NOTARY PUBLIC My Commission Expires: April 16, 1991 17 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF PEOPLES TELEPHONE COMPANY, INC. Under Section 805 of the Business Corporation Law 1. The name of the corporation is Peoples Telephone Company, Inc. (formed under the name of Shirts Unlimited Franchise, Inc.) (the "Corporation"). 2. The Corporation originally filed its Certificate of Incorporation with the New York Department of State on September 5, 1968. 3. Pursuant to the authority granted to the Board of Directors of the Corporation by Section II, Article Fourth, of its Certificate of Incorporation, the Corporation hereby amends its Certificate of Incorporation by the addition of a provision stating the number, designation, relative rights, preferences on and limitations of a series of the Corporation's Preferred Stock, in addition to the existing Series A Preferred Stock, as fixed by the Board of Directors of the Corporation, as follows: I. DESIGNATION AND RANK. The second series of preferred stock is designated "Series B Preferred Stock", and the number of shares which shall constitute such Series shall be 600,000 shares, par value $.01 per share. All Shares of Series B Preferred Stock shall rank equally and be identical in all respects. The Corporation shall on not be restricted from issuing additional securities of any kind, including shares of preferred stock of any class, series or designation (including, without limitation, preferred stock ranking in parity as to rights and preferences with the Series B Preferred Stock) now or hereafter authorized, provided that issuances of the Series B Preferred Stock shall be limited to issuances upon exercise of outstanding warrants issued pursuant to the Warrant Agreement, dated as of March 7, 1990, between the Corporation and Creditanstalt-Bankverein. II. DIVIDENDS. Dividends and other distributions, payable in cash or other property (other than shares of Common Stock), shall be paid on the Series B Preferred Stock equally, ratably and on a parity with such dividends and other distributions paid on the Common Stock, as and when such dividends and other distributions are declared by the Board of Directors of the Corporation, as though the Common Stock and Series B Preferred Stock were one and the same class; provided that in determining the number of shares of Series B Preferred Stock outstanding and entitled to 1 receipt of any such dividend or other distribution, each share of Series B Preferred Stock outstanding shall be deemed to be equal to the number of shares of Common Stock into which one share of Series B Preferred Stock could have been converted on the date on which the holders of Common Stock and Series B Preferred Stock were determined to receive payment of such dividend or other distribution, after giving effect to any adjustments provided for in Section VI of this certificate. III. REDEMPTION. The Series B Preferred Stock shall not be redeemable by the Corporation. IV. VOTING RIGHTS. Except as otherwise specifically provided by New York Law, the holders of Series B Preferred Stock shall not be entitled to vote on any matters required or permitted to be submitted to the shareholders of the Corporation for their approval. V. LIQUIDATION. The Series B Preferred Stock shall be preferred upon liquidation over the Common Stock and any other class or classes of stock of the Corporation ranking junior in rights and preferences to the Series B Preferred Stock upon liquidation. Holders of shares of Series B Preferred Stock shall be entitled to be paid, after full payment is made on any stock ranking prior to the Series B Preferred Stock as to rights and preferences (but before any distribution is made to the holders of the Common Stock and such junior stock) upon the voluntary or involuntary dissolution, liquidation or winding up of the Corporation. The amount payable on each share of Series B Preferred Stock in the event of the voluntary or involuntary dissolution, liquidation or winding up of the Corporation shall be one cent ($0.01) per share. Upon any such liquidation, dissolution or winding up of the Corporation, if its net assets are insufficient to permit the payment in full of the amounts to which the holders of all outstanding shares of Series B Preferred stock are entitled as provided above, the entire net assets of the Corporation remaining (after full payment is made on any stock ranking prior to the Series B Preferred Stock as to rights and preferences) shall be distributed among the holders of shares of Series B Preferred Stock in amounts proportionate to the full preferential amounts to which they and holders of shares of preferred stock ranking in parity with the Series B Preferred Stock as to rights and preferences are respectively entitled. For the purpose of this Section V, the voluntary sale, lease, exchange or transfer, for cash, shares of stock, securities or other consideration, of all or substantially all the Corporation's property or assets to, or its consolidation or merger with, one or more corporations shall not be deemed to be a liquidation, dissolution or winding up of the Corporation, voluntary or involuntary. Notwithstanding the foregoing, in the event that any holder of Series B Preferred Stock converts his Series B Preferred Stock to Common Stock pursuant to Section VI hereof, the right to preferential liquidation rights pursuant to this Section shall be immediately terminated. 2 VI. CONVERSION PROVISIONS. (a) Subject to the provisions for adjustment hereinafter set forth, each share of Series B Preferred Stock shall be convertible at any time at the option of the holder thereof, upon surrender to the transfer agent for the Series B Preferred Stock or the Corporation of the certificate or certificates evidencing the shares so to be converted, into one fully paid and nonassessable share of Common Stock of the Corporation. Notwithstanding the foregoing provisions of this Section VI, a holder of Series B Preferred Stock shall not have the right to convert the Series B Preferred Stock held by it if the Common Stock to be received upon conversion would, when aggregated with the shares of Common Stock then beneficially owned by such holder and it Affiliates, exceed 4.99% of the outstanding Common Stock, unless (i) if the holder is a bank which is subject to the provisions of the Bank Holding Company Act of 1956 (the "BHCA"), there is available authority for the holder to acquire Common Stock in excess of 4.99% of the outstanding Common Stock under the BHCA; or (ii) if the holder is a party other than a bank, the holder obtained the Series B Preferred Stock either (x) in a transaction in which no individual or group would have acquired more than 2% of the outstanding Common Stock if the Series B Preferred Stock so acquired had been converted into Common Stock, or (y) in a widely dispersed public offering. In addition to the foregoing amount payable on the Series B Preferred Stock upon a voluntary or involuntary dissolution, liquidation or winding up of the Corporation, after payment of said amount and the payment in full of all amounts on any stock ranking prior to the Common Stock as to rights and preferences on the voluntary or involuntary dissolution, liquidation or winding up of the Corporation, there shall be paid from the remaining net assets of the Corporation to the holders of the Series B Preferred Stock equally and ratably with the holders of the Common Stock as though the Common Stock and the Series B Preferred Stock were one and the same class an amount equal to the remaining net assets of the Corporation, after deducting therefrom an aggregate amount equal to $.01 per share of Common Stock outstanding, which amount shall be paid to the holders of the Common Stock; provided that, in determining the number of shares of Series B Preferred Stock outstanding and entitled to receipt of such payment under this Section V, each share of Series B Preferred Stock outstanding shall be deemed to be equal to the number of shares of Common Stock into which one share of Series B Preferred Stock could have been converted on the date on which the holders of the Common Stock and Series B Preferred Stock were determined to receive such payment, after giving effect to any adjustments provided in Section VI of this certificate. For purposes of this provision, "Affiliate" of any individual, corporation, trust, partnership or other entity shall mean any other individual, corporation, trust, partnership or other entity directly or indirectly controlling, controlled by or under direct or indirect common control with such individual, corporation, trust, partnership or other entity. For purposes of this definition, as to Creditanstalt-Bankverein, Affiliate shall include any partnership a majority of the partners of which are officers, directors, employees or affiliates of Creditanstalt-Bankverein. (b) The number of shares of Common Stock into which an issued and outstanding share of Series B Preferred Stock is convertible shall be subject to adjustment from time to time only as follows: 3 (i) In the event that the Corporation shall at any time (A) declare a dividend on the Common Stock in shares of its Common Stock, (B) split or subdivide the outstanding Common Stock or (C) combine the outstanding Common Stock into a smaller number of shares, each share of Series B Preferred Stock outstanding at the time of the record date for such dividend or of the effective date of such split, subdivision or combination shall thereafter be convertible into the aggregate number of shares, of Common Stock which, if such share of Series B Preferred Stock had been converted immediately prior to such time, the holder of such share would have owned or have been entitled to receive by virtue of such dividend, subdivision or combination. Such adjustment shall be made successively whenever any event listed above shall occur. (ii) In the event that the Corporation shall at any time (A) issue any shares of Common Stock without consideration or at a price per share less than the current market price per share of Common Stock (as defined in subsection VI(b)(iii) hereof), or (B) issue options, rights or warrants to subscribe for or purchase Common Stock (or securities convertible into Common Stock other than the Series B Preferred Stock) at an exercise price per share (or having a conversion price per share, if a security convertible into Common Stock) less than the then current market price per share of Common Stock (as defined in subsection VI(b)(iii) hereof), each share of Series B Preferred Stock outstanding on the date of such issuance shall thereafter be convertible into a number of shares of Common Stock equal to the product of (x) the number of shares of Common Stock into which such share of Series B Preferred Stock was convertible immediately prior to such date of issuance and (y) a fraction of which the numerator shall be the number of shares of Common Stock outstanding on the date of such issuance plus the number of additional shares of Common Stock to be issued or to be offered for subscription or purchase upon exercise of such options, rights or warrants (or into which the convertible securities so to be offered are initially convertible) and of which the denominator shall be the number of shares of Common Stock outstanding on the date of such issuance plus the number of shares of Common Stock which the aggregate offering price of the total number of shares of Common Stock so to be issued or to be offered for subscription or purchase upon exercise of such options, rights or warrants (or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current market price. In case such subscription price may be paid in a consideration part or all of which shall be in form other than cash, the value of such consideration shall be as determined by agreement between the holders of a majority of the outstanding shares of Series B Preferred Stock and the Corporation or, in the absence of such an agreement, by an independent investment banking firm or an independent appraiser reasonably acceptable to the holders of a majority of the outstanding shares of Series B Preferred Stock (in either case the cost of which engagement will be borne by the Corporation). Shares of Common Stock owned by or held for the account of the Corporation or any majority-owned subsidiary of the Corporation shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever the date of such issuance is fixed (which date of issuance shall be the record date for such issuance if a record date therefor is fixed); and, in the event that (A) such shares or options, rights or warrants are not so issued, or (B) any such option, right or warrant expires according to its terms without having been exercised, each share of 4 Series B Preferred Stock outstanding shall, as of the date of cancellation of such issuance in the case of clause (A) above and the date of such expiration in the case of clause (B) above, be convertible into the number of shares of Common Stock as would have been the case had the date of such issuance of such unissued options, rights or warrants not been fixed or such expired options, rights or warrants not been issued, as the case may be. (iii) For the purpose of any computation under this Section VI(b), the "current market price per share" of Common Stock on any date shall be deemed to be: (A) if the Common Stock is then reported on the Composite Transactions Tape, the average of the daily closing prices for the 30 consecutive trading days imImediately prior to such date as reported on the Composite Transactions Tape; or (B) if the Common Stock is then listed or admitted to trading on a national securities exchange, the average of the daily last sales prices regular way of the Common Stock, for the 30 consecutive trading days immediately prior to such date, on the principal national securities exchange on which the Common Stock is traded or, in case no such sale takes place on any such date, the average of the closing bid and asked prices regular way, in either case on such national securities exchange; or (C) if the Common Stock is then traded in the over-the-counter market, the average of the daily closing sales prices, or, if there is no closing sales price, the average of the closing bid and asked prices, in the over-the-counter market, for the 30 consecutive trading days immediately prior to such date, as reported by the National Association of Securities Dealers' Automated Quotation System, or, if not so reported, as reported by the National Quotation Bureau, Incorporated or any successor thereof, or, if not so reported the average of the closing bid and asked prices as furnished by any member of the National Association of Securities Dealers, Inc. selected from time to time by the Board of Directors of the Corporation for that purpose; or (D) If no such prices are then furnished, the higher of (x) $4.75 and (y) the fair market value of a share of Common Stock as determined by agreement between the holders of a majority of the outstanding shares of Series B Preferred Stock and the Corporation or, in the absence of such an agreement, by an independent investment banking firm or an independent appraiser (in either case the cost of which engagement will be borne by the Corporation) reasonably acceptable to the holders of a majority of outstanding shares of Series B Preferred Stock. (iv) No adjustment in the number of shares of Common Stock issuable upon conversion of a share of Series B Preferred Stock shall be required unless such adjustment would require an increase or decrease in the aggregate number of shares of Common Stock so issuable of at least 1/8th of a share, provided that any adjustments which by reason of this subsection VI(b)(iv) are not required to be made shall be carried forward and taken into account in any 5 subsequent adjustment. All calculations under this Section VI(b) shall be made to the nearest cent, or to the nearest hundredth of a share, as the case may be. (v) In the event of any capital reorganization of the Corporation, or of any reclassification of the Common Stock (other than a subdivision or combination of outstanding shares of Common Stock), or in case of the consolidation of the Corporation with or the merger of the Corporation with or into any other corporation or of the sale of the properties and assets of the Corporation as, or substantially as, an entirety to any other corporation, each share of Series B Preferred Stock shall after such capital reorganization, reclassification of Common Stock, consolidation, merger or sale be convertible upon the terms and conditions specified in this Section VI, for the number of shares of stock or other securities or assets to which a holder of the number of shares of Common Stock into which a share of Series B Preferred Stock is then convertible (at the time of such capital reorganization, reclassification of Common Stock, consolidation, merger or sale) would have been entitled upon such capital reorganization, reclassification of Common Stock, consolidation, merger or sale; and in any such case, if necessary, the provisions set forth in this Section VI with respect to the rights of conversion thereafter of the Series B Preferred Stock shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares of stock or other securities or assets thereafter deliverable on the conversion of the Series B Preferred Stock. The Corporation shall not effect any such consolidation, merger or sale, unless prior to or simultaneously with the consummation thereof, the successor corporation (if other than the Corporation) resulting from such consolidation or merger or the corporation purchasing such assets or the appropriate corporation or entity shall assume by written instrument, the obligation to deliver to the holder of each share of Series B Preferred Stock the shares of stock, securities or assets to which, in accordance with the foregoing provisions, such holder may be entitled upon conversion of such Series B Preferred Stock and all other obligations of the Corporation under this Section VI, and effective provisions are made in the Articles or Certificate of Incorporation of such successor or transferee corporation providing for conversion privileges relating to the Series B Preferred Stock equivalent to those set forth in this Section VI. (vi) If any question at any time arises with respect to the number of shares of Common Stock into which a share of Series B Preferred Stock is convertible following any adjustment pursuant to this Section VI, such question shall be determined by agreement between the holders of a majority of the outstanding shares of Series B Preferred Stock and the Corporation or, in the absence of such an agreement by an independent investment banking firm or an independent appraiser (in either case the cost of which engagement will be borne by the Corporation) reasonably acceptable to the Corporation and the holders of a majority of outstanding shares of Series B Preferred Stock and such determination shall be binding upon the Corporation and the holders of the Series B Preferred Stock. (vii) Anything in this Section VI to the contrary notwithstanding, the Corporation shall be entitled to make such increases in the number of shares of Common Stock issuable upon conversion of shares of Series B Preferred Stock, in addition to those adjustments 6 required by this Section VI, as it in its sole discretion shall determine to be advisable in order that any consolidation or subdivision of the Common Stock, or any issuance wholly for cash of any shares of Common Stock at less than the current market price, or any issuance wholly for cash of shares of Common Stock or securities which by their terms are convertible into or exchangeable for shares of Common Stock, or any issuance of rights, options or warrants referred to hereinabove in this Section VI, hereinafter made by the Corporation to the holders of its Common Stock shall not be taxable to them. (viii) Upon any adjustment of the number of the shares of Common Stock issuable upon conversion of shares of Series B Preferred Stock pursuant to this Section VI, the Corporation shall promptly but in any event within 20 days thereafter, cause to be given to each of the registered holders of the Series B Preferred Stock, at its address appearing on the Register for the Series B Preferred Stock by registered mail, postage prepaid, return receipt requested a certificate signed by its chairman, president or chief financial officer setting forth the number of shares of Common Stock issuable upon conversion of shares of Series B Preferred Stock as so adjusted and describing in reasonable detail the facts accounting for such adjustment and the method of calculation used. Where appropriate, such certificate may be given in advance and included as a part of the notice required to be mailed under the other provisions of this resolution. (ix) The Corporation will at all times have authorized, and reserve and keep available, free from preemptive rights, for the purpose of enabling it to satisfy any obligation to issue shares of Common Stock upon the conversion of the Series B Preferred Stock, the number of shares of Common Stock deliverable upon conversion of the Series B Preferred Stock. (x) The Corporation shall not be required to issue fractional shares of Common Stock upon conversion of the Series B Preferred Stock but shall pay for any such fraction of a share an amount in cash equal to the current market price per share of Common Stock of such share (determined in accordance with the provisions of subsection VI(b)(iii) hereof) multiplied by such fraction. (xi) The Corporation will pay all taxes attributable to the issuance of shares of Common Stock upon conversion of shares of Series B Preferred Stock, provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue of any shares of Common Stock in a name other than that of the registered holder of the Series B Preferred Stock surrendered for conversion, and the Corporation shall not be required to issue or deliver such certificate unless or until the person or persons requesting the issuance thereof shall have paid to the Corporation the amount of such tax or shall have established to the satisfaction of the Corporation that such tax has been paid. VII. NOTICES TO HOLDERS OF SERIES B PREFERRED STOCK. In the event: 7 (a) of any consolidation or merger to which the Corporation is a party and for which approval of any stockholders of the Corporation is required, or of the conveyance or transfer of the properties and assets of the Corporation substantially as an entirety, or of any capital reorganization or reclassification or change of the Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination); or (b) of the voluntary or involuntary dissolution, liquidation or winding up of the Corporation; or (c) that the Corporation proposes to take any other action which would require an adjustment in. the number of shares of Common Stock or other securities or assets issuable upon conversion of shares of Series B Preferred Stock pursuant to Section VI; then the Corporation shall cause to be given to each of the registered holders of the Series B Preferred Stock at its address appearing on the Register for the Series B Preferred Stock, at least 20 calendar days prior to the applicable record date hereinafter specified, by registered mail, postage prepaid, return receipt requested, a written notice stating (i) the date as of which the holders of record of Common Stock entitled to participate in the event contemplated by clause (c) above are to be determined, or (ii) the date on which any such consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of record of Common Stock shall be entitled to exchange their shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up. The failure to give the notice required by this Section VII or any defect therein shall not affect the legality or validity of any distribution, right, warrant, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up, or the vote upon any action. VIII. ADDITIONAL REMEDIES. In the event of any default in performance of the obligations set forth in Section VI hereof, any holder of Series B Preferred Stock may, in addition to any other remedies provided herein or by law, bring suit to compel performance of such obligations to such holder. 4. The provision amending the Company's Certificate of Incorporation as set forth above was duly adopted at a telephonic meeting (as permitted by Section 12 of the Bylaws of the Company) of the Board of Directors of the Corporation held on March 5, 1990, and has not been modified, rescinded or amended and remains in full force and effect as of this day. IN WITNESS WHEREOF, Peoples Telephone Company, Inc. has caused this Certificate of Amendment to be signed in its name and on its behalf by its executive vice president and secretary and each of them has affirmed this Certificate of Amendment as true and correct under the penalties of perjury on this 5th day of March, 1990. 8 PEOPLES TELEPHONE COMPANY, INC. By: /s/Robert D. Rubin ROBERT D. RUBIN Executive Vice President By: /s/ Susan Calvert SUSAN CALVERT Secretary STATE OF FLORIDA ) ) SS: COUNTY OF DADE ) BEFORE ME, the undersigned authority, personally appeared ROBERT D. RUBIN and SUSAN CALVERT, to me known to be the Executive Vice President and Secretary, respectively, of PEOPLES TELEPHONE COMPANY, INC., a New York corporation, who acknowledged before me that they have executed the foregoing Certificate in their respective capacity as officers of the said corporation for the reasons and purpose therein expressed, and that the statements contained in the said Certificate are true and correct. Sworn to and subscribed before me at Dade, Florida this day of March, 1990. /s/ Robert A. Reddoch Notary Public My Commission Expires: November 30, 1993 9 CERTIFICATE OF CORRECTION OF THE CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF PEOPLES TELEPHONE COMPANY, INC. Under Section 105 of the Business Corporation Law 1. The name of the corporation is Peoples Telephone Company, Inc. (formed under the name of Shirts Unlimited Franchise, Inc.) (the "Corporation"). 2. The Certificate to be corrected is the Corporation's Certificate of Amendment of the Certificate of Incorporation of the Corporation, which was filed by the Corporation with the New York Department of State on March 6, 1990 (the "Certificate of Amendment"). The Corporation originally filed its Certificate of Incorporation with the New York Department of State on September 5, 1968. 3. Provision 3I of the Certificate of Amendment references a Warrant Agreement, dated as of March 7, 1990, between the Company and Creditanstalt-Bankverein. The date of such agreement is incorrect, and, accordingly, provision 3I, as corrected by this Certificate of Correction, should read: I. DESIGNATION AND RANK. The second series of preferred stock is designated "Series 8 Preferred Stock", and the number of shares which shall constitute such Series shall be 600,000 shares, par value $.01 per share. All Shares of Series B Preferred Stock shall rank equally and be identical in all respects. The Corporation shall not be restricted from issuing additional securities of any kind, including shares of preferred stock of any class, series or designation (including, without limitation, preferred stock ranking in parity as to rights and preferences with the Series B Preferred Stock) now or hereafter authorized, provided that issuances of the Series B Preferred Stock shall be limited to issuances upon exercise of outstanding warrants issued pursuant to the Warrant Agreement, dated as of March 12, 1990, between the Corporation and Creditanstalt-Bankverein. IN WITNESS WHEREOF, Peoples Telephone Company, Inc. has caused this Certificate of Correction to be signed in its name and on its behalf by its executive vice president and 1 secretary, and each of them has affirmed this Certificate of Amendment as true and correct under the penalties of perjury on this 13th day of March, 1990. PEOPLES TELEPHONE COMPANY, INC. By: /s/ Robert Rubin ROBERT D. RUBIN Executive Vice President By: /s/ Susan Calvert SUSAN CALVERT Secretary STATE OF FLORIDA ) ) SS: COUNTY OF DADE ) BEFORE ME, the undersigned authority, personally appeared ROBERT D. RUBIN and SUSAN CALVERT, to me known to be the Executive Vice President and Secretary, respectively, of PEOPLES TELEPHONE COMPANY, INC., a New York corporation, who acknowledged before me that they have executed the foregoing Certificate in their respective capacity as officers of the said corporation for the reasons and purpose therein expressed, and that the statements contained in the said Certificate are true and correct. Sworn to and subscribed before me at Miami, Florida this 13th day of March, 1990. /s/ Robert A. Reddoch ROBERT A REDDOCK My Commission Expires: November 30, 1990 2 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF PEOPLES TELEPHONE COMPANY, INC. Under Section 805 of the Business Corporation Law 1. The name of the corporation is Peoples Telephone Company, Inc. (formed under the name of Shirts Unlimited Franchise, Inc.) (the "corporation"). 2. The Corporation originally filed its Certificate of Incorporation with the New York Department of State on September 5, 1968. 3. The change to the certificate of incorporation of the Corporation is as follows: Paragraph FOURTH is amended to increase the number of authorized shares of Common Stock, par value $.01 per share, from 10,000,000 to 25,000,000 shares. Paragraph FOURTH is amended in its entirety to read as follows: FOURTH: Capital Stock. The total number of shares of all classes of capital stock which the Corporation shall have the authority to issue and have outstanding is 30,000,000, of which 25,000,000 shall be Common Stock, par value $.01 per share, and 5,000,000 shall be Preferred Stock, par value $.01 per share. The shares may be issued from time to time as authorized by the Board of Directors without further approval of shareholders. The consideration for the issuance of the shares shall not be less than the par value. Future services shall not constitute payment or part payment for the issuance of shares of the corporation. The consideration for the shares shall be cash, tangible or intangible property, labor or services actually performed for the corporation, or any combination of the foregoing. In the absence of actual fraud in, the transaction, the value of such property, labor or services as determined by the Board of Directors of the Company, shall be conclusive. Upon payment of such consideration, such shares shall be deemed to be fully paid and nonassessable. 4. The provision amending the Company's Certificate of Incorporation as set forth above was duly adopted by the Corporation's board of directors by unanimous written consent dated as of June 1, 1990, and by a majority of the Corporation's shareholders entitled to vote at the Corporations annual meeting of shareholders held on May 19, 1990 and such approvals have not been modified, rescinded or amended and remains in full force and effect as of this day. IN WITNESS WHEREOF, Peoples Telephone company, Inc. has caused this Certificate of Amendment to be signed in its name and on its behalf by its executive vice president and 1 secretary and each of them has affirmed this Certificate of Amendment as true and correct under the penalties of perjury on this 1st day of June, 1990. PEOPLES TELEPHONE COMPANY, INC. By: /s/ Robert D. Rubin ROBERT D. RUBIN Executive Vice President By: /s/ Susan Calvert SUSAN CALVERT Secretary 2 Certificate of Change of PEOPLES TELEPHONE COMPANY, INC. (Under Section 805-A of the Business Corporation Law) FIRST: The name of the corporation is PEOPLES TELEPHONE COMPANY, INC. SECOND: The certificate of incorporation of the corporation was filed by the Department of State on 09-05-68 Under the original name of SHIRTS UNLIMITED FRANCHISE INC. THIRD: The certificate of incorporation of the corporation is hereby changed, so as to change the post office address to which the Secretary of State of New York shall mail a copy of process against the corporation served upon him and to change the address of the registered agent; and to accomplish said changes, the statements in the certificate of incorporation relating to said post office address and the designation of registered agent are hereby stricken and the following statements are substituted in lieu thereof: The post office address within the State of New York to which the Secretary of State of New York shall mail a copy of any process against the corporation served upon him is c/o "THE PRENTICE-HALL CORPORATION SYSTEM, INC. 500 Central Avenue, Albany, New York 12206-2290" "The name and address of the registered agent of the corporation are THE PRENTICE-HALL CORPORATION SYSTEM, INC. 500 Central Avenue, Albany, New York 12206-2290. Said registered agent is to be the agent upon which process against the corporation may be served." FOURTH: A notice of the proposed changes was mailed by the undersigned to the corporation not less than 30 days prior to the date of the delivery of this certificate to the ______________ of Department of State and the corporation has not objected thereto. The person signing this certificate is the agent of the corporation to whose address and the Secretary of the State of New York is required to mail copies of process and the registered agent of the corporation. IN WITNESS WHEREOF, we have subscribed this document on the date set forth below and do hereby affirm, under the penalties of perjury, that the statements contained therein have been examined by us and are true and correct. Date: February 1, 1995. THE PRENTICE-HALL CORPORATION SYSTEM, INC. /s/ Dennis Howarth Dennis Howarth, Vice President /s/ Richard L. Kushay Richard L. Kushay, Asst. Secretary 1 CERTIFICATE OF CHANGE OF PEOPLES TELEPHONE COMPANY, INC. (Under Section 805-A of the Business Corporation Law) FIRST: The name of the corporation is PEOPLES TELEPHONE COMPANY, INC. SECOND: The certificate of incorporation of the corporation was filed by the Department of State on September 5, 1968, under the original name Shirts Unlimited Franchise Inc. THIRD: The certificate of incorporation of the corporation is hereby changed, pursuant to the authorization of the Board of Directors of the corporation, so as to change the post office address to which the Secretary of State shall mail a copy of any process against the corporation served upon him and to change the designation of registered agent. To accomplish said changes: (a) The following statement of said post office address to which the Secretary of State shall mail a copy of process is substituted: "The post office within the State of New York to which the Secretary of State shall mail a copy of any process against the corporation served upon him is 15 Columbus Circle, c/o The Prentice-Hall Corporation System, Inc., New York, New York 10023-7773." (b) The following statement of designation of registered agent is substituted: "The name and address of the registered agent of the corporation are The Prentice-Hall Corporation System, Inc., 15 Columbus Circle, New York, New York 10023-7773. Said registered agent is to be the registered agent upon which process against the corporation may be served." 2 IN WITNESS WHEREOF, we have subscribed this document on the date hereinafter set forth and do hereby affirm, under the penalties of perjury, that the statements contained therein have been examined by us and are true and correct. Dated: March 4, 1994 Name of Signer: /s/ Robert D. Rubin Robert D. Rubin, Vice President Name of Signer: /s/ David S. Tobin David S. Tobin, Secretary 3 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF PEOPLES TELEPHONE COMPANY, INC. UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW 1. The name of the corporation is Peoples Telephone Company, Inc. (formed under the name of Shirts Unlimited Franchise, Inc.) (the "Corporation"). 2. The Corporation originally filed its Certificate of Incorporation with the New York Department of State on September 5, 1968. 3. The total number of authorized shares of capital stock of the Corporation is 30,000,000, of which 25,000,000 shares are Common Stock, par value $.01 per share, and 5,000,000 shares are Preferred Stock, par value $01. per share ("Preferred Stock"). As of the date hereof and except as set forth herein, the Corporation has a total of 4,300,000 shares of Preferred Stock undesignated as to series, none of which is outstanding. The Corporation previously authorized and issued 100,000 shares of Preferred Stock, designated Series A Preferred Stock, par value $.01 per share, all of which have been retired and may not be issued, and previously authorized 600,000 shares of Preferred Stock, designated Series B Preferred Stock, par value $.01 per share, none of which is outstanding. 4. Pursuant to the authority granted to the Board of Directors of the Corporation by Section II, Article Fourth, of its Certificate of Incorporation, the Corporation hereby amends it Certificate of Incorporation by the addition of a provision stating the number, designation, relative rights, preferences and limitations of a series of the Corporation's Preferred Stock as fixed by the Board of Directors of the Corporation, as follows (except as otherwise indicated herein, capitalized terms used herein are defined in Section M herein): 4 SECTION A. Designation and Amount; Par Value. The shares of such series shall be designated as "Series C Cumulative Convertible Preferred Stock" (the "Convertible Preferred Stock") and the number of authorized shares constituting Convertible Preferred Stock shall be 160,000. The par value of each share of such series shall be $.01. SECTION B. Dividends. 1. General Obligation. When and as declared by the Corporation's Board of Directors and to the extent permitted under the New York Business Corporation Law (the "NYBCL"), the Corporation will pay preferential dividends to the holders of the Convertible Preferred Stock as provided in this Section B. Except as otherwise provided herein, dividends on each share of Convertible Preferred Stock (a "Share") will accrue on a daily basis at a rate of 7% per annum of the Liquidation Value thereof (plus all accumulated and unpaid dividends thereon) from and including the Date of Issuance (as defined below) of such Share to and including the date on which the Liquidation Value (plus all accrued and unpaid dividends thereon) of such Share is paid in full or the date on which such share is converted into shares of Conversion Stock. Such dividends will accrue whether or not they have been declared and whether or not there are profits, surplus or other funds of the Corporation legally available for the payment of dividends. The date on which the Corporation initially issues any Share will be deemed to be its "Date of Issuance" regardless of the number of times a transfer of such Share is made on the stock records maintained by or for the Corporation and regardless of the number of certificates which may be issued to evidence such Share. The dividends on each Share shall be payable on each Dividend Reference Date during the first three years following the Date of Issuance, at the Corporation's election either in cash or accumulating. Commencing on June 30, 1998 and on each Dividend Reference Date thereafter, all accrued and unpaid dividends shall be paid in cash unless and to the extent the Corporation is prohibited from paying such dividends in cash under the Indenture or the Credit Agreement and, except to the extent paid in cash, such dividends will accumulate on each such Dividend Reference Date. Notwithstanding the foregoing, all dividends otherwise 5 accruing pursuant to this Section B1 will cease to accrue as of a Dividend Termination Date, so long as the Corporation has paid in cash all dividends which have accrued and are unpaid through such Dividend Termination Date. Further, notwithstanding termination of the dividend pursuant to the immediately preceding sentence, the dividend rate is subject to increase (or, if the dividend has previously terminated, is subject to resume accruing) pursuant to Section L2(a) (except on account of any Event of Noncompliance which is described in Section L1(c)(i) which occurs after dividends pursuant to this Section have otherwise ceased to accrue on account of the immediately preceding sentence). 2. Dividend Reference Dates. The accrued dividends will be payable on June 30 and December 31 of each year commencing on December 31, 1995 (the "Dividend Reference Dates") to the holders of record of the Convertible Preferred Stock at the close of business on the immediately preceding June 15 and December 15. To the extent that all accrued dividends are not paid on the Dividend Reference Dates, all dividends which have accrued on each Share outstanding during the six-month period (or other period in the case of the initial Dividend Reference Date) ending upon each such Dividend Reference Date will be accumulated and shall remain accumulated dividends with respect to such Share until paid. 3. Distribution of Partial Dividend Payments. Except as otherwise provided herein, if at any time the Corporation elects to pay dividends in cash and pays less than the total amount of dividends then accrued with respect to the Convertible Preferred Stock, such payment will be distributed ratably among the holders of the Convertible Preferred Stock based upon the aggregate accrued but unpaid dividends on the Shares of Convertible Preferred Stock held by each such holder, and any amounts of such dividends remaining thereafter shall be accumulated and shall remain accumulated dividends with respect to such Share until paid. SECTION C. Liquidation. Upon any liquidation, dissolution or winding up of the Corporation, the holders of the Convertible Preferred Stock will be entitled to be paid, before any 6 distribution or payment is made upon any of the Junior Securities, an amount in cash equal to the aggregate Liquidation Value (plus all accrued and unpaid dividends thereon) of all such Convertible Preferred Stock outstanding, and the holders of Convertible Preferred Stock will not be entitled to any further payment. If upon any such liquidation, dissolution or winding up of the Corporation, the Corporation's assets to be distributed among the holders of the Convertible Preferred Stock are insufficient to permit payment to such holders of the aggregate amount which they are entitled to be paid, then the entire assets to be distributed shall be distributed ratably among such holders based upon the aggregate Liquidation Value (plus all accrued and unpaid dividends) of the Convertible Preferred Stock held by each such holder. Prior to the time of any liquidation, dissolution or winding up of the Corporation, the Corporation shall declare for payment all accrued and unpaid dividends with respect to the Convertible Preferred Stock. The Corporation will mail written notice of such liquidation, dissolution or winding up, not less than 10 days prior to the payment date stated therein, to each record holder of Convertible Preferred Stock. Neither the consolidation or merger of the Corporation into or with any other corporation or corporations, nor the reduction of the capital stock of the Corporation, will be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section C. SECTION D. Redemptions. 1. Scheduled Redemption. On July 19, 2005 (the "Scheduled Redemption Date"), the Corporation will redeem all issued and outstanding Shares of Convertible Preferred Stock, at a price per Share equal to the Liquidation Value thereof (plus all accrued and unpaid dividends thereon). 2. Optional Redemptions. The Corporation may at any time and from time to time after the Date of Issuance redeem all or any portion of the Shares of Convertible Preferred Stock then outstanding. Upon any such redemption, the Corporation shall pay a price per Share equal to the Liquidation Value thereof (plus all accrued and unpaid dividends thereon). 7 3. Redemption Price. For each Share which is to be redeemed, the Corporation will be obligated on the Redemption Date to pay to the holder thereof (upon surrender by such holder at the Corporation's principal office of the certificate representing such Share) an amount in immediately available funds equal to the Liquidation Value thereof (plus all accrued and unpaid dividends thereon). If the Corporation's funds which are legally available for redemption of Shares on any Redemption Date are insufficient to redeem the total number of Shares to be redeemed on such date, those funds which are legally available will be used to redeem the maximum possible number of Shares ratably among the holders of the Shares to be redeemed based upon the aggregate Liquidation Value of such Shares (plus all accrued and unpaid dividends thereon) held by each such holder. At any time thereafter when additional funds of the Corporation are legally available for the redemption of Shares, such funds will immediately be used to redeem the balance of the Shares which the Corporation has become obligated to redeem on any Redemption Date but which it has not redeemed. 4. Notice of Redemption. Except as otherwise provided herein, the Corporation will mail written notice of each redemption of Convertible Preferred Stock to each record holder not more than 60 nor less than 30 days prior to the date on which such redemption is to be made. In case fewer than the total number of Shares represented by any certificate are redeemed, a new certificate representing the number of unredeemed Shares will be issued to the holder thereof without cost to such holder within 3 business days after surrender of the certificate representing the redeemed Shares. 5. Determination of the Number of Each Holder's Shares to be Redeemed. Except as otherwise provided herein, the number of Shares of Convertible Preferred Stock to be redeemed from each holder thereof in redemptions hereunder will be the number of Shares determined by multiplying the total number of Shares to be redeemed times a fraction, the numerator of which will be the total number of Shares then held by such holder and the denominator of 8 which will be the total number of Shares of Convertible Preferred Stock then outstanding. 6. Dividends After Redemption Date. No Share is entitled to any dividends accruing after the date on which the Liquidation Value (plus all accrued and unpaid dividends thereon) of such Share is paid in full. On such date all rights of the holder of such Share will cease, and such Share will not be deemed to be outstanding. 7. Redeemed or Otherwise Acquired Shares. Any Shares which are redeemed or otherwise acquired by the Corporation will be cancelled and will not be reissued, sold or transferred. 8. Special Redemptions. If a Change of Control (as defined below) has occurred or the Corporation obtains knowledge that a Change of Control is proposed to occur, the Corporation shall give prompt written notice of such Change of Control describing in reasonable detail the material terms and date of consummation thereof to each holder of Convertible Preferred Stock, but in any event such notice shall not be given later than 5 days after the occurrence of such Change of Control, and the Corporation shall give each holder of Convertible Preferred Stock prompt written notice of any material change in the terms or timing of such transaction. Any holder of Convertible Preferred Stock may require the Corporation to redeem all or any portion of the Convertible Preferred Stock owned by such holder at a price per Share equal to the Liquidation Value thereof (plus all accrued and unpaid dividends thereon) by giving written notice to the Corporation of such election prior to 21 days after receipt of the first such notice from the Corporation which confirms that a Change of Control has occurred (the "Expiration Date"); provided that in no event shall the Corporation be obligated to redeem Shares unless (a) all amounts then due and payable under the Credit Agreement (whether at maturity, by acceleration or otherwise) have been paid in full and (b)(i) a Change of Control Offer (as defined in the Indenture, as in effect on the Date of Issuance) has been made to the holders of the notes outstanding under the Indenture (if and to the extent that any such Change of Control Offer is required to be made pursuant to the Indenture as in effect at the time of the applicable Change of Control) and all such notes which 9 have been validly tendered in accordance therewith have been purchased in accordance with the terms of the Indenture applicable thereto as in effect on the Date of Issuance (if and to the extent required pursuant to the Indenture as in effect at the time of the applicable Change of Control), and (ii) the Corporation shall not, since the date of such Change of Control Offer, have defaulted in the payment when due of any amount of principal, interest or premium owing with respect to any notes outstanding pursuant to the Indenture (except any such default which shall have been cured or waived). The Corporation shall give prompt written notice (a "Second Notice") of each such election to all other holders of Convertible Preferred Stock within 5 days after the receipt thereof, and each such holder shall have until the later of (i) the Expiration Date or (ii) 10 days after receipt of the latest Second Notice to request redemption hereunder (by giving written notice to the Corporation) of all or any portion of the Convertible Preferred Stock owned by such holder. Subject to the proviso of the second sentence of the preceding paragraph, upon receipt of such election(s), the Corporation shall be obligated to redeem the aggregate number of Shares specified therein on the later of (i) 90 days following occurrence of the Change of Control or (ii) 5 days after the Corporation's receipt of such election(s). For purposes hereof, "Change of Control" has the meaning given such term in the Indenture as in effect on the Date of Issuance, without amendment or modification thereof and whether or not any notes issued pursuant to the Indenture are outstanding. Redemptions made pursuant to this Section D8 shall not relieve the Corporation of its obligation pursuant to Section D1 above to redeem any Convertible Preferred Stock outstanding on the Scheduled Redemption Date. SECTION E. Priority of Convertible Preferred Stock on Dividends and Redemptions. So long as any Convertible Preferred Stock remains outstanding, without the prior written consent of the holders of a majority of the outstanding shares of Convertible 10 Preferred Stock, the Corporation shall not, nor shall it permit any Subsidiary to, redeem, purchase or otherwise acquire directly or indirectly any Junior Securities, nor shall the Corporation directly or indirectly pay or declare any dividend or make any distribution upon any Junior Securities (other than dividends payable solely in the securities in respect of which such dividends are paid). SECTION F. Election of Directors. 1. So long as at least 50,000 shares of Convertible Preferred Stock are outstanding and held of record by Qualified Convertible Preferred Holders (as defined below), then the holders of a majority of the Convertible Preferred Stock, voting separately as a single class in the election of directors of the Corporation, to the exclusion of all other classes of the Corporation's capital stock and with each Share of Convertible Preferred Stock entitled to one vote, shall be entitled to elect two (2) directors to serve on the Corporation's Board of Directors until his successor is duly elected by holders of a majority of the Convertible Preferred Stock or he is removed from office by holders of a majority of the Convertible Preferred Stock; and so long as Qualified Convertible Preferred Holders hold of record an aggregate of less than 50,000 but at least 25,000 shares of Convertible Preferred Stock, then the holders of a majority of the Convertible Preferred Stock, voting separately as a single class in the election of directors of the Corporation, to the exclusion of all other classes of the Corporation's capital stock and with each Share of Convertible Preferred Stock entitled to one vote, shall be entitled to elect one (1) director to serve on the Corporation's Board of Directors until his successor is duly elected by holders of a majority of the Convertible Preferred Stock or he is removed from office by holders of a majority of the Convertible Preferred Stock. If the holders of a majority of the Convertible Preferred Stock for any reason fail to elect anyone to fill any such directorship, such position shall remain vacant until such time as the holders of a majority of the Convertible Preferred Stock elect a director to fill such position and shall not be filled by resolution or vote of the Corporation's Board of Directors or the Corporation's other stockholders. 11 2. So long as the holders of a majority of the Convertible Preferred Stock have the right to elect at least one director pursuant to Section F1, the Corporation's Board of Directors will be comprised of no more than six (6) directors, who shall include the Corporation's Chief Executive Officer and President. Each director elected by the holders of the Convertible Preferred Stock will be paid fees not less than the fees paid to any other member of the Corporation's Board of Directors (excluding fees payable for services rendered in their capacity other than as directors) and will be reimbursed for all reasonable expenses relating to attending each meeting of the Corporation's Board of Directors. For purposes of this Section F, "Qualified Convertible Preferred Holders" means and includes, collectively, UBS, any successor to all or substantially all of the business or assets thereof and each Affiliate of the foregoing. SECTION G. Other Voting Rights. The holders of the Convertible Preferred Stock shall be entitled to notice of all stockholders' meetings in accordance with the Corporation's bylaws, and the holders of the Convertible Preferred Stock shall be entitled to vote on all matters submitted to the stockholders for a vote together with the holders of the Common Stock voting together as a single class with each share of Common Stock entitled to one vote per share and each Share of Convertible Preferred Stock entitled to one vote for each share of Common Stock issuable upon conversion of the Convertible Preferred Stock as of the record date for such vote or, if no record date is specified, as of the date of such vote. SECTION H. Conversion. 1. Conversion Procedure. (a) At any time and from time to time, any holder of Convertible Preferred Stock may convert all or any portion of the Convertible Preferred Stock (including any fraction of a Share) 12 held by such holder into a number of shares of Conversion Stock computed by multiplying the number of Shares to be converted by $100.00 and dividing the result by the Conversion Price then in effect. (b) Except as otherwise provided herein, each conversion of Convertible Preferred Stock shall be deemed to have been effected as of the close of business on the date on which the certificate or certificates representing the Convertible Preferred Stock to be converted have been surrendered for conversion at the principal office of the Corporation. At the time any such conversion has been effected, the rights of the holder of the Shares converted as a holder of Convertible Preferred Stock shall cease and the Person or Persons in whose name or names any certificate or certificates for shares of Conversion Stock are to be issued upon such conversion shall be deemed to have become the holder or holders of record of the shares of Conversion Stock represented thereby. (c) The conversion rights of any Share subject to redemption hereunder shall terminate on the Redemption Date for such Share unless the Corporation has failed to pay to the holder thereof the Liquidation Value of such Share (plus all accrued and unpaid dividends thereon). (d) Notwithstanding any other provision hereof, if a conversion of Convertible Preferred Stock is to be made in connection with a Change of Control or other transaction affecting the Corporation, the conversion of any Shares of Convertible Preferred Stock may, at the election of the holder thereof, be conditioned upon the consummation of such transaction, in which case such conversion shall not be deemed to be effective until such transaction has been consummated. (e) As soon as possible after a conversion has been effected (but in any event within 5 business days in the case of subparagraph (i) below), the Corporation shall deliver to the converting holder: 13 (i) a certificate or certificates represent- ing the number of shares of Conversion Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified; (ii) payment of cash in an amount equal to all accrued dividends with respect to each Share converted which have not been paid prior thereto provided that the Corporation will not be obligated to pay such amount to the extent it is prohibited from doing so by the NYBCL or by the terms of the Indenture or the Credit Agreement; provided further that any dividend not paid shall continue to accumulate, and dividends shall continue to accrue with respect thereto, and such amount shall be paid in cash as and when, and to the extent, the Corporation is not prohibited from doing so by the NYBCL or by the terms of the Indenture and the Credit Agreement, and in any event all such accrued dividends shall be paid in cash not later than the tenth anniversary of the Date of Issuance, to the extent not previously paid in cash, subject to the last two sentences of Section D2 above; and (iii) a certificate representing any Shares of Convertible Preferred Stock which were represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. (f) If for any reason the Corporation is unable to pay any portion of the accrued and unpaid dividends on Convertible Preferred Stock being converted, the unpaid portion of such dividends may, at the election of the converting holder made by giving written notice thereof to the Corporation at any time thereafter, be converted into an additional number of shares of Conversion Stock determined by dividing (i) the amount of the unpaid portion of such dividends, by (ii) 95% of the Market Price of one share of the Conversion Stock as of the date of such notice. (g) The issuance of certificates for shares of Conversion Stock upon conversion of Convertible Preferred Stock shall be made without charge to the holders of such Convertible Preferred Stock for any issuance tax in respect thereof or other cost incurred by the Corporation in connection with such conversion 14 and the related issuance of shares of Conversion Stock. Upon conversion of each Share of Convertible Preferred Stock, the Corporation shall take all such actions as are necessary in order to insure that the Conversion Stock issuable with respect to such conversion shall be validly issued, fully paid and nonassessable, free and clear of all taxes, liens, charges and encumbrances with respect to the issuance thereof. (h) The Corporation shall not close its books against the transfer of Convertible Preferred Stock or of Conversion Stock issued or issuable upon conversion of Convertible Preferred Stock in any manner which interferes with the timely conversion of Convertible Preferred Stock. The Corporation shall assist and cooperate with any holder of Shares required to make any governmental filings or obtain any governmental approval prior to or in connection with any conversion of Shares hereunder (including, without limitation, making any filings required to be made by the Corporation). (i) The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Conversion Stock, solely for the purpose of issuance upon the conversion of the Convertible Preferred Stock, such number of shares of Conversion Stock as are issuable upon the conversion of all outstanding Convertible Preferred Stock. All shares of Conversion Stock which are so issuable shall, when issued, be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges. The Corporation shall take all such actions as may be necessary to assure that all such shares of Conversion Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange or the NASDAQ National Market upon which shares of Conversion Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Corporation upon each such issuance). The Corporation shall not take any action which would cause the number of authorized but unissued shares of Conversion Stock to be less than the number of such shares required to be reserved hereunder for issuance upon conversion of the Convertible Preferred Stock. (j) If any fractional interest in a share of 15 Conversion Stock would, except for the provisions of this subparagraph, be delivered upon any conversion of the Convertible Preferred Stock, at the request of the holder thereof, the Corporation, in lieu of delivering the fractional share therefor, shall pay an amount to the holder thereof equal to the Market Price of such fractional interest as of the date of conversion. 2. Conversion Price. (a) The initial "Conversion Price" shall be $5.25 per share. In order to prevent dilution of the conversion rights granted under this Section H, the Conversion Price shall be subject to adjustment from time to time pursuant to this Section H2. (b) If and whenever on or after the original Date of Issuance of the Convertible Preferred Stock the Corporation issues or sells, or in accordance with Section H3 is deemed to have issued or sold, any shares of its Common Stock for a consideration per share less than the Conversion Price in effect immediately prior to the time of such issue or sale, then immediately upon such issue or sale or deemed issue or sale the Conversion Price shall be reduced to the Conversion Price determined by dividing (i) the sum of (1) the product derived by multiplying the Conversion Price in effect immediately prior to such issue or sale by the number of shares of Common Stock Deemed Outstanding immediately prior to such issue or sale, plus (2) the consideration, if any, received by the Corporation upon such issue or sale, by (ii) the number of shares of Common Stock Deemed Outstanding immediately after such issue or sale. (c) Notwithstanding the foregoing, there shall be no adjustment in the Conversion Price as a result of any issue or sale (or deemed issue or sale) of (i) shares of Common Stock upon exercise of the Warrants in accordance with the terms thereof as in effect at the Date of Issuance, (ii) shares of Common Stock pursuant to stock options, warrants and other rights to acquire Common Stock described in Schedule 4.3 to the Securities Purchase Agreement (as such number of shares is proportionately adjusted for subsequent stock splits, combinations of shares and stock dividends 16 affecting the Common Stock), in each case pursuant to the terms thereof as in effect on the date of the Securities Purchase Agreement or as such terms may thereafter be adjusted as described in Schedule 4.3, (iii) shares of Common Stock upon exercise of stock options granted to employees and directors of the Corporation and its Subsidiaries pursuant to the terms of stock option plans and stock ownership plans approved by the Corporation's Board of Directors, and (iv) shares of Common Stock as consideration for the acquisition of any interest in any business or company from a Person other than an Affiliate (A) which acquisition is not prohibited pursuant to the Securities Purchase Agreement, and (B) so long as the Market Price of the Conversion Stock as of the closing of such acquisition exceeds $4.50 per share (as such price is proportionately adjusted for subsequent stock splits, combina- tions of shares and stock dividends affecting the Conversion Stock) and so long as the Market Price of the Conversion Stock has not at any time from the Date of Issuance through such closing time been equal to or greater than $5.25 per share (as so adjusted). 3. Effect on Conversion Price of Certain Events. For purposes of determining the adjusted Conversion Price under Section H2, the following shall be applicable: (a) Issuance of Rights or Options. If the Corporation in any manner grants or sells any Options and the price per share for which Common Stock is issuable upon the exercise of such Options, or upon conversion or exchange of any Convertible Securities issuable upon exercise of such Options, is less than the Conversion Price in effect immediately prior to the time of the granting or sale of such Options, then the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon conversion or exchange of the total maximum amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the granting or sale of such Options for such price per share. For purposes of this paragraph, the "price per share for which Common Stock is issuable" shall be determined by dividing (i) the total amount, if any, received or receivable by the Corporation as consideration for the granting or 17 sale of such Options, plus the minimum aggregate amount of additional consideration payable to the Corporation upon exercise of all such Options, plus in the case of such Options which relate to Convertible Securities, the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the issuance or sale of such Convertible Securities and the conversion or exchange thereof, by (ii) the total maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options. No further adjustment of the Conversion Price shall be made when Convertible Securities are actually issued upon the exercise of such Options or when Common Stock is actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (b) Issuance of Convertible Securities. If the Corporation in any manner issues or sells any Convertible Securities and the price per share for which Common Stock is issuable upon conversion or exchange thereof is less than the Conversion Price in effect immediately prior to the time of such issue or sale, then the maximum number of shares of Common Stock issuable upon conversion or exchange of such Convertible Securities shall be deemed to be outstanding and to have been issued and sold by the Corporation at the time of the issuance or sale of such Convertible Securities for such price per share. For the purposes of this paragraph, the "price per share for which Common Stock is issuable" shall be determined by dividing (i) the total amount received or receivable by the Corporation as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Corporation upon the conversion or exchange thereof, by (ii) the total maximum number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment of the Conversion Price shall be made when Common Stock is actually issued upon the conversion or exchange of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for 18 which adjustments of the Conversion Price had been or are to be made pursuant to other provisions of this Section H, no further adjustment of the Conversion Price shall be made by reason of such issue or sale. (c) Change in Option Price or Conversion Rate. If the purchase price provided for in any Options, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock changes at any time, the Conversion Price in effect at the time of such change shall be immediately adjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold. For purposes of this Section H3, if the terms of any Option or Convertible Security which was outstanding as of the Date of Issuance of the Convertible Preferred Stock are changed in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change; provided that no such change shall at any time cause the Conversion Price hereunder to be increased. (d) Treatment of Expired Options and Unexercised Convertible Securities. Upon the expiration of any Option or the termination of any right to convert or exchange any Convertible Security without the exercise of any such Option or right, the Conversion Price then in effect hereunder shall be adjusted immediately to the Conversion Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Security, to the extent outstanding immediately prior to such expiration or termination, never been issued. For purposes of this Section H3, the expiration or termination of any Option or Convertible Security which was outstanding as of the Date of Issuance of the Convertible Preferred Stock shall not cause the conversion Price hereunder to be adjusted unless, and only to the extent that, a change in the terms of such Option or Convertible 19 Security caused it to be deemed to have been issued after the Date of Issuance of the Convertible Preferred Stock. (e) Calculation of Consideration Received. If any Common Stock, Option or Convertible Security is issued or sold or deemed to have been issued or sold for cash, the consideration received therefor shall be deemed to be the amount received by the Corporation therefor (net of discounts, commissions and related expenses). If any Common Stock, Option or Convertible Security is issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Corporation shall be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Corporation shall be the Market Price thereof as of the date of receipt. If any Common Stock, Option or Convertible Security is issued to the owners of the non-surviving entity in connection with any merger in which the Corporation is the surviving corporation, the amount of consideration therefor shall be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Option or Convertible Security, as the case may be. The fair value of any consideration other than cash and securities shall be determined jointly by the Corporation and the holders of a majority of the outstanding Convertible Preferred Stock. If such parties are unable to reach agreement within a reasonable period of time, the fair value of such consideration shall be determined by an independent appraiser experienced in valuing such type of consideration jointly selected by the Corporation and the holders of a majority of the outstanding Convertible Preferred Stock. The determination of such appraiser shall be final and binding upon the parties, and the fees and expenses of such appraiser shall be borne by the Corporation. (f) Integrated Transactions. In case any Option is issued in connection with the issue or sale of other securities of the Corporation, together comprising one integrated transaction in which no specific consideration is allocated to such Option by the parties thereto, the Option shall be deemed to have been issued for a consideration of $.01. (g) Treasury Shares. The number of shares of 20 Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Corporation or any Subsidiary, and the disposition of any shares so owned or held shall be considered an issue or sale of Common Stock. (h) Record Date. If the Corporation takes a record of the holders of Common Stock for the purpose of entitling them (i) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (ii) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed to have been issued or sold upon the declaration of such dividend or upon the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. 4. Subdivision or Combination of Common Stock. If the Corporation at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision shall be proportionately reduced, and if the Corporation at any time combines (by reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination shall be proportionately increased. 5. Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Corporation's assets or other transaction, in each case which is effected in such a manner that the holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock, is referred to herein as an "Organic Change". Prior to the consummation of any Organic Change, the Corporation shall make appropriate provisions (in form and substance 21 satisfactory to the holders of a majority of the Convertible Preferred Stock then outstanding) to insure that each of the holders of Convertible Preferred Stock shall thereafter have the right to acquire and receive, in lieu of or in addition to (as the case may be) the shares of Conversion Stock immediately theretofore acquirable and receivable upon the conversion of such holder's Convertible Preferred Stock, such shares of stock, securities or assets as such holder would have received in connection with such Organic Change if such holder had converted its Convertible Preferred Stock immediately prior to such Organic Change. In each such case, the Corporation shall also make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Convertible Preferred Stock then outstanding) to insure that the provisions of this Section H and Section I hereof shall thereafter be applicable to the Convertible Preferred Stock (including, in the case of any such consolidation, merger or sale in which the successor entity or purchasing entity is other than the Corporation an immediate adjustment of the Conversion Price to the value for the Common Stock reflected by the terms of such consolidation, merger or sale, and a corresponding immediate adjustment in the number of shares of Conversion Stock acquirable and receivable upon conversion of Convertible Preferred Stock, if the value so reflected is less than the Conversion Price in effect immediately prior to such consolidation, merger or sale). The Corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof, the successor entity (if other than the Corporation) resulting from consolidation or merger or the entity purchasing such assets assumes by written instrument (in form and substance reasonably satisfactory to the holders of a majority of the Convertible Preferred Stock then outstanding), the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. 6. Certain Events. If any event occurs of the type contemplated by the provisions of this Section H but not expressly provided for by such provisions (including, without limitation, the granting of stock appreciation rights, 22 phantom stock rights or other rights with equity features), then the Corporation's Board of Directors shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of Convertible Preferred Stock; provided that no adjustment shall be made in connection with any stock appreciation rights or phantom stock rights granted to employees pursuant to employee benefit plans approved by the Corporation's Board of Directors; and provided further that no such adjustment shall increase the Conversion Price as otherwise determined pursuant to this Section H or decrease the number of shares of Conversion Stock issuable upon conversion of each Share of Convertible Preferred Stock. 7. Notices. (a) Promptly after any adjustment of the Conversion Price, the Corporation shall give written notice thereof to all holders of Convertible Preferred Stock, setting forth in reasonable detail and certifying the calculation of such adjustment. (b) The Corporation shall give written notice to all holders of Convertible Preferred Stock at least 20 days prior to the date on which the Corporation closes its books or takes a record (a) with respect to any dividend or distribution upon Common Stock, (b) with respect to any pro rata subscription offer to holders of Common Stock or (c) for determining rights to vote with respect to any Organic Change, dissolution or liquidation. (c) The Corporation shall also give written notice to the holders of Convertible Preferred Stock at least 20 days prior to the date on which any Organic Change shall take place. SECTION I. Purchase Rights. To the extent not prohibited by paragraph EIGHTH of the Corporation's Certificate of Amendment if at any time the Corporation grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then each holder of Convertible Preferred Stock shall be entitled to acquire, upon the terms applicable to such Purchase Rights, the 23 aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Conversion Stock acquirable upon conversion of such holder's Convertible Preferred Stock immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights. SECTION J. Registration of Transfer. The Corporation will keep at its principal office a register for the registration of Convertible Preferred Stock. Upon the surrender of any certificate representing Convertible Preferred Stock at such place, the Corporation will, at the request of the record holder of such certificate, execute and deliver (at the Corporation's expense) a new certificate or certificates in exchange therefor representing in the aggregate the number of Shares represented by the surrendered certificate. Each such new certificate will be registered in such name and will represent such number of Shares as is requested by the holder of the surrendered certificate and will be substantially identical in form to the surrendered certificate, and dividends will accrue on the Convertible Preferred Stock represented by such new certificate from the date to which dividends have been fully paid on such Convertible Preferred Stock represented by the surrendered certificate. SECTION K. Replacement. Upon receipt of evidence reasonably satisfactory to the Corporation (an affidavit of the registered holder will be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing Shares of any class of Convertible Preferred Stock, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Corporation (provided that if the holder is a Purchaser or other institutional investor its own agreement will be satisfactory), or, in the case of any such mutilation upon surrender of such certificate, the Corporation will (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the number of Shares of such class represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate, and dividends will accrue on the Convertible Preferred Stock represented by such new certificate from the date to which dividends have been fully paid on such lost, stolen, destroyed or mutilated certificate. 24 SECTION L. Events of Noncompliance. 1. Definitions. An Event of Noncompliance shall have occurred if: (a) the Corporation fails on any Dividend Reference Date on or after the third anniversary of the Date of Issuance to pay in cash the full amount of dividends then accrued on the Convertible Preferred Stock, whether or not legally permissible, except to the extent prohibited by the Indenture or Credit Agreement; (b) the Corporation fails to make any redemption payment with respect to the Convertible Preferred Stock which it is required to make hereunder, whether or not such payment is legally permissible or is prohibited by any agreement to which the Corporation is subject; (c) the Corporation (i) breaches any material representation or warranty, or (ii) otherwise breaches or fails to perform or observe any material covenant or agreement set forth herein or in the Definitive Agreements, which breach or failure continues for 30 days after the Corporation first becomes aware thereof; (d) the Corporation fails to pay when due any amount owing under the Indenture or Credit Agreement, and such failure continues after any grace period applicable thereunder; (e) any event described in any of paragraphs (h), (i) or (j) of Section 5.01 of the Indenture, as in effect on the Date of Issuance, shall have occurred and be continuing with respect to the Corporation; (f) any event described in paragraph (g) of Section 5.01 of the Indenture, as in effect on the Date of Issuance, shall have occurred and be continuing; 25 (g) a judgment in excess of $2,500,000 is rendered against the Corporation or any Subsidiary and, within 60 days after entry thereof, such judgment is not discharged or execution thereof stayed pending appeal, or within 60 days after the expiration of any such stay, such judgment is not discharged; provided that the Event of Noncompliance will be continuing only to the extent such amounts remain unpaid; or (h) the Corporation or any Subsidiary becomes in default of any obligation or agreement evidencing or relating to indebtedness and the result of such default is that an amount exceeding $2,500,000 has become due prior to its stated maturity; provided that the Event of Noncompliance will be continuing only to the extent such amounts remain unpaid. 2. Consequences of Events of Noncompliance. (a) If an Event of Noncompliance has occurred, the dividend rate on the Convertible Preferred Stock shall increase immediately by an increment of 50 basis points (1/2 percentage point). Thereafter, until such time as no Event of Noncompliance exists, the dividend rate shall increase automatically at the end of each succeeding 90-day period by an additional increment of 50 basis points (1/2 percentage point) up to a maximum of 400 basis points (4 percentage points). Any increase of the dividend rate resulting from the operation of this subparagraph shall terminate as of the close of business on the date on which no Event of Noncompliance exists, subject to subsequent increases pursuant to this paragraph. (b) If an Event of Noncompliance of the type described in Section L1(e) has occurred, all of the Convertible Preferred Stock then outstanding shall be subject to immediate redemption by the Corporation (without any action on the part of the holders of the Convertible Preferred Stock) at a price per Share equal to the Liquidation Value thereof (plus all accrued and unpaid dividends thereon). The Corporation shall immediately 26 redeem all Convertible Preferred Stock upon the occurrence of such Event of Noncompliance, and subject, however, to the prior payment in full of all amounts due and payable under the Credit Agreement and the Indenture. (c) If any Event of Noncompliance exists, each holder of the Convertible Preferred Stock shall also have any other rights which such holder is entitled to under any contract with the Corporation or agreement and any other rights which such holder may have pursuant to applicable law; provided that any payment with respect to any claim arising from such rights shall be subordinated to the prior payment in full of all amounts then owing and due under the Credit Agreement and the Indenture. SECTION M. Definitions. Unless defined below or elsewhere herein, each capitalized term used herein shall have the meaning given such term in the Securities Purchase Agreement. "ACP" means Appian Capital Partners, L.L.C., a Delaware limited liability company. "Common Stock" means, all shares of the Corporation's Common Stock, par value $.01 per share, as adjusted for any stock split, stock dividend, share combination, share exchange, recapitalization, merger, consolidation or other reorganization. "Common Stock Deemed Outstanding" means, at any given time, the number of shares of Common Stock actually outstanding at such time, plus the number of shares of Common Stock deemed to be outstanding pursuant to Sections H3(a) and H3(b) hereof. "Conversion Stock" means shares of the Common Stock; provided that if there is a change such that the securities issuable upon conversion of the Convertible Preferred Stock are issued by an entity other than the Corporation or there is a change in the type or class of securities so issuable, then the term "Conversion Stock" shall mean one share of the security issuable upon conversion of the Convertible Preferred Stock if such security is issuable in shares, or shall mean the smallest unit in which such security is issuable if such security is not issuable in shares. 27 "Convertible Securities" means any stock or securities directly or indirectly convertible into or exchangeable for Common Stock. "Credit Agreement" means the Fourth Amended and Restated Loan and Security Agreement dated as of July 19, 1995, by and among the Corporation, as borrower, the lenders party thereto from time to time, and Creditanstalt-Bankverein, as agent for the lenders, as amended, supplemented or otherwise modified from time to time or any agreement evidencing a refinancing of such indebtedness, including any agreement extending the maturity of, refinancing or restructuring indebtedness thereunder. "Definitive Agreements" means the Securities Purchase Agreement, the Warrants and the Registration Rights Agreement, in each case as amended from time to time in accordance with its respective terms. "Dividend Termination Date" means any date following a period of 45 consecutive trading days (a "Trading Period") during which the average of the closing prices for the Common Stock on the NASDAQ market exceeded: (x) in the case of any Trading Period of which the first 23 or more days occur during the fourth year after the closing, 200% of the conversion price for the Convertible Preferred Stock in effect as of the end of such Trading Period (the "First Target"), provided that such closing price for the Common Stock on each of the final 15 trading days of such Trading Period shall equal or exceed 90% of the First Target; (y) in the case of any Trading Period of which the last 23 or more trading days occur during the fifth year after the closing, 175% of the conversion price for the Convertible Preferred Stock in effect as of the end of such Trading Period (the "Second Target"), provided that such closing price for the Common Stock on each of the final 15 trading days of such Trading Period shall equal or exceed 90% of the Second Target; and (z) in the case of any 28 Trading Period of which the last 23 or more trading days occur during the sixth or any subsequent year after the closing, 150% of the conversion price for the Convertible Preferred Stock in effect as of the end of such Trading Period (the "Third Target"), provided that such closing price for the Common Stock on each of the final 15 trading days of such Trading Period shall equal or exceed 90% of the Third Target. "Indenture" means the Indenture governing $100,000,000 in aggregate principal amount of any series of the Corporation's 12-1/4% Senior Notes due 2002, dated as of July 15, 1995 between the Corporation and First Union National Bank of North Carolina, as trustee, as amended, supplemented or otherwise modified from time to time or any agreement evidencing a refinancing of such indebtedness, including any agreement extending the maturity of, refinancing or restructuring indebtedness thereunder. "Junior Securities" means any of the Corporation's Stock, except for the Convertible Preferred Stock. "Liquidation Value" of any Share as of any particular date will be equal to $100.00. "Market Price" of any security means the average of the closing prices of such security's sales on all securities exchanges on which such security may at the time be listed or as reported on the NASDAQ National Market, or, if there has been no sales on any such exchange or reported on the NASDAQ National Market on any day, the average of the highest bid and lowest asked prices on all such exchanges or reported at the end of such day, or, if on any day such security is not so listed or included in the NASDAQ National Market, the average of the representative bid and asked prices quoted in the NASDAQ Stock Market as of 4:00 P.M., New York time, or, if on any day such security is not quoted in the NASDAQ Stock Market, the average of the highest bid and lowest asked prices on such day in the domestic over-the-counter market as reported by the National Quotation Bureau, Incorporated, or any similar successor organization, in each such case averaged over a period of 21 days consisting of the day as of which "Market 29 Price" is being determined and the 20 consecutive business days prior to such day. If at any time such security is not listed on any securities exchange or quoted in the NASDAQ National Market, the NASDAQ Stock Market or the over-the-counter market, the "Market Price" shall be the fair value thereof determined jointly by the Corporation and the holders of a majority of the Convertible Preferred Stock. If such parties are unable to reach agreement within a reasonable period of time, such fair value shall be determined by an independent appraiser experienced in valuing securities jointly selected by the Corporation and the holders of a majority of the Convertible Preferred Stock. The determination of such appraiser shall be final and binding upon the parties, and the Corporation shall pay the fees and expenses of such appraiser. "Options" means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities other than rights, warrants or options referred to clauses (i), (ii) or (iii) of Section H2(c) above. "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock corporation, a trust, a joint venture, an unincorporated organization and a governmental entity or any department, agency or political subdivision thereof. "Purchaser" means UBS. "Redemption Date" as to any Share means the date specified in the notice of any redemption at the Corporation's option or the applicable date specified herein in the case of any other redemption; provided, that no such date will be a Redemption Date unless the applicable Liquidation Value (plus all accrued and unpaid dividends thereon) is actually paid in cash, and if not so paid, the Redemption Date will be the date on which such Liquidation Value (plus all accrued and unpaid dividends thereon) is fully paid in cash. "Registration Rights Agreement" means the Registration Rights Agreement as defined in the Securities Purchase Agreement, as such Registration Rights Agreement may be amended from time to time in accordance with its terms. "Securities Purchase Agreement" means the Securities 30 Purchase Agreement, dated as of July 3, 1995 among the Corporation, UBS and ACP, as amended from time to time in accordance with its terms. "Stock" of any Person means any shares, equity or profits interests, participations or other equivalents (however designated) of capital stock, whether voting or nonvoting, including any securities with profit participation features, and any rights, warrants, options or other securities convertible into or exercisable or exchangeable for any such shares, equity or profits interests, participations or other equivalents, or such other securities, directly or indirectly (or any equivalent ownership interests, in the case of a Person which is not a corporation). "Subsidiary" means any corporation of which the shares of outstanding capital stock possessing the voting power (under ordinary circumstances) in electing the board of directors are, at the time as of which any determination is being made, owned by the Corporation either directly or indirectly through Subsidiaries. "UBS" means UBS Capital Corporation, a New York corporation. "Warrants" means the Warrants issued pursuant to the Securities Purchase Agreement, as they may be amended from time to time in accordance with their terms. SECTION N. Amendment and Waiver No amendment, modification or waiver will be binding or effective with respect to any of the provisions of this amendment to the Corporation's Certificate of Incorporation stating the number, designation, relative rights, preferences and limitations of the Convertible Preferred Stock, without the prior written consent of the holders of at least 80% of the Shares of Convertible Preferred Stock then outstanding. SECTION O. Notices. Except as otherwise expressly provided herein, all notices referred to herein will be in writing and will be delivered by registered or certified mail, return 31 receipt requested, postage prepaid and will be deemed to have been given when so mailed (i) to the Corporation, at its principal executive offices and (ii) to any stockholder, at such holder's address as it appears in the stock records of the Corporation (unless otherwise indicated by any such holder). 5. The provision amending the Corporation's Certificate of Incorporation as set forth above was duly adopted at a telephonic meeting (as permitted by Section 12 of the Bylaws of the Corporation) of the Board of Directors of the Corporation held on June 6, 1995, and has not been modified, rescinded or amended and remains in full force and effect as of this day. IN WITNESS WHEREOF, the undersigned President and Secretary of the Corporation have executed this Certificate as of this 10th day of July, 1995, and the statements continued therein are affirmed as true under penalties of prejury. PEOPLES TELEPHONE COMPANY, INC. By: /s/ Robert D. Rubin Name: ROBERT D. RUBIN Title: President By: /s/ Francis J. Harkins, Jr. Name: FRANCIS J.HARKINS, JR. Title: Secretary NOTARIZED: 32 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF PEOPLES TELEPHONE COMPANY, INC. Under Section 805 Of The Business Corporation Law 1. The name of the corporation is Peoples Telephone Company, Inc. (formed under the name of Shirts Unlimited Franchise, Inc.) (the "Corporation"). 2. The Corporation originally filed its Certificate of Incorporation (the "Charter") with the New York Department of State on September 5, 1968. 3. The Corporation hereby amends Paragraph FOURTH of its Charter to increase the number of authorized shares of Common Stock, par value $.01 per share, from 25,000,000 shares to 75,000,000 shares and to restore the number of shares of Preferred Stock, par value $.01 per share, which may be issued to 5,000,000 shares. Paragraph FOURTH of the Charter shall read in its entirety as follows: FOURTH: Capital Stock. The total number of shares of all classes of Capital Stock which the Corporation shall have the authority to issue and have outstanding is 80,000,000 of which 75,000,000 shall be Common Stock, par value $.01 per share, and 5,000,000 shall be Preferred Stock, par value $.01 per share, of which 600,000 shares shall be the Corporation's Series B Preferred Stock and 160,000 shares shall be the Corporation's Series C Cumulative Convertible Preferred Stock. The shares may be issued from time to time as authorized by the Board of Directors without further approval of shareholders. The consideration for the issuance of the shares shall not be less than the par value. Future services shall not constitute payment or part payment for the issuance of shares of the Corporation. The consideration for the shares shall be cash, tangible or intangible property, labor or services actually performed for the Corporation, or any combination of the foregoing. In the absence of actual fraud in the transaction, the value of such property, labor or services as determined by the Board of Directors of the Corporation, shall be conclusive. Upon payment of such consideration, such shares shall be deemed to be fully paid and nonassessable. I. Common Stock. Each share of Common Stock shall have the same relative rights as and be identical in all respects with all the other shares of Common Stock. II. Preferred Stock. The Preferred Stock may be issued in series by the Board of Directors from time to time, each series with such dividend rights, voting rights, liquidation preferences, redemption rights, conversion rights and other rights and preferences as the Board of Directors may from time to time provide, as authorized by applicable law. -1- 4. The Corporation hereby amends Paragraph EIGHTH of its Charter to permit the Corporation to grant preferential or preemptive rights to subscribe for, purchase or receive equity securities of the Corporation pursuant to contractual agreements approved by the Board of Directors of the Corporation. Paragraph EIGHTH of the Charter shall read in its entirety as follows: EIGHTH: Except as provided by resolution of the Board of Directors of the Corporation or in a written agreement (including, without limitation, an amendment to the Certificate of Incorporation of the Corporation designating the rights, preferences and other terms of a series of Preferred Stock of the Corporation) approved by the Board of Directors of the Corporation, no holder of shares of the Corporation of any class, now or hereafter authorized, shall have any preferential or preemptive right to subscribe for, purchase or receive any shares of the Corporation of any class, now or hereafter authorized, or any options or warrants for such shares, or any securities convertible into or exchangeable for such shares, which may at any time be issued, or offered for sale by the Corporation. 5. The amendments to the Corporation's Charter as set forth above were duly adopted by the shareholders of the Corporation at a special meeting of the shareholders duly held on February 14 and March 7, 1997 and by the Board of Directors of the Corporation at a meeting duly held on December 18, 1996, and have not been modified, rescinded or amended and remain in full force and effect as of this day. IN WITNESS WHEREOF, the undersigned President and Chief Executive Officer and Secretary of the Corporation have executed this Certificate as of this 18th day of March, 1997, and the statements contained herein are affirmed as true under penalties of perjury. PEOPLES TELEPHONE COMPANY, INC. By: /s/ E. Craig Sanders E. Craig Sanders President and Chief Executive Officer By: /s/ Francis J. Harkins Francis J. Harkins Secretary -2- EX-4 3 Exhibit 4.4 THIRD AMENDMENT TO THE FOURTH AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS THIRD AMENDMENT TO THE FOURTH AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this "Amendment")is made and entered into as of this 26th day of March, 1997, by and among PEOPLES TELEPHONE COMPANY, INC., a New York corporation ("Borrower"), each of the Lenders signatory hereto (hereinafter referred to individually as a "Lender" and collectively as the "Lenders"), and CREDITANSTALT- BANKVEREIN, an Austrian banking corporation, as agent for the Lenders (in such capacity, together with its successors and assigns in such capacity, hereinafter referred to as the "Agent"); W I T N E S S E T H: WHEREAS, on March 12, 1990, Borrower entered into a certain Loan and Security Agreement, dated as of March 12, 1990, as amended (as so amended, the "Original Loan Agreement"), among Borrower, the banks party thereto and the Agent, pursuant to which such banks made available to Borrower a revolving credit facility; and WHEREAS, the Original Loan Agreement was superseded by that certain Amended and Restated Loan and Security Agreement, dated as of May 4, 1992 (the "First Restated Agreement") among the Borrower, the banks party thereto and the Agent; and WHEREAS, the First Restated Agreement was superseded by that certain Second Amended and Restated Loan and Security Agreement, dated as of March 29, 1993 (the "Second Restated Agreement") among Borrower and PTC Cellular, Inc., a Delaware corporation, as borrowers, the banks party thereto and the Agent; and WHEREAS, the Second Restated Agreement was superseded by that certain Third Amended and Restated Loan and Security Agreement, dated as of February 17, 1994 (the "Third Restated Agreement") among the Borrower, the lenders party thereto and the Agent; and WHEREAS, the Third Restated Agreement was superseded by that certain Fourth Amended and Restated Loan and Security Agreement, dated as of July 19, 1995 (the "Fourth Restated Agreement") among the Borrower, the lenders party thereto (the "Lenders") and the Agent; and WHEREAS, the Fourth Restated Agreement was amended on November 29, 1995 pursuant to that certain Waiver and First Amendment to Fourth Amended and Restated Loan and Security Agreement and on April 4, 1996 pursuant to that certain Second Amendment to Fourth Amended and Restated Loan and Security Agreement; WHEREAS, Borrower has requested that the Lenders and the Agent increase the Commitment (as defined in the Fourth Restated Agreement) from Ten Million Dollars ($10,000,000) to Twenty Million Dollars ($20,000,000); WHEREAS, the Lenders and the Agent are willing to increase the Commitment as requested on the condition that the Fourth Restated Agreement is amended as set forth herein; NOW, THEREFORE, for and in consideration of the foregoing premises, the mutual promises, covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. All capitalized terms used herein and not expressly defined herein shall have the same respective meanings given to such terms in the Fourth Restated Agreement. 2. Definitions. 2.1. Section 1.1 of the Fourth Restated Agreement is hereby amended by adding the following definition of "Applicable Margin" to read as follows: "Applicable Margin" shall mean (a) with respect to Eurodollar Loans, three and one half percent (31/2%) per annum and (b) with respect to Base Rate Loans, one and one-half percent (11/2%) per annum; provided, however, that if on the last day of any fiscal quarter Borrower's Leverage Ratio shall fall within any of the ranges set forth below, then, subject to delivery by a senior financial officer of Borrower of financial statements for that quarter, together with a Compliance Certificate of the chief financial officer of Borrower certifying as to Borrower's Leverage Ratio, in each case as required pursuant to Section 6.2(a) hereof, the Applicable Margin payable on the Loans shall be adjusted, from the date of Agent's receipt of such financial statements and Compliance Certificate until the date on which the next following quarterly financial statements are required to be delivered to the Agent, to the rate, calculated daily on the basis of a 360-day year and actual days elapsed, for the applicable type of Loan set forth opposite such range in the schedule below:
Leverage Ratio Base Rate Loans Eurodollar Rate Loans ----------------------------- ---------- --------------------- Greater than 3.00:1.00 1.50% 3.50% Less than or equal to 3.00:1.00 1.00% 3.00% Less than or equal to 2.50:1.00 .50% 2.50%
If Borrower does not qualify for an adjustment in interest rates as set forth above for any given fiscal quarter of Borrower or if no Compliance Certificate and quarterly financial statements are delivered by the required date, the Applicable Margin shall be those set forth in clauses (a) and (b) above. 2.2. Section 1.1 of the Fourth Restated Agreement is hereby amended by deleting the definition of "Base Lending Rate" in its entirety and substituting in lieu thereof a new definition of "Base Lending Rate" to read as follows: "Base Lending Rate" shall mean an interest rate per annum, fluctuating daily, equal to the higher of (a) a rate announced by Creditanstalt from time to time at its principal office in Greenwich, Connecticut, as its prime date for domestic (United States) commercial loans in effect on such date; and (b) the Federal Funds Rate in effect on such date plus one-half percent (1/2%). The Base Lending Rate is not necessarily intended to be the lowest rate of interest charge by Creditanstalt in connection with extensions of credit. Each change in the Base Lending Rate shall result in the corresponding change in the interest rates hereunder with respect to a Base Rate Loan and such change shall be effective on the effective date of such change in the Base Lending Rate. 2.3. Section 1.1 of the Fourth Restated Agreement is hereby further amended by deleting the definition of "Business Day" in its entirety and substituting in lieu thereof a new definition of "Business Day" to read as follows: "Business Day" shall mean a day on which banks are not required or authorized to close in New York, New York or Greenwich, Connecticut and, if such day relates to a borrowing of, a payment or prepayment of principal or interest on a Continuation or Conversion of or into, or an Interest Period for a Eurodollar Loan or a notice by Borrower with respect to any such borrowing, payment, prepayment, Continuation, Conversion or Interest Period, which is also a day on which dealings by and between banks in U.S. dollar deposits are carried out in the interbank Eurodollar market. 2.4. Section 1.1 of the Fourth Restated Agreement is hereby further amended by deleting the definition of "Commitment" in its entirety and substituting in lieu thereof a new definition of "Commitment" to read as follows: "Commitment" shall mean the aggregate obligation of the Lenders to make Loans to Borrower, subject to the terms and conditions hereof, up to an aggregate principal amount not to exceed at any one time outstanding as to all the Lenders equal to Twenty Million Dollars ($20,000,000), subject to reduction as set forth in Section 2.10 hereof. 2.5. Section 1.1 of the Fourth Restated Agreement is hereby further amended by deleting the definition of "Creditanstalt" in its entirety and substituting in lieu thereof a new definition of "Creditanstalt" to read as follows: "Creditanstalt" shall mean Creditanstalt-Bankverin, an Austrian Banking corporation, having offices at 2 Greenwich Plaza, 4th Floor, Greenwich, Connecticut 06830, and its successors and assigns. 2.6. Section 1.1 of the Fourth Restated Agreement is hereby amended by deleting the defined term "Leverage Ratio" in its entirety and by substituting therefor a new definition of "Leverage Ratio" to read as follows: "Leverage Ratio" shall mean, as of the last day of any fiscal quarter of Borrower, the ratio of (a) the aggregate principal amount of Borrower's Indebtedness outstanding on such date, to (b) an amount equal to (i) in the case of the fiscal quarter ending March 31, 1997, the product of the Borrower's Operating Cash Flow for the fiscal quarter ending on such date multiplied by four (4); (ii) in the case of the fiscal quarter ending June 30, 1997, the product of the Borrower's Operating Cash Flow for the two fiscal quarter period ending on such date multiplied by two (2); (iii) in the case of the fiscal quarter ending September 30, 1997, the product of the Borrower's Operating Cash Flow for the three fiscal quarter period ending on such date multiplied by four-thirds (4/3); and (iv) for any fiscal quarter thereafter, the Borrower's Operating Cash Flow for the four fiscal quarter period then ending; in each case computed on a consolidated basis for the Borrower and its Subsidiaries in accordance with GAAP. 2.7. Section 1.1 of the Fourth Restated Agreement is hereby further amended by deleting the definition of "Maturity Date" in its entirety and substituting in lieu thereof a new definition of "Maturity Date" to read as follows: "Maturity Date" shall mean March 26, 2000. 2.8. Section 1.1 of the Fourth Restated Agreement is hereby amended by adding the following phrase to the last sentence of the defined term "Permitted Liens" to read as follows: (f) liens permitted under Section 7.2 (e) hereof. 2.9. Section 1.1 of the Fourth Restated Agreement is hereby further amended by deleting the definition of "Quoted Rate" in its entirety and substituting in lieu thereof a new definition of "Quoted Rate" to read as follows: "Quoted Rate" shall mean, when used with respect to an Interest Period for a Eurodollar Loan, the quotient of (i) the offered rate quoted by Creditanstalt in the interbank Eurodollar market in Greenwich, Connecticut or London, England on or about 11:00 a.m. (prevailing Eastern or London time, as the case may be) two Business Days prior to such Interest Period for U.S. dollar deposits in an aggregate amount comparable to the principal amount of the Eurodollar Loan to which the Quoted Rate is to be applicable and for a period comparable to such Interest Period, divided by (ii) one minus the Reserve Percentage. For purposes of this definition, (a) "Reserve Percentage" shall mean with respect to any Interest Period, the percentage which is in effect on the first day of such Interest Period under Regulation D as the maximum reserve requirement from member banks of the Federal Reserve System in Greenwich, Connecticut with deposits comparable in amount to those of Creditanstalt against Eurocurrency Liabilities (b) "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D, as in effect from time to time. The Quoted Rate for the applicable period shall be adjusted automatically on as of the effective date of any change in the applicable Reserved Percentage. 3. Borrowing Procedures. The Fourth Restated Agreement is hereby further amended by deleting Section 2.2 thereof in its entirety and by substituting therefor a new Section 2.2 to read as follows: 2.2 Borrowing Procedures. (a) Borrower shall give Agent a Notice of Borrowing in connection with each request for a Loan hereunder in accordance with Section 2.12 hereof. The Agent shall promptly notify each Lender of any Notice of Borrowing received hereunder. Not later than 11:00 a.m (prevailing Eastern time), on the date specified for each borrowing hereunder, each Lender shall make available to the Agent the amount of the Loan to be made by such Lender in accordance with such Lender's Commitment Percentage, in immediately available funds at an account with Creditanstalt designated by the Agent. The Agent shall, subject to the terms and conditions of this Agreement, not later than 1:00 p.m. (prevailing Eastern time) on the Business Day specified for such borrowing, make such amount available to Borrower at the Agent's office in Greenwich, Connecticut. (b) Unless the Agent shall have been notified by any Lender at least one Business Day prior to the date on which any Eurodollar Loan is to be made to Borrower and not later than 11:00 a.m. (prevailing Eastern time) on the date any Base Rate Loan is to be made, that such Lender does not intend to make available to the Agent such Lender's Commitment Percentage of such Loan, the Agent may assume that such Lender has made such amount available to the Agent on the date of such Loan and the Agent may, in reliance upon such assumption, make available to Borrower a corresponding amount. If such corresponding amount is not in fact made available to Agent by such Lender, the Agent shall be entitled to recover such corresponding amount on demand from such Lender, which demand shall be made in a reasonably prompt manner. If such Lender does not pay such a corresponding amount forthwith upon the Agent's demand therefor, the Agent shall promptly notify Borrower and Borrower shall pay such corresponding amount to the Agent. The Agent shall also be entitled to recover from such Lender interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Agent to Borrower to the date such corresponding amount as recovered by the Agent at a rate per annum equal to the Federal Funds Rate, for the first two Business Days, and then thereafter at the rate per annum then in effect with respect to Base Rate Loans. Nothing herein shall be deemed to relieve any Lender from its obligation to fulfill its Commitment Percentage of the Commitment hereunder or to prejudice any rights which the Agent or Borrower may have against any Lender as a result of any Default by such Lender hereunder. 4. Payments. The Fourth Restated Agreement is hereby further amended by deleting Subsection 2.8(a) thereof in its entirety and by substituting therefor a new Subsection 2.8(a) to read as follows: (a) Each payment by the Borrower pursuant to this Agreement or the Notes shall be made prior to 1:00 p.m. (prevailing Eastern time) on the date due and shall be made without set-off or counterclaim to the Agent at its principal U.S. office located at Two Greenwich Plaza, 4th Floor, Greenwich, Connecticut or at such other place or places as Agent may designate from time to time in writing to Borrower. Each such payment shall be in lawful currency of the United States of America and in immediately available funds. The Agent shall promptly remit to each Lender such Lender's share of any payment received by the Agent from Borrower. 5. Certain Notices. The Fourth Restated Agreement is hereby further amended by deleting Section 2.12 thereof in its entirety and by substituting therefor a new Section 2.12 to read as follows: 2.12 Certain Notices. All notices given by Borrower to the Agent of terminations or reductions of the Commitment, or of borrowings, or prepayments of Loans hereunder shall either be oral, with prompt written confirmation by telecopy, or in writing, with such written confirmation or writing, in the case of a borrowing, to be substantially in the form of Exhibit B attached hereto (a "Notice of Borrowing"); shall be irrevocable; shall be effective only if received by Agent prior to 10:00 a.m. (Eastern time) on a Business Day which is: (a) at least fifteen (15) days prior to such termination or reduction of the Commitment; (b) not later than the date such Loan is to be made as, Converted to or Continued as a Base Rate Loan; (c) at least three (3) Business Days prior to the date such Loan is to be made as, Converted to or Continued as a Eurodollar Loan; (d) at least five (5) days prior to any such prepayment, in the case of a prepayment of a Base Rate Loan; or (e) not later than the date of any such prepayment, in the case of a prepayment of a Base Rate Loan. Each such notice to reduce the Commitment or to prepay the Loans shall specify the amount of the Commitment to be reduced or of the Loans to be prepaid and the date of such reduction or prepayment. Each such notice of borrowing, Conversion or Continuation shall specify: (i) the amount of such borrowing, Conversion or Continuation (which shall be an integral multiple of $100,000 and, if a Eurodollar Loan, shall be in a minimum principal amount of $1,000,000); (ii) that the amount of the Loan to be made, Converted or Continued when aggregated with all other Loans to be outstanding following the funding of such Loan, does not exceed the Borrowing Base; (iii) whether such Loan will be made, Converted or Continued as a Eurodollar Loan or as a Base Rate Loan; (iv) the date such Loan is to be made, Converted or Continued (which shall be a Business Day and, if such Loan is to Convert or Continue a Eurodollar Loan then outstanding, shall not be prior to the then current Interest Period for such outstanding Loan); and (v) if such Loan is a Eurodollar Loan, the duration of the Interest Period with respect thereto. If Borrower fails to specify the duration of the Interest Period for any Eurodollar Loan, Borrower shall instead be deemed to have requested that such Loan be made as, Converted to or Continued as a Base Rate Loan. Each request for a borrowing, Conversion or Continuation of a Loan or for any other financial accommodation by Borrower pursuant to this Agreement or the other Loan Documents shall constitute (x) an automatic warranty and representation by Borrower to each Lender that there does not then exist a Default or Event of Default or any event or condition which, with the making of such Loan, would constitute a Default or Event of Default and (y) an affirmation that as of the date of such request all of the representations and warranties of Borrower contained in this Agreement and the other Loan Documents are true and correct in all material respects, both before and after giving effect to the application of the proceeds of the Loan except for such changes in such representations and warranties which do not constitute a Default or Event of Default hereunder, which do not, individually or in the aggregate, have a Material Adverse Effect and which have, to the extent required, been disclosed to the Agent and the Lenders pursuant to Section 6.2 hereof or otherwise. If on the last day of the Interest Period of any Eurodollar Loan hereunder, Agent has not received a timely notice hereunder to Convert, Continue or prepay such Loan, Borrower shall be deemed to have submitted a notice to Convert such Loan to a Base Rate Loan. 6. Interest. The Fourth Restated Agreement is hereby further amended by deleting Sections 3.1, 3.2 and 3.3 thereof in their entirety and by substituting therefor new Sections 3.1, 3.2 and 3.3 to read as follows: 3.1 Interest. (a) Subject to modification pursuant to Section 10.1 hereof, the average daily outstanding principal amount of the Loans and all other sums payable by Borrower hereunder shall bear interest from the date thereof until paid in full at the following rates: (i) the outstanding principal amount of each Eurodollar Loan shall bear interest at a fixed rate of interest per annum equal to the Quoted Rate for the then- current Interest Period for such Loan plus the Applicable Margin, calculated on the basis of a 360-day year and actual days elapsed; and (ii) the outstanding principal amount of each Base Rate Loan and all other sums payable by Borrower hereunder shall bear interest at a fluctuating rate per annum equal to the Base Lending Rate plus the Applicable Margin, calculated daily on the basis of a 360-day year and actual days elapsed. (b) Accrued interest shall be payable (i) in the case of Base Rate Loans, monthly on the first day of each month hereafter for the previous month, commencing with the first such day following the Effective Date; (ii) in the case of a Eurodollar Loan, on the last day of each Interest Period, provided, however, that if any Interest Period in respect of a Eurodollar Loan is longer than three (3) months, such interest prior to maturity shall be paid on the last Business Day of each three (3) month interval within such Interest Period as well as on the last day of such Interest Period; (iii) in the case of any Loan, upon the payment or prepayment thereof; (iv) in the case of any other sum payable hereunder as set forth elsewhere in this Agreement or, if not so set forth, on demand; and (v) in the case of interest payable at the Default Rate, on demand. 3.2 Limitations on Interest Periods. Borrower may not select any Interest Period which extends beyond the Maturity Date. Borrower shall not have more than three (3) different Interest Periods for Eurodollar Loans outstanding at any given time during the term of this Agreement; provided, however, that so long as no Base Rate Loans are outstanding, Borrower may have up to four (4) different Interest Periods for Eurodollar Loans outstanding. 3.3 Conversions and Continuations. So long as there then exists no Default or Event of Default, Borrower shall have the right, from time to time, to Convert Loans of one type to Loans of the other type and to Continue Loans of one type as Loans of the same type; provided, however, that Eurodollar Loans may not be Continued or Converted prior to the end of the Interest Period applicable thereto. 7. Capiatlization. The Fourth Restated Agreement is hereby further amended by deleting Section 5.28 thereof in its entirety and by substituting therefor a new Section 5.28 to read as follows: 5.28 Capitalization. Borrower has authorized capital stock consisting of 75,000,000 shares of Common Stock, par value $.01 per share, of which as of March 21, 1997, 16,194,684 shares were issued and outstanding, and 5,000,000 shares of Preferred Stock, $.01 par value per share, of which (a) 600,000 shares are designated as Series B Preferred Stock, of which as of March 21, 1997, none were issued and outstanding, and (b) 160,000 shares are designated as Series C Cumulative Convertible Preferred Stock of which as of March 21, 1997, 150,000 shares were issued and outstanding. 8. Reporting Requirements. The Fourth Restated Agreement is hereby further amended by deleting Subsection 6.2(a)(v) thereof in its entirety and by substituting therefor a new Subsection 6.2(a)(v) to read as follows: (v) Together with the annual or interim financial statements referred to in clauses (i) and (ii) above, a compliance certificate of the chief executive officer or the chief financial officer of Borrower, in substantially the forms of Exhibit C hereto (the "Compliance Certificate"), certifying that, to the best of his or her knowledge, no Default or Event of Default has occurred and is continuing or, if a Default or Event of Default has occurred and is continuing, a statement as to the nature thereof and the action which is proposed to be taken with respect thereto, and that the calculations for determining the Applicable Margin and compliance with the financial covenants set forth in Article 8 hereof are true and accurate; 9. Insurance. The Fourth Restated Agreement is hereby further amended by deleting Subsection 6.9(c) thereof in its entirety and by substituting therefor a new Subsection 6.9(c) to read as follows: (c) Deliver certificates of insurance for such policy or policies to Agent, containing endorsements, in form satisfactory to the Majority Lenders , providing that the insurance shall not be cancelable, except upon thirty (30) days' prior written notice to Agent. In the event of any termination or notice of non-payment by any insurer with respect to any policy or any lapse in the coverage thereunder, Borrower shall cause such insurer to give prompt written notice to Johanna Connor, Senior Vice President, Creditanstalt- Bankverein, 2 Greenwich Plaza, Greenwich, Connecticut 06836-1300 of the occurrence of such termination, nonpayment or lapse. 10. Indebtedness. The Fourth Restated Agreement is hereby further amended by deleting Section 7.2 thereof in its entirety and by substituting therefor a new Section 7.2 to read as follows: 7.2 Indebtedness. Borrower shall not, and shall not permit any of its Subsidiaries to, incur, assume, or suffer to exist any Indebtedness other than (a) the Obligations; (b) Subordinated Debt; (c) Indebtedness of Borrower evidenced by the Senior Notes; (d) Indebtedness in a principal amount of not more than $3,500,000 secured by a mortgage on the real estate owned by Borrower located at 2300 N.W. 89th Place, Miami, Dade County, Florida; and (e) other Indebtedness of Borrower in a principal amount not in excess of Five Million Dollars ($5,000,000) at any one time outstanding provided that not more than Two Million Five Hundred Thousand Dollars ($2,500,000) of Indebtedness permitted by this clause (e) may be secured by any assets of Borrower or its Subsidiaries. 11. Asset Sales. The Fourth Restated Agreement is hereby further amended by deleting Section 7.3 thereof in its entirety and by substituting therefor a new Section 7.3 to read as follows: 7.3 Asset Sales. Borrower shall not, and shall not permit any of its Subsidiaries to, sell, lease or otherwise dispose of any of the Collateral or any interest therein or any of its other assets except for (a) the sale of Inventory in the ordinary course of business; (b) the sale of assets no longer used or useful in the business of Borrower or its Subsidiaries and having an aggregate value of not more than Two Million Five Hundred Thousand Dollars ($2,500,000) during any fiscal year. 12. Investments. The Fourth Restated Agreement is hereby further amended by deleting Section 7.5 thereof in its entirety and by substituting therefor a new Section 7.5 to read as follows: 7.5 Investments. Borrower shall not, and shall not permit any of its Subsidiaries to make any Investment in any Person except for (i) Acquisition of any Person engaged in the Pay Telephone business for which the aggregate purchase price payable other than in shares of Common Stock (whether payable in cash, notes, property, assumption of liabilities or otherwise, with property being valued at the fair market value thereof and notes and assumed liabilities being valued at the face amount thereof) is not in excess of Two Million Dollars ($2,000,000.00) for any single Acquisition or related series of Acquisitions; provided, however, that at the time of such Acquisition, and giving effect thereto, there does not exist a Default or Event of Default hereunder; and (ii) investments in (a) certificates of deposit issued by commercial banks located in the United States (including foreign banks with a United States Federal Branch) having combined capital and surplus in excess of Five Hundred Million Dollars ($500,000,000), and having a maturity date within one year after the date such investment is made; (b) readily marketable commercial paper of a domestic issuer rated at least "A-1" by Standard & Poor's Corporation or "P-1" by Moody's Investors Service, Inc.; and (c) direct obligations of the United States of America or agencies thereof or obligations fully guaranteed by the United States of America. 13. Financial Covenants. The Fourth Restated Agreement is hereby further amended by deleting Sections 8.1 and 8.2 thereof in their entirety and by substituting therefor new Sections 8.1 and 8.2 to read as follows: 8.1 Operating Cash Flow. Borrower shall maintain (i) as of the last day of the fiscal quarter of Borrower ending March 31, 1997, Operating Cash Flow for the fiscal quarter then ending of not less than $4,500,000, (ii) as of the last day of the fiscal quarter of Borrower ending June 30, 1997, Operating Cash Flow for the two fiscal quarters then ending of not less than $10,500,000, (iii) as of the last day of the fiscal quarter of Borrower ending September 30, 1997, Operating Cash Flow for the three fiscal quarters then ending of not less than $16,500,000, and (v) as of the last day of each fiscal quarter of Borrower ending after September 30, 1997, Operating Cash Flow for the four fiscal quarter period then ending of not less than the amount set forth below opposite each such applicable period: Applicable Period Amount
10/01/97 - 12/31/97 $22,500,000 01/01/98 - 03/31/98 $24,500,000 04/01/98 - 6/30/98 $26,000,000 07/01/98 - 09/30/98 $27,500,000 10/01/98 - 12/31/98 $29,000,000 01/01/99 - 03/31/99 $30,500,000 04/01/99 - 06/30/99 $31,000,000 07/01/99 - 09/30/99 $31,500,000 Each Fiscal Quarter Thereafter $32,000,000
8.2 Interest Coverage Ratio. Borrower shall maintain (i) as of the last day of the fiscal quarter of Borrower ending March 31, 1997, an Interest Coverage Ratio for the fiscal quarter then ending of not less than 1.30:1.00, (ii) as of the last day of the fiscal quarter of Borrower ending June 30, 1997, Interest Coverage Ratio for the two fiscal quarters then ending of not less than 1.50:1.00, (iii) as of the last day of the fiscal quarter of Borrower ending September 30, 1997, Interest Coverage Ratio for the three fiscal quarters then ending of not less than 1.50:1.00, and (v) as of the last day of each fiscal quarter of Borrower ending after September 30, 1997, Interest Coverage Ratio for the four fiscal quarter period then ending of not less than the ratio set forth below opposite each such applicable period:
Applicable Period Ratio 10/01/97 - 12/31/97 1.50:1.00 01/01/98 - 03/31/98 1.75:1.00 04/01/98 - 12/31/98 2.00:1.00 Each Fiscal Quarter thereafter 2.25:1.00
14. Schedules. The Fourth Restated Agreement is hereby further amended by supplementing each of the schedules thereof with the information attached hereto as Exhibit A and incorporated herein by reference. 15. Note. The Fourth Restated Agreement is hereby further amended by deleting Exhibit A thereof in its entirety and by substituting therefor new Exhibit A attached hereto as Exhibit B and incorporated herein by reference. 16. Compliance Certificate. The Fourth Restated Agreement is hereby further amended by deleting Exhibit C thereof in its entirety and by substituting therefor new Exhibit C attached hereto as Exhibit C and incorporated herein by reference. 17. Conditions Precedent. This Amendment shall not become effective unless and until the following conditions have been met, to the sole and complete satisfaction of the Lenders, the Agent and their respective counsel: (a) No Material Adverse Change. Since November 30, 1996, there shall not have occurred any material adverse change in the assets, liabilities, business, operations or condition (financial or otherwise) of the Borrower, or any event, condition, or state of facts which would be expected to have a Material Adverse Effect subsequent to the date hereof; (b) Fee. All fees due on or prior to the date hereof pursuant to that certain letter agreement dated of even date herewith between Borrower and Creditanstalt shall have been paid; (c) Documentation. The Agent and the Lenders shall have received the following documents, each duly executed and delivered to the Agent and the Lenders, and each to be satisfactory in form and substance to Agent and its counsel: (i) this Amendment; (ii) the Note; (iii) the Compliance Certificate; (iv) a certificate of the Secretary of Borrower certifying (i) that attached thereto is a true and correct copy of the resolutions adopted by its Board of Directors, authorizing the execution, delivery and performance of this Amendment, the Note and the other documents contemplated hereby, and (ii) as the incumbency and genuineness of its officers executing this Amendment, the Note and the other documents contemplated hereby; (v) the written opinion of Steel, Hector & Davis LLP, counsel to Borrower, in the form and substance satisfactory to Lenders and Agent; (vi) such other documents, instruments and agreements with respect to the transactions contemplated by this Amendment, in each case in such form and containing such additional terms and conditions as may be reasonably satisfactory to the Majority Lenders, and containing, without limitation, representations and warranties which are customary and usual in such documents. 18. Representations and Warranties; No Default. Borrower hereby represents and warrants to the Agent and the Lenders that giving effect to this Amendment, (a) all of Borrower's representations and warranties contained in the Fourth Restated Agreement and the other Loan Documents are true and correct as of the date hereof in all material respects with the same force and effect as if made on and as the date hereof except for such changes in such representations and warranties which do not constitute a Default or Event of Default, which do not, individually or in the aggregate, have a Material Adverse Effect and which have, to the extent required, been disclosed to the Agent and the Lenders pursuant to Section 6.2 or 6.8 of the Fourth Restated Agreement or otherwise; (b) no Default or Event of Default has occurred and is continuing as of such date under any Loan Document; (c) Borrower has the power and authority to enter into this Agreement and to perform all of its obligations hereunder; (d) the execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on the part of Borrower; and (e) the execution and delivery of this Agreement and performance thereof by Borrower does not and will not violate the Articles of Incorporation, By-laws or other organizational documents of the Borrower and does not and will not violate or conflict with any law, order, writ, injunction, or decree of any court, administrative agency or other governmental authority applicable to Borrower or its properties. 19. Expenses. Borrower agrees to pay, immediately upon demand by the Agent, all costs, expenses, attorneys' fees and other charges and expenses actually incurred by the Agent in connection with the negotiation, preparation, execution and delivery of this Agreement and any other instrument, document, agreement or amendment executed in connection with this Agreement. 20. Defaults Hereunder. The breach of any representation, warranty or covenant contained herein or in any document executed in connection herewith, or the failure to observe or comply with any term or agreement contained herein shall constitute a Default or Event of Default under the Fourth Restated Agreement and the Agent and the Lenders shall be entitled to exercise all rights and remedies they may have under the Fourth Restated Agreement, any other documents executed in connection therewith and applicable law. 21. References. All references in the Fourth Restated Agreement and the Loan Documents to the Fourth Restated Agreement shall hereafter be deemed to be references to the Fourth Restated Agreement as amended hereby and as the same may hereafter be amended from time to time. 22. Limitation of Agreement. Except as especially set forth herein, this Agreement shall not be deemed to waive, amend or modify any term or condition of the Fourth Restated Agreement, each of which is hereby ratified and reaffirmed and which shall remain in full force and effect, nor to serve as a consent to any matter prohibited by the terms and conditions thereof. 23. Counterparts. This Agreement may be executed in any number of counterparts, and any party hereto may execute any counterpart, each of which, when executed and delivered, will be deemed to be an original and all of which, taken together will be deemed to be but one and the same agreement. 24. Further Assurances. Borrower agrees to take such further action as the Agent or the Majority Lenders shall reasonably request in connection herewith to evidence the amendments herein contained to the Fourth Restated Agreement. 25. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the parties hereto. 26. Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York, without regard to principles of conflicts of law. 27. No Claim. Borrower hereby represents, warrants, acknowledges and agrees to end with the Lenders and Agent that (a) Borrower neither holds nor claims any right of action, claim, cause of action or damages, either at law or in equity, against the Lenders and Agent which arises from, may arise from, allegedly arise from, are based upon or are related in any manner whatsoever to the Fourth Restated Agreement and the Loan Documents or which are based upon acts or omissions of the Lenders or Agent in connection therewith and (b) the Obligations are absolutely owed to the Lenders and Agent, without offset, deduction or counterclaim. IN WITNESS WHEREOF, the parties hereto have executed this Amendment under seal as of the date first written above. "BORROWER" PEOPLES TELEPHONE COMPANY, INC. By: /s/ Bonnis S. Biummi Bonnie E. Biumi Executive Vice President and Chief Financial Officer Attest: /s/ Francis J. Harkins, Jr. Francis J. Harkins, Jr. Secretary [CORPORATE SEAL] "AGENT" CREDITANSTALT-BANKVEREIN By:/s/ Robert M. Biringer Robert M. Biringer Executive Vice President By: /s/ Joseph P. Longosz Joseph P. Longosz Vice President [Signatures Continued On Next Page] [Signatures Continued From Previous Page] "LENDER" CREDITANSTALT-BANKVEREIN By: /s/ Robert M. Biringer Robert M. Biringer Eecutive Vice President By: /s/ Joseph P. Longosz Joseph P. Longosz Vice President EX-10 4 Exhibit 10.15 January 10, 1996 Ms. Bonnie S. Biumi Peoples Telephone Company, Inc. 2300 Northwest 89th Place Miami, FL 33172-2431 Dear Ms. Biumi: This is to confirm the offer of Peoples Telephone Company, Inc. ("Peoples") to extend the initial term of the Employment Agreement dated July 11, 1994 between Peoples and yourself (the "Agreement") for one (1) year. The effect of this extension is that the Initial Term as defined in the Agreement would expire on December 31, 1998, unless sooner terminated as set forth in the Agreement. Further, the date set forth in the fifth line of Section 1.1 of the Agreement currently reading as follows: "...that commencing on January 1, 1998..." shall be changed to January 1, 1999. All other terms of the Agreement remain unchanged and in effect. If you agree to these changes to the Agreement, please sign in the space provided below and return this letter to me. Very truly yours, PEOPLES TELEPHONE COMPANY, INC. By: /s/ Robert E. Lund Robert E. Lund Chief Executive Officer Agreed and Accepted this 24th day of January, 1996: /s/ Bonnie S. Biumi Bonnie S. Biumi EX-10 5 Exhibit 10.18 LETTER AGREEMENT January 27, 1997 Mr. Lawrence Ellman Peoples Telephone Company, Inc. 2300 Northwest 89th Place Miami, FL 33172-2431 Dear Mr. Ellman: This is to confirm the offer of Peoples Telephone Company, Inc. ("Peoples") to extend the term of the Employment Agreement dated June 22, 1994 between Peoples and yourself (the "Agreement") for six (6) months. The effect of this extension is that the Term of Employment (as defined in the Agreement) will expire on December 31, 1997. All other terms of the Agreement remain unchanged and in effect. This Letter Agreement contains all obligations and understandings between the parties and merges and supersedes all prior discussions, negotiations and agreements, if any, between them relating to its subject matter. If you agree to the aforementioned change to the Agreement, please sign in the space provided below and return this letter to me. Very truly yours, PEOPLES TELEPHONE COMPANY, INC. By: /s/ E. Craig Sanders E. Craig Sanders President and Chief Executive Officer Agreed and Accepted this 3rd day of January, 1997: /s/ Lawrence Ellman Lawrence Ellman Executive Vice President/President - National Accounts EX-10 6 Exhibit 10.19 LETTER AGREEMENT April 30, 1996 Mr. C. Keith Pressley Peoples Telephone Company, Inc. 2300 N.W. 89th Place Miami, Florida 33172 Dear Mr. Pressley: This is to confirm our agreement as further set forth herein that: 1. Peoples Telephone Company, Inc. (the "Company") relies upon you and your expertise and wishes to continue to take advantage of and benefit from such experience and, therefore, wishes to enter into this Letter Agreement and you wish to enter into this Letter Agreement. 2. The Company and you agree that in case of a "Change in Control" (as defined in Exhibit A attached hereto), if you are (a) terminated without cause by the Company or any successor thereof, for a period beginning three (3) months before and ending twelve (12) months after the Change of Control, (b) are asked to assume lesser duties and/or title or duties inconsistent with your current position without your consent or (c) the Company's corporate headquarters is moved or you are required to be based at any office or location other than that of the Company's present corporate headquarters which change of location would require you to commute more than fifty (50) miles in excess of your commute prior to such change ("Termination Date"), in addition to any other benefits due you from the Company and without affecting any such other compensation or benefits owed to you, the Company shall pay you within five (5) days of such Termination Date as severance pay (i) a lump sum amount equal to fifty percent (50%) of your annual base salary at the highest rate in effect during the twelve (12) months immediately preceding the Termination Date plus (ii) any bonus you may be eligible for under any Company bonus plan (such amount to be paid as if any and all goals and conditions to such bonus payment had been met) plus (iii) all options granted to you by the Company shall vest if not already vested (and shall not be subject to any thirty (30) day exercise rule unless exemption from such rule shall be prohibited by the plan under which such options were granted). Mr. C. Keith Pressley Peoples Telephone Company, Inc. April 30, 1996 Page 2 3. This Letter Agreement shall be binding upon the Company and any successors and assigns thereof. If you agree, please sign in the space provided below and return this form to me. Very truly yours, PEOPLES TELEPHONE COMPANY, INC. By: /s/ Robert E. Lund Robert E. Lund President/Chief Executive Officer Agreed and Accepted this 30th day of April, 1996: /s/ C. Keith Pressley C. Keith Pressley Vice President/MIS EXHIBIT A For purposes of this Agreement, a "Change in Control" means: (1) the acquisition of beneficial ownership, direct or indirect, of equity securities of the Company by any person (as that term is defined in Sections 13(d) and 14(d) of the Securities Exchange Act of l934, as amended (the "Exchange Act") which, when combined with all other securities of the Company beneficially owned, directly or indirectly by that person, equals or exceeds 50% of (i) either the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition by the Company or any of its subsidiaries, (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries or (iii) any acquisition by any corporation with respect to which, following such acquisition, more than 75% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Comon Stock and Outstanding Company Voting Securities immediately prior to such acquisition in substantially the same proportions as their ownership, immediately prior to such acquisition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; (2) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding for this purpose any such individual whose initial assumption of office occurs as a result of either an actual or threatened solicitation to which Rule 14a-11 of Regulation 14A promulgated under the Exchange Act applies or other actual or threatened solicitation of proxies or consents; (3) approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, with respect to which all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation do not, following such reorganization, merger or consolidation, beneficially own, directly or indirectly, more than 75% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or (4) approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, more than 75% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be. The term "the sale or disposition by the Company of all or substantially all of the assets of the Company" shall mean a sale or other disposition transaction or series of related transactions involving assets of the Company or of any direct or indirect subsidiary of the Company (including the stock of any direct or indirect subsidiary of the Company) in which the value of the assets or stock being sold or otherwise disposed of (as measured by the purchase price being paid therefor or by such other method as the Board determines is appropriate in a case where there is no readily ascertainable purchase price) constitutes more than two-thirds of the fair market value of the Company (as hereinafter defined). The "fair market value of the Company" shall be the aggregate market value of the then outstanding Company Common Stock (on a fully diluted basis) plus the aggregated market value of Company's other outstanding equity securities. The aggregate market value of the shares of Outstanding Company Common Stock shall be determined by multiplying the number of shares of Outstanding Company Common Stock (on a fully diluted basis) outstanding on the date of the execution and delivery of a definitive agreement with respect to the transaction or series of related transactions (the "Transaction Date") by the average closing price of the shares of Outstanding Company Common Stock for the ten trading days immediately preceding the Transaction Date. The aggregate market value of any other equity securities of the Company shall be determined in a manner similar to that prescribed in the immediately preceding sentence for determining the aggregate market value of the shares of Outstanding Company Common Stock or by such other method as the Board shall determine is appropriate. EX-21 7 Exhibit 21 Subsidiaries Peoples Telephone Company, Inc. South Carolina Campus Telephone Inc. Texas (d/b/a Telink Inc.) PTC Cellular, Inc. Delaware Silverado Communications, Inc. Colorado Southwest Inmate Pay Telephone Systems, Inc. Texas PTC Global Link, Inc. Florida PTC Security Systems, Inc. Florida Telink, Inc. Texas Telink Telephone System, Inc. Georgia Peoples Acquisition Corp. Pennsylvania EX-23 8 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 33-58607) and the related prospectus of Peoples Telephone Company, Inc., and in the Registration Statement (Form S-8 No. 33- 58603) pertaining to stock option and incentive plans of Peoples Telephone Company Inc. of our report dated March 3, 1997, except for the third paragraph of Note 6, as to which the date is March 26, 1997, with respect to the consolidated financial statements and schedule of Peoples Telephone Company, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1996. ERNST & YOUNG LLP Miami, Florida March 26, 1997 EX-23 9 EXHIBIT 23.2 Consent of Independent Certified Public Accountants To the Board of Directors and Shareholders' of Peoples Telephone Company, Inc. We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (no. 33-58607) of Peoples Telephone Company, Inc. of our report dated March 28, 1995, except as to the second paragraph of Note 18 (except for the statements related to Messrs. Rubin, Hanft and Frank resignations), and the matters discussed in the second and third paragraphs of that report, which are as of May 31, 1995, on our audit of the financial statements as of December 31, 1994 and for the year ended December 31, 1994, appearing on Pages 37 and 38 of this Annual Report on Form 10-K for the year ended December 31, 1996. We also consent to the incorporation by reference in the Registration Statement on Form S-8 (no. 33-58603) of Peoples Telephone Company, Inc. of our report dated March 28, 1995, except as to the second paragraph of Note 18 (except for the statement related to Mr. Hanft's resignation) , and the matters discussed in the second and third paragraphs of that report, which are as of May 31, 1995, on our audit of the financial statements as of December 31, 1994 and for the year ended December 31, 1994, appearing on Pages 37 and 38 of this Annual Report on Form 10-K for the year ended December 31, 1996. PRICE WATERHOUSE LLP Miami, Florida March 26, 1997 EX-27 10
5 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 12,556,000 0 15,959,000 (4,361,000) 2,412,000 29,231,000 135,501,000 (70,434,000) 140,870,000 28,855,000 100,657,000 15,079,000 0 162,000 (4,456,000) 140,870,000 124,957,000 124,957,000 105,604,000 128,619,000 (545,000) 0 12,875,000 (15,992,000) 0 (15,992,000) 0 0 0 (15,992,000) (1.05) (1.05)
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