-----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, B3r5NY+6WABamjXX8/uvoar77/Q9QuzS8XvlDZtHlTO13/gaKYF8rmKwRpR/utLm KmbPZKp91jSNaKsGECofSg== 0000950144-98-012157.txt : 19981110 0000950144-98-012157.hdr.sgml : 19981110 ACCESSION NUMBER: 0000950144-98-012157 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19981109 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-K/A SEC ACT: SEC FILE NUMBER: 001-12443 FILM NUMBER: 98740903 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-K/A 1 PEOPLES TELEPHONE CO AMEND 1 TO 10-K ON 12/31/97 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A NO. 1 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 Commission File Number: 0001-12443 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(b) 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(G) OF THE ACT: (TITLE OF CLASS) None 2 Part II, Item 6 of the Form 10-K for the fiscal year ended December 31, 1997 is amended in its entirety to read as follows: 2 3 PART II ITEM 6. SELECTED FINANCIAL DATA The selected financial data, as of and for each of the years in the five-year period ended December 31, 1997, has been derived from and 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. All years presented have been restated to present inmate telephone operations as discontinued operations. Certain amounts for the prior years have been reclassified to conform with the current year presentation.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (in thousands, except per share data) CONSOLIDATED STATEMENT OF OPERATIONS DATA: REVENUES: Coin calls ...................................................... $ 76,449 $ 77,389 $ 78,353 $ 79,392 $ 56,607 Non-coin calls (1) .............................................. 35,786 29,617 33,887 35,566 23,301 Service and other ............................................... -- -- 122 1,615 1,809 --------- --------- --------- --------- --------- Total revenues ................................................. 112,235 107,006 112,362 116,573 81,717 COSTS AND EXPENSES: Telephone charges ............................................. 29,310 30,107 35,582 43,716 20,714 Commissions (1) ............................................... 29,656 28,250 27,599 23,565 17,585 Field service and collection .................................. 19,598 19,130 21,134 18,608 11,994 Depreciation and amortization ................................. 21,304 20,466 19,180 18,337 12,958 Selling, general and administrative ........................... 13,023 12,491 11,160 13,044 7,368 Other operating (income) expense .............................. -- (1,500) 6,177 -- -- --------- --------- --------- --------- --------- Total costs and expenses ........................................ 112,891 108,944 120,832 117,270 70,619 --------- --------- --------- --------- --------- Operating (loss) profit ....................................... (656) (1,938) (8,470) (697) 11,098 --------- --------- --------- --------- --------- OTHER (INCOME) AND EXPENSES: Interest expense, net ......................................... 13,106 12,875 10,355 7,516 3,065 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 .......................... 13,106 12,330 10,921 13,022 4,795 --------- --------- --------- --------- --------- (Loss) income from continuing operations before income taxes and extraordinary item .................. (13,762) (14,268) (19,391) (13,719) 6,303 Benefit from (provision for) income taxes ....................... -- -- 217 5,245 (2,374) --------- --------- --------- --------- --------- Net (loss) income from continuing operations before extraordinary item .......................................... (13,762) (14,268) (19,174) (8,474) 3,929 Discontinued operations: Income (loss) from operations ................................. (2,418) (1,724) (19) (2,599) 1,413 Gain (loss) on disposition .................................... 4,510 -- (15,340) (7,320) -- --------- --------- --------- --------- --------- Gain (loss) from discontinued operations ........................ 2,092 (1,724) (15,359) (9,919) 1,413 --------- --------- --------- --------- --------- Net (loss) income before extraordinary item ..................... (11,670) (15,992) (34,533) (18,393) 5,342 Extraordinary item, net ......................................... -- -- (3,327) -- -- --------- --------- --------- --------- --------- Net (loss) income ............................................... $ (11,670) $ (15,992) $ (37,860) $ (18,393) $ 5,342 ========= ========= ========= ========= =========
3 4
DECEMBER 31, ------------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (in thousands, except per share data) Basic net (loss) income per common share: Continuing operations ........................................... $ (0.92) $ (0.96) $ (1.23) $ (0.54) $ 0.31 Discontinued operations ......................................... 0.13 (0.10) (0.95) (0.63) 0.11 Extraordinary item .............................................. -- -- (0.20) -- -- Basic net (loss) income per common share ........................ $ (0.79) $ (1.06) $ (2.38) $ (1.17) $ 0.42 ========= ========= ========= ========= ========= Diluted net (loss) income per common share: Continuing operations ........................................... $ (0.92) $ (0.96) $ (1.23) $ (0.54) $ 0.27 Discontinued operations ......................................... 0.13 (0.10) (0.95) (0.63) 0.10 Extraordinary item .............................................. -- -- (0.20) -- -- --------- --------- --------- --------- --------- Diluted net (loss) income per common share: ..................... $ (0.79) $ (1.06) $ (2.38) $ (1.17) $ 0.37 ========= ========= ========= ========= ========= Weighted average number of outstanding shares of Common stock: Basic ....................................................... 16,198 16,188 16,091 15,713 12,700 Diluted ..................................................... 16,198 16,188 16,091 15,713 14,517 BALANCE SHEET DATA: Working capital (deficit) ....................................... $ 13,133 $ 8,454 $ (3,700) $ (2,421) $ 673 Total assets .................................................... 131,317 140,870 160,071 190,591 173,342 Long-term debt .................................................. 100,275 101,230 102,577 98,301 75,262 Mandatorily redeemable preferred stock .......................... 16,284 15,079 13,886 -- -- Shareholders' equity ............................................ (17,680) (4,294) 14,288 48,715 65,333
- ------------ (1) Includes 1997 Dial-Around Compensation Adjustment. See Note 19 to the accompanying Consolidated Financial Statements. 4 5 Part II, Item 7 of the Form 10-K for the fiscal year ended December 31, 1997 is amended in its entirety to read as follows: 5 6 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, 1997 to the year ended December 31, 1996 and the year ended December 31, 1996 to the year ended December 31, 1995, 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 Part 1, "Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995." OVERVIEW 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. On October 9, 1995, the Company sold a portion of its inmate telephone operations for approximately $1.7 million and on December 19, 1997, the Company sold its remaining inmate telephone operations for approximately $10.6 million (see Note 1 and Note 17 to the accompanying consolidated financial statements). The results of operations and gain/(loss) on disposal are included in the consolidated financial statements as discontinued operations. All years presented have been restated to present inmate telephone operations as discontinued operations. 6 7 The financial results discussed below relate to continuing operations and are presented as additional analysis of the Company's results of operations.
PERCENTAGE POINT CHANGE ---------------------- PERCENTAGE OF TOTAL REVENUES YEAR ENDED DECEMBER 31, 1997 1996 ----------------------------------- COMPARED COMPARED 1997 1996 1995 TO 1996 TO 1995 --------- --------- --------- --------- --------- REVENUES: Coin calls .............................................. 68.1% 72.3% 69.7% (4.2) pts. 2.6 pts. Non-coin calls (1) ...................................... 31.9 27.7 30.2 4.2 (2.5) Service and other ....................................... 0.0 0.0 0.1 0.0 (0.1) --------- --------- --------- --------- --------- Total revenues ...................................... 100.0 100.0 100.0 0.0 0.0 --------- --------- --------- --------- --------- COSTS AND EXPENSES: Telephone charges ....................................... 26.1 28.1 31.7 (2.0) (3.6) Commissions (1) ........................................ 26.4 26.4 24.6 0.0 1.8 Field service and collection ........................... 17.5 17.9 18.8 (0.4) (0.9) Depreciation and amortization .......................... 19.0 19.1 17.1 (0.1) 2.0 Selling, general and administrative .................... 11.6 11.7 9.9 (0.1) 1.8 Other operating (income) expense ....................... 0.0 (1.4) 5.5 1.4 (6.9) --------- --------- --------- --------- --------- Total costs and expenses ............................ 100.6 101.8 107.6 (1.2) (5.8) --------- --------- --------- --------- --------- Operating loss .................................... (0.6) (1.8) (7.6) 1.2 5.8 --------- --------- --------- --------- --------- OTHER (INCOME) AND EXPENSES: Interest expense, net .................................. 11.7 12.0 9.2 (0.3) 2.8 (Gain) loss on disposal of prepaid calling card and international telephone centers ................ 0.0 (0.5) 0.5 0.5 (1.0) --------- --------- --------- --------- --------- Total other (income) and expenses, net ............... 11.7 11.5 9.7 0.2 1.8 --------- --------- --------- --------- Loss from continuing operations before income taxes ........................................ (12.3) (13.3) (17.3) 1.0 4.0 Benefit from income taxes ................................. 0.0 0.0 0.2 0.0 (0.2) --------- --------- --------- --------- --------- Net loss from continuing operations ....................... (12.3)% (13.3)% (17.1)% 1.0 3.8 ========= ========= ========= ========= =========
- ------------- (1) Includes 1997 Dial-Around Compensation Adjustment. See Note 19 to the accompanying Consolidated Financial Statements. 7 8
CHANGE ---------------------- PER PHONE PER MONTH YEAR ENDED DECEMBER 31, 1997 1996 ----------------------------------- COMPARED COMPARED 1997 1996 1995 TO 1996 TO 1995 --------- --------- --------- --------- --------- Average number of phones ........................................ 39,237 38,354 39,197 883 (843) REVENUES: Coin calls .................................................... $ 162.37 $ 168.15 $ 166.58 $ (5.78) $ 1.57 Non-coin calls (1) ............................................ 76.00 64.35 72.04 11.65 (7.69) Service and other ............................................. 0.00 0.00 0.26 0.00 (0.26) --------- --------- --------- --------- --------- Total revenues ............................................ 238.37 232.50 238.88 5.87 (6.38) --------- --------- --------- --------- --------- COSTS AND EXPENSES: Telephone charges ............................................ 62.25 65.41 75.65 (3.16) (10.24) Commissions (1) .............................................. 62.98 61.38 58.68 1.60 2.70 Field service and collection ................................. 41.62 41.57 44.93 0.05 (3.36) Depreciation and amortization ................................ 45.25 44.47 40.78 0.78 3.69 Selling, general and administrative .......................... 27.66 27.14 23.73 0.52 3.41 Other operating (income) expense ............................. 0.00 (3.26) 13.13 3.26 (16.39) --------- --------- --------- --------- --------- Total costs and expenses .................................. 239.76 236.71 256.90 3.05 (20.19) --------- --------- --------- --------- --------- Operating loss ............................................ (1.39) (4.21) (18.02) 2.82 13.81 --------- --------- --------- --------- --------- OTHER (INCOME) AND EXPENSES: Interest expense, net ........................................ 27.83 27.97 22.01 (0.14) 5.96 (Gain) loss on disposal of prepaid calling card and international telephone centers ......................... 0.00 (1.18) 1.20 1.18 (2.38) --------- --------- --------- --------- --------- Total other (income) and expenses, net .................... 27.83 26.79 23.21 1.04 3.58 --------- --------- --------- --------- --------- Loss from continuing operations before incomes taxes ............................................ (29.22) (31.00) (41.23) 1.78 10.23 Benefit from income taxes .................................... 0.00 0.00 0.46 0.00 (0.46) --------- --------- --------- --------- --------- Net loss from continuing operations .......................... $ (29.22) $ (31.00) $ (40.77) $ 1.78 $ 9.77 ========= ========= ========= ========= =========
- ---------- (1) Includes 1997 Dial-Around Compensation Adjustment. See Note 19 to the accompanying Consolidated Financial Statements. 8 9 The following tables summarize the Company's quarterly results of continuing operations (in thousands, except per share data):
1997 QUARTER ENDED --------------------------------------------------- MARCH 31 JUNE 30 SEPT.30 DEC.31 --------- --------- --------- --------- REVENUES: Coin calls .................................................... $ 17,940 $ 19,293 $ 19,796 $ 19,420 Non-coin calls (1) ............................................ 10,111 10,173 6,640 8,862 --------- --------- --------- --------- Total revenues ................................................ 28,051 29,466 26,436 28,282 COSTS AND EXPENSES: Telephone charges ............................................... 7,413 7,327 7,484 7,086 Commissions (1) ................................................. 7,566 7,998 6,029 8,063 Field service and collection .................................... 4,746 4,914 4,960 4,978 Depreciation and amortization ................................... 5,256 5,352 5,376 5,320 Selling, general and administrative ............................. 2,935 2,926 3,592 3,570 Other ........................................................... -- -- -- -- --------- --------- --------- --------- Total costs and expenses ........................................ 27,916 28,517 27,441 29,017 --------- --------- --------- --------- Operating (loss) profit ......................................... 135 949 (1,005) (735) OTHER INCOME AND EXPENSES: Interest expense, net ........................................... 3,348 3,280 3,192 3,286 Gain on disposal of prepaid calling card and international telephone centers ..................... -- -- -- -- --------- --------- --------- --------- Total other (income) and expenses, net .......................... 3,348 3,280 3,192 3,286 --------- --------- --------- --------- Net loss from continuing operations ............................. $ (3,213) $ (2,331) $ (4,197) $ (4,021) ========= ========= ========= =========
- --------------- (1) Includes 1997 Dial-Around Compensation Adjustment. See Note 19 to the accompanying Consolidated Financial Statements. 9 10
1996 QUARTER ENDED --------------------------------------------------- MARCH 31 JUNE 30 SEPT.30 DEC.31 --------- --------- --------- --------- REVENUES: Coin calls .................................................... $ 18,141 $ 19,995 $ 20,093 $ 19,160 Non-coin calls ................................................ 7,588 6,868 6,717 8,444 --------- --------- --------- --------- Total revenues ................................................. 25,729 26,863 26,810 27,604 COSTS AND EXPENSES: Telephone charges ............................................... 7,515 7,290 7,902 7,400 Commissions ..................................................... 6,800 7,222 6,984 7,244 Field service and collection .................................... 4,530 4,753 4,872 4,975 Depreciation and amortization ................................... 4,945 5,124 5,191 5,206 Selling, general and administrative ............................. 3,426 3,186 2,961 2,918 Other ........................................................... -- -- (1,500) -- --------- --------- --------- --------- Total costs and expenses ........................................ 27,216 27,575 26,410 27,743 --------- --------- --------- --------- Operating (loss) profit ......................................... (1,487) (712) 400 (139) OTHER INCOME AND EXPENSES: Interest expense, net ........................................... 3,263 3,130 3,257 3,225 Gain on disposal of prepaid calling card and international telephone centers ..................... (545) -- -- -- --------- --------- --------- --------- Total other (income) and expenses, net .......................... 2,718 3,130 3,257 3,225 --------- --------- --------- --------- Net loss from continuing operations ............................. $ (4,205) $ (3,842) $ (2,857) $ (3,364) ========= ========= ========= =========
10 11 REVENUES The Company primarily derives its revenues from coin and non-coin calls. Coin revenue is generated exclusively from calls made by depositing coins in the Company's public pay telephones. Coin revenue decreased 1.2% to $76.4 million in 1997 as compared to 1996. The Company's average installed public pay telephone base was 39,237 phones and 38,354 phones for the years ended December 31, 1997 and 1996, respectively. Coin revenue on a per phone basis decreased by approximately 3.4% for the year ended December 31, 1997, as compared to 1996. The Company believes that this decrease can be attributed to a shift in call mix, particularly away from coin and operator assisted long-distance traffic to Dial-Around Calls. Also, the decline was magnified by a temporary increase in the number of local and long-distance coin calls in 1996 resulting from the implementation and promotion of new calling programs during the spring and summer months of 1996. Coin revenue decreased by 1.2% to approximately $77.4 million in 1996 as compared to $78.4 million in 1995. Although the Company's installed public pay telephone base decreased to an average of 38,354 phones in 1996 compared to 39,197 phones in 1995, coin revenue on a per phone basis remained relatively consistent between 1996 and 1995. 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 recent regulatory changes, although there can be no assurances. Effective October 7, 1997, the FCC deregulated local coin rates. See "Business - - Public Pay Telephone Industry Overview" and "- Regulation". During the fourth quarter of 1997, the Company increased the local call rate from $0.25 to $0.35 on approximately 50% of its payphones. An additional 35% were converted in January, 1998. Since implementing these local coin call increases, the Company has experienced a reduction in the number of coin calls on average from its pay telephones. While the Company believes that this call count suppression will improve, no assurances can be given in this regard. Non-coin operator services 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. During the second quarter of 1995, the Company signed a contract with AT&T to act as its primary national OSP. Prior to the execution of this agreement, non-coin calls were routed through the Company's private label OSP. The Company used its private label operator service or a third-party operator service provider based on which service the Company believes netted it the highest gross margin from the call. The Company recorded as revenue the total amount the end user paid for the call (net of taxes) when the call was completed through the Company's private label operator service. In contrast, when the call is completed through a third-party OSP, the Company records as revenue the amount it receives from the third-party OSP 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 reduction in non-coin revenue from the change in the compensation structure under the AT&T contract was approximately $3.7 million for the year ended December 31, 1996. During 1997, the Company signed new contracts with AT&T and Sprint to provide operator services on terms favorable to the Company. 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+/0- calls, for which the Company receives a commission percentage of the revenue generated by those calls, to Dial-Around Calls for which the 11 12 Company receives Dial-Around Compensation. Due to aggressive advertising campaigns by long-distance companies promoting the use of Dial-Around Calls, the Company believes that the decrease in non-coin primary operator services revenue is likely to continue. The Company believes that this decrease in revenues should be largely offset by changes in the amount of Dial-Around Compensation received by the Company, as required under the FCC rulings, and continued favorable contract terms with its primary carrier, although there can be no assurances. See "Business-Regulation". Effective July 1, 1998, new FCC rules regarding Billed Party Preference require payphone operators to give payphone users the option of receiving a rate quote before a call is connected when making a O+ interstate call. These rules could reduce revenues earned by the Company on long-distance calls placed from payphones by encouraging more consumers to dial around the OSP utilized by the Company. The Company cannot currently assess what impact the new rules will have on its financial performance. Dial-Around Compensation is included in non-coin revenue and is compensation paid to the Company for the use of its public pay telephones to access operator services providers other than the service provider selected by the Company and to originate "toll-free""1-800" or "1-888" calls. Under the terms of the Initial Payphone Orders, the Company recorded Dial-Around Compensation at $45.85 ($0.35 multiplied by an assumed 131 calls) per month per phone for the period from November 7, 1996 through June 30, 1997. The FCC, in its Remand Order of October 9, 1997, established a rate of $0.284 per call for Dial Around Compensation for the two year period from October 7, 1997 through October 6, 1999. From July 1, 1997 through October 6, 1997, the Company has recorded Dial-Around Compensation at $37.20 per phone ($0.284 multiplied by an assumed 131 calls). See "Provision for Dial-Around Compensation Adjustment" below for further information. From October 7, 1997 through year-end, the Company has based its compensation on an estimated number of calls (131) per payphone per month because actual call counts from the IXCs are not available until later in 1998. From October 7, 1997 forward, this amount may be adjusted for actual call counts provided by the IXCs. See "Business - Regulation". As part of non-coin revenue, the Company recorded Dial-Around Compensation revenue of approximately $3.2 million for the period from November 7, 1996 through December 31, 1996 and approximately $17.2 million for the period from January 1, 1997 through December 31, 1997. Revenue from non-coin calls increased by 20.8% to $35.8 million in 1997, compared to 1996. The increase was primarily attributable to the increased Dial-Around Compensation, offset by the decline in operator assisted calls. Non-coin revenue decreased by approximately 12.6% to $29.6 million in 1996 as compared to 1995. This decrease is primarily 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; and (ii) the change in the Company's compensation structure under the AT&T contract. 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 12 13 telephones on an ongoing basis, costs of collecting coins 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. Telephone charges decreased as a percentage of total revenues to 26.1% for the year ended December 31, 1997, compared to 28.1% for the same period in 1996 and 31.7% for the same period in 1995. The Company has experienced decreased telephone charges as a result of regulatory changes and emerging competition within the local/intraLATA service markets. In addition, the decrease in telephone charges can be partially 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. The Company incurred no such costs when a third-party operator service provider such as AT&T or Sprint completed the call. Commissions expense remained relatively consistent as a percentage of total revenues in 1997 compared with 1996. However, during the third quarter of 1997, the Company renegotiated its contract terms under a joint venture with AT&T for providing pay telephones at Atlanta's Hartsfield International Airport and recorded other adjustments which in total reduced commissions expense by approximately $2.0 million. Excluding these adjustments, commissions expense as a percent of total revenues would have been 28.2% in 1997 compared to 26.4% in 1996. This increase in commissions as a percentage of revenues from 1996 to 1997 as well as from 1996 as compared to 1995 was primarily attributable to: (i) higher commission rates for new and renewed contracts due to increasing competition in the public pay telephone markets; and (ii) 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 and Sprint as the Company's primary national operator service providers. Additionally, the Company adjusted commission expense in the third quarter of 1997 by approximately $0.5 million as part of the provision for dial-around compensation adjustment discussed more fully below. Field service and collection expenses as a percentage of revenues decreased slightly in 1997 as compared to 1996 and 1996 as compared to 1995. The Company has been able to realize economies of scale and improve operating efficiencies from its field service operation. 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, but no assurances can be given. Selling, general and administrative expenses remained relatively consistent at approximately 11.6%, and 11.7% as a percentage of revenues for the years ended December 31, 1997 and 1996, compared to 9.9% in 1995. The increase from 1995 to 1996 and 1997 relates primarily to settlements of employment agreements with former executives, increases in insurance premiums and the salaries associated with the hiring of an internal sales force. DEPRECIATION AND AMORTIZATION 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 a ten-year useful life for public pay telephone equipment. 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 three to twenty years. Depreciation and 13 14 amortization increased to $21.3 million in 1997 from $20.5 million in 1996 and $19.2 million in 1995. The increases in depreciation and amortization are primarily attributable to amortization expense related to the cost of acquiring and renewing location contracts. PROVISION FOR DIAL-AROUND COMPENSATION ADJUSTMENT On September 20, 1996, the Federal Communications Commission ("FCC") adopted rules in a docket entitled IN THE MATTER OF IMPLEMENTATION OF THE PAY TELEPHONE RECLASSIFICATION AND COMPENSATION PROVISIONS OF THE TELECOMMUNICATIONS ACT OF 1996, FCC 96-388 implementing the payphone provisions of Section 276 of the Telecommunications Act of 1996 ("Telecom Act") (collectively, with the September 20, 1996 order, the "Initial Payphone Orders"). The FCC essentially affirmed its September 20, 1996 decision in a second order issued on November 8, 1996. The Initial Payphone Orders, which became effective November 7, 1996, initially mandated Dial-Around Compensation for both access code calls and 800 subscriber calls at a flat rate of $45.85 per payphone per month (an assumed 131 calls multiplied by $0.35 per call). Commencing October 7, 1997 and ending October 6, 1998 the $45.85 per payphone per month rate was to transition to a per-call system at the rate of $0.35 per call. Several parties filed petitions for judicial review of certain of the FCC regulations including the Dial-Around Compensation rate. On July 1, 1997, the U.S. Court of Appeals for the District of Columbia Circuit (the "Court") responded to appeals related to the 1996 Payphone Orders by remanding certain issues to the FCC for reconsideration. These issues included, among other things, the manner in which the FCC established the Dial-Around Compensation, the manner in which the FCC established the interim Dial-Around Compensation plan and the basis upon which interexchange carriers ("IXCs") would be required to compensate payphone service providers ("PSPs"). The Court remanded the issues to the FCC for further consideration, and clarified on September 16, 1997 that it had vacated certain portions of the FCC's Initial Payphone Orders, including the Dial-Around Compensation rate. Specifically, the Court determined that the FCC did not adequately justify (i) the per-call compensation rate for Dial-Around Calls at the deregulated local coin rate of $0.35 because it did not sufficiently justify its conclusion that the costs of local coin calls are similar to those of Dial-Around Calls; and (ii) the allocation of the payment obligation for Dial-Around Compensation among the IXCs for the period from November 7, 1996 through October 6, 1997. In accordance with the Court's mandate, on October 9, 1997, the FCC adopted and released its SECOND REPORT AND ORDER in the same docket, FCC 97-371 (the "Remand Order") in light of the decisions of the Court which vacated and remanded certain portions of the FCC's Initial Payphone Orders. The FCC concluded that the rate for Dial-Around Calls from payphones is the deregulated local coin rate adjusted for certain cost differences. Accordingly, the FCC established a rate of $0.284 ($0.35-$0.066) per call for the first two years of per-call Dial-Around Compensation (October 7, 1997 through October 6, 1999). The IXCs are required to pay this per-call amount to PSPs, including the Company, beginning October 7, 1997 based upon the actual number of calls. After the first two years of per-call compensation, the market-based local coin rate, adjusted for certain costs defined by the FCC as $0.066 per call, is to take effect. These new regulations became rule provisions effective as of October 7, 1997; however, they are still subject to challenge. See "Business - Regulation - - Federal Regulation". In addition, the Remand Order tentatively concluded that the same $0.284 per call rate adopted on a going-forward basis should also govern compensation obligations during the period from November 7, 1996 through October 6, 1997, and that PSPs are entitled to compensation for all access code and subscriber 800 calls during this period. The FCC stated that the manner in which the payment obligation of the IXCs for the period from November 7, 1996 through October 6, 1997 will be allocated among the 14 15 IXCs will be addressed in a subsequent order. Based on the FCC's tentative conclusion in the Remand Order, the Company has adjusted the amounts of Dial-Around Compensation previously recorded related to the period from November 7, 1996 through June 30, 1997 from the initial $45.85 rate to $37.20 ($0.284 per call multiplied by an assumed 131 calls). As a result of this adjustment, the Company recorded a net provision in the third quarter of 1997 for reduced Dial-Around Compensation of approximately $2.1 million ($0.13 per share), consisting of a reduction in non-coin revenue of approximately $2.6 million and a reduction in commissions expense of approximately $0.5 million. For the period from July 1, 1997 through October 6, 1997, the Company has recorded Dial-Around Compensation at the rate of $37.20 per payphone per month. The amount of Dial-Around Compensation recognized in the period from July 1, 1997 through October 6, 1997 is approximately $4.7 million and such amount will be billed after final resolution of the allocation obligations of the IXCs as determined by the FCC. The Company's counsel, Latham & Watkins, is of the opinion that the Company is legally entitled to fair compensation under the Telecom Act for Dial-Around Calls the Company delivered to any carrier during the period from November 7, 1996 through October 6, 1997. Based on the information available, the Company believes that the minimum amount it is entitled to as fair compensation under the Telecom Act for the period from November 7, 1996 through October 6, 1997 is $37.20 per payphone per month and the Company, based on the information available to it, does not believe that it is reasonably possible that the amount will be materially less than $37.20 per payphone per month. The foregoing sentence constitutes a forward-looking statement within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended. While the amount of $0.284 per call constitutes the Company's position on the appropriate level of fair compensation, certain IXCs have asserted in the past, have asserted in petitions for reconsideration now pending before the FCC and in appeals pending before the U.S. Court of Appeals for the District of Columbia Circuit, and are expected to assert in the future that the appropriate level of fair compensation should be lower than $0.284 per call. For example, in a letter to the FCC dated August 15, 1997, AT&T stated its intention to make Dial-Around Compensation payments to PSPs based on its imputed rate of $0.12 per call until the FCC issues a new order setting the level of fair compensation. For further information regarding Dial-Around Compensation developments, see "Business-Regulation-Federal Regulation". OTHER OPERATING (INCOME) EXPENSE Other income for the year ended December 31, 1996 consists of 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). OPERATING LOSS Operating losses for the years ended December 31, 1997, 1996 and 1995 were approximately $(0.7) million, $(1.9) million and $(8.5) million, respectively. 15 16 INTEREST Interest expense increased approximately $0.2 million to $13.1 million in 1997 as compared to 1996. Interest expense in 1995 was approximately $10.4 million. The increase in 1996 is primarily attributable to the higher interest rate on the Company's $100.0 million Senior Notes as compared with the rates in effect on the Company's line of credit outstanding for the first half of 1995. (GAIN) LOSS ON DISPOSAL OF PREPAID CALLING CARD AND INTERNATIONAL TELEPHONE CENTERS The year ended December 31, 1996 includes gains on disposal 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 Telco 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. BENEFIT FROM INCOME TAXES Since the second quarter of 1995, the Company has 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. As a result, the Company's benefit from income taxes decreased approximately $0.2 million from 1995 to 1996. The Company recorded deferred tax asset valuation allowances for continuing operations of approximately $3.3 million, $3.0 million and $12.0 million during 1997, 1996 and 1995, respectively. NET (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM The Company had a net loss from continuing operations before extraordinary item of approximately $13.8 million in 1997 compared to $14.3 million in 1996 and $19.2 million in 1995. EXTRAORDINARY LOSS As a result of debt modifications during 1995, the Company recorded an extraordinary loss 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 1997 or 1996. LIQUIDITY AND CAPITAL RESOURCES During the year ended December 31, 1997, the Company financed its operations primarily from operating cash flow. The Company's operating cash flow was $7.0 million in 1997 compared to $6.0 million in 1996 and $12.0 million in 1995. 16 17 The Company's working capital was approximately $11.0 million, with a current ratio of 1.34 to 1, at December 31, 1997. This is compared to working capital of $6.0 million and a current ratio of 1.21 to 1 at December 31, 1996. The change in the Company's working capital is primarily a result of increases in certain accounts receivable balances related to Dial-Around Compensation and other non-coin revenues. Approximately $11.3 million of cash was used in January, 1998 to acquire the assets of Indiana Telcom. The Company's primary sources of financing are its Senior Notes and Preferred Stock, issued in July, 1995. The Company also entered into a new $40.0 million revolving credit facility (the "New Credit Facility") with Creditanstalt-Bankverein (the "Bank"). 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 availability to $10.0 million, and amended 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 2000, and interest is payable monthly for loans based on the prime rate and quarterly for loans based on the LIBOR rate. As of December 31, 1997, 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 New 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 until December 31, 1999, although there can be no assurance that it will be able to do so. DISCONTINUED OPERATIONS 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 and payment of approximately $1.2 million of PTC Cellular's liabilities by STC. This transaction resulted in a loss of approximately $14.6 million which was recorded as a loss on disposal in the accompanying statements of operations for the year ended December 31, 1995 (see Note 17 to the accompanying consolidated financial statements). Income of $0.3 million was recorded in 1997 with respect to a payment on the promissory note which had been fully reserved. During the third quarter of 1995 the Company sold a portion of its inmate telephone business for approximately $1.7 million. Impairment losses of approximately $0.3 million and a net loss on the sale of these inmate telephone operations of approximately $0.4 million are included in the loss from discontinued operations in the accompanying 1995 Consolidated Statements of Operations. On December 19, 1997, the Company sold the remaining operating assets of its inmate phone division to Talton Holdings, Inc. for approximately $10.6 million in cash, plus additional contingent 17 18 consideration based on a formula which shares incremental profits from certain existing contracts and from Talton's closing on certain pending bids. This transaction resulted in a gain on sale of approximately $4.2 million. The gain, combined with an operating loss of approximately $2.4 million, resulted in a net income of approximately $1.8 million from the discontinued inmate division in 1997. IMPACT OF YEAR 2000 The Year 2000 Issue is the result of computer programs using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure, disruption of operations, and/or a temporary inability to conduct normal business activities. Based on a recent assessment, the Company presently believes that with modifications to existing software and conversions to new software, the Year 2000 Issue should not pose significant operational problems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the Company's operations. In addition, formal communications with all significant suppliers and customers have been initiated to determine the extent to which related interfaces with Company systems are vulnerable if these third parties fail to remediate their own Year 2000 Issues. There can be no assurance that these third parties systems will be converted on a timely basis and will not adversely affect the Company's systems. The Company will utilize both internal and external resources to complete and test Year 2000 modifications and expects to complete this process not later than mid 1999. At the present time, the total estimated cost of this project is in a range of $0.5 to $1 million and is being funded through operating cash flows. Approximately 20% of the total will relate to purchased software and will be capitalized. The remainder will be expensed as incurred. Through 1997, related costs incurred were not material. Project costs and the targeted completion date are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, the ability to locate and correct all relevant computer codes, third party modification plans and other factors. There can be no assurance these estimates will be achieved or that the actual results will not differ materially from those anticipated. 18 19 Part II, Item 8 of the Form 10-K for the fiscal year ended December 31, 1997 is amended in its entirety to read as follows: 19 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS AND SCHEDULES PAGE NUMBERS ------------ Report of Independent Certified Public Accountants......................... 21 Consolidated Balance Sheets as of December 31, 1997 and 1996............................................... 22 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995......................................... 23 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1997, 1996 and 1995............................. 24 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995......................................... 25 Notes to Consolidated Financial Statements................................. 27 SCHEDULES: II - Valuation and Qualifying Accounts and Reserves........................ 48 All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 20 21 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. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity/(deficit) and cash flows for each of the three years in the period ended December 31, 1997. Our audit also included the financial statement schedule 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. and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 1, the Company previously presented replacement parts as inventory and has restated the 1997, 1996 and 1995 consolidated financial statements to include replacement parts as a component of property and equipment. /s/ ERNST & YOUNG LLP Miami, Florida February 27, 1998, except for the second and third paragraphs of Note 20, as to which the date is October 27, 1998, and the fourth paragraph of Note 1, as to which the date is November 6, 1998 21 22 PEOPLES TELEPHONE COMPANY, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share data)
DECEMBER 31, ------------------------- ASSETS 1997 1996 ---------- ---------- Current assets: Cash and cash equivalents .......................................... $ 22,834 $ 12,556 Restricted cash .................................................... 920 -- Accounts receivable, net of allowance for doubtful accounts of $4,936 in 1997 and $4,361 in 1996 ................... 17,061 11,598 Prepaid expenses and other current assets ......................... 2,631 2,547 Net assets of discontinued operations .............................. -- 8,196 ---------- ---------- Total current assets ........................................... 43,446 34,897 Property and equipment, net .......................................... 50,362 61,541 Location contracts, net .............................................. 23,936 26,498 Intangible assets, net ............................................... 824 1,475 Goodwill, net ........................................................ 4,084 4,788 Deferred income taxes ................................................ 3,407 3,407 Other assets, net .................................................... 5,258 8,264 ---------- ---------- Total assets .................................................... $ 131,317 $ 140,870 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable and current maturities of long-term debt ............. $ 634 $ 548 Current portion of obligations under capital leases ................ 536 952 Accounts payable and accrued expenses .............................. 22,722 19,240 Accrued interest payable ........................................... 5,702 5,697 Income and other taxes payable ..................................... 2,844 2,418 ---------- ---------- Total current liabilities ....................................... 32,438 28,855 Notes payable and long-term debt ..................................... 100,000 100,657 Obligations under capital leases ..................................... 275 573 ---------- ---------- Total liabilities ............................................... 132,713 130,085 ---------- ---------- Commitments and contingencies (Notes 14 and 15) ...................... -- -- Redeemable Preferred Stock: Cumulative convertible preferred stock; Series C, $.01 par value; 160 shares authorized; 150 shares issued and outstanding, $100 per share liquidation value ................. 13,711 13,556 Preferred stock dividends payable .................................. 2,573 1,523 ---------- ---------- Total preferred stock .......................................... 16,284 15,079 ---------- ---------- Common shareholders' deficit: Preferred stock; $.01 par value; 4,240 shares authorized in 1997 and 4,140 shares authorized in 1996; none issued and outstanding ................................................. -- -- Convertible preferred stock; Series B, $.01 par value; 600 shares authorized; none issued and outstanding ............... -- -- Common stock; $.01 par value; 75,000 shares authorized in 1997 and 25,000 shares authorized in 1996; 16,209 shares in 1997 and 16,195 shares in 1996 issued and outstanding ................................................ 162 162 Capital in excess of par value ..................................... 59,291 60,453 Accumulated deficit ................................................ (75,108) (63,438) Unrealized loss on investments ..................................... (2,025) (1,471) ---------- ---------- Total common shareholders' deficit .............................. (17,680) (4,294) ---------- ---------- Total liabilities less shareholders' deficit .................... $ 131,317 $ 140,870 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 22 23 PEOPLES TELEPHONE COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 ---------- ---------- ---------- Revenues: Coin calls ......................................................... $ 76,449 $ 77,389 $ 78,353 Non-coin calls, including 1997 dial-around compensation adjustment (see Note 19) ........................... 35,786 29,617 33,887 Service and other .................................................. -- -- 122 ---------- ---------- ---------- Total revenues .................................................. 112,235 107,006 112,362 Costs and expenses: Telephone charges .................................................. 29,310 30,107 35,582 Commissions ........................................................ 29,656 28,250 27,599 Field service and collection ....................................... 19,598 19,130 21,134 Depreciation and amortization ...................................... 21,304 20,466 19,180 Selling, general and administrative ................................ 13,023 12,491 11,160 Other operating (income) expense ................................... -- (1,500) 6,177 ---------- ---------- ---------- Total costs and expenses ....................................... 112,891 108,944 120,832 ---------- ---------- ---------- Operating loss ..................................................... (656) (1,938) (8,470) Other (income) and expenses: Interest expense, net .............................................. 13,106 12,875 10,355 (Gain) loss on disposal of prepaid calling card and international telephone centers ............................... -- (545) 566 ---------- ---------- ---------- Total other (income) and expenses, net .......................... 13,106 12,330 10,921 ---------- ---------- ---------- Loss from continuing operations before income taxes and extraordinary item ......................... (13,762) (14,268) (19,391) Benefit from income taxes ............................................ -- -- 217 ---------- ---------- ---------- Loss from continuing operations before extraordinary item ............................................... (13,762) (14,268) (19,174) Discontinued operations: Loss from operations ............................................... (2,418) (1,724) (19) Gain (loss) on dispositions ........................................ 4,510 -- (15,340) ---------- ---------- ---------- Gain (loss) from discontinued operations ........................... 2,092 (1,724) (15,359) ---------- ---------- ---------- Loss before extraordinary item ....................................... (11,670) (15,992) (34,533) Extraordinary loss from extinguishment of debt, net of income tax benefit of $1,737 ................................. -- -- (3,327) ---------- ---------- ---------- Net loss ............................................................. $ (11,670) $ (15,992) $ (37,860) ========== ========== ========== Earnings per share (basic and diluted): Loss from continuing operations ................................... $ (0.92) $ (0.96) $ (1.23) Income (loss) from discontinued operations ........................ 0.13 (0.10) (0.95) Extraordinary loss, net ........................................... -- -- (0.20) ---------- ---------- ---------- Net loss ........................................................ $ (0.79) $ (1.06) $ (2.38) ========== ========== ========== Weighted average common shares outstanding ........................... 16,198 16,188 16,091 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 23 24 PEOPLES TELEPHONE COMPANY, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH DECEMBER 31, 1997 (in thousands, except per share data)
CAPITAL UNREALIZED COMMON IN EXCESS OF ACCUMULATED LOSS ON STOCK PAR VALUE DEFICIT INVESTMENTS TOTAL ---------- ---------- ---------- ---------- ---------- Balance at January 1, 1995 ....................... $ 158 $ 58,143 $ (9,586) $ -- $ 48,715 Exercise of 93 options at $2.00-$3.59 per share ..................................... 1 306 -- -- 307 Issuance of 224 shares for prior acquisitions .... 2 1,302 -- -- 1,304 Series C preferred stock dividends accrued ....... -- (473) -- -- (473) Preferred stock issuance cost accretion .......... -- (69) -- -- (69) Issuance of 275 preferred stock warrants ......... -- 558 -- -- 558 Write-off of officer and director notes receivable -- 1,806 -- -- 1,806 Net loss ......................................... -- -- (37,860) -- (37,860) ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1995 ..................... 161 61,573 (47,446) -- 14,288 Issuance of 22 shares for prior acquisitions ..... 1 74 -- -- 75 Series C preferred stock dividends accrued ....... -- (1,050) -- -- (1,050) Preferred stock issuance cost accretion .......... -- (144) -- -- (144) Unrealized loss on investments ................... -- -- -- (1,471) (1,471) Net loss ......................................... -- -- (15,992) -- (15,992) ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1996 ..................... 162 60,453 (63,438) (1,471) (4,294) Exercise of 18 options at $2.19-$3.44 per share .. -- 44 -- -- 44 Series C preferred stock dividends accrued ....... -- (1,050) -- -- (1,050) Preferred stock issuance cost accretion .......... -- (156) -- -- (156) Unrealized loss on investments ................... -- -- -- (554) (554) Net loss ......................................... -- -- (11,670) -- (11,670) ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1997 ..................... $ 162 $ 59,291 $ (75,108) $ (2,025) $ (17,680) ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 24 25 PEOPLES TELEPHONE COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
FOR THE YEAR ENDED DECEMBER 31 ---------------------------------------- 1997 1996 1995 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss ........................................................... $ (11,670) $ (15,992) $ (37,860) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization .................................... 21,304 20,466 19,180 Amortization of deferred financing costs ......................... 611 906 390 Deferred income taxes ............................................ -- -- (1,954) Extraordinary loss on debt extinguishment ........................ -- -- 5,064 (Gain) loss on disposition of assets, net ........................ -- (545) 956 (Gain) loss on sale of discontinued operations, net .............. (4,510) -- 15,340 Write-off of officer and director receivables .................... -- -- 3,555 Changes in operating assets and liabilities: Accounts receivable ............................................ (6,906) (4,381) 7,335 Prepaid expenses and other current assets ...................... (84) 1,101 1,156 Other assets ................................................... 809 (470) 4,828 Accounts payable and accrued expenses .......................... 5,363 (478) (3,092) Accrued interest payable ....................................... 5 94 4,542 Income and other taxes payable ................................. 45 (34) (239) Net effect of discontinued operations and assets held for sale ................................................ 2,081 5,304 (7,210) ---------- ---------- ---------- Net cash provided by operating activities ........................ 7,048 5,971 11,991 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Property and equipment additions ................................... (2,181) (2,932) (5,637) Proceeds from sale of assets ....................................... 1,208 1,383 3,295 Proceeds from sale of discontinued operations ...................... 10,625 848 895 Payments for certain contracts ..................................... (3,163) (3,347) (2,806) Restricted cash .................................................... (920) -- -- Other .............................................................. -- -- 127 ---------- ---------- ---------- Net cash provided by (used in) investing activities ................ 5,569 (4,048) (4,126) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under long-term debt .................................... -- -- 101,600 Principal payments on long-term debt ............................... (571) (560) (110,487) Principal payments under capital lease obligations ................. (1,594) (1,173) (3,384) Debt issuance costs ................................................ (218) -- (5,100) Exercise of stock options and warrants ............................. 44 -- 307 Proceeds from Series C preferred stock ............................. -- -- 15,000 Issuance costs associated with stock offerings ..................... -- -- (1,198) Proceeds from the issuance of stock warrants ....................... -- -- 100 ---------- ---------- ---------- Net cash used in financing activities .............................. (2,339) (1,733) (3,162) ---------- ---------- ---------- Net increase in cash and cash equivalents ............................ 10,278 190 4,703 Cash and cash equivalents at beginning of year ....................... 12,556 12,366 7,663 ---------- ---------- ---------- Cash and cash equivalents at end of year ............................. $ 22,834 $ 12,556 $ 12,366 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 25 26 PEOPLES TELEPHONE COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (in thousands) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
FOR THE YEAR ENDED DECEMBER 31 ---------------------------------------- 1997 1996 1995 ---------- ---------- ---------- Cash paid during the year for: Interest ........................................................... $ 13,541 $ 12,643 $ 7,357 ========== ========== ========== Income taxes ....................................................... $ 135 $ 158 $ 242 ========== ========== ========== NON-CASH INVESTING AND FINANCING ACTIVITIES Fixed assets acquired under capital lease obligations ................................................ $ 325 $ 224 $ 1,185 ========== ========== ========== Fair value of Common stock issued for acquisition ...................................................... $ -- $ 75 $ 1,304 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 26 27 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 telephone systems connected to the network of regulated telephone companies at various third party property owner locations throughout the United States. The Company also derives commission revenue from routing calls to operator service companies and from FCC - mandated payments by interexchange carriers for access code ("10xxx") and subscriber access toll-free calls ("Dial-Around Compensation"). PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The divestitures of the Company's cellular and inmate telephone operations have been accounted for as discontinued operations. Accordingly, operating results and cash flows for these businesses have been segregated and reported as discontinued operations in the accompanying consolidated financial statements (see Note 17). RESTATEMENT The Company maintains replacement parts to service its base of payphones. The Company previously reported replacement parts as inventory in its consolidated balance sheets. On November 6, 1998, replacement parts were reclassified to property and equipment for all periods presented. CHANGES IN BUSINESS 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). Operations for these business for the year ended December 31, 1995 were not significant. On November 13, 1995, the Company sold its cellular telephone operations for approximately $6.0 million (see Note 17). On October 9, 1995, the Company sold a portion of its inmate telephone operations for approximately $1.7 million. Included in discontinued operations in the accompanying consolidated statement of operations in 1995 are approximately $0.3 million of impairment losses and a $0.4 million loss on the sale of these inmate telephone operations (see Note 17). On December 19, 1997, the Company sold its remaining inmate telephone operations for approximately $10.6 million. The Company recognized a net gain of approximately $4.2 million as a result of this sale (see Note 17). 27 28 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES RECOGNITION OF REVENUE Revenue is recognized when earned. Coin call and non-coin call 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. 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 considers cash and cash equivalents as those highly liquid investments purchased with an original maturity of three months or less. The credit risk associated with cash and cash equivalents in banks is considered low due to the credit quality of the financial institutions. RESTRICTED CASH Approximately $0.9 million of cash on the accompanying consolidated balance sheet is restricted and serves as collateral for the Company's performance under an inmate payphone agreement and a letter of credit. 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. 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. LOCATION CONTRACTS AND OTHER INTANGIBLE ASSETS Location contracts and other 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 their estimated lives (3 to 10 years). Accumulated amortization at December 31, 28 29 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1997 and 1996 was approximately $26.3 million and $20.0 million, respectively. 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, 1997 and 1996 was approximately $3.0 million and $2.3 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. The Company accounts for long-lived assets pursuant to SFAS No. 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 events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management reviews long-lived assets and the related intangible assets for impairment whenever events or changes in circumstances indicate the assets may be impaired. The Company, based on current circumstances, does not believe that any long-lived assets are impaired at December 31, 1997. OTHER ASSETS Other assets primarily include deferred financing costs and long-term deposits. Deferred financing costs are amortized over the term of the debt on a straight-line basis. At December 31, 1997 and 1996, accumulated amortization of the deferred financing costs was approximately $1.8 million and $1.2 million, respectively. The Company's investment in Global Telecommunications Solutions, Inc. ("GTS") is accounted for in accordance with Statement No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, and is reported at fair value with unrealized gains or losses, net of tax, recorded as a separate component of Shareholders' Equity (Deficit) (see Note 16). The Company's investment in GTS is included in "other assets, net" in the accompanying consolidated balance sheet. OTHER OPERATING (INCOME) EXPENSE Other operating (income)/expense is comprised of amounts recorded in connection with settlements of loans and employment contracts with former officers, the Company's former equity interest in the operating results of an unconsolidated affiliate and amounts related to the resolution of outstanding litigation. 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 the tax assets will not be realized. 29 30 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS STOCK OPTIONS The Company adopted the provisions of Statement No. 123 ("SFAS 123"), ACCOUNTING FOR STOCK-BASED COMPENSATION, on January 1, 1996, but as permitted by SFAS 123 will continue to account for options issued to employees or directors under the Company's 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 or exceeds the market price of the underlying stock on the date of grant; therefore, no compensation expense is recognized under APB 25. EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 128 ("SFAS 128"), EARNINGS PER SHARE. SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS 128 requirements. Diluted earnings per share amounts are computed based upon the weighted average number of common and common equivalent shares outstanding. Earnings per share on a diluted basis were equal to basic earnings per share for all periods presented, since exercise of outstanding options and warrants, and the conversion of convertible preferred stock would be anti-dilutive. RECLASSIFICATION Certain amounts for the prior years have been reclassified to conform with the current year presentation. NEW ACCOUNTING STANDARDS In 1997, the FASB issued Statement No. 130 ("SFAS 130"),"REPORTING COMPREHENSIVE INCOME" and Statement No. 131 ("SFAS 131"), "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION". These statements are effective beginning in 1998. SFAS 130 establishes standards for reporting and displaying comprehensive income, while SFAS 131 abandons the "industry segment approach" in favor of the "managing approach" for disclosure purposes. Adoption of SFAS 130 is not expected to result in a significant change from the current required disclosures and the adoption of SFAS 131 is not expected to result in additional disclosures. NOTE 3 - ACCOUNTS RECEIVABLE Accounts receivable at December 31, 1997 and 1996 consist primarily of amounts currently due from long distance carriers for Dial-Around Compensation (as defined in Note 19) and commissions from various operator service companies which handle non-coin calls. The balance due from one collection clearinghouse for Dial-Around Compensation was approximately $4.1 million and $2.7 million at December 31, 1997 and 1996, respectively. The balance due from one operator service company for commissions was $4.3 million and $3.5 million at December 31, 1997 and 1996, 30 31 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS respectively. NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment is summarized as follows (in thousands):
DECEMBER 31, ESTIMATED ------------------------- USEFUL LIVES 1997 1996 (IN YEARS) ---------- ---------- ------------ Installed telephones and related equipment ........................... $ 106,903 $ 103,060 10 Telephones and related equipment pending installation .............. 5,146 7,704 Land ............................................................... 950 950 Building and improvements .......................................... 4,366 4,360 25 Furniture, fixtures and office equipment ........................... 7,086 6,190 5-7 Vehicles and equipment under capital leases ........................ 3,027 3,906 4 Other .............................................................. 1,022 1,019 5 ---------- ---------- 128,500 127,189 Less accumulated depreciation and amortization, including $2,042 and $2,198 for capital leases .................... (78,138) (65,648) ---------- ---------- $ 50,362 $ 61,541 ========== ==========
Depreciation expense for the years ended December 31, 1997, 1996 and 1995 was approximately $14.2 million, $13.8 million and $12.9 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 1995 consolidated statement of operations. The majority of the Company's assets are security for long-term bank debt (see Note 6). 31 32 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company has entered into various noncancellable leases which are classified as capital leases. Future minimum lease payments, including imputed interest, are as follows (in thousands): FOR THE YEAR ENDING DECEMBER 31 ------------------------------- 1998............................................. $ 603 1999............................................. 188 2000............................................. 102 2001............................................. 18 2002............................................. 1 ----------- 912 Less amount representing interest........................ (93) ----------- Present value of obligations under capital leases........ 819 Less current interest payable............................ (8) Less current portion..................................... (536) ----------- $ 275 =========== NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following (in thousands):
DECEMBER 31, ------------------------- 1997 1996 ---------- ---------- Telecommunication charges........................ $ 2,676 $ 3,473 Commissions...................................... 10,343 7,879 Employee costs................................... 3,282 2,023 Unearned revenue................................. 3,258 314 Other............................................ 3,163 5,551 ---------- ---------- $ 22,722 $ 19,240 ========== ==========
32 33 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - NOTES PAYABLE AND LONG-TERM DEBT Notes payable and long-term debt consist of the following (in thousands):
DECEMBER 31, ------------------------- 1997 1996 ---------- ---------- $100 million Senior Notes due 2002 with a stated interest rate of 12 1/4% ............................................ $ 100,000 $ 100,000 $20 million revolving line of credit with interest rates ranging from the Bank's prime rate plus 1.5% to LIBOR plus 3.0% ............. -- -- Various notes payable 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 .................... 634 1,205 ---------- ---------- 100,634 101,205 Less current maturities .............................................. (634) (548) ---------- ---------- $ 100,000 $ 100,657 ========== ==========
During July 1995, the Company completed the sale of $100.0 million of Senior Notes due 2002 (the "Senior Notes") and the issuance of $15.0 million of Series C Cumulative Convertible Preferred Stock (the "Preferred Stock") (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 Senior Notes. 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 requirements of the financial covenants. During March 1997, the Company executed an amendment increasing the credit facility to $20.0 million. The interest rate on balances outstanding under the $20.0 million credit facility varies based upon the leverage ratio maintained by the Company. All outstanding principal balances are due in full in 2000, 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 33 34 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS certain cash flow levels and interest coverage ratios and places certain restrictions on the payment of dividends. At December 31, 1997, there were no amounts outstanding under the credit facility. 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 an income tax benefit of approximately $1.7 million. 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. During 1995, 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 proceeds of $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. The net proceeds were allocated to the preferred stock and warrants based on their respective fair values. The preferred stock is being accreted to its redemption value, using the effective interest method through retained earnings, or in the case of an accumulated deficit, 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. Under the terms of the Company's loan agreement, as amended, the Company granted its lender warrants to purchase 1,600,000 shares of common stock. 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. From 1992 through 1994, the Company's lender exercised its right to purchase 900,000 shares of common stock at $3.17 per share. All warrants expire in the year 2000. 34 35 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. As of December 31, 1997, common shares reserved for issuance are as follows: Series C Preferred Stock................................ 2,857,143 Employee stock options outstanding...................... 2,657,408 Warrants................................................ 975,000 --------- Total............................................ 6,489,551 ========= NOTE 9 - STOCK OPTION PLANS The Company maintains five 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 or exceeds the market price of the common stock on the date of grant, no compensation expense is recognized. 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 grants of these options have been approved by the Company's shareholders. The 1997 Incentive Plan allows for the issuance of options for the purchase of 1,350,000 shares. 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 generally vest at rates of 10%, 20%, 33% and 100% per year from the date of issuance and generally expire after 5 to 10 years of continued employment or within periods of up to 90 days of the termination or resignation of the employee or director. 35 36 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes information related to the Company's stock option activity (in thousands, except for per share data):
1997 1996 1995 --------------------- --------------------- --------------------- NUMBER WTD. AVG. NUMBER WTD. AVG. NUMBER WTD. AVG. OF SHARES EX. PRICE OF SHARES EX. PRICE OF SHARES EX. PRICE -------- -------- -------- -------- -------- -------- Outstanding at beginning of year ................ 1,709 $ 6.05 2,272 $ 6.42 2,794 $ 6.33 Granted .................. 1,206 5.61 283 2.92 200 3.68 Exercised ................ (18) 2.82 -- -- (93) 3.27 Expired .................. (95) 5.75 (29) 3.45 (629) 5.59 Canceled ................. (145) 5.37 (817) 5.85 -- -- -------- -------- -------- Outstanding at end of year 2,657 5.96 1,709 6.05 2,272 6.42 ======== ======== ======== Exercisable at end of year 1,946 6.86 1,645 6.09 2,055 6.39 ======== ======== ========
The exercise prices for options outstanding as of December 31, 1997 ranged from $2.00 to $11.38. The weighted average remaining contractual life of those options is approximately 2.7 years. The fair value of options granted during 1997, 1996 and 1995 were estimated using a binomial valuation model. The following weighted-average assumptions were used in calculating the fair value of options granted in 1997, 1996 and 1995, respectively: risk free interest rates of 5.6%, 6.3% and 6.1%; dividend yields of 0%; volatility factors of 0.669, 0.706 and 0.846; and weighted average expected life of the options of 2.7, 4.0 and 3.3 years. Pro forma net loss and loss 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 loss per share (in thousands, except for per share data):
YEAR ENDED DECEMBER 31 ------------------------------------------ 1997 1996 1995 ---------- ---------- ---------- Pro forma net loss ........................ $ (13,071) $ (16,311) $ (38,213) Pro forma loss per share, basic and diluted $ (0.87) $ (1.07) $ (2.40)
The effect on pro forma net loss and loss per share of applying SFAS 123 is not necessarily indicative of pro forma net loss and loss per share for future periods until the new fair value method is applied to all non-vested awards. 36 37 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 5 years. The Company matches 25% of employee contributions. Employees may contribute up to 15% of their earnings each plan year. The Company's contributions totaled approximately $0.1 million in each of the years ended December 31, 1997, 1996 and 1995. NOTE 11 - INCOME TAXES The components of the benefit from income taxes are as follows (in thousands):
YEAR ENDED DECEMBER 31 ------------------------------------------ 1997 1996 1995 ---------- ---------- ---------- Currently payable: Federal ............................... $ -- $ -- $ -- State ................................. -- -- 107 Deferred .............................. -- -- (324) ---------- ---------- ---------- $ -- $ -- $ (217) ========== ========== ==========
A reconciliation between the Company's effective income tax rate and federal income tax statutory rate is as follows:
YEAR ENDED DECEMBER 31 ------------------------------------------ 1997 1996 1995 ---------- ---------- ---------- Statutory tax rate ........................ (34.0)% (34.0) (34.0) Change in valuation allowance ............. 37.5 37.5 35.4 Non-deductible expenses ................... -- -- 1.0 State taxes and other, net ................ (3.5) (3.5) (3.5) ---------- ---------- ---------- 0% 0% (1.1)% ========== ========== ==========
37 38 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Significant temporary differences included in the net deferred tax asset are as follows (in thousands):
DECEMBER 31 ------------------------- 1997 1996 ---------- ---------- Deferred tax assets: Net operating loss carryforward ...................................... $ 21,854 $ 18,721 Alternative Minimum Tax Credit carryforward .......................... 30 218 Other ................................................................ 8,626 6,012 ---------- ---------- Total gross deferred tax assets ...................................... 30,510 24,951 Less-valuation allowance ............................................. 18,364 15,017 ---------- ---------- Total deferred tax assets ............................................ 12,146 9,934 ---------- ---------- Deferred tax liabilities: Difference between book and tax bases of fixed assets ................ (7,322) (5,105) Other ................................................................ (1,417) (1,422) ---------- ---------- Total deferred tax liabilities ....................................... (8,739) (6,527) ---------- ---------- Net deferred tax assets .............................................. $ 3,407 $ 3,407 ========== ==========
At December 31, 1997, the Company has tax net operating loss carry forwards of approximately $80.8 million, which expire in various amounts in the years 2002 to 2012. 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 1997, the Company generated a capital loss of approximately $0.7 million, which expires in the year 2002. During 1997, the deferred tax asset valuation allowance against net operating losses increased to approximately $18.4 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 in net 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. 38 39 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - EARNINGS PER SHARE For the years ended December 31, 1997, 1996 and 1995, the treasury stock method was used to determine the dilutive effect of the options and warrants on earnings per share data. The following table summarizes the restated net loss from continuing operations per share and the weighted average number of shares outstanding used in the computations in accordance with SFAS No. 128 (in thousands, except per share data):
1997 1996 1995 ---------- ---------- ---------- Net loss from continuing operations ............................. $ (13,762) $ (14,268) $ (19,174) Deduct: Cumulative preferred stock dividend requirement ............ 1,050 1,050 473 Preferred stock issuance cost accretion ....................... 156 144 69 ---------- ---------- ---------- Net loss applicable to common shareholders .................... $ (14,968) $ (15,462) $ (19,716) ========== ========== ========== Weighted average common shares outstanding .............. 16,198 16,188 16,091 Basic and diluted loss per share ......................... $ (0.92) $ (0.96) $ (1.23) ========== ========== ==========
Diluted earnings per share is equal to basic earnings per share since the conversion of preferred shares and the exercise of outstanding options and warrants would be anti-dilutive for all periods presented. NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS The fair market values of financial instruments held by the Company at December 31, 1997 and 1996 are based on a variety of factors and assumptions, 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 fair value of the Company's Senior Notes at December 31, 1997 and 1996 was approximately $106.5 million and $105.0 million, respectively. The fair value of the Company's credit facility is assumed to be equal to its carrying value. At December 31, 1997 and 1996 there were no amounts outstanding under the credit facility. 39 40 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $13.7 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 amount due upon redemption equals $15.0 million plus accrued dividends. NOTE 14 - LEASES The Company leases office and warehouse space under various operating lease agreements expiring through 2000. Rental expense under such leases aggregated approximately $0.5 million, $0.5 million and $0.7 million for the years ended December 31, 1997, 1996 and 1995, respectively. As of December 31, 1997, future minimum payments under noncancellable operating leases with remaining terms in excess of one year are as follows (in thousands): Year ended: 1998............................... $ 308 1999............................... 174 2000............................... 41 ---------- $ 523 ========== NOTE 15 - COMMITMENTS AND CONTINGENCIES In March, 1997, the Company and WorldCom Network Services, Inc. amicably settled and resolved litigation to the satisfaction of both parties involved. In connection with that settlement, the Company paid approximately $240,000 to WorldCom in full settlement and satisfaction of all claims raised, or which could have been raised, by WorldCom against the Company arising from the parties' prior business relationship. During July 1995, the Company reached an agreement in principle for the settlement (the "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 Settlement of approximately $0.9 million was recorded in the accompanying consolidated statement of operations for the year ended December 31, 1995. The 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 December 1995, Cellular World 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 40 41 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS business relationship with Alamo Rent-A-Car, and alleged misappropriation of Cellular World's trade secrets concerning Cellular World's proprietary cellular car phone rental system equipment. Cellular World is seeking damages alleged to exceed $10 million. Formal discovery has not been completed. Trial has been set for July 1998. Based on the discovery conducted to date, the Company continues to believe that it has several meritorious legal and factual defenses. Based upon the incomplete status of discovery, the Company is unable to predict the final outcome of the litigation. 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 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. The operations of the prepaid calling card business for the year ended December 31, 1995 were not significant. 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 receivable. Included in other assets in the accompanying 1997 and 1996 consolidated balance sheets is the fair value of the Company's investment in GTS common stock of approximately $1.1 million and $1.7 million, net of approximately $2.0 million and $1.5 million of unrealized investment losses, respectively. 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 operating (income) expenses" in the accompanying consolidated statements of operations. 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. The operations of the international telephone center business for the year ended December 31, 1995 were not significant. 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 other income and expenses in the accompanying consolidated statements of operations during the years ended December 31, 1996 and 1995, respectively. 41 42 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17 - DISCONTINUED 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, and payment of approximately $1.2 million of the Company's liabilities. This transaction resulted in a loss of $14.6 million. The loss on disposal on the accompanying December 31, 1995 statement of operations includes a valuation allowance of approximately $5.5 million to reduce the deferred tax assets generated by this transaction to a level which, more likely than not, will be realized. For the period from January 1, 1995 through the divestiture date, the cellular telephone operations had net operating losses of $3.7 million which were previously accrued for in 1994. On October 9, 1995, the Company sold a portion of its inmate telephone operations for approximately $1.7 million. Included in discontinued operations in the accompanying consolidated statement of operations in 1995 are approximately $0.3 million of impairment losses and a $0.4 million loss on the sale of these inmate telephone operations. On December 19, 1997, the Company sold the remaining operating assets of the Company's inmate phone division to Talton Holdings, Inc. ("Talton") for $10.6 million in cash plus additional contingent consideration. This transaction resulted in a gain of approximately $4.2 million. The contingent consideration is payable within 18 months after the closing based upon a formula which generally provides for the sharing of (a) incremental profits from revenue increases on certain contracts sold to Talton and (b) profits resulting from Talton closing on pending bids initiated by the Company which result in new contracts. For financial accounting purposes, the contingent consideration will be recognized as received. 42 43 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables set forth the results of operations and gain (loss) on disposal of the cellular and inmate telephone operations as they are included in the consolidated financial statements (in thousands): CELLULAR TELEPHONE OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 ---------- ---------- ---------- Revenues .............................................. $ -- $ -- $ -- Income (loss) from discontinued operations before income taxes ................................ -- -- -- Gain (loss) on disposal ............................... 268 -- (14,600) ---------- ---------- ---------- Gain (loss) on discontinued operations before income taxes ....................................... 268 -- (14,600) Provision for income taxes ............................ -- -- -- ---------- ---------- ---------- Gain (loss) from discontinued operations .............. $ 268 $ -- $ (14,600) ========== ========== ==========
INMATE TELEPHONE OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------- 1997 1996 1995 ---------- ---------- ---------- Revenues .............................................. $ 11,931 $ 17,952 $ 26,029 Income (loss) from discontinued operations before income taxes .............................. (2,418) (1,724) (19) Gain (loss) on disposal ............................... 4,242 -- (740) ---------- ---------- ---------- Gain (loss) on discontinued operations before income taxes ..................................... 1,824 (1,724) (759) Provision for income taxes ............................ -- -- -- ---------- ---------- ---------- Gain (loss) from discontinued operations .............. $ 1,824 $ (1,724) $ (759) ========== ========== ==========
NOTE 18 - RELATED PARTY TRANSACTIONS During February 1995, the Company sold its prepaid calling card business to Global Link for approximately $6.3 million. At the time of the transactions, a former officer and director of the Company and two directors of the Company were also directors of Global Link. Mr. Jeffrey Hanft, a former officer and director of the Company, resigned as a director of Global Link in October 1995, and Mr. Jody Frank, a former director of the Company, 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 43 44 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 operating (income) and expenses" in the accompanying consolidated statements of operations. During 1997, the Company recorded an additional reserve for potential uncollectible loan amounts of approximately $0.2 million which is included in "Selling, general and administrative expense" in the accompanying 1997 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 operating (income) and expenses" 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. 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 "Selling, general and administrative expense" 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 "Selling, general and administrative expense" in the accompanying 1996 consolidated statement of operations. During July 1997, the Company terminated Bonnie S. Biumi, the Company's former Chief Financial Officer, without cause. Approximately $0.3 million of severance costs incurred by the Company in connection with Ms. Biumi's termination have been recorded in "Selling, general and administrative expense" in the accompanying 1997 consolidated statement of operations. 44 45 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 19 - PROVISION FOR DIAL-AROUND COMPENSATION ADJUSTMENT On September 20, 1996, the Federal Communications Commission ("FCC") adopted rules in a docket entitled IN THE MATTER OF IMPLEMENTATION OF THE PAY TELEPHONE RECLASSIFICATION AND COMPENSATION PROVISIONS OF THE TELECOMMUNICATIONS ACT OF 1996, FCC 96-388 (the "1996 Payphone Order"), implementing the payphone provisions of Section 276 of the Telecommunications Act of 1996 ("Telecom Act"). The 1996 Payphone Order, which became effective November 7, 1996, initially mandated dial- around compensation for both access code calls and 800 subscriber calls ("Dial-Around Compensation") at a flat rate of $45.85 per payphone per month (131 calls multiplied by $0.35 per call). Commencing October 7, 1997 and ending October 6, 1998 the $45.85 per payphone per month rate was to transition to a per-call system at the rate of $0.35 per call. Several parties filed petitions for judicial review of certain of the FCC regulations including the Dial-Around Compensation rate. On July 1, 1997, the U.S. Court of Appeals for the District of Columbia Circuit (the "Court") responded to appeals related to the 1996 Payphone Order by remanding certain issues to the FCC for reconsideration. These issues included, among other things, the manner in which the FCC established the Dial-Around Compensation for 800 subscriber and access code calls, the manner in which the FCC established the interim Dial-Around Compensation plan and the basis upon which interexchange carriers ("IXCs") would be required to compensate payphone service providers ("PSPs"). The Court remanded the issues to the FCC for further consideration, and clarified on September 16, 1997 that it had vacated certain portions of the FCC's 1996 Payphone Order, including the Dial-Around Compensation rate. Specifically, the Court determined that the FCC did not adequately justify (i) the per-call compensation rate for subscriber 800 and access code calls at the deregulated local coin rate of $0.35, because it did not sufficiently justify its conclusion that the costs of local coin calls are similar to those of subscriber 800 and access code calls; and (ii) the allocation of the payment obligation among the IXCs for the period from November 7, 1996 through October 6, 1997. In accordance with the Court's mandate, on October 9, 1997, the FCC adopted and released its SECOND REPORT AND ORDER in the same docket, FCC 97-371 (the "Remand Order"). This order addressed the per-call compensation rate for subscriber 800 and access code calls that originate from payphones in light of the decision of the Court which vacated and remanded certain portions of the FCC's 1996 Payphone Order. The FCC concluded that the rate for per-call compensation for subscriber 800 and access code calls from payphones is the deregulated local coin rate adjusted for certain cost differences. Accordingly, the FCC established a rate of $0.284 ($0.35-$0.066) per call for the first two years of per-call compensation (October 7, 1997 through October 6, 1999). The IXCs are required to pay this per-call amount to PSPs, including the Company, beginning October 7, 1997. After the first two years of per-call compensation, the market-based local coin rate, adjusted for certain costs defined by the FCC as $0.066 per call, is the surrogate for the per-call rate for subscriber 800 and access code calls. These new regulations were made effective as of October 7, 1997; however, they are still subject to challenge. In addition, the Remand Order tentatively concluded that the same $0.284 per call rate adopted on a going-forward basis should also govern compensation obligations during the period from November 7, 1996 through October 6, 1997, and that PSPs are entitled to compensation for all access code and subscriber 800 calls during this period. The FCC stated that the manner in which the payment obligation of the IXCs for the period from November 7, 1996 through October 6, 1997 will be allocated among the IXCs will be addressed in a subsequent order. 45 46 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Based on the FCC's tentative conclusion in the Remand Order, the Company has adjusted the amounts of Dial-Around Compensation previously recorded related to the period from November 7, 1996 through June 30, 1997 from the initial $45.85 rate to $37.20 ($0.284 per call multiplied by 131 calls). As a result of this adjustment, the Company recorded a provision in the third quarter of 1997 for reduced Dial-Around Compensation of approximately $2.1 million ($0.13 per share). The Company previously reported this provision as a separate component of costs and expenses. In the third quarter of 1998, the Company reclassified the provision as a reduction in non-coin revenue of approximately $2.6 million and a reduction in commissions expense of approximately $0.5 million. For the period from July 1, 1997 through October 6, 1997, the Company has recorded Dial-Around Compensation at the rate of $37.20 per payphone per month. The amount of dial-around revenue recognized in the period from July 1, 1997 through October 6, 1997 is approximately $4.7 million and such amount will be billed after final resolution of the allocation obligations of the IXCs as determined by the FCC. The Company's counsel, Latham & Watkins, is of the opinion that the Company is legally entitled to fair compensation under the Telecom Act for Dial-Around Calls the Company delivered to any carrier during the period from November 7, 1996 through October 6, 1997. Based on the information available, the Company believes that the minimum amount it is entitled to as fair compensation under the Telecom Act for the period from November 7, 1996 through October 6, 1997 is $37.20 per payphone per month and the Company, based on the information available to it, does not believe that it is reasonably possible that the amount will be materially less than $37.20 per payphone per month. While the amount of $0.284 per call constitutes the Company's position of the appropriate level of fair compensation, certain IXCs have asserted in the past, have asserted in petitions for reconsideration now pending before the FCC and in appeals pending before the U.S. Court of Appeals for the District of Columbia Circuit, and are expected to assert in the future that the appropriate level of fair compensation should be lower than $0.284 per call. For example, in a letter to the FCC dated August 15, 1997, AT&T stated its intention to make dial-around payments to PSPs based on its imputed rate of $0.12 per call until the FCC issues a new order setting the level of fair compensation. 46 47 PEOPLES TELEPHONE COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 20 - SUBSEQUENT EVENTS On January 12, 1998, the Company acquired the operating assets of Indiana Telcom Corporation for approximately $11.3 million in cash. This transaction added approximately 2,600 public pay telephones, located primarily in Indiana and adjacent midwestern states. On July 5, 1998, the Company entered into a definitive merger agreement with Davel Communications Group, Inc. and Davel Holdings, Inc. (collectively "Davel"). Under the terms of the agreement, which has been approved by the Board of Directors of each company, holders of common stock of the Company will receive 0.235 of a share of Davel common stock for each outstanding share of Company common stock and the Company will become a wholly-owned subsidiary of Davel (the "Merger"). The transaction, which is intended to close in the fourth quarter of 1998, is subject to the approval of the shareholders of both companies, receipt of required regulatory approvals and other customary conditions. Consummation of the Merger is conditioned on its eligibility for pooling-of-interests accounting treatment. The transaction is also subject to conversion of the Company's Series C Cumulative Convertible Preferred Stock into common stock and receipt by Davel of financing for, and successful consummation of, a cash tender offer for the Company's 12 1/4% Senior Notes due 2002 (the "Senior Notes"), pursuant to which a minimum of 85% of the aggregate outstanding principal amount of $100 million shall have been tendered. Davel plans to refinance the Senior Notes through a new senior credit facility. No assurance can be given that all of the conditions for the consummation of the proposed Merger will be satisfied. On June 12, 1998, Davel signed a definitive agreement to merge with PhoneTel Technologies, Inc. ("PhoneTel"). On September 29, 1998, Davel announced that it was exercising its contractual rights to terminate the Davel/PhoneTel merger agreement, based on breaches of representations, warranties and covenants by PhoneTel. On October 1, 1998, Davel filed a lawsuit in Delaware Chancery Court seeking damages, rescission of the Davel/PhoneTel merger agreement and a declaratory judgment that such breaches occurred. On October 27, 1998, PhoneTel answered the complaint and filed a counterclaim against Davel alleging that the Davel/PhoneTel merger agreement had been wrongfully terminated, and also filed a third-party claim against the Company alleging that the Company wrongfully caused the termination of the Davel/PhoneTel merger agreement. The counterclaim and third party claim seek specific performance by Davel of the transactions contemplated by the Davel/PhoneTel merger agreement and damages and other equitable relief from Davel and the Company. The Company believes that the third party claim is without merit and intends to defend against it vigorously. 47 48 PEOPLES TELEPHONE COMPANY, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (in thousands)
BALANCE CHARGED TO BALANCE AT BEGINNING COSTS AND AT END OF PERIOD(1) EXPENSES(1) DEDUCTIONS(1)(2) OF PERIOD(1) ---------- ---------- ---------- ---------- CLASSIFICATION - -------------- YEAR ENDED 12/31/97 Allowance for doubtful accounts ........ $ 4,361 $ 3,925 $ 3,350 $ 4,936 ========== ========== ========== ========== Deferred tax asset valuation allowance ............................. 15,017 3,347 -- 18,364 ========== ========== ========== ========== Accumulated amortization: Location contracts ................ 16,402 5,709 8 22,103 ========== ========== ========== ========== Intangible assets ................. 3,559 650 -- 4,209 ========== ========== ========== ========== Goodwill .......................... 2,253 704 -- 2,957 ========== ========== ========== ========== YEAR ENDED 12/31/96 Allowance for doubtful accounts ........ 5,108 3,411 4,158 4,361 ========== ========== ========== ========== Deferred tax asset valuation allowance ............................. 12,023 2,994 -- 15,017 ========== ========== ========== ========== Accumulated amortization: Location contracts ................ 11,115 5,287 -- 16,402 ========== ========== ========== ========== Intangible assets ................. 2,870 1,594 905 3,559 ========== ========== ========== ========== Goodwill .......................... 1,549 704 -- 2,253 ========== ========== ========== ========== 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 ................ 6,412 5,131 428 11,115 ========== ========== ========== ========== Intangible assets ................. 2,079 769 (22) 2,870 ========== ========== ========== ========== Goodwill .......................... $ 820 $ 729 $ -- $ 1,549 ========== ========== ========== ==========
- ------------ (1) All years presented have been restated to present inmate telephone operations as discontinued operations. (2) Deductions represent bad debt write-offs and adjustments to accumulated amortization for assets sold. 48 49 Part IV, Item 14 of the Form 10-K for the fiscal year ended December 31, 1997 is amended in its entirety to read as follows: 49 50 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 the Annual Report on Form 10-K as amended by this Form 10-K/A, see the Index to Financial Statements and Schedules in Item 8 on Page 20. 2. FINANCIAL STATEMENT SCHEDULES. The following Supplementary Schedules are filed with the Annual Report on Form 10-K as amended by this Form 10-K/A: See Index to Financial Statements and Schedules on Page 20. 3. EXHIBITS. (i) See Exhibit Index on Pages 52-54. (b) Reports on Form 8-K. (1) On October 16, 1997, the Company filed a current report on Form 8-K with the Commission dated October 16, 1997, reporting information under Item 5, Other Events. (2) On December 30, 1997, the Company filed a current report on Form 8-K with the Commission dated December 30, 1997, reporting information under Item 2, Acquisition or Disposition of Assets, Item 5, Other Events and Item 7, Financial Statements and Exhibits. 50 51 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PEOPLES TELEPHONE COMPANY, INC. REGISTRANT Date: November 6, 1998 /s/ WILLIAM A. BAUM ------------------------------- William A. Baum On behalf of the registrant and as Chief Financial Officer 51 52 EXHIBIT INDEX EXHIBITS 2.1 Asset Purchase Agreement dated December 19, 1997 by and between the Company and Talton Holdings, Inc. (incorporated herein by reference to the Company's current report on Form 8-K dated December 30, 1997) (File No. 1-12443) 3.1 Amended and Restated Certificate of Incorporation (incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) (File No. 1-12443) 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 Creditanstalt-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 31, 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 quarter 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 (incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996). (File No. 1-12443) 52 53 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 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) 10.2 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). 10.3 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) 10.4 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) 10.5 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) 10.6 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) 10.7 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) 10.8 1997 Incentive Plan (incorporated herein by reference to the Company's Registration Statement on Form S-8 (Registration Statement No. 333-40793) filed on November 21, 1997). 10.9 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). 10.10 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). 10.11 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). 10.12 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). 10.13 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) 53 54 10.14 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) 10.15 Letter Agreement dated April 30, 1996 between the Company and C. Keith Pressley. (incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996) (File No. 1-12443) 21 List of Subsidiaries. (incorporated herein by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997)(File No.1-12443) *23.2 Consent of Ernst & Young LLP *27 Financial Data Schedule (for SEC use only) - ------------- * Filed with the Annual Report on Form 10-K as amended by this Form 10-K/A. 54 EX-23.2 2 CONSENT OF ERNST & YOUNG 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 33-58607) and in the related prospectus of Peoples Telephone Company, Inc., and in the Registration Statements (Form S-8 No. 33-58603 and Form S-8 No. 333-40793) pertaining to stock option and incentive plans of Peoples Telephone Company, Inc. of our report dated February 27, 1998, except for the second and third paragraphs of Note 20, as to which the date is October 27, 1998, and the fourth paragraph of Note 1, as to which the date is November 6, 1998, 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, 1997, as amended, included in this Form 10-K/A. /s/ ERNST & YOUNG LLP Miami, Florida November 6, 1998 55 EX-27 3 FINANCIAL DATA SCHEDULE
5 0000819694 PEOPLES TELEPHONE COMPANY, INC. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 22,834,000 0 21,997,000 (4,936,000) 0 43,446,000 128,500,000 (78,138,000) 131,317,000 32,438,000 100,000,000 0 16,284,000 162,000 (17,840,000) 131,317,000 112,235,000 112,235,000 91,587,000 112,891,000 0 0 13,106,000 (13,762,000) 0 (13,762,000) 2,092,000 0 0 (11,670,000) (0.79) (0.79)
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