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