<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A NO. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File Number: 0001-12443
PEOPLES TELEPHONE COMPANY, INC.
(Exact Name of registrant as specified in its charter)
NEW YORK 13-2626435
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2300 NORTHWEST 89TH PLACE, MIAMI, FLORIDA 33172
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (305) 593-9667
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ------------------- ---------------------
Common Stock
Par Value $.01 per share American Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
(TITLE OF CLASS)
None
<PAGE> 2
Part II, Item 6 of the Form 10-K for the fiscal year ended December 31, 1997 is
amended in its entirety to read as follows:
2
<PAGE> 3
PART II
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data, as of and for each of the years in the
five-year period ended December 31, 1997, has been derived from and should be
read in conjunction with the consolidated financial statements of the Company
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report. All years presented have
been restated to present inmate telephone operations as discontinued
operations. Certain amounts for the prior years have been reclassified to
conform with the current year presentation.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(in thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
REVENUES:
Coin calls ...................................................... $ 76,449 $ 77,389 $ 78,353 $ 79,392 $ 56,607
Non-coin calls (1) .............................................. 35,786 29,617 33,887 35,566 23,301
Service and other ............................................... -- -- 122 1,615 1,809
--------- --------- --------- --------- ---------
Total revenues ................................................. 112,235 107,006 112,362 116,573 81,717
COSTS AND EXPENSES:
Telephone charges ............................................. 29,310 30,107 35,582 43,716 20,714
Commissions (1) ............................................... 29,656 28,250 27,599 23,565 17,585
Field service and collection .................................. 19,598 19,130 21,134 18,608 11,994
Depreciation and amortization ................................. 21,304 20,466 19,180 18,337 12,958
Selling, general and administrative ........................... 13,023 12,491 11,160 13,044 7,368
Other operating (income) expense .............................. -- (1,500) 6,177 -- --
--------- --------- --------- --------- ---------
Total costs and expenses ........................................ 112,891 108,944 120,832 117,270 70,619
--------- --------- --------- --------- ---------
Operating (loss) profit ....................................... (656) (1,938) (8,470) (697) 11,098
--------- --------- --------- --------- ---------
OTHER (INCOME) AND EXPENSES:
Interest expense, net ......................................... 13,106 12,875 10,355 7,516 3,065
Loss from operations of prepaid calling card and
international telephone centers ............................. -- -- -- 1,816 1,730
(Gain) loss on disposal of prepaid calling card and
international telephone centers ............................. -- (545) 566 3,690 --
--------- --------- --------- --------- ---------
Total other (income) and expenses, net .......................... 13,106 12,330 10,921 13,022 4,795
--------- --------- --------- --------- ---------
(Loss) income from continuing operations
before income taxes and extraordinary item .................. (13,762) (14,268) (19,391) (13,719) 6,303
Benefit from (provision for) income taxes ....................... -- -- 217 5,245 (2,374)
--------- --------- --------- --------- ---------
Net (loss) income from continuing operations before
extraordinary item .......................................... (13,762) (14,268) (19,174) (8,474) 3,929
Discontinued operations:
Income (loss) from operations ................................. (2,418) (1,724) (19) (2,599) 1,413
Gain (loss) on disposition .................................... 4,510 -- (15,340) (7,320) --
--------- --------- --------- --------- ---------
Gain (loss) from discontinued operations ........................ 2,092 (1,724) (15,359) (9,919) 1,413
--------- --------- --------- --------- ---------
Net (loss) income before extraordinary item ..................... (11,670) (15,992) (34,533) (18,393) 5,342
Extraordinary item, net ......................................... -- -- (3,327) -- --
--------- --------- --------- --------- ---------
Net (loss) income ............................................... $ (11,670) $ (15,992) $ (37,860) $ (18,393) $ 5,342
========= ========= ========= ========= =========
</TABLE>
3
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<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Basic net (loss) income per common share:
Continuing operations ........................................... $ (0.92) $ (0.96) $ (1.23) $ (0.54) $ 0.31
Discontinued operations ......................................... 0.13 (0.10) (0.95) (0.63) 0.11
Extraordinary item .............................................. -- -- (0.20) -- --
Basic net (loss) income per common share ........................ $ (0.79) $ (1.06) $ (2.38) $ (1.17) $ 0.42
========= ========= ========= ========= =========
Diluted net (loss) income per common share:
Continuing operations ........................................... $ (0.92) $ (0.96) $ (1.23) $ (0.54) $ 0.27
Discontinued operations ......................................... 0.13 (0.10) (0.95) (0.63) 0.10
Extraordinary item .............................................. -- -- (0.20) -- --
--------- --------- --------- --------- ---------
Diluted net (loss) income per common share: ..................... $ (0.79) $ (1.06) $ (2.38) $ (1.17) $ 0.37
========= ========= ========= ========= =========
Weighted average number of outstanding shares
of Common stock:
Basic ....................................................... 16,198 16,188 16,091 15,713 12,700
Diluted ..................................................... 16,198 16,188 16,091 15,713 14,517
BALANCE SHEET DATA:
Working capital (deficit) ....................................... $ 13,133 $ 8,454 $ (3,700) $ (2,421) $ 673
Total assets .................................................... 131,317 140,870 160,071 190,591 173,342
Long-term debt .................................................. 100,275 101,230 102,577 98,301 75,262
Mandatorily redeemable preferred stock .......................... 16,284 15,079 13,886 -- --
Shareholders' equity ............................................ (17,680) (4,294) 14,288 48,715 65,333
</TABLE>
- ------------
(1) Includes 1997 Dial-Around Compensation Adjustment. See Note 19 to the
accompanying Consolidated Financial Statements.
4
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Part II, Item 7 of the Form 10-K for the fiscal year ended December 31, 1997 is
amended in its entirety to read as follows:
5
<PAGE> 6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis compares the year ended December 31, 1997
to the year ended December 31, 1996 and the year ended December 31, 1996 to the
year ended December 31, 1995, and should be read in conjunction with the
audited consolidated financial statements and notes thereto appearing elsewhere
in this Annual Report.
The following discussion contains forward-looking statements. The Company's
actual results could differ materially from those discussed in such
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below and elsewhere in this Form 10-K. See
Part 1, "Safe Harbor Statement under the Private Securities Litigation Reform
Act of 1995."
OVERVIEW
On November 13, 1995, the Company sold its cellular telephone operations for
approximately $6.0 million (see Note 17 to the accompanying consolidated
financial statements). The results of operations and loss on disposal are
included in the consolidated financial statements as discontinued operations.
On October 9, 1995, the Company sold a portion of its inmate telephone
operations for approximately $1.7 million and on December 19, 1997, the Company
sold its remaining inmate telephone operations for approximately $10.6 million
(see Note 1 and Note 17 to the accompanying consolidated financial statements).
The results of operations and gain/(loss) on disposal are included in the
consolidated financial statements as discontinued operations. All years
presented have been restated to present inmate telephone operations as
discontinued operations.
6
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The financial results discussed below relate to continuing operations and are
presented as additional analysis of the Company's results of operations.
<TABLE>
<CAPTION>
PERCENTAGE POINT CHANGE
----------------------
PERCENTAGE OF TOTAL REVENUES
YEAR ENDED DECEMBER 31, 1997 1996
----------------------------------- COMPARED COMPARED
1997 1996 1995 TO 1996 TO 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES:
Coin calls .............................................. 68.1% 72.3% 69.7% (4.2) pts. 2.6 pts.
Non-coin calls (1) ...................................... 31.9 27.7 30.2 4.2 (2.5)
Service and other ....................................... 0.0 0.0 0.1 0.0 (0.1)
--------- --------- --------- --------- ---------
Total revenues ...................................... 100.0 100.0 100.0 0.0 0.0
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Telephone charges ....................................... 26.1 28.1 31.7 (2.0) (3.6)
Commissions (1) ........................................ 26.4 26.4 24.6 0.0 1.8
Field service and collection ........................... 17.5 17.9 18.8 (0.4) (0.9)
Depreciation and amortization .......................... 19.0 19.1 17.1 (0.1) 2.0
Selling, general and administrative .................... 11.6 11.7 9.9 (0.1) 1.8
Other operating (income) expense ....................... 0.0 (1.4) 5.5 1.4 (6.9)
--------- --------- --------- --------- ---------
Total costs and expenses ............................ 100.6 101.8 107.6 (1.2) (5.8)
--------- --------- --------- --------- ---------
Operating loss .................................... (0.6) (1.8) (7.6) 1.2 5.8
--------- --------- --------- --------- ---------
OTHER (INCOME) AND EXPENSES:
Interest expense, net .................................. 11.7 12.0 9.2 (0.3) 2.8
(Gain) loss on disposal of prepaid calling card
and international telephone centers ................ 0.0 (0.5) 0.5 0.5 (1.0)
--------- --------- --------- --------- ---------
Total other (income) and expenses, net ............... 11.7 11.5 9.7 0.2 1.8
--------- --------- --------- ---------
Loss from continuing operations before
income taxes ........................................ (12.3) (13.3) (17.3) 1.0 4.0
Benefit from income taxes ................................. 0.0 0.0 0.2 0.0 (0.2)
--------- --------- --------- --------- ---------
Net loss from continuing operations ....................... (12.3)% (13.3)% (17.1)% 1.0 3.8
========= ========= ========= ========= =========
</TABLE>
- -------------
(1) Includes 1997 Dial-Around Compensation Adjustment. See Note 19 to the
accompanying Consolidated Financial Statements.
7
<PAGE> 8
<TABLE>
<CAPTION>
CHANGE
----------------------
PER PHONE PER MONTH
YEAR ENDED DECEMBER 31, 1997 1996
----------------------------------- COMPARED COMPARED
1997 1996 1995 TO 1996 TO 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Average number of phones ........................................ 39,237 38,354 39,197 883 (843)
REVENUES:
Coin calls .................................................... $ 162.37 $ 168.15 $ 166.58 $ (5.78) $ 1.57
Non-coin calls (1) ............................................ 76.00 64.35 72.04 11.65 (7.69)
Service and other ............................................. 0.00 0.00 0.26 0.00 (0.26)
--------- --------- --------- --------- ---------
Total revenues ............................................ 238.37 232.50 238.88 5.87 (6.38)
--------- --------- --------- --------- ---------
COSTS AND EXPENSES:
Telephone charges ............................................ 62.25 65.41 75.65 (3.16) (10.24)
Commissions (1) .............................................. 62.98 61.38 58.68 1.60 2.70
Field service and collection ................................. 41.62 41.57 44.93 0.05 (3.36)
Depreciation and amortization ................................ 45.25 44.47 40.78 0.78 3.69
Selling, general and administrative .......................... 27.66 27.14 23.73 0.52 3.41
Other operating (income) expense ............................. 0.00 (3.26) 13.13 3.26 (16.39)
--------- --------- --------- --------- ---------
Total costs and expenses .................................. 239.76 236.71 256.90 3.05 (20.19)
--------- --------- --------- --------- ---------
Operating loss ............................................ (1.39) (4.21) (18.02) 2.82 13.81
--------- --------- --------- --------- ---------
OTHER (INCOME) AND EXPENSES:
Interest expense, net ........................................ 27.83 27.97 22.01 (0.14) 5.96
(Gain) loss on disposal of prepaid calling card
and international telephone centers ......................... 0.00 (1.18) 1.20 1.18 (2.38)
--------- --------- --------- --------- ---------
Total other (income) and expenses, net .................... 27.83 26.79 23.21 1.04 3.58
--------- --------- --------- --------- ---------
Loss from continuing operations before
incomes taxes ............................................ (29.22) (31.00) (41.23) 1.78 10.23
Benefit from income taxes .................................... 0.00 0.00 0.46 0.00 (0.46)
--------- --------- --------- --------- ---------
Net loss from continuing operations .......................... $ (29.22) $ (31.00) $ (40.77) $ 1.78 $ 9.77
========= ========= ========= ========= =========
</TABLE>
- ----------
(1) Includes 1997 Dial-Around Compensation Adjustment. See Note 19 to the
accompanying Consolidated Financial Statements.
8
<PAGE> 9
The following tables summarize the Company's quarterly results of
continuing operations (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPT.30 DEC.31
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Coin calls .................................................... $ 17,940 $ 19,293 $ 19,796 $ 19,420
Non-coin calls (1) ............................................ 10,111 10,173 6,640 8,862
--------- --------- --------- ---------
Total revenues ................................................ 28,051 29,466 26,436 28,282
COSTS AND EXPENSES:
Telephone charges ............................................... 7,413 7,327 7,484 7,086
Commissions (1) ................................................. 7,566 7,998 6,029 8,063
Field service and collection .................................... 4,746 4,914 4,960 4,978
Depreciation and amortization ................................... 5,256 5,352 5,376 5,320
Selling, general and administrative ............................. 2,935 2,926 3,592 3,570
Other ........................................................... -- -- -- --
--------- --------- --------- ---------
Total costs and expenses ........................................ 27,916 28,517 27,441 29,017
--------- --------- --------- ---------
Operating (loss) profit ......................................... 135 949 (1,005) (735)
OTHER INCOME AND EXPENSES:
Interest expense, net ........................................... 3,348 3,280 3,192 3,286
Gain on disposal of prepaid calling
card and international telephone centers ..................... -- -- -- --
--------- --------- --------- ---------
Total other (income) and expenses, net .......................... 3,348 3,280 3,192 3,286
--------- --------- --------- ---------
Net loss from continuing operations ............................. $ (3,213) $ (2,331) $ (4,197) $ (4,021)
========= ========= ========= =========
</TABLE>
- ---------------
(1) Includes 1997 Dial-Around Compensation Adjustment. See Note 19 to the
accompanying Consolidated Financial Statements.
9
<PAGE> 10
<TABLE>
<CAPTION>
1996 QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPT.30 DEC.31
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Coin calls .................................................... $ 18,141 $ 19,995 $ 20,093 $ 19,160
Non-coin calls ................................................ 7,588 6,868 6,717 8,444
--------- --------- --------- ---------
Total revenues ................................................. 25,729 26,863 26,810 27,604
COSTS AND EXPENSES:
Telephone charges ............................................... 7,515 7,290 7,902 7,400
Commissions ..................................................... 6,800 7,222 6,984 7,244
Field service and collection .................................... 4,530 4,753 4,872 4,975
Depreciation and amortization ................................... 4,945 5,124 5,191 5,206
Selling, general and administrative ............................. 3,426 3,186 2,961 2,918
Other ........................................................... -- -- (1,500) --
--------- --------- --------- ---------
Total costs and expenses ........................................ 27,216 27,575 26,410 27,743
--------- --------- --------- ---------
Operating (loss) profit ......................................... (1,487) (712) 400 (139)
OTHER INCOME AND EXPENSES:
Interest expense, net ........................................... 3,263 3,130 3,257 3,225
Gain on disposal of prepaid calling
card and international telephone centers ..................... (545) -- -- --
--------- --------- --------- ---------
Total other (income) and expenses, net .......................... 2,718 3,130 3,257 3,225
--------- --------- --------- ---------
Net loss from continuing operations ............................. $ (4,205) $ (3,842) $ (2,857) $ (3,364)
========= ========= ========= =========
</TABLE>
10
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REVENUES
The Company primarily derives its revenues from coin and
non-coin calls. Coin revenue is generated exclusively from calls made by
depositing coins in the Company's public pay telephones. Coin revenue decreased
1.2% to $76.4 million in 1997 as compared to 1996. The Company's average
installed public pay telephone base was 39,237 phones and 38,354 phones for the
years ended December 31, 1997 and 1996, respectively. Coin revenue on a per
phone basis decreased by approximately 3.4% for the year ended December 31,
1997, as compared to 1996. The Company believes that this decrease can be
attributed to a shift in call mix, particularly away from coin and operator
assisted long-distance traffic to Dial-Around Calls. Also, the decline was
magnified by a temporary increase in the number of local and long-distance coin
calls in 1996 resulting from the implementation and promotion of new calling
programs during the spring and summer months of 1996. Coin revenue decreased by
1.2% to approximately $77.4 million in 1996 as compared to $78.4 million in
1995. Although the Company's installed public pay telephone base decreased to
an average of 38,354 phones in 1996 compared to 39,197 phones in 1995, coin
revenue on a per phone basis remained relatively consistent between 1996 and
1995.
The Company believes that the number of coin calls made at its
public pay telephones may remain flat or decrease over time. The Company
believes that, among other things, the decrease will primarily result from the
increased usage of alternative methods of calling such as prepaid calling cards
and wireless technologies and the operation of more public pay telephones in
closer proximity to the Company's telephones. The Company also believes that
these decreases may be offset, over time, by increases in local coin call rates
as a result of recent regulatory changes, although there can be no assurances.
Effective October 7, 1997, the FCC deregulated local coin rates. See "Business
- - Public Pay Telephone Industry Overview" and "- Regulation". During the fourth
quarter of 1997, the Company increased the local call rate from $0.25 to $0.35
on approximately 50% of its payphones. An additional 35% were converted in
January, 1998. Since implementing these local coin call increases, the Company
has experienced a reduction in the number of coin calls on average from its pay
telephones. While the Company believes that this call count suppression will
improve, no assurances can be given in this regard.
Non-coin operator services revenue is derived from calling
card calls, credit card calls, collect calls and third-party billed calls
placed from the Company's public pay telephones. During the second quarter of
1995, the Company signed a contract with AT&T to act as its primary national
OSP. Prior to the execution of this agreement, non-coin calls were routed
through the Company's private label OSP. The Company used its private label
operator service or a third-party operator service provider based on which
service the Company believes netted it the highest gross margin from the call.
The Company recorded as revenue the total amount the end user paid for the call
(net of taxes) when the call was completed through the Company's private label
operator service. In contrast, when the call is completed through a third-party
OSP, the Company records as revenue the amount it receives from the third-party
OSP which represents a negotiated percentage of the total amount the caller
pays for the call.
In May 1996, AT&T began paying a specified per call amount for
interLATA (800) Dial-Around Calls as opposed to a percentage of the revenue
generated by those calls. The Company estimates that the reduction in non-coin
revenue from the change in the compensation structure under the AT&T contract
was approximately $3.7 million for the year ended December 31, 1996. During
1997, the Company signed new contracts with AT&T and Sprint to provide operator
services on terms favorable to the Company. In addition to the change in
compensation under the AT&T contract, the Company is continuing to experience a
shift in call traffic from 0+/0- calls, for which the Company receives a
commission percentage of the revenue generated by those calls, to Dial-Around
Calls for which the
11
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Company receives Dial-Around Compensation. Due to aggressive advertising
campaigns by long-distance companies promoting the use of Dial-Around Calls,
the Company believes that the decrease in non-coin primary operator services
revenue is likely to continue. The Company believes that this decrease in
revenues should be largely offset by changes in the amount of Dial-Around
Compensation received by the Company, as required under the FCC rulings, and
continued favorable contract terms with its primary carrier, although there can
be no assurances. See "Business-Regulation".
Effective July 1, 1998, new FCC rules regarding Billed Party
Preference require payphone operators to give payphone users the option of
receiving a rate quote before a call is connected when making a O+ interstate
call. These rules could reduce revenues earned by the Company on long-distance
calls placed from payphones by encouraging more consumers to dial around the
OSP utilized by the Company. The Company cannot currently assess what impact
the new rules will have on its financial performance.
Dial-Around Compensation is included in non-coin revenue and
is compensation paid to the Company for the use of its public pay telephones to
access operator services providers other than the service provider selected by
the Company and to originate "toll-free""1-800" or "1-888" calls. Under the
terms of the Initial Payphone Orders, the Company recorded Dial-Around
Compensation at $45.85 ($0.35 multiplied by an assumed 131 calls) per month per
phone for the period from November 7, 1996 through June 30, 1997. The FCC, in
its Remand Order of October 9, 1997, established a rate of $0.284 per call for
Dial Around Compensation for the two year period from October 7, 1997 through
October 6, 1999. From July 1, 1997 through October 6, 1997, the Company has
recorded Dial-Around Compensation at $37.20 per phone ($0.284 multiplied by an
assumed 131 calls). See "Provision for Dial-Around Compensation Adjustment"
below for further information. From October 7, 1997 through year-end, the
Company has based its compensation on an estimated number of calls (131) per
payphone per month because actual call counts from the IXCs are not available
until later in 1998. From October 7, 1997 forward, this amount may be adjusted
for actual call counts provided by the IXCs. See "Business - Regulation".
As part of non-coin revenue, the Company recorded Dial-Around
Compensation revenue of approximately $3.2 million for the period from November
7, 1996 through December 31, 1996 and approximately $17.2 million for the
period from January 1, 1997 through December 31, 1997.
Revenue from non-coin calls increased by 20.8% to $35.8
million in 1997, compared to 1996. The increase was primarily attributable to
the increased Dial-Around Compensation, offset by the decline in operator
assisted calls. Non-coin revenue decreased by approximately 12.6% to $29.6
million in 1996 as compared to 1995. This decrease is primarily attributable
to: (i) the method of recording revenue for certain non-coin calls as a result
of the change to AT&T as the Company's primary national operator service
provider; and (ii) the change in the Company's compensation structure under the
AT&T contract.
OPERATING EXPENSES
Operating expenses include telephone charges, commissions,
field service and collection expenses and selling, general and administrative
expenses. Telephone charges consist of local line charges paid to LECs which
include costs of basic service and transport of local coin calls, long-distance
transmission charges and network costs and billing, collection and validation
costs. Commissions represent payments to property owners for revenues generated
by public pay telephones located on their properties. Field service and
collection expenses represent the costs of servicing and maintaining the
12
<PAGE> 13
telephones on an ongoing basis, costs of collecting coins from the telephones
and other related operational costs. Selling, general and administrative
expenses primarily consist of payroll and related costs, legal and other
professional fees, promotion and advertising expenses, property, gross receipt
and certain other taxes, corporate travel and entertainment and various other
expenses.
Telephone charges decreased as a percentage of total revenues
to 26.1% for the year ended December 31, 1997, compared to 28.1% for the same
period in 1996 and 31.7% for the same period in 1995. The Company has
experienced decreased telephone charges as a result of regulatory changes and
emerging competition within the local/intraLATA service markets. In addition,
the decrease in telephone charges can be partially attributed to a decline in
the number of calls placed through the Company's private label operator service
program. The Company paid the costs incurred to transmit, bill, collect and
validate the call when the call was completed through its private label
operator services. The Company incurred no such costs when a third-party
operator service provider such as AT&T or Sprint completed the call.
Commissions expense remained relatively consistent as a
percentage of total revenues in 1997 compared with 1996. However, during the
third quarter of 1997, the Company renegotiated its contract terms under a
joint venture with AT&T for providing pay telephones at Atlanta's Hartsfield
International Airport and recorded other adjustments which in total reduced
commissions expense by approximately $2.0 million. Excluding these adjustments,
commissions expense as a percent of total revenues would have been 28.2% in
1997 compared to 26.4% in 1996. This increase in commissions as a percentage of
revenues from 1996 to 1997 as well as from 1996 as compared to 1995 was
primarily attributable to: (i) higher commission rates for new and renewed
contracts due to increasing competition in the public pay telephone markets;
and (ii) the reduced revenue base due to the method of recording revenue for
certain non-coin calls as a result of the change to AT&T and Sprint as the
Company's primary national operator service providers. Additionally, the
Company adjusted commission expense in the third quarter of 1997 by
approximately $0.5 million as part of the provision for dial-around
compensation adjustment discussed more fully below.
Field service and collection expenses as a percentage of
revenues decreased slightly in 1997 as compared to 1996 and 1996 as compared to
1995. The Company has been able to realize economies of scale and improve
operating efficiencies from its field service operation. The Company currently
expects that field service and collection expenses will remain relatively
constant or may decrease slightly over the next twelve months, as a percentage
of revenues, but no assurances can be given.
Selling, general and administrative expenses remained
relatively consistent at approximately 11.6%, and 11.7% as a percentage of
revenues for the years ended December 31, 1997 and 1996, compared to 9.9% in
1995. The increase from 1995 to 1996 and 1997 relates primarily to settlements
of employment agreements with former executives, increases in insurance
premiums and the salaries associated with the hiring of an internal sales
force.
DEPRECIATION AND AMORTIZATION
Depreciation is based on the cost of the telephones, booths,
pedestals and other enclosures, related installation costs and line
interconnection charges and is calculated on a straight-line method using a
ten-year useful life for public pay telephone equipment. Amortization is
primarily based on acquisition costs, including location contracts, goodwill
and non-competition provisions, and is calculated on a straight-line method
using estimated useful lives ranging from three to twenty years. Depreciation
and
13
<PAGE> 14
amortization increased to $21.3 million in 1997 from $20.5 million in 1996 and
$19.2 million in 1995. The increases in depreciation and amortization are
primarily attributable to amortization expense related to the cost of acquiring
and renewing location contracts.
PROVISION FOR DIAL-AROUND COMPENSATION ADJUSTMENT
On September 20, 1996, the Federal Communications Commission
("FCC") adopted rules in a docket entitled IN THE MATTER OF IMPLEMENTATION OF
THE PAY TELEPHONE RECLASSIFICATION AND COMPENSATION PROVISIONS OF THE
TELECOMMUNICATIONS ACT OF 1996, FCC 96-388 implementing the payphone provisions
of Section 276 of the Telecommunications Act of 1996 ("Telecom Act")
(collectively, with the September 20, 1996 order, the "Initial Payphone
Orders"). The FCC essentially affirmed its September 20, 1996 decision in a
second order issued on November 8, 1996. The Initial Payphone Orders, which
became effective November 7, 1996, initially mandated Dial-Around Compensation
for both access code calls and 800 subscriber calls at a flat rate of $45.85
per payphone per month (an assumed 131 calls multiplied by $0.35 per call).
Commencing October 7, 1997 and ending October 6, 1998 the $45.85 per payphone
per month rate was to transition to a per-call system at the rate of $0.35 per
call. Several parties filed petitions for judicial review of certain of the FCC
regulations including the Dial-Around Compensation rate. On July 1, 1997, the
U.S. Court of Appeals for the District of Columbia Circuit (the "Court")
responded to appeals related to the 1996 Payphone Orders by remanding certain
issues to the FCC for reconsideration. These issues included, among other
things, the manner in which the FCC established the Dial-Around Compensation,
the manner in which the FCC established the interim Dial-Around Compensation
plan and the basis upon which interexchange carriers ("IXCs") would be required
to compensate payphone service providers ("PSPs"). The Court remanded the
issues to the FCC for further consideration, and clarified on September 16,
1997 that it had vacated certain portions of the FCC's Initial Payphone Orders,
including the Dial-Around Compensation rate. Specifically, the Court determined
that the FCC did not adequately justify (i) the per-call compensation rate for
Dial-Around Calls at the deregulated local coin rate of $0.35 because it did
not sufficiently justify its conclusion that the costs of local coin calls are
similar to those of Dial-Around Calls; and (ii) the allocation of the payment
obligation for Dial-Around Compensation among the IXCs for the period from
November 7, 1996 through October 6, 1997.
In accordance with the Court's mandate, on October 9, 1997,
the FCC adopted and released its SECOND REPORT AND ORDER in the same docket,
FCC 97-371 (the "Remand Order") in light of the decisions of the Court which
vacated and remanded certain portions of the FCC's Initial Payphone Orders. The
FCC concluded that the rate for Dial-Around Calls from payphones is the
deregulated local coin rate adjusted for certain cost differences. Accordingly,
the FCC established a rate of $0.284 ($0.35-$0.066) per call for the first two
years of per-call Dial-Around Compensation (October 7, 1997 through October 6,
1999). The IXCs are required to pay this per-call amount to PSPs, including the
Company, beginning October 7, 1997 based upon the actual number of calls. After
the first two years of per-call compensation, the market-based local coin rate,
adjusted for certain costs defined by the FCC as $0.066 per call, is to take
effect. These new regulations became rule provisions effective as of October 7,
1997; however, they are still subject to challenge. See "Business - Regulation
- - Federal Regulation".
In addition, the Remand Order tentatively concluded that the
same $0.284 per call rate adopted on a going-forward basis should also govern
compensation obligations during the period from November 7, 1996 through
October 6, 1997, and that PSPs are entitled to compensation for all access code
and subscriber 800 calls during this period. The FCC stated that the manner in
which the payment obligation of the IXCs for the period from November 7, 1996
through October 6, 1997 will be allocated among the
14
<PAGE> 15
IXCs will be addressed in a subsequent order.
Based on the FCC's tentative conclusion in the Remand Order,
the Company has adjusted the amounts of Dial-Around Compensation previously
recorded related to the period from November 7, 1996 through June 30, 1997 from
the initial $45.85 rate to $37.20 ($0.284 per call multiplied by an assumed 131
calls). As a result of this adjustment, the Company recorded a net provision in
the third quarter of 1997 for reduced Dial-Around Compensation of approximately
$2.1 million ($0.13 per share), consisting of a reduction in non-coin revenue
of approximately $2.6 million and a reduction in commissions expense of
approximately $0.5 million. For the period from July 1, 1997 through October 6,
1997, the Company has recorded Dial-Around Compensation at the rate of $37.20
per payphone per month. The amount of Dial-Around Compensation recognized in
the period from July 1, 1997 through October 6, 1997 is approximately $4.7
million and such amount will be billed after final resolution of the allocation
obligations of the IXCs as determined by the FCC.
The Company's counsel, Latham & Watkins, is of the opinion
that the Company is legally entitled to fair compensation under the Telecom Act
for Dial-Around Calls the Company delivered to any carrier during the period
from November 7, 1996 through October 6, 1997. Based on the information
available, the Company believes that the minimum amount it is entitled to as
fair compensation under the Telecom Act for the period from November 7, 1996
through October 6, 1997 is $37.20 per payphone per month and the Company, based
on the information available to it, does not believe that it is reasonably
possible that the amount will be materially less than $37.20 per payphone per
month. The foregoing sentence constitutes a forward-looking statement within
the meaning of Section 21E of the Securities and Exchange Act of 1934, as
amended. While the amount of $0.284 per call constitutes the Company's position
on the appropriate level of fair compensation, certain IXCs have asserted in
the past, have asserted in petitions for reconsideration now pending before the
FCC and in appeals pending before the U.S. Court of Appeals for the District of
Columbia Circuit, and are expected to assert in the future that the appropriate
level of fair compensation should be lower than $0.284 per call. For example,
in a letter to the FCC dated August 15, 1997, AT&T stated its intention to make
Dial-Around Compensation payments to PSPs based on its imputed rate of $0.12
per call until the FCC issues a new order setting the level of fair
compensation. For further information regarding Dial-Around Compensation
developments, see "Business-Regulation-Federal Regulation".
OTHER OPERATING (INCOME) EXPENSE
Other income for the year ended December 31, 1996 consists of
amounts received in connection with the settlement of outstanding litigation.
In 1995, other expenses included approximately $0.9 million incurred in
connection with the settlement of a lawsuit brought by two shareholders against
the Company, approximately $0.6 million of losses for the Company's equity
interest in an unconsolidated affiliate, approximately $1.4 million for the
settlement of an employment contract with a former officer and approximately
$3.2 million of reserves for potentially uncollectible loans receivable from
certain officers (see Note 18 to the accompanying consolidated financial
statements).
OPERATING LOSS
Operating losses for the years ended December 31, 1997, 1996
and 1995 were approximately $(0.7) million, $(1.9) million and $(8.5) million,
respectively.
15
<PAGE> 16
INTEREST
Interest expense increased approximately $0.2 million to $13.1
million in 1997 as compared to 1996. Interest expense in 1995 was approximately
$10.4 million. The increase in 1996 is primarily attributable to the higher
interest rate on the Company's $100.0 million Senior Notes as compared with the
rates in effect on the Company's line of credit outstanding for the first half
of 1995.
(GAIN) LOSS ON DISPOSAL OF PREPAID CALLING CARD AND INTERNATIONAL TELEPHONE
CENTERS
The year ended December 31, 1996 includes gains on disposal of
approximately $0.3 million received in connection with the sale of the
Company's international telephone center operations and approximately $0.3
million recognized in connection with the merger of Global Link Telco
Corporation and Global Telecommunications Solutions, Inc. (see Note 16 to the
accompanying consolidated financial statements).
In 1995, loss on disposal of prepaid calling card and
international telephone centers includes the write-off of approximately $1.1
million of accounts receivable related to the Company's prepaid calling card
business offset by $0.5 million received in connection with the Company's sale
of its international telephone center operations.
BENEFIT FROM INCOME TAXES
Since the second quarter of 1995, the Company has recorded
valuation allowances for 100% of the deferred tax assets generated from
operating losses. The Company records valuation allowances for deferred tax
assets which may not be realized in future periods. As a result, the Company's
benefit from income taxes decreased approximately $0.2 million from 1995 to
1996. The Company recorded deferred tax asset valuation allowances for
continuing operations of approximately $3.3 million, $3.0 million and $12.0
million during 1997, 1996 and 1995, respectively.
NET (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM
The Company had a net loss from continuing operations before
extraordinary item of approximately $13.8 million in 1997 compared to $14.3
million in 1996 and $19.2 million in 1995.
EXTRAORDINARY LOSS
As a result of debt modifications during 1995, the Company
recorded an extraordinary loss from the write-off of deferred financing costs
associated with the early extinguishment of debt of approximately $5.0 million,
before the related income tax benefit of approximately $1.7 million. There were
no such transactions in 1997 or 1996.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1997, the Company financed
its operations primarily from operating cash flow. The Company's operating cash
flow was $7.0 million in 1997 compared to $6.0 million in 1996 and $12.0
million in 1995.
16
<PAGE> 17
The Company's working capital was approximately $11.0 million,
with a current ratio of 1.34 to 1, at December 31, 1997. This is compared to
working capital of $6.0 million and a current ratio of 1.21 to 1 at December
31, 1996. The change in the Company's working capital is primarily a result of
increases in certain accounts receivable balances related to Dial-Around
Compensation and other non-coin revenues. Approximately $11.3 million of cash
was used in January, 1998 to acquire the assets of Indiana Telcom.
The Company's primary sources of financing are its Senior
Notes and Preferred Stock, issued in July, 1995. The Company also entered into
a new $40.0 million revolving credit facility (the "New Credit Facility") with
Creditanstalt-Bankverein (the "Bank"). Proceeds from the sale of the Senior
Notes, together with the proceeds from the sale of the Preferred Stock, were
used to repay the prior credit facility and various other obligations of the
Company.
During April 1996, the Company amended the New Credit Facility
reducing the availability to $10.0 million, and amended the financial
covenants, among other things. In March 1997, the Company executed a third
amendment to the New Credit Facility with the Bank increasing the amount
available to $20.0 million and modifying certain of the financial covenants.
All outstanding balances are due in full in 2000, and interest is payable
monthly for loans based on the prime rate and quarterly for loans based on the
LIBOR rate. As of December 31, 1997, the Company was in compliance with the
financial covenants and had no amounts borrowed under the New Credit Facility.
In March 1997, the Company's shareholders approved an increase
to the number of authorized shares of the Company's Common Stock to 75 million
shares.
Based upon current expectations, the Company believes that
cash flow from operations, together with amounts which may be borrowed under
the New Credit Facility, will be adequate for it to meet its working capital
requirements, pursue its business strategy and service its obligations with
respect to the Senior Notes until December 31, 1999, although there can be no
assurance that it will be able to do so.
DISCONTINUED OPERATIONS
On November 13, 1995, the Company sold its cellular telephone
operations to Shared Technologies Cellular, Inc. ("STC") for approximately $6.0
million. The assets were sold for $0.3 million in cash, a $2.0 million
promissory note bearing interest at 8.0% with principal and interest payable
semiannually through 2000, shares of STC Common Stock and payment of
approximately $1.2 million of PTC Cellular's liabilities by STC. This
transaction resulted in a loss of approximately $14.6 million which was
recorded as a loss on disposal in the accompanying statements of operations for
the year ended December 31, 1995 (see Note 17 to the accompanying consolidated
financial statements). Income of $0.3 million was recorded in 1997 with respect
to a payment on the promissory note which had been fully reserved.
During the third quarter of 1995 the Company sold a portion of
its inmate telephone business for approximately $1.7 million. Impairment losses
of approximately $0.3 million and a net loss on the sale of these inmate
telephone operations of approximately $0.4 million are included in the loss
from discontinued operations in the accompanying 1995 Consolidated Statements
of Operations.
On December 19, 1997, the Company sold the remaining operating
assets of its inmate phone division to Talton Holdings, Inc. for approximately
$10.6 million in cash, plus additional contingent
17
<PAGE> 18
consideration based on a formula which shares incremental profits from certain
existing contracts and from Talton's closing on certain pending bids. This
transaction resulted in a gain on sale of approximately $4.2 million. The gain,
combined with an operating loss of approximately $2.4 million, resulted in a
net income of approximately $1.8 million from the discontinued inmate division
in 1997.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure, disruption of operations, and/or a temporary inability to conduct
normal business activities. Based on a recent assessment, the Company presently
believes that with modifications to existing software and conversions to new
software, the Year 2000 Issue should not pose significant operational problems.
However, if such modifications and conversions are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on the
Company's operations. In addition, formal communications with all significant
suppliers and customers have been initiated to determine the extent to which
related interfaces with Company systems are vulnerable if these third parties
fail to remediate their own Year 2000 Issues. There can be no assurance that
these third parties systems will be converted on a timely basis and will not
adversely affect the Company's systems.
The Company will utilize both internal and external resources
to complete and test Year 2000 modifications and expects to complete this
process not later than mid 1999. At the present time, the total estimated cost
of this project is in a range of $0.5 to $1 million and is being funded through
operating cash flows. Approximately 20% of the total will relate to purchased
software and will be capitalized. The remainder will be expensed as incurred.
Through 1997, related costs incurred were not material. Project costs and the
targeted completion date are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, the ability to locate and correct
all relevant computer codes, third party modification plans and other factors.
There can be no assurance these estimates will be achieved or that the actual
results will not differ materially from those anticipated.
18
<PAGE> 19
Part II, Item 8 of the Form 10-K for the fiscal year ended December 31, 1997 is
amended in its entirety to read as follows:
19
<PAGE> 20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE NUMBERS
------------
Report of Independent Certified Public Accountants......................... 21
Consolidated Balance Sheets as of
December 31, 1997 and 1996............................................... 22
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995......................................... 23
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended December 31, 1997, 1996 and 1995............................. 24
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995......................................... 25
Notes to Consolidated Financial Statements................................. 27
SCHEDULES:
II - Valuation and Qualifying Accounts and Reserves........................ 48
All other schedules are omitted because they are not
applicable or the required information is shown in the financial statements or
notes thereto.
20
<PAGE> 21
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Peoples Telephone Company, Inc.
We have audited the consolidated balance sheets of Peoples Telephone Company,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity/(deficit) and cash
flows for each of the three years in the period ended December 31, 1997. Our
audit also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Peoples Telephone Company, Inc. and subsidiaries at December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
As discussed in Note 1, the Company previously presented replacement parts as
inventory and has restated the 1997, 1996 and 1995 consolidated financial
statements to include replacement parts as a component of property and
equipment.
/s/ ERNST & YOUNG LLP
Miami, Florida
February 27, 1998, except for
the second and third paragraphs
of Note 20, as to which the date
is October 27, 1998, and the
fourth paragraph of Note 1, as to
which the date is November 6, 1998
21
<PAGE> 22
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
ASSETS 1997 1996
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................... $ 22,834 $ 12,556
Restricted cash .................................................... 920 --
Accounts receivable, net of allowance for doubtful
accounts of $4,936 in 1997 and $4,361 in 1996 ................... 17,061 11,598
Prepaid expenses and other current assets ......................... 2,631 2,547
Net assets of discontinued operations .............................. -- 8,196
---------- ----------
Total current assets ........................................... 43,446 34,897
Property and equipment, net .......................................... 50,362 61,541
Location contracts, net .............................................. 23,936 26,498
Intangible assets, net ............................................... 824 1,475
Goodwill, net ........................................................ 4,084 4,788
Deferred income taxes ................................................ 3,407 3,407
Other assets, net .................................................... 5,258 8,264
---------- ----------
Total assets .................................................... $ 131,317 $ 140,870
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt ............. $ 634 $ 548
Current portion of obligations under capital leases ................ 536 952
Accounts payable and accrued expenses .............................. 22,722 19,240
Accrued interest payable ........................................... 5,702 5,697
Income and other taxes payable ..................................... 2,844 2,418
---------- ----------
Total current liabilities ....................................... 32,438 28,855
Notes payable and long-term debt ..................................... 100,000 100,657
Obligations under capital leases ..................................... 275 573
---------- ----------
Total liabilities ............................................... 132,713 130,085
---------- ----------
Commitments and contingencies (Notes 14 and 15) ...................... -- --
Redeemable Preferred Stock:
Cumulative convertible preferred stock; Series C, $.01 par
value; 160 shares authorized; 150 shares issued and
outstanding, $100 per share liquidation value ................. 13,711 13,556
Preferred stock dividends payable .................................. 2,573 1,523
---------- ----------
Total preferred stock .......................................... 16,284 15,079
---------- ----------
Common shareholders' deficit:
Preferred stock; $.01 par value; 4,240 shares authorized in
1997 and 4,140 shares authorized in 1996; none issued
and outstanding ................................................. -- --
Convertible preferred stock; Series B, $.01 par value;
600 shares authorized; none issued and outstanding ............... -- --
Common stock; $.01 par value; 75,000 shares authorized
in 1997 and 25,000 shares authorized in 1996;
16,209 shares in 1997 and 16,195 shares in 1996 issued
and outstanding ................................................ 162 162
Capital in excess of par value ..................................... 59,291 60,453
Accumulated deficit ................................................ (75,108) (63,438)
Unrealized loss on investments ..................................... (2,025) (1,471)
---------- ----------
Total common shareholders' deficit .............................. (17,680) (4,294)
---------- ----------
Total liabilities less shareholders' deficit .................... $ 131,317 $ 140,870
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE> 23
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Coin calls ......................................................... $ 76,449 $ 77,389 $ 78,353
Non-coin calls, including 1997 dial-around
compensation adjustment (see Note 19) ........................... 35,786 29,617 33,887
Service and other .................................................. -- -- 122
---------- ---------- ----------
Total revenues .................................................. 112,235 107,006 112,362
Costs and expenses:
Telephone charges .................................................. 29,310 30,107 35,582
Commissions ........................................................ 29,656 28,250 27,599
Field service and collection ....................................... 19,598 19,130 21,134
Depreciation and amortization ...................................... 21,304 20,466 19,180
Selling, general and administrative ................................ 13,023 12,491 11,160
Other operating (income) expense ................................... -- (1,500) 6,177
---------- ---------- ----------
Total costs and expenses ....................................... 112,891 108,944 120,832
---------- ---------- ----------
Operating loss ..................................................... (656) (1,938) (8,470)
Other (income) and expenses:
Interest expense, net .............................................. 13,106 12,875 10,355
(Gain) loss on disposal of prepaid calling card and
international telephone centers ............................... -- (545) 566
---------- ---------- ----------
Total other (income) and expenses, net .......................... 13,106 12,330 10,921
---------- ---------- ----------
Loss from continuing operations
before income taxes and extraordinary item ......................... (13,762) (14,268) (19,391)
Benefit from income taxes ............................................ -- -- 217
---------- ---------- ----------
Loss from continuing operations before
extraordinary item ............................................... (13,762) (14,268) (19,174)
Discontinued operations:
Loss from operations ............................................... (2,418) (1,724) (19)
Gain (loss) on dispositions ........................................ 4,510 -- (15,340)
---------- ---------- ----------
Gain (loss) from discontinued operations ........................... 2,092 (1,724) (15,359)
---------- ---------- ----------
Loss before extraordinary item ....................................... (11,670) (15,992) (34,533)
Extraordinary loss from extinguishment of debt, net
of income tax benefit of $1,737 ................................. -- -- (3,327)
---------- ---------- ----------
Net loss ............................................................. $ (11,670) $ (15,992) $ (37,860)
========== ========== ==========
Earnings per share (basic and diluted):
Loss from continuing operations ................................... $ (0.92) $ (0.96) $ (1.23)
Income (loss) from discontinued operations ........................ 0.13 (0.10) (0.95)
Extraordinary loss, net ........................................... -- -- (0.20)
---------- ---------- ----------
Net loss ........................................................ $ (0.79) $ (1.06) $ (2.38)
========== ========== ==========
Weighted average common shares outstanding ........................... 16,198 16,188 16,091
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE> 24
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH DECEMBER 31, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
CAPITAL UNREALIZED
COMMON IN EXCESS OF ACCUMULATED LOSS ON
STOCK PAR VALUE DEFICIT INVESTMENTS TOTAL
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 ....................... $ 158 $ 58,143 $ (9,586) $ -- $ 48,715
Exercise of 93 options at $2.00-$3.59
per share ..................................... 1 306 -- -- 307
Issuance of 224 shares for prior acquisitions .... 2 1,302 -- -- 1,304
Series C preferred stock dividends accrued ....... -- (473) -- -- (473)
Preferred stock issuance cost accretion .......... -- (69) -- -- (69)
Issuance of 275 preferred stock warrants ......... -- 558 -- -- 558
Write-off of officer and director notes receivable -- 1,806 -- -- 1,806
Net loss ......................................... -- -- (37,860) -- (37,860)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1995 ..................... 161 61,573 (47,446) -- 14,288
Issuance of 22 shares for prior acquisitions ..... 1 74 -- -- 75
Series C preferred stock dividends accrued ....... -- (1,050) -- -- (1,050)
Preferred stock issuance cost accretion .......... -- (144) -- -- (144)
Unrealized loss on investments ................... -- -- -- (1,471) (1,471)
Net loss ......................................... -- -- (15,992) -- (15,992)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 ..................... 162 60,453 (63,438) (1,471) (4,294)
Exercise of 18 options at $2.19-$3.44 per share .. -- 44 -- -- 44
Series C preferred stock dividends accrued ....... -- (1,050) -- -- (1,050)
Preferred stock issuance cost accretion .......... -- (156) -- -- (156)
Unrealized loss on investments ................... -- -- -- (554) (554)
Net loss ......................................... -- -- (11,670) -- (11,670)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 ..................... $ 162 $ 59,291 $ (75,108) $ (2,025) $ (17,680)
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE> 25
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ........................................................... $ (11,670) $ (15,992) $ (37,860)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization .................................... 21,304 20,466 19,180
Amortization of deferred financing costs ......................... 611 906 390
Deferred income taxes ............................................ -- -- (1,954)
Extraordinary loss on debt extinguishment ........................ -- -- 5,064
(Gain) loss on disposition of assets, net ........................ -- (545) 956
(Gain) loss on sale of discontinued operations, net .............. (4,510) -- 15,340
Write-off of officer and director receivables .................... -- -- 3,555
Changes in operating assets and liabilities:
Accounts receivable ............................................ (6,906) (4,381) 7,335
Prepaid expenses and other current assets ...................... (84) 1,101 1,156
Other assets ................................................... 809 (470) 4,828
Accounts payable and accrued expenses .......................... 5,363 (478) (3,092)
Accrued interest payable ....................................... 5 94 4,542
Income and other taxes payable ................................. 45 (34) (239)
Net effect of discontinued operations and assets
held for sale ................................................ 2,081 5,304 (7,210)
---------- ---------- ----------
Net cash provided by operating activities ........................ 7,048 5,971 11,991
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment additions ................................... (2,181) (2,932) (5,637)
Proceeds from sale of assets ....................................... 1,208 1,383 3,295
Proceeds from sale of discontinued operations ...................... 10,625 848 895
Payments for certain contracts ..................................... (3,163) (3,347) (2,806)
Restricted cash .................................................... (920) -- --
Other .............................................................. -- -- 127
---------- ---------- ----------
Net cash provided by (used in) investing activities ................ 5,569 (4,048) (4,126)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under long-term debt .................................... -- -- 101,600
Principal payments on long-term debt ............................... (571) (560) (110,487)
Principal payments under capital lease obligations ................. (1,594) (1,173) (3,384)
Debt issuance costs ................................................ (218) -- (5,100)
Exercise of stock options and warrants ............................. 44 -- 307
Proceeds from Series C preferred stock ............................. -- -- 15,000
Issuance costs associated with stock offerings ..................... -- -- (1,198)
Proceeds from the issuance of stock warrants ....................... -- -- 100
---------- ---------- ----------
Net cash used in financing activities .............................. (2,339) (1,733) (3,162)
---------- ---------- ----------
Net increase in cash and cash equivalents ............................ 10,278 190 4,703
Cash and cash equivalents at beginning of year ....................... 12,556 12,366 7,663
---------- ---------- ----------
Cash and cash equivalents at end of year ............................. $ 22,834 $ 12,556 $ 12,366
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 26
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(in thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid during the year for:
Interest ........................................................... $ 13,541 $ 12,643 $ 7,357
========== ========== ==========
Income taxes ....................................................... $ 135 $ 158 $ 242
========== ========== ==========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Fixed assets acquired under capital
lease obligations ................................................ $ 325 $ 224 $ 1,185
========== ========== ==========
Fair value of Common stock issued for
acquisition ...................................................... $ -- $ 75 $ 1,304
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 27
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
DESCRIPTION OF BUSINESS
Peoples Telephone Company, Inc. (the "Company") owns, operates, services and
maintains public pay telephone systems connected to the network of regulated
telephone companies at various third party property owner locations throughout
the United States. The Company also derives commission revenue from routing
calls to operator service companies and from FCC - mandated payments by
interexchange carriers for access code ("10xxx") and subscriber access
toll-free calls ("Dial-Around Compensation").
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
The divestitures of the Company's cellular and inmate telephone operations have
been accounted for as discontinued operations. Accordingly, operating results
and cash flows for these businesses have been segregated and reported as
discontinued operations in the accompanying consolidated financial statements
(see Note 17).
RESTATEMENT
The Company maintains replacement parts to service its base of payphones. The
Company previously reported replacement parts as inventory in its consolidated
balance sheets. On November 6, 1998, replacement parts were reclassified to
property and equipment for all periods presented.
CHANGES IN BUSINESS
During 1995, the Company sold its prepaid calling card business and
international telephone center operations for $6.3 million and $2.0 million,
respectively (see Note 16). Operations for these business for the year ended
December 31, 1995 were not significant.
On November 13, 1995, the Company sold its cellular telephone operations for
approximately $6.0 million (see Note 17).
On October 9, 1995, the Company sold a portion of its inmate telephone
operations for approximately $1.7 million. Included in discontinued operations
in the accompanying consolidated statement of operations in 1995 are
approximately $0.3 million of impairment losses and a $0.4 million loss on the
sale of these inmate telephone operations (see Note 17).
On December 19, 1997, the Company sold its remaining inmate telephone
operations for approximately $10.6 million. The Company recognized a net gain
of approximately $4.2 million as a result of this sale (see Note 17).
27
<PAGE> 28
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RECOGNITION OF REVENUE
Revenue is recognized when earned. Coin call and non-coin call revenues are
recognized at the time the call is made. Revenue from service contracts is
recognized on a straight-line basis over the term of the contract.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers cash and cash equivalents as those highly liquid
investments purchased with an original maturity of three months or less. The
credit risk associated with cash and cash equivalents in banks is considered
low due to the credit quality of the financial institutions.
RESTRICTED CASH
Approximately $0.9 million of cash on the accompanying consolidated balance
sheet is restricted and serves as collateral for the Company's performance
under an inmate payphone agreement and a letter of credit.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets commencing
when the equipment is installed or placed in service. Installed telephones and
related equipment includes installation and other costs which are capitalized
and amortized over the estimated useful lives of the equipment. The costs
associated with maintenance, repair and refurbishment of telephone equipment
are charged to expense as incurred.
The capitalized cost of equipment and vehicles under capital leases is
amortized over the lesser of the lease term or the asset's estimated useful
life, and is included in depreciation and amortization expense in the
consolidated statements of operations.
LOCATION CONTRACTS AND OTHER INTANGIBLE ASSETS
Location contracts and other intangible assets primarily result from business
combinations and signing bonuses paid to property owners and include
acquisition costs allocated to location owner contracts, agreements not to
compete, and other identifiable intangible assets. These assets are amortized
on a straight-line basis over their estimated lives (3 to 10 years).
Accumulated amortization at December 31,
28
<PAGE> 29
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997 and 1996 was approximately $26.3 million and $20.0 million, respectively.
Goodwill arising from acquisitions is amortized on a straight-line basis over
the periods to be benefited or 20 years, whichever is less. Accumulated
amortization at December 31, 1997 and 1996 was approximately $3.0 million and
$2.3 million, respectively.
The carrying value of intangible assets is periodically reviewed by the Company
and impairments, if any, are recognized when the expected future undiscounted
cash flows derived from such intangible assets are less than their carrying
value.
The Company accounts for long-lived assets pursuant to SFAS No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF, which requires impairment losses to be recorded on long-lived
assets used in operations when events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Management reviews
long-lived assets and the related intangible assets for impairment whenever
events or changes in circumstances indicate the assets may be impaired. The
Company, based on current circumstances, does not believe that any long-lived
assets are impaired at December 31, 1997.
OTHER ASSETS
Other assets primarily include deferred financing costs and long-term deposits.
Deferred financing costs are amortized over the term of the debt on a
straight-line basis. At December 31, 1997 and 1996, accumulated amortization of
the deferred financing costs was approximately $1.8 million and $1.2 million,
respectively.
The Company's investment in Global Telecommunications Solutions, Inc. ("GTS")
is accounted for in accordance with Statement No. 115, ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES, and is reported at fair value with
unrealized gains or losses, net of tax, recorded as a separate component of
Shareholders' Equity (Deficit) (see Note 16). The Company's investment in GTS
is included in "other assets, net" in the accompanying consolidated balance
sheet.
OTHER OPERATING (INCOME) EXPENSE
Other operating (income)/expense is comprised of amounts recorded in connection
with settlements of loans and employment contracts with former officers, the
Company's former equity interest in the operating results of an unconsolidated
affiliate and amounts related to the resolution of outstanding litigation.
INCOME TAXES
Deferred income taxes are recognized for temporary differences between the tax
and financial reporting bases of the Company's assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not the tax assets will not
be realized.
29
<PAGE> 30
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK OPTIONS
The Company adopted the provisions of Statement No. 123 ("SFAS 123"),
ACCOUNTING FOR STOCK-BASED COMPENSATION, on January 1, 1996, but as permitted
by SFAS 123 will continue to account for options issued to employees or
directors under the Company's stock option plans in accordance with Accounting
Principles Board Opinion No. 25 ("APB 25"), ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES. The exercise price of the Company's employee stock options equals or
exceeds the market price of the underlying stock on the date of grant;
therefore, no compensation expense is recognized under APB 25.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement No.
128 ("SFAS 128"), EARNINGS PER SHARE. SFAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the SFAS 128
requirements. Diluted earnings per share amounts are computed based upon the
weighted average number of common and common equivalent shares outstanding.
Earnings per share on a diluted basis were equal to basic earnings per share
for all periods presented, since exercise of outstanding options and warrants,
and the conversion of convertible preferred stock would be anti-dilutive.
RECLASSIFICATION
Certain amounts for the prior years have been reclassified to conform with the
current year presentation.
NEW ACCOUNTING STANDARDS
In 1997, the FASB issued Statement No. 130 ("SFAS 130"),"REPORTING
COMPREHENSIVE INCOME" and Statement No. 131 ("SFAS 131"), "DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION". These statements are
effective beginning in 1998. SFAS 130 establishes standards for reporting and
displaying comprehensive income, while SFAS 131 abandons the "industry segment
approach" in favor of the "managing approach" for disclosure purposes. Adoption
of SFAS 130 is not expected to result in a significant change from the current
required disclosures and the adoption of SFAS 131 is not expected to result in
additional disclosures.
NOTE 3 - ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1997 and 1996 consist primarily of amounts
currently due from long distance carriers for Dial-Around Compensation (as
defined in Note 19) and commissions from various operator service companies
which handle non-coin calls.
The balance due from one collection clearinghouse for Dial-Around Compensation
was approximately $4.1 million and $2.7 million at December 31, 1997 and 1996,
respectively. The balance due from one operator service company for commissions
was $4.3 million and $3.5 million at December 31, 1997 and 1996,
30
<PAGE> 31
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
respectively.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
------------------------- USEFUL LIVES
1997 1996 (IN YEARS)
---------- ---------- ------------
<S> <C> <C> <C>
Installed telephones and related equipment ........................... $ 106,903 $ 103,060 10
Telephones and related equipment pending installation .............. 5,146 7,704
Land ............................................................... 950 950
Building and improvements .......................................... 4,366 4,360 25
Furniture, fixtures and office equipment ........................... 7,086 6,190 5-7
Vehicles and equipment under capital leases ........................ 3,027 3,906 4
Other .............................................................. 1,022 1,019 5
---------- ----------
128,500 127,189
Less accumulated depreciation and amortization,
including $2,042 and $2,198 for capital leases .................... (78,138) (65,648)
---------- ----------
$ 50,362 $ 61,541
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and 1995 was
approximately $14.2 million, $13.8 million and $12.9 million, respectively.
During 1995, the Company recorded obsolescence reserves of approximately $1.7
million for telephone and related equipment pending installation which is
included in field service and collection expenses in the accompanying 1995
consolidated statement of operations.
The majority of the Company's assets are security for long-term bank debt (see
Note 6).
31
<PAGE> 32
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has entered into various noncancellable leases which are classified
as capital leases. Future minimum lease payments, including imputed interest,
are as follows (in thousands):
FOR THE YEAR ENDING DECEMBER 31
-------------------------------
1998............................................. $ 603
1999............................................. 188
2000............................................. 102
2001............................................. 18
2002............................................. 1
-----------
912
Less amount representing interest........................ (93)
-----------
Present value of obligations under capital leases........ 819
Less current interest payable............................ (8)
Less current portion..................................... (536)
-----------
$ 275
===========
NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Telecommunication charges........................ $ 2,676 $ 3,473
Commissions...................................... 10,343 7,879
Employee costs................................... 3,282 2,023
Unearned revenue................................. 3,258 314
Other............................................ 3,163 5,551
---------- ----------
$ 22,722 $ 19,240
========== ==========
</TABLE>
32
<PAGE> 33
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
$100 million Senior Notes due 2002 with a stated
interest rate of 12 1/4% ............................................ $ 100,000 $ 100,000
$20 million revolving line of credit with interest rates ranging
from the Bank's prime rate plus 1.5% to LIBOR plus 3.0% ............. -- --
Various notes payable with interest rates ranging from
prime plus 1.25% to prime plus 1.5% and maturity
dates ranging from due on demand to October 1998 .................... 634 1,205
---------- ----------
100,634 101,205
Less current maturities .............................................. (634) (548)
---------- ----------
$ 100,000 $ 100,657
========== ==========
</TABLE>
During July 1995, the Company completed the sale of $100.0 million of Senior
Notes due 2002 (the "Senior Notes") and the issuance of $15.0 million of Series
C Cumulative Convertible Preferred Stock (the "Preferred Stock") (see Note 7).
The Senior Notes bear interest at 12 1/4% per annum, payable semiannually
beginning January 15, 1996. The Senior Notes are senior unsecured obligations
of the Company and are redeemable at the option of the Company, in whole or in
part, on or after July 15, 2000, at pre-established redemption prices together
with accrued and unpaid interest to the redemption date. The Company paid
approximately $5.1 million in issuance costs which was deferred and is being
amortized over the term of the Senior Notes.
Simultaneously with the sale of the Senior Notes and issuance of the Preferred
Stock, the Company executed the Fourth Amended and Restated Loan and Security
Agreement (the "Loan Agreement") with Creditanstalt Bankverein (the "Bank").
The Loan Agreement provided for a new $40.0 million credit facility bearing
interest at rates ranging from the Bank's prime rate plus 1 1/2% to LIBOR plus
3%. During April 1996, the Company amended the Fourth Amended Loan and Security
Agreement (the "Amendment") with the Bank. The Amendment, among other things,
decreased the facility to $10.0 million and reduced the requirements of the
financial covenants. During March 1997, the Company executed an amendment
increasing the credit facility to $20.0 million.
The interest rate on balances outstanding under the $20.0 million credit
facility varies based upon the leverage ratio maintained by the Company. All
outstanding principal balances are due in full in 2000, and interest is payable
monthly for loans based on the prime rate and quarterly for loans based on the
LIBOR rate. A commitment fee of 1/2 of 1% is charged on the aggregate daily
unused balance of the credit facility under the Loan Agreement. The Loan
Agreement is secured by substantially all of the Company's assets and contains
certain restrictive covenants which, among other things, require the Company to
maintain
33
<PAGE> 34
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
certain cash flow levels and interest coverage ratios and places certain
restrictions on the payment of dividends. At December 31, 1997, there were no
amounts outstanding under the credit facility.
As a result of various 1995 amendments to its credit facilities, the Company
recorded extraordinary losses of $5.0 million for the write off of deferred
financing costs associated with the early extinguishment of debt, before an
income tax benefit of approximately $1.7 million.
NOTE 7 - PREFERRED STOCK
In March 1997, the Company's shareholders approved an increase to the Company's
authorized Preferred Stock to 5 million shares.
During 1995, the Company issued 150,000 shares of Series C Cumulative
Convertible Preferred Stock to UBS Partners, Inc., a wholly-owned subsidiary of
Union Bank of Switzerland, for proceeds of $15.0 million. The Preferred Stock
cumulates dividends at an annual rate of 7%. The dividends are payable in cash
or, at the Company's option during the first three years, will cumulate. The
Preferred Stock is immediately convertible into shares of Common stock of the
Company at an initial conversion price of $5.25 per share and is mandatorily
redeemable by the Company in July 2005. The liquidation value and annual
dividends are $100 per share and $7 per share, respectively. Pursuant to the
terms of the Preferred Stock, the holders are entitled to elect two of the six
members of the Company's Board of Directors and have voting rights equal to
those of Common Shareholders. The Company paid issuance costs of approximately
$1.2 million.
In connection with the sale of the Preferred Stock, the Company issued warrants
to purchase 275,000 shares of Common Stock of the Company to a third party
which assisted with the transaction, for approximately $100,000. The warrants
are exercisable at $5.25 per share through the year 2005.
The net proceeds were allocated to the preferred stock and warrants based on
their respective fair values. The preferred stock is being accreted to its
redemption value, using the effective interest method through retained
earnings, or in the case of an accumulated deficit, capital in excess of par
value over the term of the Preferred Stock.
NOTE 8 - SHAREHOLDERS' EQUITY
In March 1997, the Company's shareholders approved an increase to the number of
authorized shares of the Company's Common Stock to 75 million shares. The
Company has a sufficient number of authorized common shares available to issue
upon the conversion of the outstanding preferred stock, warrants and stock
options.
Under the terms of the Company's loan agreement, as amended, the Company
granted its lender warrants to purchase 1,600,000 shares of common stock. The
exercise price of 900,000 of these shares is $3.17 per share and the remaining
700,000 shares is $5.25 per share. From 1992 through 1994, the Company's lender
exercised its right to purchase 900,000 shares of common stock at $3.17 per
share. All warrants expire in the year 2000.
34
<PAGE> 35
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's preferred stock may be issued from time to time at the discretion
of the Board of Directors without shareholder approval. The Board of Directors
is authorized to issue these shares in different series and, with respect to
each series, to determine the dividend rate, provisions regarding redemption,
conversion, liquidation preference and other rights and privileges.
As of December 31, 1997, common shares reserved for issuance are as follows:
Series C Preferred Stock................................ 2,857,143
Employee stock options outstanding...................... 2,657,408
Warrants................................................ 975,000
---------
Total............................................ 6,489,551
=========
NOTE 9 - STOCK OPTION PLANS
The Company maintains five non-qualified stock option plans covering primarily
employees and directors. The Company continues to account for its stock options
issued under APB 25. Under APB 25, because the exercise price of the underlying
stock option equals or exceeds the market price of the common stock on the date
of grant, no compensation expense is recognized.
The 1987 Non Qualified Stock Option Plan and 1994 Stock Incentive Plan cover
substantially all employees and provide for the issuance of options to purchase
up to 2,100,000 shares and 100,000 shares of the Company's common stock,
respectively. The 1987 and 1993 Non-Employee Director Stock Option Plans allow
for the issuance of options for the purchase of 750,000 shares and 315,000
shares, respectively. Options are issued to non-employee members of the
Company's Board of Directors for their service. In addition, prior to February
of 1995, the Company, from time to time, issued options to purchase shares of
the Company's Common Stock outside of the established stock option plans. The
grants of these options have been approved by the Company's shareholders. The
1997 Incentive Plan allows for the issuance of options for the purchase of
1,350,000 shares.
Options to purchase shares of the Company's Common Stock are issuable at the
discretion of committees appointed by the Board of Directors which determine
the specific terms of options granted. Currently, options generally vest at
rates of 10%, 20%, 33% and 100% per year from the date of issuance and
generally expire after 5 to 10 years of continued employment or within periods
of up to 90 days of the termination or resignation of the employee or director.
35
<PAGE> 36
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information related to the Company's stock
option activity (in thousands, except for per share data):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- ---------------------
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 at beginning
of year ................ 1,709 $ 6.05 2,272 $ 6.42 2,794 $ 6.33
Granted .................. 1,206 5.61 283 2.92 200 3.68
Exercised ................ (18) 2.82 -- -- (93) 3.27
Expired .................. (95) 5.75 (29) 3.45 (629) 5.59
Canceled ................. (145) 5.37 (817) 5.85 -- --
-------- -------- --------
Outstanding at end of year 2,657 5.96 1,709 6.05 2,272 6.42
======== ======== ========
Exercisable at end of year 1,946 6.86 1,645 6.09 2,055 6.39
======== ======== ========
</TABLE>
The exercise prices for options outstanding as of December 31, 1997 ranged from
$2.00 to $11.38. The weighted average remaining contractual life of those
options is approximately 2.7 years.
The fair value of options granted during 1997, 1996 and 1995 were estimated
using a binomial valuation model. The following weighted-average assumptions
were used in calculating the fair value of options granted in 1997, 1996 and
1995, respectively: risk free interest rates of 5.6%, 6.3% and 6.1%; dividend
yields of 0%; volatility factors of 0.669, 0.706 and 0.846; and weighted
average expected life of the options of 2.7, 4.0 and 3.3 years.
Pro forma net loss and loss per share information is provided in accordance
with SFAS 123 as if the Company's stock options were accounted for under the
fair value method.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The following table
sets forth pro forma net loss and loss per share (in thousands, except for per
share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net loss ........................ $ (13,071) $ (16,311) $ (38,213)
Pro forma loss per share, basic and diluted $ (0.87) $ (1.07) $ (2.40)
</TABLE>
The effect on pro forma net loss and loss per share of applying SFAS 123 is
not necessarily indicative of pro forma net loss and loss per share for
future periods until the new fair value method is applied to all non-vested
awards.
36
<PAGE> 37
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - EMPLOYEE SAVINGS PLAN
During November 1990, the Company established a savings plan under the
provisions of section 401(k) of the Internal Revenue Code (the "Plan"), which
covers substantially all employees. The Company's contributions to the Plan are
discretionary. Employees participating in the Plan vest in amounts contributed
by the Company over a period of 5 years. The Company matches 25% of employee
contributions. Employees may contribute up to 15% of their earnings each plan
year. The Company's contributions totaled approximately $0.1 million in each of
the years ended December 31, 1997, 1996 and 1995.
NOTE 11 - INCOME TAXES
The components of the benefit from income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Currently payable:
Federal ............................... $ -- $ -- $ --
State ................................. -- -- 107
Deferred .............................. -- -- (324)
---------- ---------- ----------
$ -- $ -- $ (217)
========== ========== ==========
</TABLE>
A reconciliation between the Company's effective income tax rate and federal
income tax statutory rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Statutory tax rate ........................ (34.0)% (34.0) (34.0)
Change in valuation allowance ............. 37.5 37.5 35.4
Non-deductible expenses ................... -- -- 1.0
State taxes and other, net ................ (3.5) (3.5) (3.5)
---------- ---------- ----------
0% 0% (1.1)%
========== ========== ==========
</TABLE>
37
<PAGE> 38
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant temporary differences included in the net deferred tax asset are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward ...................................... $ 21,854 $ 18,721
Alternative Minimum Tax Credit carryforward .......................... 30 218
Other ................................................................ 8,626 6,012
---------- ----------
Total gross deferred tax assets ...................................... 30,510 24,951
Less-valuation allowance ............................................. 18,364 15,017
---------- ----------
Total deferred tax assets ............................................ 12,146 9,934
---------- ----------
Deferred tax liabilities:
Difference between book and tax bases of fixed assets ................ (7,322) (5,105)
Other ................................................................ (1,417) (1,422)
---------- ----------
Total deferred tax liabilities ....................................... (8,739) (6,527)
---------- ----------
Net deferred tax assets .............................................. $ 3,407 $ 3,407
========== ==========
</TABLE>
At December 31, 1997, the Company has tax net operating loss carry forwards of
approximately $80.8 million, which expire in various amounts in the years 2002
to 2012. Approximately $3.2 million of these net operating loss carryforwards
relate to business acquisitions for which annual utilization will be limited to
approximately $0.3 million, with further limitation if future ownership changes
occur. In addition, these loss carryforwards can only be utilized against
future taxable income, if any, generated by these acquired companies as if
these companies continued to file separate income tax returns. During 1997, the
Company generated a capital loss of approximately $0.7 million, which expires
in the year 2002.
During 1997, the deferred tax asset valuation allowance against net operating
losses increased to approximately $18.4 million. Realization of deferred tax
assets is dependent upon sufficient future taxable income during the periods
that temporary differences and carryforwards are expected to be available to
reduce taxable income. Based upon past earnings history, trends, regulatory
changes, expiration dates of net operating loss carryforwards and tax planning
strategies that could be implemented, if necessary, the Company believes it
will be able to realize its $3.4 million in net deferred tax assets. In
addition, the Company has recorded a valuation allowance to reflect the
estimated amount of deferred tax assets which may not be realized due to the
expiration of its operating loss carryforwards.
38
<PAGE> 39
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - EARNINGS PER SHARE
For the years ended December 31, 1997, 1996 and 1995, the treasury stock method
was used to determine the dilutive effect of the options and warrants on
earnings per share data. The following table summarizes the restated net loss
from continuing operations per share and the weighted average number of shares
outstanding used in the computations in accordance with SFAS No. 128 (in
thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net loss from continuing
operations ............................. $ (13,762) $ (14,268) $ (19,174)
Deduct:
Cumulative preferred stock
dividend requirement ............ 1,050 1,050 473
Preferred stock issuance cost
accretion ....................... 156 144 69
---------- ---------- ----------
Net loss applicable to common
shareholders .................... $ (14,968) $ (15,462) $ (19,716)
========== ========== ==========
Weighted average common
shares outstanding .............. 16,198 16,188 16,091
Basic and diluted loss
per share ......................... $ (0.92) $ (0.96) $ (1.23)
========== ========== ==========
</TABLE>
Diluted earnings per share is equal to basic earnings per share since the
conversion of preferred shares and the exercise of outstanding options and
warrants would be anti-dilutive for all periods presented.
NOTE 13 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair market values of financial instruments held by the Company at December
31, 1997 and 1996 are based on a variety of factors and assumptions, may not
necessarily be representative of the actual gains or losses that will be
realized in the future, and do not include expenses that could be incurred in
an actual sale or settlement.
LONG-TERM DEBT
The fair value of the Company's Senior Notes was estimated by obtaining quoted
market prices. The fair value of the Company's Senior Notes at December 31,
1997 and 1996 was approximately $106.5 million and $105.0 million,
respectively.
The fair value of the Company's credit facility is assumed to be equal to its
carrying value. At December 31, 1997 and 1996 there were no amounts outstanding
under the credit facility.
39
<PAGE> 40
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PREFERRED STOCK
The Company's Preferred Stock does not have a quoted market price and the
Company does not believe it is practicable to estimate a fair value different
from the security's carrying value of approximately $13.7 million because of
features unique to this security including, but not limited to, the right to
appoint two directors and super majority voting requirements. The amount due
upon redemption equals $15.0 million plus accrued dividends.
NOTE 14 - LEASES
The Company leases office and warehouse space under various operating lease
agreements expiring through 2000. Rental expense under such leases aggregated
approximately $0.5 million, $0.5 million and $0.7 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
As of December 31, 1997, future minimum payments under noncancellable operating
leases with remaining terms in excess of one year are as follows (in
thousands):
Year ended:
1998............................... $ 308
1999............................... 174
2000............................... 41
----------
$ 523
==========
NOTE 15 - COMMITMENTS AND CONTINGENCIES
In March, 1997, the Company and WorldCom Network Services, Inc. amicably
settled and resolved litigation to the satisfaction of both parties involved.
In connection with that settlement, the Company paid approximately $240,000 to
WorldCom in full settlement and satisfaction of all claims raised, or which
could have been raised, by WorldCom against the Company arising from the
parties' prior business relationship.
During July 1995, the Company reached an agreement in principle for the
settlement (the "Settlement") of a lawsuit seeking class action certification
brought by two shareholders against the Company and certain of its officers and
directors in the United States District Court, Southern District of Florida,
alleging the violation of certain federal securities laws. The Company's share
of the Settlement of approximately $0.9 million was recorded in the
accompanying consolidated statement of operations for the year ended December
31, 1995. The Settlement was approved by the United States District Court
during January 1996.
During April 1995, the Company settled a dispute with one of its vendors which
resulted in a reduction of the amounts owed. Accounts payable and telephone
charges were reduced during the first quarter of 1995 by approximately $1.3
million to reflect this settlement.
In December 1995, Cellular World filed a complaint in Dade County Circuit Court
against the Company and its subsidiary, PTC Cellular, Inc., alleging wrongful
interference with Cellular World's advantageous
40
<PAGE> 41
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
business relationship with Alamo Rent-A-Car, and alleged misappropriation of
Cellular World's trade secrets concerning Cellular World's proprietary cellular
car phone rental system equipment. Cellular World is seeking damages alleged to
exceed $10 million. Formal discovery has not been completed. Trial has been set
for July 1998. Based on the discovery conducted to date, the Company continues
to believe that it has several meritorious legal and factual defenses. Based
upon the incomplete status of discovery, the Company is unable to predict the
final outcome of the litigation.
In addition to the aforementioned litigation, the Company is a party to certain
legal actions arising in the normal course of business. In the opinion of
management, the ultimate outcome of such litigation will not have a material
effect on the financial position, results of operations or cash flows of the
Company.
The Company has employment contracts with certain officers which expire through
December 31, 1999. The contracts provide for increases in annual base salary,
contingent upon the profitability of the Company, as well as bonus and stock
option provisions.
NOTE 16 - PREPAID CALLING CARD AND INTERNATIONAL TELEPHONE CENTERS
During February 1995, the Company sold its prepaid calling card business to
Global Link Teleco Corporation ("Global Link") for approximately $6.3 million
of cash, promissory notes and shares of common stock of Global Link. The
operations of the prepaid calling card business for the year ended December 31,
1995 were not significant.
On March 1, 1996, Global Link consummated a merger transaction (the "Merger")
with Global Telecommunications Solutions, Inc. ("GTS"). The Company exchanged
its outstanding notes and other receivables, including accrued interest, for
shares of GTS Common stock, $0.6 million in cash and $1.5 million of notes
receivable.
Included in other assets in the accompanying 1997 and 1996 consolidated balance
sheets is the fair value of the Company's investment in GTS common stock of
approximately $1.1 million and $1.7 million, net of approximately $2.0 million
and $1.5 million of unrealized investment losses, respectively.
Prior to the Merger, the Company's investment in Global Link was accounted for
using the equity method. The Company's share of the results of operations of
Global Link from the divestiture date through December 31, 1995 are included in
"Other operating (income) expenses" in the accompanying consolidated statements
of operations.
On September 28, 1995, the Company sold its international telephone center
operations for $0.5 million in cash and a $1.5 million promissory note. The
operations of the international telephone center business for the year ended
December 31, 1995 were not significant. For financial accounting purposes, the
recovery of $2.0 million previously written-off will be recognized as the cash
is received. Accordingly, a gain of approximately $0.3 million and $0.5 million
has been included in other income and expenses in the accompanying consolidated
statements of operations during the years ended December 31, 1996 and 1995,
respectively.
41
<PAGE> 42
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - DISCONTINUED OPERATIONS
On November 13, 1995, the Company sold its cellular telephone operations to
Shared Technologies Cellular, Inc. ("STC") for approximately $6.0 million. The
proceeds from the sale were $0.3 million in cash, a $2.0 million promissory
note bearing interest at 8.0%, with principal and interest payable
semi-annually through 2000, shares of STC Common Stock, and payment of
approximately $1.2 million of the Company's liabilities. This transaction
resulted in a loss of $14.6 million. The loss on disposal on the accompanying
December 31, 1995 statement of operations includes a valuation allowance of
approximately $5.5 million to reduce the deferred tax assets generated by this
transaction to a level which, more likely than not, will be realized.
For the period from January 1, 1995 through the divestiture date, the cellular
telephone operations had net operating losses of $3.7 million which were
previously accrued for in 1994.
On October 9, 1995, the Company sold a portion of its inmate telephone
operations for approximately $1.7 million. Included in discontinued operations
in the accompanying consolidated statement of operations in 1995 are
approximately $0.3 million of impairment losses and a $0.4 million loss on the
sale of these inmate telephone operations.
On December 19, 1997, the Company sold the remaining operating assets of the
Company's inmate phone division to Talton Holdings, Inc. ("Talton") for $10.6
million in cash plus additional contingent consideration. This transaction
resulted in a gain of approximately $4.2 million. The contingent consideration
is payable within 18 months after the closing based upon a formula which
generally provides for the sharing of (a) incremental profits from revenue
increases on certain contracts sold to Talton and (b) profits resulting from
Talton closing on pending bids initiated by the Company which result in new
contracts. For financial accounting purposes, the contingent consideration will
be recognized as received.
42
<PAGE> 43
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth the results of operations and gain (loss) on
disposal of the cellular and inmate telephone operations as they are included
in the consolidated financial statements (in thousands):
CELLULAR TELEPHONE OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues .............................................. $ -- $ -- $ --
Income (loss) from discontinued operations
before income taxes ................................ -- -- --
Gain (loss) on disposal ............................... 268 -- (14,600)
---------- ---------- ----------
Gain (loss) on discontinued operations before
income taxes ....................................... 268 -- (14,600)
Provision for income taxes ............................ -- -- --
---------- ---------- ----------
Gain (loss) from discontinued operations .............. $ 268 $ -- $ (14,600)
========== ========== ==========
</TABLE>
INMATE TELEPHONE OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues .............................................. $ 11,931 $ 17,952 $ 26,029
Income (loss) from discontinued operations
before income taxes .............................. (2,418) (1,724) (19)
Gain (loss) on disposal ............................... 4,242 -- (740)
---------- ---------- ----------
Gain (loss) on discontinued operations before
income taxes ..................................... 1,824 (1,724) (759)
Provision for income taxes ............................ -- -- --
---------- ---------- ----------
Gain (loss) from discontinued operations .............. $ 1,824 $ (1,724) $ (759)
========== ========== ==========
</TABLE>
NOTE 18 - RELATED PARTY TRANSACTIONS
During February 1995, the Company sold its prepaid calling card business to
Global Link for approximately $6.3 million. At the time of the transactions, a
former officer and director of the Company and two directors of the Company
were also directors of Global Link. Mr. Jeffrey Hanft, a former officer and
director of the Company, resigned as a director of Global Link in October 1995,
and Mr. Jody Frank, a former director of the Company, resigned as a director of
Global Link prior to the March 1996 transaction with GTS (see Note 16).
During 1994 and 1995, the Company made loans of approximately $3.6 million to
certain officers and directors for, among other things, the repayment of debt
previously incurred by them in connection with the exercise of stock options
and payment of related income taxes. The officers and directors exercised the
stock options in December 1993 to purchase the Company's Common Stock for
purposes of increasing the
43
<PAGE> 44
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Company's shareholders' equity without accessing external capital markets. The
officers and directors executed promissory notes for a portion of the amounts
due which became payable on March 28, 1996. In addition, during 1994 and 1995,
under the terms of employment contracts with certain officers, the Company paid
approximately $0.6 million in life insurance policy premiums. Such premiums are
required to be reimbursed by such officers upon termination. During the fourth
quarter of 1995, the Company recorded a reserve for potential uncollectible
loan and insurance amounts of approximately $3.2 million which is included in
"Other operating (income) and expenses" in the accompanying consolidated
statements of operations. During 1997, the Company recorded an additional
reserve for potential uncollectible loan amounts of approximately $0.2 million
which is included in "Selling, general and administrative expense" in the
accompanying 1997 statements of operations.
During December 1995, the Company entered into a settlement agreement in
connection with the termination of an employment contract and settlement of a
claim made by Robert D. Rubin, the Company's former president. As part of the
settlement agreement, approximately $1.4 million of severance costs were
incurred by the Company and have been recorded in "Other operating (income) and
expenses" in the accompanying 1995 consolidated statement of operations. Mr.
Rubin repaid approximately $0.4 million of amounts owed the Company as part of
the settlement agreement.
In February 1996, the Company restructured approximately $0.2 million of
outstanding loans to Jody Frank, a director of the Company. In connection with
the restructuring, the Company received from Mr. Frank promissory notes with
various due dates through 2007 and a stock pledge agreement encumbering 35,000
shares of the Company's Common Stock held by Mr. Frank.
During April 1996, the Company terminated Richard F. Militello, the Company's
former Chief Operating Officer, without cause. Pursuant to terms of his
employment agreement, Mr. Militello was due a severance payment of
approximately $0.5 million. The after tax portion of this amount was offset
against certain outstanding loans owed to the Company by Mr. Militello.
Approximately $0.2 million of severance costs incurred by the Company in
connection with Mr. Militello's termination have been recorded in "Selling,
general and administrative expense" in the accompanying 1996 consolidated
statement of operations.
During October 1996, the Company entered into a separation agreement with
Jeffrey Hanft, the Company's former Chairman and Chief Executive Officer. As
part of the separation agreement, the Company received a promissory note for
amounts owed by Mr. Hanft, which becomes due and payable in 2001. In addition,
the Company received from Mr. Hanft a stock pledge agreement encumbering 0.3
million shares of the Company's Common Stock issuable upon exercise of certain
employment agreement options. Approximately $0.3 million of severance costs
incurred by the Company in connection with the separation agreement have been
recorded in "Selling, general and administrative expense" in the accompanying
1996 consolidated statement of operations.
During July 1997, the Company terminated Bonnie S. Biumi, the Company's former
Chief Financial Officer, without cause. Approximately $0.3 million of severance
costs incurred by the Company in connection with Ms. Biumi's termination have
been recorded in "Selling, general and administrative expense" in the
accompanying 1997 consolidated statement of operations.
44
<PAGE> 45
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19 - PROVISION FOR DIAL-AROUND COMPENSATION ADJUSTMENT
On September 20, 1996, the Federal Communications Commission ("FCC") adopted
rules in a docket entitled IN THE MATTER OF IMPLEMENTATION OF THE PAY TELEPHONE
RECLASSIFICATION AND COMPENSATION PROVISIONS OF THE TELECOMMUNICATIONS ACT OF
1996, FCC 96-388 (the "1996 Payphone Order"), implementing the payphone
provisions of Section 276 of the Telecommunications Act of 1996 ("Telecom
Act"). The 1996 Payphone Order, which became effective November 7, 1996,
initially mandated dial- around compensation for both access code calls and 800
subscriber calls ("Dial-Around Compensation") at a flat rate of $45.85 per
payphone per month (131 calls multiplied by $0.35 per call). Commencing October
7, 1997 and ending October 6, 1998 the $45.85 per payphone per month rate was
to transition to a per-call system at the rate of $0.35 per call. Several
parties filed petitions for judicial review of certain of the FCC regulations
including the Dial-Around Compensation rate. On July 1, 1997, the U.S. Court of
Appeals for the District of Columbia Circuit (the "Court") responded to appeals
related to the 1996 Payphone Order by remanding certain issues to the FCC for
reconsideration. These issues included, among other things, the manner in which
the FCC established the Dial-Around Compensation for 800 subscriber and access
code calls, the manner in which the FCC established the interim Dial-Around
Compensation plan and the basis upon which interexchange carriers ("IXCs")
would be required to compensate payphone service providers ("PSPs"). The Court
remanded the issues to the FCC for further consideration, and clarified on
September 16, 1997 that it had vacated certain portions of the FCC's 1996
Payphone Order, including the Dial-Around Compensation rate. Specifically, the
Court determined that the FCC did not adequately justify (i) the per-call
compensation rate for subscriber 800 and access code calls at the deregulated
local coin rate of $0.35, because it did not sufficiently justify its
conclusion that the costs of local coin calls are similar to those of
subscriber 800 and access code calls; and (ii) the allocation of the payment
obligation among the IXCs for the period from November 7, 1996 through October
6, 1997.
In accordance with the Court's mandate, on October 9, 1997, the FCC adopted and
released its SECOND REPORT AND ORDER in the same docket, FCC 97-371 (the
"Remand Order"). This order addressed the per-call compensation rate for
subscriber 800 and access code calls that originate from payphones in light of
the decision of the Court which vacated and remanded certain portions of the
FCC's 1996 Payphone Order. The FCC concluded that the rate for per-call
compensation for subscriber 800 and access code calls from payphones is the
deregulated local coin rate adjusted for certain cost differences. Accordingly,
the FCC established a rate of $0.284 ($0.35-$0.066) per call for the first two
years of per-call compensation (October 7, 1997 through October 6, 1999). The
IXCs are required to pay this per-call amount to PSPs, including the Company,
beginning October 7, 1997. After the first two years of per-call compensation,
the market-based local coin rate, adjusted for certain costs defined by the FCC
as $0.066 per call, is the surrogate for the per-call rate for subscriber 800
and access code calls. These new regulations were made effective as of October
7, 1997; however, they are still subject to challenge.
In addition, the Remand Order tentatively concluded that the same $0.284 per
call rate adopted on a going-forward basis should also govern compensation
obligations during the period from November 7, 1996 through October 6, 1997,
and that PSPs are entitled to compensation for all access code and subscriber
800 calls during this period. The FCC stated that the manner in which the
payment obligation of the IXCs for the period from November 7, 1996 through
October 6, 1997 will be allocated among the IXCs will be addressed in a
subsequent order.
45
<PAGE> 46
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based on the FCC's tentative conclusion in the Remand Order, the Company has
adjusted the amounts of Dial-Around Compensation previously recorded related to
the period from November 7, 1996 through June 30, 1997 from the initial $45.85
rate to $37.20 ($0.284 per call multiplied by 131 calls). As a result of this
adjustment, the Company recorded a provision in the third quarter of 1997 for
reduced Dial-Around Compensation of approximately $2.1 million ($0.13 per
share). The Company previously reported this provision as a separate component
of costs and expenses. In the third quarter of 1998, the Company reclassified
the provision as a reduction in non-coin revenue of approximately $2.6 million
and a reduction in commissions expense of approximately $0.5 million. For the
period from July 1, 1997 through October 6, 1997, the Company has recorded
Dial-Around Compensation at the rate of $37.20 per payphone per month. The
amount of dial-around revenue recognized in the period from July 1, 1997
through October 6, 1997 is approximately $4.7 million and such amount will be
billed after final resolution of the allocation obligations of the IXCs as
determined by the FCC.
The Company's counsel, Latham & Watkins, is of the opinion that the Company is
legally entitled to fair compensation under the Telecom Act for Dial-Around
Calls the Company delivered to any carrier during the period from November 7,
1996 through October 6, 1997. Based on the information available, the Company
believes that the minimum amount it is entitled to as fair compensation under
the Telecom Act for the period from November 7, 1996 through October 6, 1997 is
$37.20 per payphone per month and the Company, based on the information
available to it, does not believe that it is reasonably possible that the
amount will be materially less than $37.20 per payphone per month. While the
amount of $0.284 per call constitutes the Company's position of the appropriate
level of fair compensation, certain IXCs have asserted in the past, have
asserted in petitions for reconsideration now pending before the FCC and in
appeals pending before the U.S. Court of Appeals for the District of Columbia
Circuit, and are expected to assert in the future that the appropriate level of
fair compensation should be lower than $0.284 per call. For example, in a
letter to the FCC dated August 15, 1997, AT&T stated its intention to make
dial-around payments to PSPs based on its imputed rate of $0.12 per call until
the FCC issues a new order setting the level of fair compensation.
46
<PAGE> 47
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 - SUBSEQUENT EVENTS
On January 12, 1998, the Company acquired the operating assets of Indiana
Telcom Corporation for approximately $11.3 million in cash. This transaction
added approximately 2,600 public pay telephones, located primarily in Indiana
and adjacent midwestern states.
On July 5, 1998, the Company entered into a definitive merger agreement with
Davel Communications Group, Inc. and Davel Holdings, Inc. (collectively
"Davel"). Under the terms of the agreement, which has been approved by the Board
of Directors of each company, holders of common stock of the Company will
receive 0.235 of a share of Davel common stock for each outstanding share of
Company common stock and the Company will become a wholly-owned subsidiary of
Davel (the "Merger"). The transaction, which is intended to close in the fourth
quarter of 1998, is subject to the approval of the shareholders of both
companies, receipt of required regulatory approvals and other customary
conditions. Consummation of the Merger is conditioned on its eligibility for
pooling-of-interests accounting treatment. The transaction is also subject to
conversion of the Company's Series C Cumulative Convertible Preferred Stock into
common stock and receipt by Davel of financing for, and successful consummation
of, a cash tender offer for the Company's 12 1/4% Senior Notes due 2002 (the
"Senior Notes"), pursuant to which a minimum of 85% of the aggregate outstanding
principal amount of $100 million shall have been tendered. Davel plans to
refinance the Senior Notes through a new senior credit facility. No assurance
can be given that all of the conditions for the consummation of the proposed
Merger will be satisfied.
On June 12, 1998, Davel signed a definitive agreement to merge with PhoneTel
Technologies, Inc. ("PhoneTel"). On September 29, 1998, Davel announced that it
was exercising its contractual rights to terminate the Davel/PhoneTel merger
agreement, based on breaches of representations, warranties and covenants by
PhoneTel. On October 1, 1998, Davel filed a lawsuit in Delaware Chancery Court
seeking damages, rescission of the Davel/PhoneTel merger agreement and a
declaratory judgment that such breaches occurred. On October 27, 1998, PhoneTel
answered the complaint and filed a counterclaim against Davel alleging that the
Davel/PhoneTel merger agreement had been wrongfully terminated, and also filed a
third-party claim against the Company alleging that the Company wrongfully
caused the termination of the Davel/PhoneTel merger agreement. The counterclaim
and third party claim seek specific performance by Davel of the transactions
contemplated by the Davel/PhoneTel merger agreement and damages and other
equitable relief from Davel and the Company. The Company believes that the third
party claim is without merit and intends to defend against it vigorously.
47
<PAGE> 48
PEOPLES TELEPHONE COMPANY, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
<TABLE>
<CAPTION>
BALANCE CHARGED TO BALANCE
AT BEGINNING COSTS AND AT END
OF PERIOD(1) EXPENSES(1) DEDUCTIONS(1)(2) OF PERIOD(1)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CLASSIFICATION
- --------------
YEAR ENDED 12/31/97
Allowance for doubtful accounts ........ $ 4,361 $ 3,925 $ 3,350 $ 4,936
========== ========== ========== ==========
Deferred tax asset valuation
allowance ............................. 15,017 3,347 -- 18,364
========== ========== ========== ==========
Accumulated amortization:
Location contracts ................ 16,402 5,709 8 22,103
========== ========== ========== ==========
Intangible assets ................. 3,559 650 -- 4,209
========== ========== ========== ==========
Goodwill .......................... 2,253 704 -- 2,957
========== ========== ========== ==========
YEAR ENDED 12/31/96
Allowance for doubtful accounts ........ 5,108 3,411 4,158 4,361
========== ========== ========== ==========
Deferred tax asset valuation
allowance ............................. 12,023 2,994 -- 15,017
========== ========== ========== ==========
Accumulated amortization:
Location contracts ................ 11,115 5,287 -- 16,402
========== ========== ========== ==========
Intangible assets ................. 2,870 1,594 905 3,559
========== ========== ========== ==========
Goodwill .......................... 1,549 704 -- 2,253
========== ========== ========== ==========
YEAR ENDED 12/31/95
Allowance for doubtful accounts ........ 6,035 7,386 8,313 5,108
========== ========== ========== ==========
Deferred tax asset valuation
allowance ............................. -- 12,023 -- 12,023
========== ========== ========== ==========
Accumulated amortization:
Location contracts ................ 6,412 5,131 428 11,115
========== ========== ========== ==========
Intangible assets ................. 2,079 769 (22) 2,870
========== ========== ========== ==========
Goodwill .......................... $ 820 $ 729 $ -- $ 1,549
========== ========== ========== ==========
</TABLE>
- ------------
(1) All years presented have been restated to present inmate telephone
operations as discontinued operations.
(2) Deductions represent bad debt write-offs and adjustments to
accumulated amortization for assets sold.
48
<PAGE> 49
Part IV, Item 14 of the Form 10-K for the fiscal year ended December 31, 1997
is amended in its entirety to read as follows:
49
<PAGE> 50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed with, and as a part of, this Annual
Report on Form 10-K.
1. FINANCIAL STATEMENTS.
For a complete list of the Financial Statements filed with the Annual
Report on Form 10-K as amended by this Form 10-K/A, see the Index to
Financial Statements and Schedules in Item 8 on Page 20.
2. FINANCIAL STATEMENT SCHEDULES.
The following Supplementary Schedules are filed with the Annual Report
on Form 10-K as amended by this Form 10-K/A:
See Index to Financial Statements and Schedules on Page 20.
3. EXHIBITS.
(i) See Exhibit Index on Pages 52-54.
(b) Reports on Form 8-K.
(1) On October 16, 1997, the Company filed a current report on Form
8-K with the Commission dated October 16, 1997, reporting information under
Item 5, Other Events.
(2) On December 30, 1997, the Company filed a current report on Form
8-K with the Commission dated December 30, 1997, reporting information under
Item 2, Acquisition or Disposition of Assets, Item 5, Other Events and Item 7,
Financial Statements and Exhibits.
50
<PAGE> 51
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEOPLES TELEPHONE COMPANY, INC.
REGISTRANT
Date: November 6, 1998 /s/ WILLIAM A. BAUM
-------------------------------
William A. Baum
On behalf of the registrant and as
Chief Financial Officer
51
<PAGE> 52
EXHIBIT INDEX
EXHIBITS
2.1 Asset Purchase Agreement dated December 19, 1997 by and between
the Company and Talton Holdings, Inc. (incorporated herein by reference to the
Company's current report on Form 8-K dated December 30, 1997) (File No.
1-12443)
3.1 Amended and Restated Certificate of Incorporation (incorporated
herein by reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996) (File No. 1-12443) as amended to the date of filing of
this Form 10-K.
3.2 Restated Bylaws adopted on November 30, 1987 (incorporated herein
by reference from the Registration Statement on Form 10) (File No. 0-16479),
filed with the Securities and Exchange Commission (the "SEC")
3.3 Form of Second Amended and Restated Warrant Agreement dated as of
February 17, 1994 between the Company and Creditanstalt American Corporation
("CAC") (incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1994) (File No. 0-16479)
3.4 First Amendment to Second Amended and Restated Warrant Agreement
dated October 30, 1995 between the Company and CAC (incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995) (File No. 0-16479)
3.5 Second Amendment to Second Amended and Restated Warrant Agreement
dated April 4, 1996 between the Company and CAC (incorporated herein by
reference to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996) (File No. 0-16479)
4.1 Fourth Amended and Restated Loan and Security Agreement dated July
19, 1995 by and among the Company, the lenders named therein and
Creditanstalt-Bankverein (incorporated herein by reference to Form 8-K dated
July 19, 1995). (File No. 0-16479)
4.2 Waiver and First Amendment dated November 29, 1995 between the
Company and Creditanstalt-Bankverein with regard to the Fourth Amended and
Restated Loan and Security Agreement. (incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended December 31, 1995).
(File No. 0-16479)
4.3 Second Amendment dated April 4, 1996 to the Fourth Amended and
Restated Loan and Security Agreement between the Company and
Creditanstalt-Bankverein. (incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996). (File No.
0-16479)
4.4 Third Amendment dated March 26, 1997 to the Fourth Amended and
Restated Loan and Security Agreement between the Company and
Creditanstalt-Bankverein (incorporated herein by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996). (File No.
1-12443)
52
<PAGE> 53
4.5 Indenture, dated as of July 15, 1995, between the Company and
First Union National Bank of North Carolina (incorporated herein by reference
to Form 8-K dated July 19, 1995). (File No. 0-16479)
10.1 Employment Agreement dated January 1, 1995 between the Company
and Bruce W. Renard (incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended 1994). (File No. 0-16479)
10.2 AT&T Commission Agreement dated April 20, 1995 by and between
AT&T Communications, Inc. and the Company (incorporated herein by reference to
Amendment No. 2 to Form S-3 Registration No. 33-58657).
10.3 Security Purchase Agreement between UBS Capital Corporation;
Appian Capital Partners, L.L.C. and the Company dated July 3, 1995
(incorporated herein by reference to Form 8-K dated July 19, 1995). (File No.
0-16479)
10.4 Letter Agreement, dated July 18, 1995, among the Company, UBS
Capital Corporation, UBS Partners, Inc. and Appian Capital Partners, L.L.C.,
amending the Securities Purchase Agreement, dated as of July 3, 1995 among the
Company, UBS Capital Corporation and Appian Capital Partners, L.L.C.
(incorporated herein by reference to Form 8-K dated July 19, 1995). (File No.
0-16479)
10.5 Form of Stock Purchase Warrant issued on July 19, 1995 to Appian
Capital Partners, L.L.C. (incorporated herein by reference to Form 8-K dated
July 19, 1995). (File No. 0-16479)
10.6 Form of Contingent Stock Purchase Warrant issued on July 19, 1995
to UBS Partners, Inc. (incorporated herein by reference to Form 8-K dated July
19, 1995). (File No. 0-16479)
10.7 Registration Rights Agreement dated as of July 19, 1995 between
the Company and UBS Partners, Inc. (incorporated herein by reference to Form
8-K dated July 19, 1995). (File No. 0-16479)
10.8 1997 Incentive Plan (incorporated herein by reference to the
Company's Registration Statement on Form S-8 (Registration Statement No.
333-40793) filed on November 21, 1997).
10.9 1994 Stock Incentive Plan of the Company (incorporated herein by
reference to pages A-1 through A-7 of the Company's 1994 Proxy Statement).
(File No. 0-16479).
10.10 1987 Non-Qualified Stock Option Plan (incorporated herein by
reference to the Company's Registration Statement on Form S-8 (Registration
Statement No. 33-58603) filed on April 13, 1995. (File No. 0-16479).
10.11 1987 Non-Qualified Stock Option Plan for Non-Employee Directors
(incorporated herein by reference to the Company's Registration Statement on
Form S-8 (Registration Statement No. 33- 58603) filed on April 13, 1995. (File
No. 0-16479).
10.12 1993 Non-Employee Director Stock Option Plan (incorporated
herein by reference to pages A-1 through A-4 of the Company's 1993 Proxy
Statement). (File No. 0-16479).
10.13 Employment Agreement dated May 2, 1996 between the Company and
E. Craig Sanders.(incorporated herein by reference to the Company's Quarterly
Report on Form 10-Q for the Quarter ended March 31, 1996). (File No. 0-16479)
53
<PAGE> 54
10.14 Employment Agreement dated August 15, 1996 between the Company
and Neil N. Snyder, III. (incorporated herein by reference to the Company's
Quarterly Report on Form 10-Q for the Quarter ended September 30, 1996). (File
No. 0-16479)
10.15 Letter Agreement dated April 30, 1996 between the Company and C.
Keith Pressley. (incorporated herein by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1996) (File No. 1-12443)
21 List of Subsidiaries. (incorporated herein by reference to the
Company's Annual Report on Form 10-K for the year ended December 31, 1997)(File
No.1-12443)
*23.2 Consent of Ernst & Young LLP
*27 Financial Data Schedule (for SEC use only)
- -------------
* Filed with the Annual Report on Form 10-K as amended by this Form 10-K/A.
54
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 33-58607) and in the related prospectus of Peoples Telephone Company,
Inc., and in the Registration Statements (Form S-8 No. 33-58603 and Form S-8 No.
333-40793) pertaining to stock option and incentive plans of Peoples Telephone
Company, Inc. of our report dated February 27, 1998, except for the second and
third paragraphs of Note 20, as to which the date is October 27, 1998, and the
fourth paragraph of Note 1, as to which the date is November 6, 1998, with
respect to the consolidated financial statements and schedule of Peoples
Telephone Company, Inc. included in the Annual Report (Form 10-K) for the year
ended December 31, 1997, as amended, included in this Form 10-K/A.
/s/ ERNST & YOUNG LLP
Miami, Florida
November 6, 1998
55
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