UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File Number: 0001-12443
PEOPLES TELEPHONE COMPANY, INC.
(Exact Name of registrant as specified in its charter)
NEW YORK 13-2626435
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
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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
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 20, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $46,648,989. As of March 20,
1998, there were 16,212,434 shares of the registrant's Common stock outstanding.
Documents incorporated by reference: None
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Part I
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), Peoples Telephone Company,
Inc. ("Peoples" or the "Company") is hereby providing cautionary statements
identifying important factors that could cause the Company's actual results to
differ materially from those projected in forward-looking statements (as such
term is defined in the Reform Act) made by or on behalf of the Company herein or
orally, whether in presentations, in response to questions or otherwise. Any
statements that express, or involve discussions as to expectations, beliefs,
plans, targets, objectives, assumptions or future events or performance (often,
but not always, through the use of words or phrases such as "will result," "are
expected to," "will continue," "is anticipated," "estimated," "should",
"projection" and "outlook") are not historical facts and may be forward-looking
and, accordingly, such statements involve estimates, assumptions, known and
unknown risks and uncertainties which could cause actual results to differ
materially from those expressed in the forward-looking statements. Such known
and unknown risks, uncertainties and other factors include, but are not limited
to, the following: (i) the impact of competition especially in a deregulated
environment (including the ability of the Company to implement higher
market-based rates for local coin calls); (ii) uncertainties with respect to the
implementation and effect of the Telecommunications Act of 1996 including any
new rule making by the Federal Communications Commission (FCC) or litigation
which may seek to modify or overturn the FCC's orders implementing such act or
portions thereof; (iii) the ongoing ability of the Company to deploy and
maintain its public pay phones in favorable locations; (iv) the Company's
ability to continue to implement operational improvements, and (v) the ability
of the Company to efficiently integrate acquisitions of other telecommunication
companies.
The Company cautions that the factors described above could cause actual
results or outcomes to differ materially from those expressed in any
forward-looking statements made by or on behalf of the Company. Any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for
management to predict all of such factors. Further, management cannot assess the
impact of each such factor on the business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
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ITEM 1. BUSINESS
Glossary
Billed Party Preference is a plan that would automatically route "0+"
dialed non-coin calls from pay telephones to the "billed party's"(i.e.:
cardholder, called party of a collect call) preferred carrier, thereby bypassing
the opportunity for the pre-subscribed carrier of the public pay telephone
provider to handle and receive revenues from such calls.
CLEC's are local exchange telephone services providers offering local
exchange telephone services on a basis competitive with the traditional
incumbent landline local telephone companies in the applicable jurisdictions.
Dial-Around Compensation is the FCC-prescribed payment made to public pay
telephone providers, including the Company, for use of their public pay
telephones for callers to (a) access OSPs other than the primary OSPs selected
by the owner of the public pay telephone (Carrier Access Code calls) and (b)
originate "toll free" "1-800" or "1-888" dialed calls (Subscriber Access Code
calls).
Dial-Around Calls are those for which Dial-Around Compensation is due,
including carrier access code and "toll-free" subscriber access code calls,
typically dialed by using 10XXX, 101XXX, 950, 1-800 and 1-888 access codes.
Federal Communications Commission, ("FCC") is the agency which regulates
the interstate, international and, in certain circumstances, intrastate
provision of telecommunications facilities and services originating or
terminating in the United States.
Initial Payphone Orders are the FCC orders implementing Section 276 of the
Telecommunications Act of 1996, governing the national provision of pay
telephone service and issued on September 20, 1996 and November 8, 1996.
Interexchange carrier ("IXC") is a telecommunications provider of
transmission services originating and terminating between local exchanges,
typically referred to as long-distance or toll telephone service.
Local access and transport area ("LATA") is a geographic area designed to
differentiate between local/short-haul telecommunications transmission service
versus long distance telephone service.
InterLATA calls are those originating and terminating in different LATAs.
IntraLATA calls are those originating and terminating within the same LATA.
LEC is a local exchange carrier, which is a company providing local
telephone services.
Non-coin calls are calling card, credit card, collect and third-party
billed calls. Such calls include those dialed using "0+" the number or "0-"
dialing patterns ("0+/0-").
Operator service provider ("OSP") is a company providing automated and/or
live operator services in conjunction with calls placed from pay telephones and
other transient locations.
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Property Owners or Location Owners are those persons or entities operating
establishment locations, such as convenience stores, service stations, grocery
stores, hospitals, hotels, shopping centers, truck stops and airports, where
public pay telephones (including the Company's) are installed.
PSPs are pay telephone services providers, which classification includes
the Company, other independent pay telephone providers and LEC providers.
Public Switched Network is the traditional domestic landline public
telecommunications network, comprised of local, intraLATA and interLATA
facilities used to carry, switch and connect telephone calls between the calling
and called parties.
RBOCs are the Regional Bell Operating Companies, which were formed to
provide local and intraLATA telephone services as a result of the stipulated
break-up of the Bell System under the modification of final judgement ("MFJ")
entered in United States v. American Telephone & Telegraph Company.
Remand Order is the FCC's Payphone Implementation order issued on October
9, 1997, subsequent to the remand of certain provisions of the FCC's Initial
Payphone Orders by the Court in Illinois Public Telephone Association v. FCC, et
al.
Telecommunications Act of 1996 (the "Telecom Act") is the comprehensive
1996 federal legislative enactment amending the Communications Act of 1934,
which includes Section 276 governing the provision of public pay telephone
services in the United States, including those offered by the Company.
General and Recent Developments
The Company is a leading independent provider of public pay telephone
services in the United States, on the basis of the number of the public pay
telephones in operation, the Company's longevity in the industry and the quality
of services offered to the public. Since installing its first public pay
telephone in 1985, the Company's core public pay telephone business has grown to
an installed base, as of December 31, 1997, of approximately 40,100 public pay
telephones operated in 39 states and the District of Columbia.
The Company owns, operates, services and maintains a system of independent
public pay telephones. Its public pay telephone business generates revenues from
coin calls and non-coin calls such as telephone calling card, commercial credit
card, collect and third-party billed calls made from its public pay telephones.
Non-coin calls also include Dial-Around Calls. The Company, in past years, grew
through the acquisition of public pay telephone routes from other independent
operators. From 1990 through 1994, the Company acquired over 33,000 public pay
telephones from 27 independent public pay telephone operators. Between 1995 and
1997, the Company focused on growth through internal sales. However, on January
12, 1998, the Company closed its first pay telephone company acquisition since
October 1994, in an asset purchase transaction that added approximately 2,600
new pay telephones to the Company's installed base. The Company continually
focuses on improvements to its pay telephone business with the intent of
increasing cash flow, enhancing operating efficiencies, and achieving balanced,
profitable growth.
The Company grows internally by entering into contracts for the
installation of public pay telephones in locations where the Company believes
there will be significant demand for public pay telephone service, such as
convenience stores, grocery stores, service stations, shopping centers, hotels,
restaurants, airports and truck stops. The Company believes that its nationwide
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presence in the public pay telephone marketplace makes it a particularly
attractive supplier of public pay telephone services for location owners with
regional or national facilities. Further external growth will be achieved
through the targeted acquisition of other pay telephone routes that meet the
Company's strict financial and operational criteria for such transactions. The
Company believes that substantially all of its public pay telephones are in high
traffic locations.
Between 1990 and 1993 the Company entered into several non-pay telephone
businesses including telephone debit card services, cellular rental services,
international services and inmate services. In late 1994, the Company adopted a
new strategic direction to return its focus to the core public pay telephone
business and to divest itself of the other non-core businesses. The sale of
these non-strategic businesses took place largely in 1995 and concluded with the
sale of the remaining portion of Company's inmate services division in December,
1997. See "Business-Inmate Telecommunications Divestiture" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
During 1996, E. Craig Sanders joined the Company as a Director, President
and Chief Executive Officer and Neil N. Snyder, III joined as Executive Vice
President and Chief Operating Officer. During the first quarter of 1997, David
A. Arvizu joined the Company as Senior Vice President of Sales and Services and
during the third quarter of 1997, William A. Baum joined the Company as Senior
Vice President and Chief Financial Officer.
Public Pay Telephone Industry Overview
Based on information compiled largely from the "Statistics of
Telecommunications Common Carriers" filed with the FCC, there were approximately
2 million public pay telephones in the U.S., as of December 31, 1996. Of this
total, approximately 350,000 pay telephones were operated by independent pay
telephone companies, and the balance were provided by the various local exchange
telephone companies. Using these figures, the Company's pay telephone base
represents approximately 2% of the total domestic U.S. public pay telephone
installed base.
The telecommunications marketplace through 1995 was principally shaped by
the 1984 ruling of the United States District Court for the District of Columbia
(the "AT&T Divestiture Court"), in the well-documented Bell System antitrust
divestiture case, United States v. American Telephone & Telegraph Company (the
"AT&T Divestiture"). The AT&T Divestiture created various business opportunities
in the telecommunications industry and paved the way for FCC rulings in 1984
which authorized independent public pay telephone equipment to be connected to
the public switched network and operated competitively. Subsequent to the 1984
FCC rulings, virtually all state jurisdictions have authorized the competitive
provision of public pay telephone services within their territories.
In 1990, Congress passed the Telephone Operator Services Consumer
Information Act of 1990 ("TOSCIA"), which established the mandate that pay
telephone providers adopt a series of operational measures designed to provide
information and "open access" for consumers seeking to place calls at public pay
telephones nationwide. As a result of TOSCIA, PSPs are required to afford open
consumer access to carrier access code dialing and 1-800 "toll free" calling
from public pay telephones. TOSCIA also required the FCC to consider fair
compensation to pay telephone providers for the access offered on such calls.
The various state and FCC regulatory rulings implementing competition in
the pay telephone business, both before and after Congress' enactment of TOSCIA,
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created an operating environment in which competitive PSPs, such as the Company,
were placed at a fundamental disadvantage vis-a-vis their primary competitors,
the LEC pay telephone operators, in a variety of operational and financial
aspects integral to the competitive provision of pay telephone services. For
example, LECs were permitted to subsidize their pay telephone operations from
their regulated local exchange telephone company operations. This
cross-subsidization resulted in various market distortions including "below
cost" end user rates for local coin and certain other calls. Yet, regulators
applied these same end-user rates as rate ceilings for competitive pay telephone
providers, even though the latter did not have an opportunity to subsidize their
pay telephone operations from monopoly telephone operations.
On February 8, 1996, the Telecom Act was signed into law, giving broad
powers to the FCC to preside over the development of competitive
telecommunications markets, including local exchange, long distance and public
pay telephone sectors. The significant public pay telephone provisions of the
new law contained in Section 276 are designed to improve parity among public pay
telephone service providers and to address those fundamental regulatory
inequities that have long plagued the public communications industry sector.
Specific public pay telephone provisions of the Telecom Act have required the
FCC to adopt rules that would: (i) create a standard regulatory scheme for all
public pay telephone providers, including the RBOC public pay telephone
operations; (ii) require removal by the RBOCs of their public pay telephone
operations and investment from their regulated books of account; (iii) prescribe
certain safe-guards to eliminate future discrimination or subsidization in favor
of RBOC public pay telephone operations; (iv) require "fair compensation" to be
paid to PSPs for all calls using public pay telephones (except for calls to 911
Emergency and Telecommunications Relay Services numbers); (v) provide the right
for all PSPs, subject to existing and future contractual rights with the
Location Owner, to select the provider for both intraLATA and interLATA operator
and network services; (vi) evaluate whether and how "public interest" pay
telephones (public pay telephones not normally placed under purely competitive
conditions but potentially required for public policy reasons) should be
maintained; and (vii) preempt state requirements that are inconsistent with
relevant FCC rule provisions.
In response to these requirements of the Telecom Act, the FCC conducted
extensive proceedings resulting in the issuance of two orders in September of
1996 and November of 1996, implementing the statutory mandates of Section 276 of
the Telecom Act (the "Initial Payphone Orders"). The Initial Payphone Orders
were subsequently appealed, by a variety of parties, to the United States Court
of Appeals for the District of Columbia Circuit, challenging the FCC's
establishment of a Dial-Around Compensation system and a market based pricing
regime for local coin calls. The Court, in orders issued on July 1, 1997 and
September 16, 1997, upheld the FCC's preemptive deregulation of local coin call
pricing, but vacated and remanded certain aspects of the FCC's dial-around
compensation system for further administrative proceedings. The FCC subsequently
conducted such further proceedings and, on October 9, 1997, issued its Second
Report and Order (the "Remand Order") reaffirming the general framework of its
original dial-around decisions, and adopting specific revisions to address the
precise cost and pricing issues raised by the Court of Appeals. Subsequent to
the issuance of the Remand Order, various parties have sought Reconsideration
from the FCC and have filed new court challenges to the Remand Order, which
proceedings are presently pending. Separately, one state commission and a
consumer group have requested that the U.S. Supreme Court review the Court of
Appeals decision upholding the FCC's preemption of state regulation of local
coin rates. On March 30, 1998, the U.S. Supreme Court declined to accept
jurisdiction; and, thus, affirmed the Court of Appeals decision upholding the
FCC's deregulation of local coin rates. The final outcome of these proceedings,
and other ongoing or anticipated regulatory actions at both state and federal
levels, will significantly impact the industry and the operations of the Company
in the foreseeable future. The Company is unable to predict the outcome of such
actions or whether all or a part of the Orders and the Remand Order will be
modified, affirmed or otherwise affected. See "Business-Regulation".
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Business Strategy
Against this broader industry backdrop, the Company's vision is to be the
Recognized Quality Public Access Leader At All Times. The Company's business
objectives are to focus on continued strengthening of its core public pay
telephone business, to deliver an unsurpassed quality of service to its
customers and to grow operating cash flow by continuing to expand and refine its
base of pay telephones. The Company expects to implement these objectives by
continuing to focus on operational excellence and balanced growth, although
there can be no assurances that such objectives will in fact be achieved to the
degree desired by the Company.
The Company's Plan for Operational Excellence includes the following
elements:
Unsurpassed Level of Customer Care. The Company is committed to providing
the highest quality service in the industry and establishing strong
relationships with its customers. To provide a superior level of customer
service, the Company uses "smart" microprocessor-equipped telephones, a
sophisticated management information system and a highly trained service and
support staff. The Company's advanced telephone technology provides records of
telephone activity, which allow for verification of coin revenue and rapid
response (typically within 24 hours) to equipment malfunctions. As one of the
country's largest independent public pay telephone providers, the Company is in
a competitive position to service regional and national corporate accounts, in
contrast to smaller competitors or LECs who now typically operate within their
specific geographic regions.
Achievement of Operating Standards. The Company has conducted an overall
review of its operating procedures and policies and has instituted a range of
new standards and goals to be met by its operations personnel in order to more
fully utilize the Company's operating infrastructure. These targets include,
among others, improved service reliability and responsiveness, reduced
installation time and reduced repair time. The Company believes that its phones
operate at a level commensurate with or in excess of industry standards and that
the quality of its operations, by such measures as uptime and time to repair,
have experienced ongoing service improvement in 1997.
Cost of Operations Savings. The Company has developed and is in the process
of implementing an action plan to increase economies of scale and maximize
operating efficiencies. The action plan includes a heightened focus on more
efficient route management, prompt delivery of repair parts and central
inventory management, all of which, along with other aspects of the plan, should
further increase productivity. Additionally, as a high volume consumer of
telecommunications services, the Company has been able to negotiate favorable
terms with operator and long-distance service providers such as AT&T, Sprint and
WorldCom Inc. and, the Company believes that its "smart" telephones, management
information systems and trained service and support staff will permit telephone
repair and maintenance cost savings over time. The Company further believes
that, as its plans are implemented, it can realize additional economies of scale
in field service, coin collection and other selling and administrative
functions, although no assurances can be given.
The Company's Plan for Growth includes the following elements:
Internal Growth. The Company is seeking to achieve internal growth by
increasing the number of public pay telephones that the Company owns, operates
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or services at local, regional and national accounts. As part of this process,
the Company began to develop in 1997 an aggressive multi-channel sales
organization as a complement to its direct sales efforts. The Company believes
that its nationwide presence makes it an especially attractive supplier of
public pay telephone services for regional and national accounts. Offering these
accounts a consolidated and consistent service level and reducing the time and
burden involved when dealing with multiple providers, has proven to be of real
value. The primary focus of the Company's marketing efforts has been, and
continues to be, accounts in high foot traffic locations which currently include
locations such as convenience stores, food chains, malls and gasoline stations.
Acquisitions. Based upon an improved operating and regulatory environment,
in January, 1998, the Company completed its first pay telephone company
acquisition since 1994 when it acquired substantially all the telephone assets
of Indiana Telcom, Inc., adding approximately 2,600 telephones, located
primarily in mid-western states, to the Company's installed base. Additionally,
especially in light of anticipated economic benefits from the Telecom Act, the
Company will continue to evaluate acquisition opportunities and may from time to
time pursue an acquisition if management believes such an acquisition would be
beneficial to the Company.
Marketing Partners. The Company believes there is significant value and
benefit to entering into marketing partnerships with a select number of major
concerns which parallel the Company in management philosophy and business
objectives. Strategic partnering allows the Company to take advantage of certain
synergies in operations along with regional, national or other volume
aggregation opportunities. The Company believes that it is an attractive
strategic partner for fully integrated telecom providers that do not have
internal pay telephone route management resources. As a result, during 1997, the
Company has entered into various partnering opportunities with a select number
of such providers and will continue to explore future beneficial opportunities.
There can be no assurance, however, that the Company's strategy as outlined
above will be sufficient to restore profitability or that the strategy will not
be adversely affected by future regulatory, competitive or other industry
actions.
Public Pay Telephones
As of December 31, 1997, the Company's public pay telephone system
consisted of approximately 40,100 public pay telephones located in 39 states and
the District of Columbia. The majority of the Company's payphones are located in
the eastern half of the United States and California, with the largest
geographic concentrations in the following key states: Florida, New York,
California, Indiana, Texas, Maryland, Virginia, Pennsylvania, Tennessee,
Georgia, Louisiana, Ohio, and North Carolina.
The Company's core public pay telephone business generates revenues from
coin and non-coin calls. Coin calls are made by depositing coins into the pay
telephone. Non-coin calls include calling card, credit card, collect and
third-party billed calls made using the OSP pre-selected by the Company for its
pay telephones and Dial-Around Calls.
Coin Calls
The Company's public pay telephones generate coin revenues primarily from
local calls. Pursuant to FCC rulings implementing the Telecom Act, the Company
has, effective October 7, 1997, begun to price local coin calls using market
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based rates in most jurisdictions. Long distance intrastate coin calls are
priced in accordance with applicable state regulatory rate caps or guidelines,
while the Company continues to maintain pricing flexibility on certain
intrastate and all interstate coin calls. The Company pays local line and usage
charges to the LECs, or in certain circumstances CLECs, for the underlying local
exchange transmission services provided for each of the Company's installed
public pay telephones. These line and usage charges cover basic dial tone
service to the pay telephone, as well as the transport and completion of local
coin calls. The Company also pays usage based charges to its primary
interexchange carriers for the underlying telecommunications transmission
service used to initiate and complete coin long distance calls.
Non-coin Calls
The Company receives revenues (typically in the form of carrier paid
commissions) from non-coin calls made from its public pay telephones. The
services needed to complete a non-coin call include providing an automated or
live operator to answer and process the call, verifying billing information,
validating calling cards and credit cards, routing and transmitting the call to
its destination, monitoring the call's duration, determining the charge for the
call and billing and collecting the applicable end user charges. In all
jurisdictions, the Company has the right to select the operator service provider
for interLATA, interstate and international traffic for use on its public pay
telephones. In certain jurisdictions, the Company has historically been required
to use the LEC as the local, intraLATA and ("0-") service provider. The Telecom
Act, however, has preempted and thereby eliminated most of these requirements
prospectively and the Company is now authorized to select the provider for
substantially all dialed revenue generating calls from its public pay
telephones. Currently, the Company selects third-party OSPs to handle the calls
for all of its traffic. The Company uses the operator services of AT&T, Sprint
and other smaller operator service providers, in addition to certain LEC
providers. The Company has initiated a process of consolidating its traffic with
fewer OSPs, to obtain the most beneficial commission and service arrangements,
and believes this consolidation initiative will result in a positive impact to
the Company, although there can be no assurance of this.
Each operator service provider selected by the Company handles 0+/0- calls
and pays the Company a commission for each call completed thereby, except in
those limited instances where the Company is prohibited contractually, legally
or otherwise from selecting the operator service provider. The state regulatory
authorities have jurisdiction to mandate rates for intrastate calls other than
local calls, and many have adopted such requirements. The FCC has the authority
to regulate the amount public pay telephone operators may charge for interstate
calls, although no rate ceilings have been established. On January 29, 1998, the
FCC adopted certain rate disclosure requirements for interstate 0+ calls
originated from public pay telephones and other transient locations. While the
Company believes that such rate disclosure requirements will prove beneficial
for the pay telephone industry generally and the Company specifically, there can
be no assurance of this. See "Business Regulation."
The Company also receives non-coin revenue from IXCs pursuant to FCC
regulations as Dial-Around Compensation for non-coin calls made from its public
pay telephones. Pursuant to current FCC regulations adopted in the Remand Order,
the Company is entitled to receive $0.284 per call for all Dial-Around Calls
completed from its pay telephones, for a two year period beginning October 7,
1997. The FCC, in its Remand Order, has tentatively concluded that this same
$0.284 call compensation rate will also govern compensation obligations of the
OSP's for the period from November 7, 1996 through October 6, 1997 and that PSPs
are entitled to receive this compensation for all Dial-Around Calls during this
prior period. The Remand Order further states that the allocation of this
payment obligation between the OSPs for the period from November 7, 1996 through
October 6, 1997 will be addressed in a subsequent order. Petitions for
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Reconsideration and Petitions for Review of the Remand Order are currently
pending before the FCC and the U.S. Court of Appeals for the District of
Columbia Circuit, respectively. While the Company believes that the essential
elements of the Remand Order should remain intact notwithstanding these
Petitions, changes to the specific terms and conditions of the current FCC
mandated Dial-Around Compensation regime may result from either proceeding.
Operating Expenses
The Company pays monthly charges to the LECs and CLECs for interconnection
to the Public Switched Network for basic dial tone and local usage. These
charges are computed, depending on the LEC or CLEC, using either a flat monthly
rate or a fixed monthly charge plus a per message or per minute usage rate,
based on the duration of the call. Additionally, the Company pays the LECs,
CLECs and IXCs a fee, based on usage, for intraLATA and interLATA transmission
service used to complete coin long-distance calls. The Company also typically
shares coin revenues and commissions paid to the Company by the OSPs with the
Property Owners. Once accessed to the Public Switched Network, the Company is
also responsible for the associated billing, collection, bad-debt and validation
costs, when the Company is acting as the operator service provider. As
previously noted, the Company currently is using AT&T and Sprint as its primary
national providers of operator services, where none of these costs applies
directly to the Company.
The Telecom Act was designed to open virtually all markets to competition
in the telecommunications industry and the Company believes that the future
effect will be to lower certain costs of the Company such as line charges and
usage rates for local interconnection, although there can be no assurances as to
the specific timing or amount of such reductions. In this regard, recently, the
FCC has ordered the implementation of several new charges, namely, Universal
Service Funding ("USF"), Presubscribed Interexchange Carrier ("PICC"), and
Payphone Line Coding charges, which represent increases in the Company's
telephone charges and which are in varying stages of administrative review.
These new charges may limit the cost reductions otherwise anticipated under the
Telcom Act, although there can be no assurance of the ultimate impacts
experienced by the Company or the materiality of such impacts.
Internal Growth
Placement of Public Pay Telephones. The Company seeks to install its public
pay telephones in locations where it believes there will be significant demand
for public telephone service, such as convenience stores, grocery stores,
gasoline service stations, shopping centers, hotels, restaurants, airports and
truck stops. In evaluating locations, the Company generally conducts a site
survey to examine geographical factors, population density, traffic patterns,
historical information (to the extent available) and other factors, in
determining whether to install a public pay telephone. The Company has focused
its efforts to date on securing telephone locations from local and regional
accounts, and large national accounts which can provide a large number of high
quality locations.
The Company installs its public pay telephone equipment pursuant to
agreements ("Property Agreements") with the Property Owners. The Company's
typical Property Agreement has a three to five-year term and may provide the
Company with the option to renew for an additional three to five years. Each
Property Agreement provides for a revenue sharing arrangement between the
Company and the Property Owner based on the revenue generated from the public
pay telephone. The percentage of revenue paid to a Property Owner is generally
fixed for the period of the Property Agreement. The Company estimates that the
average cost of installing a new public pay telephone, including site selection,
hardware and labor, is approximately $1,950.
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In the past several years, the Company has been able to grow internally
through use of existing inventory and parts. To meet planned growth in new phone
installations, the Company now expects to significantly increase purchases of
new pay telephones and parts for installations and repair purposes.
The Company is obligated to repair, maintain and service the public pay
telephone equipment installed pursuant to the Property Agreements. Through its
computer systems, the Company generally is able to determine potential
malfunctions before they are reported and repairs such malfunctions within 24
hours in the majority of cases. Generally, the failure of the Company to remedy
a default within 30 days after notice gives the Property Owner the right to
terminate the Property Agreement and the Company may terminate a Property
Agreement on 30 days' prior notice to the Property Owner if the public pay
telephone does not generate sufficient total revenue for two consecutive months.
Marketing. Although the Company's past growth in its core public pay
telephone business was primarily driven by acquisitions through 1994, the
Company has more recently focused on internal sales growth to increase the
number of public pay telephones that the Company owns, operates or services at
local, regional and national accounts. An aggressive multi-channel sales
organization is currently being developed by the Company as a complement to this
process. The primary focus of the Company's marketing efforts has been, and
continues to be, regional and national corporate accounts, although the Company
does operate a large number of its installed payphone base at local account
locations. As one of the country's largest independent public pay telephone
providers, the Company believes it is in a strong position to service national
accounts, in contrast to smaller competitors or LECs, which currently operate
only in their specific geographic regions. In contrast to the limited resources
of the smaller independent public pay telephone operators, the Company's "smart"
pay telephones, sophisticated management information systems, and highly trained
national service and support staff allow the Company to maintain a high level of
service and react quickly to repair damaged equipment. The Company's size and
cost structure also allow it to offer attractive commissions to Property Owners
that are competitive with other independent operators and the LECs, although the
industry has become substantially more competitive with regard to commissions.
Based upon the Telecom Act, the Company believes that there will be additional
changes in the competitive public payphone environment, which may create both
opportunities and risks for the Company, the ultimate outcome of which cannot be
predicted with any assurance.
Acquisitions
Through 1994, the Company's core public pay telephone business grew
primarily through acquisition of other public pay telephone companies. The
company's acquisition of public pay telephones for amounts in excess of $500,000
from 1990 through 1994 included approximately 32,350 telephones from 17
companies. See "Business Strategy - Acquisitions."
Competition
The Company believes the principal competitive factors in the public pay
telephone business are: (i) commission payments to Property Owners; (ii) the
ability to serve accounts with locations in several LATAs or states; (iii) the
quality of service provided to the Property Owners and the users of the
telephones; and (iv) responsiveness to customer service needs.
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In the public pay telephone business, the Company principally competes with
the LECs, a number of independent providers of public pay telephone services,
major OSPs and IXCs. Some of these independent companies have increased in size
through acquisitions and many of these companies compete for the most favorable
public pay telephone contracts and sites. Most LECs and IXCs with which the
Company competes have substantially greater financial, marketing and other
resources than the Company. In addition, many LECs, faced with competition from
independent public pay telephone companies, have increased their compensation
arrangements with Property Owners by offering more favorable commission
schedules and other incentives. As a result of the passage of the Telecom Act
and other regulatory changes, under certain circumstances, the LECs have been
allowed to begin providing services outside of their monopoly franchise
territories in a more deregulated mode, and other companies may also compete
against the LECs for in-territory local business. The potential for competition
from other new entrants in the payphone industry exists as well. These
possibilities present both business opportunities and risks for the Company.
Opportunities include, but are not necessarily limited to, potential lower
interconnection costs due to the advent of competition in the local service
business and improved revenues as a result of the adoption of Dial-Around
Compensation. The risks include increased competition from the LECs, other new
entrants, and a range of wireless technologies, particularly in light of recent
increases in local coin call prices. See "Regulation".
Telephone Systems Management and Service
The Company has internally developed a computer software system which
interfaces with microprocessors in the Company's public pay telephones. The
Company's computer system polls the public pay telephones each night to
determine the amount of coin revenue in each telephone and to diagnose possible
operational problems occurring with the telephones.
Based on the results of each night's polling, the Company determines which
telephones require collection or service. Each of the Company's technicians
generally remove from 20 to 25 sealed coin boxes each day, depending upon the
number of public pay telephones within the collector's specified collection
route. Once the route is completed, the technician returns to one of the
Company's coin collection rooms located at its executive office or one of its
regional offices, where the seal on the coin box is removed and the coins are
electronically counted. The actual amount in each coin box is automatically
recorded and compared to the expected amount determined by polling the public
pay telephone on the previous night.
The Company maintains a staff of approximately 320 field service telephone
technicians located throughout the states in which the Company's public pay
telephones are installed. The Company has imposed a high standard of service and
maintenance in order to ensure that the public pay telephones are operating
properly and generating maximum revenue. Through its computer system, the
Company generally is able to determine malfunctions before they are reported and
is able, in most cases, to repair such malfunctions within 24 hours. The most
typical payphone malfunctions or problems are caused by vandalism and theft. On
average, less than 2% of the Company's public pay telephones are out of service
or are not operating properly at any one time. For accounting purposes,
telephone repair costs are expensed by the Company as incurred. The Company also
continuously monitors and reviews the latest technology in the industry to
prevent tampering, vandalism, fraud and theft at its public pay telephones. The
Company's management systems allow the Company to decentralize its operations by
giving its field operations personnel access to more information, thus allowing
for quicker response and reduced out of service downtime.
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The Company has continued its refurbishment program to improve the
condition of its installed public pay telephone base. In connection with this
program, the Company has created its own repair center located at its
headquarters. This repair center has assisted in lowering the Company's repair
costs and providing a steadier supply of repaired equipment back to the field
for deployment.
Telephone Equipment Suppliers
The Company purchases its public pay telephones from independent
manufacturers. The Company's public pay telephones use microprocessors that
provide voice synthesized calling instructions and the capability to detect and
count coins deposited during each call. These "smart" public pay telephones also
provide information to the caller at certain intervals regarding the time
remaining on the call and the need for an additional deposit to continue to
call. As of December 31, 1997, approximately 34,000, or 85%, of the public pay
telephones that the Company operates were manufactured by Intellicall, Inc.
("Intellicall"). The Company also operates public pay telephones manufactured by
other manufacturers. The Company believes that it can purchase public pay
telephones from other public pay telephone manufacturers on terms similar to
those in effect with Intellicall. The Company has a non-exclusive arrangement
with Intellicall whereby the software and engineering schematics to repair the
Intellicall telephones are held in escrow, to protect the Company against the
bankruptcy of, the cessation of business operations by, or the failure to
provide system support maintenance by, Intellicall. The Company, therefore,
believes that the loss of Intellicall as a manufacturer of the Company's public
pay telephone equipment would not have a material adverse effect on its
business, although no assurances can be given.
Long-Distance Operator Services Aggregator
The Company has developed a program involving the aggregation and resale of
certain operator ("0+"/"0-") services and transmission ("1+") services to other
PSPs. The Company is able to arbitrage these services to smaller payphone
companies based upon the favorable higher volume terms and conditions under
which the Company is able to obtain the services from the underlying LECs, OSPs
and IXCs. Network and operator services which the Company presently is
authorized to resell to other PSPs either directly or through agency agreements
include those of AT&T, Sprint, BellSouth Telecommunications, Inc., GTE Corp. and
Ameritech Corp. The Company is committed to developing alternate distribution
channels for both carrier services and a full range of other public
communications support services, which the Company believes it is uniquely
suited to provide. The Company believes this area of the business should provide
future revenue streams that will assist in the Company's return to
profitability, although there can be no assurances that such a positive impact
will occur.
Prepaid Calling Card/International Telephone Centers
In December 1994, as part of its strategic initiative to return its focus
to the core public pay telephone business, the Company's Board of Directors
approved the sale of the Company's prepaid calling card, international telephone
center and cellular operations. The sale of these units occurred in 1995. (For
additional information, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations.")
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Inmate Telecommunications Divestiture
On December 19, 1997, the Company sold the operating assets of its Inmate
Services Division to Talton Holdings, Inc. of Dallas, Texas, ("Talton") for a
cash purchase price of $10,625,000, plus possible deferred consideration
contingent on future operating results. Sale of the division resulted in a
one-time gain on disposition of $4.2 million, recorded in the fourth quarter of
1997. As one of the continuing terms of the transaction, the Company will
maintain, subject to specified conditions and for a limited period, a
performance bond and related collateralization with respect to an ongoing Clark
County, Nevada inmate services agreement. In addition, pursuant to a Management
Agreement concurrently entered into between the parties, and subject to the
terms and conditions of the Asset Purchase Agreement, Talton will, for the
benefit of the Company, supervise and manage the ongoing daily operations of the
business with respect to those inmate services agreements requiring either
regulatory or contractual approval prior to formal transfer of title to the
assets.
Regulation
Overview
The Company's operations are significantly influenced by the regulation of
public pay telephone and other related telecommunications services. Authority
for regulation of these services has traditionally been vested concurrently with
the FCC and the various state public utility commissions. Regulatory
jurisdiction has generally been determined by the interstate or intrastate
character of the subject service, and the degree of regulatory oversight varies
among jurisdictions. While most matters affecting the Company's operations fall
within the administrative purview of these regulatory agencies, state and
federal legislatures and the courts have also been involved in establishing
certain rules governing key aspects of the Company's operations.
Section 276 of the Telecom Act (see "Business - Public Pay Telephone
Industry Overview") vests broad new authority in the FCC with regard to the
regulation (or forbearance from regulation) of public pay telephone services.
The FCC has adopted a series of orders implementing Section 276. As an outgrowth
of the Telecom Act, there has been an expansion of the FCC's role in shaping
overall regulatory requirements for the public pay telephone industry.
Specifically, pursuant to Section 276 of the Telecom Act, the rules adopted by
the FCC under the new payphone provisions of the Telecom Act have effectively
preempted any inconsistent payphone regulations by a state authority. Moreover
with the FCC's adoption of regulations to implement Section 276, there will be
no effective ongoing role of the AT&T Divestiture court for any purpose relevant
or material to the Company's operations. Although this expected restructuring of
the traditional jurisdictional and regulatory authorities for public pay
telephone service comports with the best current information available to the
Company, a final determination must await the outcome of pending federal court
appeals and further FCC implementation actions. In the event the FCC orders
implementing Section 276 are ultimately declared invalid, in whole or in part,
the Company could be materially and adversely affected.
State Regulation
State regulatory commissions have historically been responsible for
regulating the rates, terms and conditions of intrastate public pay telephone
services. This has generally involved the setting of rate ceilings on intrastate
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services provided to end users of the payphone; establishment of rates paid by
competitive public pay telephone providers to the LECs for lines and
local/intraLATA services; imposing mandatory service and operational
requirements; and, in several cases establishment of intrastate "Dial-Around"
Compensation or "set use fee" mechanisms for PSPs. These existing state
regulatory rules are subject to significant revision at the state level (i.e.,
local coin rate deregulation under the Initial Payphone Orders), and the Company
believes, although there can be no assurances, that federal preemption of some
additional aspects of these state regulations may occur on a prospective basis
pursuant to the terms of the Telecom Act and the regulations adopted thereunder
by the FCC. Moreover, proceedings are now underway in many state jurisdictions
addressing (i) tariff filings by the LECs to implement the requirements of
Section 276 and the FCC rulings thereunder; and (ii) revisions of state pay
telephone rules to conform to the new federal requirements.
To date, the degree to which state agencies regulate the types of services
offered by the Company varies widely, from certain states which do not require
any certification or authorization to operate within their borders, to other
states that have historically prohibited non-LEC public pay telephone services
entirely. In most states which permit such services, approval to operate in the
state involves the submission of a certification application and an agreement by
the Company to comply with the rules, regulations and reporting requirements of
the state. The Company has, directly or through contractual partners, obtained
the requisite regulatory approvals to offer public pay telephone service in all
states where the Company currently operates.
The Company is also affected by state regulation of operator services,
either directly with respect to operator services provided by the Company or
indirectly through the impact upon the OSPs utilized by the Company. Typically,
state regulatory bodies have adopted intrastate provisions that are similar or
identical to the regulations adopted by the FCC pursuant to the Telephone
Operator Consumer Services Improvement Act of 1990 ("TOCSIA"). These regulations
address "branding", "posting" and "unblocking" requirements for public pay
telephones, to which a significant number of states have also added rate
regulation in the form of rate "ceilings", reporting requirements and
restrictions on the handling of certain call categories (i.e., "0-" dialed
calls). The Company, or its designated carrier(s), have obtained the required
intrastate operator service authorizations, including, where applicable,
certificates of public convenience and necessity and approval or acceptance of
tariffs in all jurisdictions in which the Company provides service. As with the
future regulation of public pay telephone services, the scope and application of
state regulatory requirements to operator services provided in a public pay
telephone context remain uncertain, pending full and final implementation of
Section 276 of the Telecom Act by the FCC and the state regulatory agencies.
Federal Regulation
Until recently, regulation of the public pay telephone business at the
federal level has not been as detailed or comprehensive as many of the state
regulatory regimes described in the preceding section. The FCC, since first
authorizing the registration and interconnection of "instrument implemented"
public pay telephones in 1984, has primarily addressed issues of basic
interconnection to the Public Switched Network for the provision of interstate
telecommunications services from payphones, implementation of the provisions of
TOCSIA (involving "branding", "posting", "rate quotation", and "unblocking"
access code dialing to all operator services providers from public pay
telephones), establishment of Dial Around Compensation and the handling of
general consumer complaints with regard to public pay telephone services.
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<PAGE>
The Company however, believes that the passage of the Telecom Act and,
specifically, Section 276 of the Act, marks a significant change in the form and
scope of federal regulation, or the preemptive forbearance from such regulation,
for public pay telephone service, and hence for providers of the service
including the Company. The Telecom Act defines "payphone service" to mean "the
provision of public or semi-public pay telephones, the provision of inmate
telephone service in correctional institutions, and any ancillary service".
Section 276 of the Telecom Act charged the FCC with implementing rules that
would: (i) create a standard regulatory scheme for all public pay telephone
providers, including the RBOC public pay telephone operations; (ii) require
removal by the RBOCs of their public pay telephone operations from their
regulated books of account; (iii) prescribe certain safeguards to eliminate
future discrimination or subsidization of LEC public pay telephones; (iv)
require "fair compensation" to all public pay telephone providers for all calls
using public pay telephones (except for calls to 911 Emergency Services and
Telecommunications Relay Services numbers); (v) provide the right for all pay
telephone service providers, subject to existing and future contractual rights
with the Location Owner, to select the provider for both intraLATA and interLATA
network services; (vi) evaluate whether and how "public interest" pay telephones
(pay telephones that would not normally be placed in a location under purely
competitive conditions but may be required for public policy reasons) should be
maintained; and, ( vii) preempt state requirements that are inconsistent with
these provisions.
The FCC responded to Section 276's charge on September 20, 1996 and
November 8, 1996, when it issued its Initial Payphone Orders setting forth and
affirming regulations required to implement this section of the Telecom Act. In
implementing Section 276, these orders established, among other things, an
interim Dial-Around Compensation scheme for independent public payphone
providers for both access code and 1-800 subscriber calls at a flat rate of
$45.85 per pay telephone per month beginning November 6, 1996. This flat rate
was to be effective through October 6, 1997, at which time, compensation was to
begin on a per call basis at a rate of $0.35 per call or such other rate as
might be negotiated by the PSP and the carrier(s). Effective October, 1998, the
Dial-Around Compensation rate was to track the local coin rate at each phone or
such alternative rate as may be negotiated with the carrier(s).
To further ensure that pay telephone providers were fairly compensated, the
FCC in its initial Payphone Orders set forth a plan for the deregulation of
local coin calling rates by October 7, 1997. Under the plan, local coin calling
rates were designated to be set by market forces rather than prospective
regulation. The Initial Payphone Orders allowed individual states to order
deregulation prior to the October, 1997 deadline, or request a modification or
exemption from local coin rate deregulation upon a detailed showing in support
of such request by the state.
In order to discontinue the traditional interstate and intrastate payphone
subsidies for LEC pay telephones from the regulated rate base operations of the
LECs and eliminate future discrimination or subsidies in favor of RBOC pay
telephone services, the FCC's Initial Payphone Orders mandated nonstructural
separation for all LEC pay telephone operations, by April 15, 1997. LECs were
also required to file interconnection plans with the FCC that discussed the
manner in which compliance with the nondiscrimination and anti-cross
subsidization requirements would be effectuated. As a further
anti-discrimination measure, the Payphone Orders specifically required LECs to
provide access lines and associated services to all pay telephone providers on a
basis equal to that provided by the LECs to their own pay telephone operations.
Additional regulations under the Initial Payphone Orders included a
provision authorizing PSPs to select the primary intraLATA and interLATA
carriers of choice. For public safety reasons, "0-" dialed emergency calls may
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be directed to be routed to the LEC if such a state requirement exists, but the
states were not authorized by the FCC to require non-emergency "0- " dialed
calls to be completed by the LEC. Finally, the Initial Payphone Orders stated
that enforceable agreements between a location provider and a pay telephone
provider or carrier, existing as of the date of the Act, were unaffected by the
Act.
In response to the FCC's initial Payphone Orders, numerous parties filed
petitions with the United States Court of Appeals for the District of Columbia
Circuit seeking review and modification of those Orders. In Illinois Public
Telecommunications Ass'n v. FCC, 117 F.3d 555, 123 F. 3. 693 (D.C. Cir. 1997)
("Illinois Public Telecom"), the court on July 1, 1997 and September 16, 1997,
affirmed key aspects of the FCC's rules implementing Section 276, including
specifically the deregulation of local coin calling rates, but also vacated and
remanded certain other aspects of those rules. The court overturned the FCC's
determinations in the Initial Payphone Orders regarding: (i) the interim and
permanent compensation rates of $0.35 per call established for Dial-Around
Calls; (ii) the requirement that only those IXCs with annual toll revenues over
$100 million pay PSPs for these calls during the first year of the interim
period; (iii) the failure to provide any interim compensation to RBOC PSPs for
"0+" calls and calls made from inmate payphones; and (iv) the use of fair market
value for payphone assets transferred from an RBOC to a separate affiliate. On
October 9, 1997, the FCC issued its Second Report and Order in the same docket,
FCC 97-371 (the "Remand Order"), revising certain aspects of the original
Payphone Orders in response to the court's order in Illinois Public Telecom. The
FCC concluded in the Remand Order that the rate for per-call compensation 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 compensation
(October 7, 1997 through October 6, 1999). Absent another negotiated rate
between the parties, the IXCs and OSPs were required to pay this per-call amount
to PSPs, including the Company, beginning October 7, 1997. After the first two
years of per-call Dial-Around Compensation, the actual market-based local coin
rate applicable on a per phone basis, adjusted for certain costs defined by the
FCC as $0.066 per call, is to take effect. These new provisions were made
effective as of October 7, 1997. 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
Dial-Around Calls during this period. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Provision for Dial-Around
Compensation Adjustment". The FCC stated that the manner in which the carrier
payment obligations, for the period from November 7, 1996 through October 6,
1997, will be allocated among the applicable carriers shall be addressed in a
subsequent order.
Since issuance of the Remand Order, several additional legal and regulatory
developments have taken place. First, several parties have filed Petitions for
Reconsideration with the FCC challenging the new default compensation rate and
several related aspects of the Remand Order. Comments have been filed by the
parties on these Reconsideration Petitions and the matter is currently awaiting
an FCC decision. Second, several parties have filed new appeals with the U. S.
Court of Appeals for the District of Columbia Circuit. Initial briefs have been
filed by the parties and oral argument has been scheduled for May 7, 1998, with
a court ruling expected in the second half of 1998. Third, several parties have
petitioned the FCC and the Circuit Court for a stay of the effectiveness of the
Remand Order. These petitions were subsequently denied by the FCC and by the
Court, thus leaving the Remand Order in place pending a final court ruling on
the appeal. Fourth, certain parties have filed a Petition for Certiorari Review
with the U.S. Supreme Court on the FCC's decision to deregulate local coin
calling rates, which decision was previously affirmed by the Circuit Court in
Illinois Public Telecom. On March 30, 1998, the U.S. Supreme Court declined to
accept jurisdiction and thus affirmed the Court of Appeals decision upholding
the FCC's regulation of local coin rates.
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Finally, petitions and comments have been filed with the FCC, seeking a
delay in the start date for per-call compensation, based upon the alleged
technical limitations of the relevant carrier tracking systems. On March 9,
1998, the Commission issued a Common Carrier Bureau Memorandum Opinion and Order
(the "Waiver Order") clarifying and waiving certain requirements established in
the Initial Payphone Orders, regarding payphone-specific coding digits needed to
facilitate the transition for LECs, PSPs and IXCs to a "per-call" Dial Around
Compensation regime. The Waiver Order stated or reiterated in relevant part
that: (i) limited time waivers for LEC's to provide payphone specific coding
digits in support of "per-call" Dial-Around Compensation will be granted; (ii)
during the waiver period, the previously established IXC obligations to pay
per-call compensation remain in effect; (iii) absent a negotiated agreement,
IXC's must pay per-call compensation of $0.284 for all calls they receive from
payphones not otherwise compensated; (iv) payment for the October, 1997 through
December 31, 1997 period must be made no later than April 1, 1998; (v) because
LECs and IXCs have identified problems in transmitting and receiving
payphone-specific coding digits, a retroactive adjustment (true-up) of payphone
compensation and/or an extension of the flat rate Dial-Around Compensation
surrogate may be necessary for the waiver periods and will be addressed in a
subsequent order; (vi) LECs must file tariffs with charges to PSPs imposed to
recover the incremental costs, without overhead loadings, of implementing
payphone-specific coding digits equally from all payphone lines; and, (vii) to
be eligible for "per-call" compensation, each pay telephone instrument must, by
April 8, 1998, be interconnected to the Public Switched Network via a "payphone
specific" line from the LEC/CLEC. The Company believes that, on balance, the
Waiver Order provides positive clarification and greater certainty with respect
to the issues presented, although there can be no assurances given as to the
final impacts resulting from the Waiver Order or subsequent modification orders
of the FCC or a court.
Similarly, although the Company believes the enactment and implementation
of Section 276 of the Telecom Act will result in an overall improvement to the
competitive environment in which the Company operates, the Company also
recognizes the potential for increased competitive and financial pressures from
the RBOCs or other LECs that may be more aggressive in the largely deregulated
mode provided for under the Telecom Act. The specific provisions of the FCC's
rules addressing the selection of a long distance carrier for the RBOC
payphones, the adequacy of the transfer valuation assigned to the RBOC payphone
operations upon their removal from regulated rate base accounts and whether the
precise "non-structural" safeguards applicable to the RBOCs and LECs will be
effective in eliminating cross subsidies and discrimination, will all
significantly impact the future level and scope of competition faced by the
Company in the public pay telephone market.
The Company's business is affected by a number of other recently adopted
federal regulations. On January 29, 1998, the FCC issued an order terminating
its consideration of the "billed party preference" proposal, under which
payphone providers would have been prevented from routing "0+" dialed non-coin
calls to their designated OSPs. In lieu of "billed party preference" the FCC
adopted regulations requiring rate quote announcements for "0+" interstate
calls. Under the rate quote regulations, an OSP must provide to callers dialing
interstate "0+" non-coin calls (and also to parties receiving "0+" collect
calls), a voice announcement at the beginning of the call stating that a rate
quote is available and informing the consumer how to obtain a rate quote without
terminating the call. The rate quote requirement is effective July 1, 1998. The
Company believes that the FCC's rejection of Billed Party Preference and
adoption of rate quote requirements is a positive event that represents the most
acceptable resolution of the interstate rate issues addressed by the FCC; and
will provide greater certainty and a more acceptable industry environment in
which the Company operates, although no assurances can be given.
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In regulations adopted in May 1997, the FCC required all telecommunications
service providers, including payphone companies, to make quarterly payments to
"universal service" funds. These funds are mandated by the Telecom Act as a
means to support telecommunications service to high-cost areas, low-income
subscribers, schools, libraries and rural health care facilities. Providers must
pay based on a "factor" (percentage) of their revenues collected from
"end-users." In the case of payphone providers, "end-user" revenue includes coin
revenue and non-coin revenue billed directly to consumers, but excludes per-call
compensation payments and commission payments received from carriers on non-coin
calls. The "factor" (or percentage payment) requirements vary on a
quarter-by-quarter basis. Starting in January, 1998, the Company has been
assessed approximately $56,000 per month for such funds. Payments have been made
by the Company under protest and are subject to pending FCC review.
Other changes in federal regulations affect the charges incurred by the
Company for local and long-distance telecommunications service. For example, in
May, 1997, the FCC adopted new regulations that restructure interstate access
charges. As a result of these changes, local exchange carriers are supposed to
reduce the per-minute interstate access charges on interexchange carriers. To
partially offset these reductions, LECs were authorized to assess interexchange
carriers a flat "Presubscribed Interexchange Carrier Charge" of up to $2.75 per
line per month. As a net result of these and other changes, many carriers have
restructured their rates. Based upon these latter FCC actions, the Company
believes it will experience an increase in carrier costs, that will be subsumed
within, and to some extent offset by, the carrier cost reductions otherwise
expected from application of the FCC's "new services" test and the advent of
competition in local exchange services, but no assurances can be given as to the
actual aggregate net impact of these actions.
Employees
As of December 31, 1997, the Company had approximately 450 employees,
approximately 130 of whom were executive, administrative, accounting, sales or
clerical personnel and approximately 320 of whom were installers, maintenance
and repair personnel and coin collectors.
ITEM 2. PROPERTIES
The Company's headquarters facility, which is owned by the Company,
consists of a 68,000 square-foot building located at 2300 Northwest 89th Place,
Miami, Florida.
The Company maintains 21 service facilities which are linked to the
Company's headquarters by computer. The Company considers its current facilities
adequate for its business purposes.
ITEM 3. LEGAL PROCEEDINGS
In December 1995, Cellular World filed a complaint in Dade County Circuit
Court against the Company and its subsidiary, PTC Cellular, Inc., alleging
wrongful interference with Cellular World's advantageous business relationship
with Alamo Rent-A-Car, and alleged misappropriation of 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. For information regarding regulatory proceedings which could affect
the Company, see Item 1-"Business-Regulation".
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The Company is also subject to various ordinary and routine legal
proceedings arising out of the conduct of its business. The Company does not
believe that the ultimate disposition of these proceedings will have a material
adverse effect on its financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<TABLE>
<CAPTION>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
Effective November 13, 1996, the Common Stock of the Company began trading
on the American Stock Exchange under the symbol "PHO". Previously, the Company's
stock was traded on the NASDAQ's National Market System and the SmallCap Market.
The following table sets forth the high and low closing sales prices or the high
and low bid prices per share of Common Stock as reported on the respective
exchange and quotation systems for the periods indicated. Bid quotations
represent prices between dealers and do not reflect mark-ups, mark-downs or
commissions and may not necessarily represent actual transactions.
High Low
------ ------
<S> <C> <C>
Year ended December 31, 1997:
First Quarter .................................. $ 4.00 $ 2.88
Second Quarter ................................. 3.75 3.00
Third Quarter .................................. 3.50 2.56
Fourth Quarter ................................. 4.50 3.00
High Low
------ ------
Year ended December 31, 1996:
First Quarter .................................. $ 2.81 $ 1.69
Second Quarter ................................. 4.25 2.31
Third Quarter .................................. 4.13 2.38
Fourth Quarter ................................. 4.50 2.75
</TABLE>
As of March 20, 1998, the Company had 452 shareholders of record.
Dividend Policy
The Company has never declared or paid cash dividends on its Common Stock.
The Company presently intends to retain all earnings for the operation and
development of its business and does not anticipate paying any cash dividends on
its Common Stock in the foreseeable future. In addition, the Company's credit
agreement precludes the Company from purchasing, redeeming or retiring any of
its capital stock without the prior written consent of its lenders or from
paying dividends in excess of 25% of the Company's net income. The payment of
dividends by the Company also is limited by provisions of the $100.0 million 12
1/2% Senior Notes due 2002 and by the Series C Cumulative Convertible Preferred
Stock. Any future determination as to the payment of cash dividends will depend
on a number of factors including future earnings, capital requirements, the
financial condition and prospects of the Company and any restrictions under
credit agreements existing from time to time, as well as such other factors as
the Board of Directors may deem relevant. There can be no assurance that the
Company will pay any dividends in the future.
21
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<TABLE>
<CAPTION>
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. Consolidated Statement of Operations Data:
Year Ended December 31,
1997 1996 1995 1994 1993
--------- --------- -------- ---------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Coin calls ................................................. $ 76,449 $ 77,389 $ 78,353 $ 79,392 $ 56,607
Non-coin calls ............................................. 38,431 29,617 33,887 35,566 23,301
Service and other .......................................... -- -- 122 1,615 1,809
--------- -------- -------- --------- ---------
Total revenues ............................................ 114,880 107,006 112,362 116,573 81,717
Costs and expenses:
Telephone charges ........................................ 29,310 30,107 35,582 43,716 20,714
Commissions .............................................. 30,185 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
Provision for dial-around compensation adjustment ........ 2,116 -- -- -- --
Other operating (income) expense ......................... -- (1,500) 6,177 -- --
--------- -------- -------- --------- ---------
Total costs and expenses ................................... 115,536 108,944 120,832 117,270 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>
22
<PAGE>
<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
EBITDA(1)................................................. $ 20,648 $ 19,073 $ 10,144 $12,133 $ 22,326
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
Total long-term debt and preferred stock(2) ............. 116,559 116,309 116,463 98,301 75,262
Shareholders' equity ..................................... (17,680) (4,294) 14,288 48,715 65,333
</TABLE>
_____________________
(1) EBITDA represents net earnings from continuing operations before interest,
income taxes, depreciation and amortization. EBITDA is not presented as an
alternative to operating results or cash flow from operations as determined
by generally accepted accounting principles ("GAAP"), but rather to provide
additional information related to the ability of the Company to meet
current trade obligations and debt service requirements.
(2) Total long-term debt and preferred stock includes the long-term portion of
the Company's notes payable and capital lease obligations, plus the Series
C Cumulative Convertible Preferred Stock and preferred stock dividends
payable.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis compares the year ended December 31, 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.
24
<PAGE>
<TABLE>
<CAPTION>
The financial results discussed below relate to continuing operations and are
presented as additional analysis of the Company's results of operations.
Percentage Percentage Point Change
of Total Revenues 1997 1996
Year Ended December 31, Compared Compared
1997 1996 1995 to 1996 to 1995
------ ------ ----- ---------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Coin calls ......................................... 66.5% 72.3% 69.7% (5.8) pts. 2.6 pts.
Non-coin calls ..................................... 33.5 27.7 30.2 5.8 (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 .................................. 25.5 28.1 31.7 (2.6) (3.6)
Commissions ....................................... 26.3 26.4 24.6 (0.1) 1.8
Field service and collection ...................... 17.1 17.9 18.8 (0.8) (0.9)
Depreciation and amortization ..................... 18.5 19.1 17.1 (0.6) 2.0
Selling, general and administrative ............... 11.3 11.7 9.9 (0.4) 1.8
Provision for dial-around compensation
adjustment ..................................... 1.8 0.0 0.0 1.8 0.0
Other operating (income) expense .................. 0.0 (1.4) 5.5 1.4 (6.9)
------ ------ ----- ------ -----
Total costs and expenses ........................... 100.5 101.8 107.6 (1.3) (5.8)
------ ------ ----- ------ -----
Operating loss ................................... (0.5) (1.8) (7.6) 1.3 5.8
------ ------ ----- ------ -----
Other (income) and expenses:
Interest expense, net ............................. 11.4 12.0 9.2 (0.6) 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 .......... 11.4 11.5 9.7 (0.1) 1.8
------ ------ ----- ------ -----
Loss from continuing operations before
income taxes ................................... (11.9) (13.3) (17.3) 1.4 4.0
Benefit from income taxes ............................ 0.0 0.0 0.2 0.0 (0.2)
------ ------ ----- ------ -----
Net loss from continuing operations .................. (11.9)% (13.3)% (17.1)% 1.4 3.8
====== ====== ====== ====== =====
EBITDA ............................................... 18.0% 17.8% 9.0% 0.2 8.8
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Change
-------------------
Per Phone Per Month 1997 1996
Year Ended December 31, 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 ..................................... 81.62 64.35 72.04 17.27 (7.69)
Service and other .................................. 0.00 0.00 0.26 0.00 (0.26)
------- ------ ------ -------- --------
Total revenues ..................................... 243.99 232.50 238.88 11.49 (6.38)
------- ------ ------ -------- --------
Costs and expenses:
Telephone charges ................................. 62.25 65.41 75.65 (3.16) (10.24)
Commissions ....................................... 64.11 61.38 58.68 2.73 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
Provision for dial-around compensation
adjustment ..................................... 4.49 0.00 0.00 4.49 0.00
Other operating (income) expense .................. 0.00 (3.26) 13.13 3.26 (16.39)
------- ------ ------ -------- --------
Total costs and expenses ........................ 245.38 236.71 256.90 8.67 (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
======== ======== ======== ======== =======
EBITDA ............................................... $ 43.86 $ 41.44 $ 21.56 $ 2.42 $ 19.88
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
The following tables summarize the Company's quarterly results of continuing
operations (in thousands, except per share data):
1997 Quarter Ended
------------------------------------------
March 31 June 30 Sept.30 Dec.31
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Coin calls ................................................ $ 17,940 $ 19,293 $ 19,796 $ 19,420
Non-coin calls ............................................ 10,111 10,173 9,285 8,862
-------- -------- -------- --------
Total revenues ............................................ $ 28,051 $ 29,466 $ 29,081 $ 28,282
Costs and expenses:
Telephone charges .......................................... 7,413 7,327 7,484 7,086
Commissions ................................................ 7,566 7,998 6,558 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
Provision for dial-around compensation adjustment........... -- -- 2,116 --
Other ...................................................... -- -- -- --
-------- -------- -------- --------
Total costs and expenses ................................... 27,916 28,517 30,086 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)
======== ======== ======== ========
EBITDA ..................................................... $ 5,391 $ 6,301 $ 4,371 $ 4,585
</TABLE>
27
<PAGE>
<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
Provision for dial-around compensation adjustment .... -- -- -- --
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)
======= ======= ======= =======
EBITDA ............................................... $ 4,003 $ 4,412 $ 5,591 $ 5,067
</TABLE>
28
<PAGE>
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
29
<PAGE>
Calls for which the 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".
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. See Provision
for Dial-Around Compensation Adjustment for further information. 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 year-end, the Company has recorded
Dial-Around Compensation at $37.20 per phone ($0.284 multiplied by an assumed
131 calls). From October 7, 1997 forward, this amount may be adjusted for actual
call counts provided by the IXCs. See "Business-Regulation".
Revenue from non-coin calls increased by 29.8% to $38.4 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 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 from
continuing operations to 25.5% 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.
30
<PAGE>
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 28.0% 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.
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 11.3%, 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 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
31
<PAGE>
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 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 provision, net of applicable commissions,
recorded in 1997 for reduced Dial-Around Compensation is approximately $2.1
million ($0.13 per share). 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
32
<PAGE>
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.
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.
33
<PAGE>
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.
Earnings Before Interest, Taxes, Depreciation and Amortization
EBITDA is not presented as an alternative to operating results or cash flow
from operations as determined by Generally Accepted Accounting Principles
("GAAP"), but rather to provide additional information related to the ability of
the Company to meet current trade obligations and debt service requirements.
EBITDA should not be considered in isolation from, or construed as having
greater importance than, GAAP operating income or cash flows from operations as
a measure of an entity's performance.
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 $7.2 million in 1997 compared to $5.3 million in 1996 and $13.0 million in
1995.
The Company's working capital was approximately $13.1 million, with a
current ratio of 1.40 to 1, at December 31, 1997. This is compared to working
capital of $8.5 million and a current ratio of 1.29 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.
34
<PAGE>
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, 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 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 net income of approximately $1.8 million
from the discontinued inmate division in 1997.
35
<PAGE>
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.
36
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Schedules
PAGE NUMBERS
Report of Independent Certified Public Accountants............. 38
Consolidated Balance Sheets as of December 31, 1997 and 1996... 39
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995................... 40
Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 1997, 1996 and 1995........ 41
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995...................... 42
Notes to Consolidated Financial Statements................... 44
SCHEDULES:
II - Valuation and Qualifying Accounts and Reserves............ 65
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
37
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Peoples Telephone Company, Inc.
We have audited the consolidated balance sheets of Peoples Telephone Company,
Inc. 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.
/s/ ERNST & YOUNG LLP
Miami, Florida
February 27, 1998
38
<PAGE>
<TABLE>
<CAPTION>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
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
Inventory ...................................................... 2,125 2,412
Prepaid expenses and other current assets ..................... 2,631 2,547
Net assets of discontinued operations .......................... -- 8,196
--------- ---------
Total current assets ....................................... 45,571 37,309
Property and equipment, net ...................................... 48,237 59,129
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; 5,000 shares authorized in
1997 and 4,240 shares authorized in 1996; none issued
and outstanding ............................................. -- --
Convertible preferred stock; Series B, $.01 par value;
600 shares authorized; none issued and outstanding .......... -- --
Common stock; $.01 par value; 75,000 shares authorized
in 1997 and 25,000 shares authorized in 1996;
16,209 shares in 1997 and 16,195 shares in 1996 issued
and outstanding ............................................ 162 162
Capital in excess of par value ................................. 59,291 60,453
Accumulated deficit ............................................ (75,108) (63,438)
Unrealized loss on investments ................................. (2,025) (1,471)
--------- ---------
Total common shareholders' deficit .......................... (17,680) (4,294)
--------- ---------
Total liabilities less shareholders' deficit ................ $ 131,317 $ 140,870
========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
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 ..................................................... 38,431 29,617 33,887
Service and other .................................................. -- -- 122
------- -------- --------
Total revenues .................................................. 114,880 107,006 112,362
Costs and expenses:
Telephone charges .................................................. 29,310 30,107 35,582
Commissions ........................................................ 30,185 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
Provision for dial-around compensation adjustment .................. 2,116 -- --
Other operating (income) expense ................................... -- (1,500) 6,177
------- -------- --------
Total costs and expenses ....................................... 115,536 108,944 120,832
------- -------- --------
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.
40
<PAGE>
<TABLE>
<CAPTION>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH DECEMBER 31, 1997
(in thousands, except per share data)
Capital Unrealized
Common in Excess 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.
41
<PAGE>
<TABLE>
<CAPTION>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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
Inventory ........................................ 167 (623) 1,004
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 ............. 7,215 5,348 12,995
--------- ---------- ------
Cash flows from investing activities
Property and equipment additions ...................... (2,348) (2,309) (6,641)
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 ... 5,402 (3,425) (5,130)
--------- ---------- -------
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.
42
<PAGE>
<TABLE>
<CAPTION>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(in thousands)
Supplemental disclosures of cash flow information
For the year ended
December 31
---------------------------
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.
43
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
Description of business
Peoples Telephone Company, Inc. (the "Company") owns, operates, services and
maintains public pay 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).
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).
44
<PAGE>
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.
45
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Inventories
Inventories, which consist primarily of replacement parts, are carried at the
lower of cost or market, with cost being determined on the first-in, first-out
basis.
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, 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.
46
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
47
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 13 ("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, respectively.
48
<PAGE>
<TABLE>
<CAPTION>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows (in thousands):
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 .. 3,021 5,292
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
--------- ----------
126,375 124,777
Less accumulated depreciation and amortization,
including $2,042 and $2,198 for capital leases ..... (78,138) (65,648)
--------- ----------
$ 48,237 $ 59,129
========= =========
</TABLE>
<TABLE>
<CAPTION>
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).
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:
<S> <C> <C>
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
========
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in thousands):
December 31,
-----------------
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>
<TABLE>
<CAPTION>
NOTE 6 - NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following (in thousands):
December 31,
----------------------
1997 1996
-------- ----------
<S> <C> <C>
$100 million Senior Notes due 2002 with a stated
interest rate of 12 1/2%............................................. $ 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.
50
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
51
<PAGE>
<TABLE>
<CAPTION>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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:
<S> <C>
Series C Preferred Stock............................ 2,857,143
Employee stock options outstanding.................. 2,657,408
Warrants............................................ 975,000
---------
Total............................................ 6,489,551
=========
</TABLE>
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
52
<PAGE>
<TABLE>
<CAPTION>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The following table summarizes information related to the Company's stock option
activity (in thousands, except for per share data):
1997 1996 1995
------------------------ ----------------------- ----------------------
Number Wtd. Avg. Number Wtd. Avg. Number Wtd. Avg.
of Shares Ex. Price of Shares Ex. Price of Shares Ex. Price
---------- ----------- ----------- ----------- ---------- ----------
<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.
53
<PAGE>
<TABLE>
<CAPTION>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro forma net loss and loss per share information is provided in accordance with
SFAS 123 as if the Company's stock options' were accounted for under the fair
value method.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options vesting period. The following table
sets forth pro forma net loss and loss per share (in thousands, except for per
share data):
Year-ended December 31,
------------------------------------
1997 1996 1995
---------- ----------- ----------
<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>
<TABLE>
<CAPTION>
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.
NOTE 10 - EMPLOYEE SAVINGS PLAN
During November 1990, the Company established a savings plan under the
provisions of section 401(k) of the Internal Revenue Code (the "Plan"), which
covers substantially all employees. The Company's contributions to the Plan are
discretionary. Employees participating in the Plan vest in amounts contributed
by the Company over a period of 5 years. The Company matches 25% of employee
contributions. Employees may contribute up to 15% of their earnings each plan
year. The Company's contributions totaled approximately $0.1 million in each of
the years ended December 31, 1997, 1996 and 1995.
NOTE 11 - INCOME TAXES
The components of the benefit from income taxes are as follows (in thousands):
Year ended December 31
----------------------------
1997 1996 1995
------ -------- -------
<S> <C> <C> <C>
Currently payable:
Federal.......................... $ -- $ -- $ --
State............................ -- -- 107
Deferred......................... $ -- -- (324)
------ -------- -------
$ -- $ -- $ (217)
========= ======== =======
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation between the Company's effective income tax rate and federal
income tax statutory rate is as follows:
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>
<TABLE>
<CAPTION>
Significant temporary differences included in the net deferred tax asset are as
follows (in thousands):
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.
55
<PAGE>
<TABLE>
<CAPTION>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - EARNINGS PER SHARE
For the years ended December 31, 1997, 1996 and 1995, the treasury stock method
was used to determine the dilutive effect of the options and warrants on
earnings per share data. The following table summarizes the restated net loss
from continuing operations per share and the weighted average number of shares
outstanding used in the computations in accordance with SFAS No. 128 (in
thousands, except per share data):
1997 1996 1995
--------- --------- ---------
<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.
56
<PAGE>
<TABLE>
<CAPTION>
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):
<S> <C> <C>
Year ended:
1998. . . . . . . . . $ 308
1999. . . . . . . . . 174
2000. . . . . . . . . 41
---------
$ 523
=========
</TABLE>
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.
57
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
58
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
59
<PAGE>
<TABLE>
<CAPTION>
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
(in thousands)
For the Years 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 beforeincome
taxes .................................................. 268 -- (14,600)
Provision for income taxes ............................... -- -- --
--------- -------- ---------
Gain (loss) from discontinued operations ................. $ 268 $ -- $(14,600)
======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Inmate Telephone Operations
(in thousands)
For the Years 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).
60
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1994 and 1995, the Company made loans of approximately $3.6 million to
certain officers and directors for, among other things, the repayment of debt
previously incurred by them in connection with the exercise of stock options and
payment of related income taxes. The officers and directors exercised the stock
options in December 1993 to purchase the Company's Common Stock for purposes of
increasing the Company's shareholders' equity without accessing external capital
markets. The officers and directors executed promissory notes for a portion of
the amounts due which became payable on March 28, 1996. In addition, during 1994
and 1995, under the terms of employment contracts with certain officers, the
Company paid approximately $0.6 million in life insurance policy premiums. Such
premiums are required to be reimbursed by such officers upon termination. During
the fourth quarter of 1995, the Company recorded a reserve for potential
uncollectible loan and insurance amounts of approximately $3.2 million which is
included in "Other 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.
61
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
62
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 provision, net of applicable commissions, recorded in 1997 for
reduced Dial-Around Compensation is approximately $2.1 million ($0.13 per
share). 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.
63
<PAGE>
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.
64
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
PEOPLES TELEPHONE COMPANY, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
Balance at Charged to Balance
beginning costs and at end
of period expenses Deductions(1)(2) of period
---------(1) ---------(1) ---------- ---------(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
==-===== ======== ======= =======
- ------------------
(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.
</TABLE>
65
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
66
<PAGE>
<TABLE>
<CAPTION>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth the name, age and position of each of the
directors and executive officers of the Company:
Name Age Position
<S> <C> <C>
E. Craig Sanders 53 President, Chief Executive Officer,
Director
Neil N. Snyder, III 51 Chief Operating Officer,
Executive Vice President
Bruce W. Renard 44 General Counsel and Executive Vice
President-Legal and Regulatory
Affairs/Carrier Relations
Lawrence T. Ellman 45 Executive Vice President/
President-National Accounts
William A. Baum 48 Chief Financial Officer,
Senior Vice President
David A. Arvizu 49 Senior Vice President-Sales and
Services
C. Keith Pressley 54 Vice President-Revenue Management
Charles J. Delaney(1)(2) 38 Director
Jody Frank (1) 46 Director
Robert E. Lund (2) 53 Director
Justin S. Maccarone (1)(2) 39 Director
______________
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
</TABLE>
67
<PAGE>
The principal occupation of each director and executive officer for at
least the last five years is set forth below:
E. Craig Sanders has served as President, Chief Executive Officer and a
director of the Company since May 1996. From 1995 to 1996, Mr. Sanders was a
partner of PSN Ventures, L.L.C., a company which identifies investment
opportunities in the telecommunications industry. From 1994 to 1995, Mr. Sanders
served as Chairman and Chief Executive Officer of a privately held long distance
company. From 1982 to 1994, Mr. Sanders was an employee of Sprint Corporation,
and held the office of Senior Vice President for Product Management from 1991
until 1994.
Neil N. Snyder, III joined the Company in September 1996 as Executive Vice
President and Chief Operating Officer. Prior to joining the Company, Mr. Snyder
concluded over 28 years in the U.S. Army, rising to the rank of Brigadier
General, most recently as the senior staff officer for operational support at
the U.S. Army Training and Doctrine Command in Hampton, Virginia where he
oversaw the management of 16 installations and the $3.2 billion budget for those
bases.
Bruce W. Renard joined the Company as General Counsel and Vice President --
Regulatory Affairs in January 1992 and, since February 1996, has served as
General Counsel and Executive Vice President -- Legal & Regulatory
Affairs/Carrier Relations. From September 1, 1991 to December 31, 1991, Mr.
Renard was a sole practitioner specializing in legal and regulatory consulting
services to the telecommunications and utility industries. From August 1984 to
September 1991, Mr. Renard was a partner with the Florida law firm of Messrs,
Vickers, Caparello, French and Madsen, managing the utility and
telecommunications law sections of the firm. Prior to that time, Mr. Renard
served as Associate General Counsel for the Florida Public Service Commission.
Lawrence T. Ellman joined the Company in June 1994 as President of its Pay
Telephone Division and held that office until February 1996 when he became
Executive Vice President -- Sales. Since February 1996, he has served as
Executive Vice President/President-National Accounts. From 1990 until joining
the Company, Mr. Ellman was President of Atlantic Telco Joint Venture, an
independent public telephone operator acquired by the Company in June 1994. For
approximately eight years prior thereto, he was Executive Vice President and
Chief Financial Officer of American Potomac Distributing Company, a beverage
distributor.
William A. Baum has served as Senior Vice President, Chief Financial
Officer since July 1997. Previously, he served for 16 years in a series of
financial management positions with Ryder System, Inc., a highway transportation
and logistics company, most recently as Vice President Finance and Chief
Financial Officer of Ryder Integrated Logistics. Prior to joining Ryder, Mr.
Baum spent seven years with Arthur Andersen, rising to the position of manager
in their audit services practice.
David A. Arvizu joined the Company in March 1997 as Senior Vice President
of Sales and Marketing for local and regional markets and was named Senior Vice
President, Sales and Services in December, 1997. From 1994 to 1997 Mr. Arvizu
served as Vice President-Western Region of Western Union Financial Services,
Inc. From 1991 to 1994, he was president of a sales, marketing and consulting
service for a co-op of independent Pepsi-Cola franchisees. Prior to 1991, Mr.
Arvizu spent twenty years in sales and brand management positions with Pepsico
Inc. and General Foods Corp.
68
<PAGE>
C. Keith Pressley joined the Company in February 1994 as Vice President of
Management Information Systems. He became President of the Inmate
Telecommunications Division in June 1996. Upon the sale of the inmate
operations, he was named Vice President - Revenue Management in December, 1997.
Prior to joining the Company, he was Director of Information Systems for Smith
International, Inc., an oil field services company, since 1991.
Charles J. Delaney has served as a Director of the Company since August,
1995. Mr. Delaney has been President of UBS Capital LLC since January 1993. From
1989 to 1996 Mr. Delaney was also a Managing Director of the leveraged finance
group of the Union Bank of Switzerland. Mr. Delaney is also a director of Van de
Kamp's Inc., CBP Resources, Inc., Speciality Foods Corporation and Cinnabon
International.
Jody Frank has served as a director of the Company and its predecessor
since September 1986. From November 1997 to the present, he has been an
Executive Director of CIBC Oppenheimer, a financial services company. From
February 1990 to October 1997, he was a vice president of Shearson Lehman and,
after Smith Barney Inc. acquired the assets of Shearson Lehman in 1994, Smith
Barney Inc.
Robert E. Lund has served as a director of the Company since May 1994. He
has served as Chief Executive Officer of Intrepid Tech. Inc., a technology
services company, since December 1996. Mr. Lund served as Chief Executive
Officer of the Company from November 1995 until May 1996 and as President from
February 1996 until May 1996. From December 1994 through December 1995, Mr. Lund
served as President and Chief Executive Officer of S2 Software, Inc., a software
company. From February 1993 until October 1994 (when Newtrend, L.P. was sold),
Mr. Lund served as Chief Operating Officer of Newtrend, L.P., a provider of
software and professional services. From 1990 to 1992, Mr. Lund was Chairman and
Chief Executive Officer of International Telecharge, Inc., a telecommunications
company.
Justin S. Maccarone has served as a director of the Company since June
1996. Mr. Maccarone has been a Managing Director of UBS Capital, LLC since 1993
and, before that time, was a Senior Vice President at GE Capital Corporation.
Mr. Maccarone is also a director of American Sports Product Group, Inc.,
Communications Supply Corporation, Cinnabon International, Inc., and Trident
Automotive, PLC.
Ownership and Transactions Reports
Under Section 16 of the Securities Exchange Act of 1934, the Company's
directors, certain of its officers, and beneficial owners of more than 10% of
the outstanding Common Stock are required to file reports with the Securities
and Exchange Commission concerning their ownership of and transactions in Common
Stock; such persons are also required to furnish the Company with copies of such
reports. Based solely upon the reports and related information furnished to the
Company, the Company believes that all such filing requirements were complied
with in a timely manner during 1997.
69
<PAGE>
<TABLE>
<CAPTION>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years ended December 31,
1997, 1996 and 1995, the compensation earned by the Company's Chief Executive
Officer and each of the four remaining most highly compensated executive
officers for the fiscal year ended December 31, 1997.
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
Name and Principal Shares Underlying All Other
Position Year Salary Bonus Options(#) Compensation(1)
- -------------------------- ------ --------- -------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
E. Craig Sanders(2)........ 1997 $300,000 $130,000 -- $ 2,375
President, ................ 1996 212,000 -- 600,000 --
Chief Executive Officer
Neil N. Snyder, III(3)..... 1997 150,000 24,375 -- 2,375
Executive Vice President .. 1996 50,577 -- 200,000 --
Chief Operating Officer
Lawrence T. Ellman ........ 1997 170,000 42,850 37,500 --
Executive Vice President .. 1996 167,000 43,000 -- --
President-National Accounts 1995 149,994 25,000 -- --
Bruce W. Renard............ 1997 192,500 140,425 37,500 1,188
Executive Vice President,.. 1996 192,000 65,000 -- --
Legal & Regulatory Affairs, 1995 171,635 25,000 50,000 355
Carrier Relations,
General Counsel
C. Keith Pressley.......... 1997 120,000 10,500 22,500 2,375
Vice President- ........... 1996 112,000 10,500 -- 1,800
Revenue Management ........ 1995 100,000 -- -- 1,800
</TABLE>
____________________
(1) The amounts disclosed in this column include the Company's contribution on
behalf of the named executive officer to the Company's 401(k) retirement
plan in amounts equal to 25% of the executive officer's yearly
participation in the plan. Perquisites and other personal benefits do not
exceed 10% of salary and bonus.
(2) Mr. Sanders joined the Company in May 1996.
(3) Mr. Snyder joined the Company in September 1996.
70
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth certain information with respect to stock
options granted during the year ended December 31, 1997 to the executive
officers named in the Summary Compensation Table:
Options Grants in Last Fiscal Year Potential Realizable
Individual Grants Value of Assumed
Annual Rates of
% of Total Stock Price
Number of Options Granted Exercise or Appreciation for
Securities to Employees in Base price Option Term (1)
Underlying Options Fiscal Year ($/share) Expiration Date 5% 10%
------------------ -------------- ----------- ----------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Lawrence T. Ellman 7,500 3.63 2007 $16,275 $42,075
7,500 4.25 2007 16,275 42,075
7,500 5.25 2007 16,275 42,075
7,500 6.25 2007 16,275 42,075
7,500 7.25 2007 16,275 42,075
------
Total 37,500 8.04%
Bruce W. Renard 7,500 3.63 2007 16,275 42,075
7,500 4.25 2007 16,275 42,075
7,500 5.25 2007 16,275 42,075
7,500 6.25 2007 16,275 42,075
7,500 7.25 2007 16,275 42,075
------
Total 37,500 8.04%
C. Keith Pressley 4,500 3.63 2007 9,765 25,245
4,500 4.25 2007 9,765 25,245
4,500 5.25 2007 9,765 25,245
4,500 6.25 2007 9,765 25,245
4,500 7.25 2007 9,765 25,245
------
Total 22,500 4.82%
</TABLE>
____________________
(1) These amounts represent assumed rates of appreciation which may not
necessarily be achieved. The actual gains, if any, are dependent on the
market value of the Company's Common Stock at a future date as well as the
option holder's continued employment throughout the vesting period.
Appreciation reported is net of exercise price.
71
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth certain information as to each exercise of
stock options during the year ended December 31, 1997 by the executive officers
named in the Summary Compensation Table and the fiscal year end value of
unexercised options:
Aggregated Option Exercises In Last Fiscal Year
and Fiscal Year-End Option Values
Number of Value of Unexercised
Unexercised Options In-the-Money Options
at Fiscal Year End at Fiscal Year-End
Shares ------------------- ---------------------
Acquired on Value Exercisable/ Exercisable/
Name Exercise(s) Realized Unexercisable Unexercisable
- ------------------ ------------- ---------- ------------------ ---------------------
<S> <C> <C> <C> <C>
E. Craig Sanders .. -- -- 400,000/200,000 $ 118,750/-
Neil N. Snyder, III -- -- 66,666/133,334 10,250/-
Lawrence T. Ellman -- -- 45,000/37,500 -/431
Bruce W. Renard ... -- -- 85,000/37,500 62,375/431
C. Keith Pressley . -- -- 5,000/22,500 -/259
</TABLE>
COMPENSATION OF DIRECTORS
Currently, all directors receive $500 per person for each board meeting
attended telephonically and $1,000 per person for each board meeting attended in
person as compensation for serving on the Board of Directors. Upon election (or
re-election) by the shareholders of the Company at an annual meeting of
shareholders, pursuant to the terms of the Company's 1993 Non-Employee Director
Stock Option Plan, each non-employee director of the Company receives an option
to purchase 10,000 shares of Common Stock of the Company. Non-employee directors
who are chosen to fill a newly created directorship or vacancy in the Board of
Directors are also granted an option to purchase 10,000 shares of Common Stock
of the Company. The exercise price of any option granted to directors is the
fair market value of the Common Stock of the Company on the date the option is
granted. All of the directors of the Company are reimbursed for all travel and
other expenses incurred in attending meetings.
72
<PAGE>
EMPLOYMENT AGREEMENTS
The Company is a party to an employment agreement with E. Craig Sanders,
the President and Chief Executive Officer of the Company. The employment
agreement is for a term commencing May 2, 1996 and ending on December 31, 1998.
The agreement provides for a base salary at the annual rate of $300,000, subject
to increase upon the review of the Board. The agreement provides for bonus
compensation based upon the attainment of performance targets. The agreement
provides for the grant of stock options for 600,000 shares of the Company's
Common Stock at exercise prices ranging from $2.50 to $7.25 per share, vesting
at various dates during the contract term. If the Company terminates Mr.
Sanders' employment without cause (except in the circumstances described in the
following sentence), the Company will pay Mr. Sanders an amount equal to 200% of
his base salary in effect on the date of the termination, as well as provide
those fringe benefits enjoyed by him at the date of his termination for a period
of two years or, to the extent Mr. Sanders is not eligible to participate in any
Company fringe benefit plans, the after tax value of such benefits. If, after a
change in control of the Company, Mr. Sanders' employment is terminated by the
Company without cause or terminated by Mr. Sanders for good reason, the Company
will pay him an amount equal to 200% of the sum of his base salary plus the
maximum bonus compensation which he would have been entitled to receive had the
Company achieved the performance targets to which bonus compensation is tied for
the year of such termination and will continue to provide him with those fringe
benefits enjoyed at the date of his termination for a period of two years or, to
the extent Mr. Sanders is not eligible to participate in any Company fringe
benefit plans, the after tax value of such benefits. In addition, upon a change
in control of the Company, all options granted to Mr. Sanders will vest.
The Company is a party to an employment agreement with Neil N. Snyder, III,
the Executive Vice President and Chief Operating Officer of the Company. The
employment agreement is for a term commencing August 15, 1996 and ending on
December 31, 1999. The agreement provides for a base salary at the annual rate
of $150,000, subject to increase upon the review of the Board. The agreement
provides for bonus compensation based upon the attainment of performance
targets. The agreement provides for the grant of stock options for 200,000
shares of the Company's Common Stock at exercise prices ranging from $3.38 to
$7.25 per share, vesting at various dates during the contract term. If the
Company terminates Mr. Snyder's employment without cause (except in the
circumstances described in the following sentence), the Company will pay Mr.
Snyder an amount equal to 150% of his base salary in effect on the date of the
termination, as well as provide those fringe benefits enjoyed by him at the date
of his termination for a period of two years or, to the extent Mr. Snyder is not
eligible to participate in any Company fringe benefit plans, the after tax value
of such benefits. If, after a change in control of the Company, Mr. Snyder's
employment is terminated by the Company without cause or terminated by Mr.
Snyder for good reason, the Company will pay him an amount equal to 150% of the
sum of his base salary plus the maximum bonus compensation which he would have
been entitled to receive had the Company achieved the performance targets to
which bonus compensation is tied for the year of such termination for a period
of two years or, to the extent Mr. Snyder is not eligible to participate in any
Company fringe benefit plans, the after tax value of such benefits. In addition,
upon a change in control of the Company, all options granted to Mr. Snyder will
vest.
73
<PAGE>
The Company is a party to an employment agreement with Bruce W. Renard, the
Company's General Counsel and Executive Vice President -- Legal and Regulatory
Affairs/Carrier Relations. The employment agreement was originally for a three
year term commencing on January 1, 1995 and ending on December 31, 1997 and has
been extended to December 31, 1998. The agreement provides for payment of a base
salary initially fixed at the annual rate of $172,500 with an annual increase of
10%, provided the Company has met certain income targets. If the Company
terminates Mr. Renard's employment without cause or Mr. Renard terminates the
agreement for certain defined reasons, the Company will pay Mr. Renard (a) his
base salary through the date of termination and (b) as severance pay a lump sum
amount equal to 100% of Mr. Renard's salary in effect during the 12 months
immediately preceding termination. Mr. Renard's employment agreement also
provides that upon termination in connection with a change in control, Mr.
Renard shall receive (a) his base salary through the termination date, (b) all
other benefits provided in the employment agreement in connection with a change
in control, (c) as severance pay a lump sum amount equal to 100% of his highest
annual base salary in effect during the 12 months immediately preceding the
termination and (d) options granted to Mr. Renard under the employment agreement
will vest.
The employment agreements above generally restrict the employee from
competing with the Company for one year in the areas in which the Company then
operates following termination of the agreement.
The Company is a party to a change in control agreement with C. Keith
Pressley, Vice President-Revenue Management, an at-will employee of the Company.
Upon termination in connection with a change of control of the Company, Mr.
Pressley shall receive (a) his base salary through the termination date, (b)
severance pay equal to 50% of his annual base salary at the highest rate in
effect during the 12 months immediately preceding such termination and (c) all
options granted to Mr. Pressley will vest.
Compensation Committee Interlocks and Insider Participation
Robert E. Lund served as a member of the Compensation Committee of the
Board of Directors during 1996 and 1997 and, from November 29, 1995 through May
1, 1996, served as the Chief Executive Officer of the Company.
Compensation Committee member Jody Frank has participated in transactions
with the Company since January 1, 1997, which transactions and borrowings are
described below. See Item-13 Certain Relationships and Related Transactions.
74
<PAGE>
<TABLE>
<CAPTION>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of the Common Stock of the Company as of March 19, 1998
(except as otherwise indicated) by (i) each person known by the Company to
beneficially own more than five percent of the outstanding Common Stock of the
Company, (ii) each current director, (iii) each executive officer named in the
Summary Compensation Table included elsewhere herein, and (iv) all directors and
executive officers of the Company, as a group. Except as otherwise indicated,
the persons named in the table have the sole voting and investment power with
respect to the shares shown as beneficially owned by them.
Amount and Nature
Name of Beneficial Owner of Beneficial Ownership(1) Percent of Class
- ------------------------ --------------------------- -------------------
<S> <C> <C>
Charles J. Delaney -- (7) --
Jody Frank 238,262 (2)(3) 1.44%
Robert E. Lund 121,350 (2) *
Justin S. Maccarone -- (7) --
E. Craig Sanders 400,000 (4) 1.22%
Lawrence T. Ellman 52,500 (4) *
Bruce W. Renard 92,500 (4) *
C. Keith Pressley 9,500 (4) *
Neil N. Snyder, III 66,666 (4) --
All directors and
executive officers
as a group (11 persons) 980,111(4) 4.62%
Creditanstalt American Corp.
245 Park Avenue
New York, New York 10167 850,000(5)(6) 5.03%
Heartland Advisors, Inc.
790 N. Milwaukee Street
Milwaukee, Wisconsin 53202 4,956,300(5) 30.6%
UBS Capital II LLC
299 Park Avenue
New York, New York 10171 2,917,143(5)(7) 15.17%
Wellington Management Company, LLP
75 State Street
Boston, MA 02109 2,267,290(5) 13.99%
Goldman Sachs & Co.
85 Broad Street
New York, New York 10004 1,337,900(5) 8.3%
</TABLE>
75
<PAGE>
________________________
* Less than one percent.
(1) Includes shares of Common Stock issuable upon the exercise of stock
options, which are exercisable within 60 days of March 19, 1998.
(2) Includes options to purchase shares of Common Stock granted to the
following directors: 90,000 to Jody Frank (at an average exercise price of
$6.14 per share); and 110,000 to Robert E. Lund (at an average exercise
price of $4.66 per share).
(3) Includes 40,050 shares of Common Stock in a voting trust of which Jody
Frank is the beneficial owner. Also includes 3,812 shares owned by Jody
Frank as custodian for Aaron Frank, Rebekah Frank, and Lucy Frank, Mr.
Frank's minor children.
(4) Includes options to purchase 621,166 shares of Common Stock granted to the
following executive officers: 400,000 to E. Craig Sanders (at an average
exercise price of $4.56 per share); 52,500 to Lawrence T. Ellman (at an
average exercise price of $4.66 per share); 92,500 to Bruce W. Renard (at
an average exercise price of $5.66 per share); 9,500 to C. Keith Pressley
(at an average exercise price of $5.13); and 66,666 to Neil N. Snyder, III
(at an average exercise price at $3.81 per share).
(5) Information provided by Scheduled 13D and/or 13Gs filed by such persons.
Shared investment and voting power with respect to Goldman Sachs & Co. and
Wellington Management Company, LLP.The Company has not independently
verified such information.
(6) Represents currently exercisable warrants received in connection with a
previous credit facility between the Company and Creditanstalt-Bankverein
(of which Creditanstalt American Corporation is a wholly-owned subsidiary)
and 150,000 shares of Common Stock obtained upon the exercise of warrants
in connection with a previous credit facility. The currently exercisable
warrants expire March 12, 2000 and are exercisable for 700,000 shares of
Common Stock or the Company's Series B Preferred Stock at price of $5.25
per share. Each share of Series B Preferred Stock is convertible into one
share of Common Stock. See "Certain Relationships and Related
Transactions."
(7) Includes:(i) options to acquire 50,000 shares of Common Stock of the
Company at an average exercise price of $3.91, held for the benefit of UBS
Capital II LLC by current directors Charles J. Delaney and Justin S.
Maccarone; and (ii) 2,867,143 shares of Common Stock issuable upon
conversion of 150,000 shares of Preferred Stock currently outstanding. All
of the outstanding Preferred Stock is owned by UBS Capital II LLC (a
wholly-owned subsidiary of Union Bank of Switzerland).
76
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1, 1997 the Company has engaged in the following transactions with
directors and/or executive officers of the Company shareholders listed in the
Security Ownership Table or with businesses with which they are associated.
1. As disclosed in previous proxy statements, the Company loaned certain
funds (the "Company Loans") to Jody Frank, and certain now former executive
officers of the Company (the "Borrowers") for the reasons described below. Each
of the Company Loans was made following approval by the members of the Board of
Directors who were not parties to the transactions as a means to provide the
Borrowers with a vehicle to refinance certain commercial bank indebtedness they
had incurred to exercise Company stock options and pay related income taxes. The
Borrowers exercised the stock options in December 1993 to purchase the Company's
Common Stock for purposes of increasing the Company's shareholders' equity
without accessing the external capital markets. The Borrowers personally
borrowed the funds to exercise the options from a commercial bank and pledged
the Company's Common Stock issued upon exercise as collateral for the bank loans
("Bank Loans"). This equity increase in turn was a significant factor in
permitting the Company to increase its credit facility from $60.0 million to
$125.0 million in February 1994.
Commencing in May 1994, as the market price of the stock declined, the bank on
several occasions required the Borrowers to pay down the Bank Loans or provide
additional collateral. The Borrowers approached the disinterested members of the
Company's Board of Directors to seek the Company's assistance in refinancing a
portion of their Bank Loans. The Company then advanced the Company Loans,
including an aggregate of $213,217 to Mr. Frank, of which $143,217 was to
refinance his bank loan and $70,000 was in connection with the payment of
personal income taxes related to the phantom gain incurred upon the December
1993 exercise of the stock options mentioned above.
In February 1996, the Company agreed to restructure the full principal amount of
Mr. Frank's loans plus accrued interest in an aggregate amount of $248,501. In
connection with the restructuring, the Company received from Mr. Frank a stock
pledge agreement encumbering 35,000 shares of Common Stock of the Company held
by Mr. Frank. As restructured, $124,250.50 of Mr. Frank's loans are evidenced by
a non-recourse promissory note (which note limits enforcement of the note to the
35,000 pledged shares of Common Stock) bearing interest at the rate of 6.43%
annually, and payable in full on February 1, 2001. The remaining $124,250.50 is
evidenced by a promissory note bearing interest at the rate of 6.19% annually
and payable in five annual installments beginning on February 1, 2002. Except
for such restructured loan and related pledge of Common Stock, Mr. Frank has no
indebtedness to the Company.
2. In April 1996, the Company amended its credit facility with
Creditanstalt-Bankverein to accomplish, among other things, the following: (i)
Creditanstalt-Bankverein waived additional defaults arising under the credit
facility; (ii) the line of credit under the credit facility was decreased from
$40 million to $10 million. At the same time, the Company decreased to $5.25 the
exercise price of the warrants held by Creditanstalt American Corporation to
acquire Common Stock or Series B Preferred Stock of the Company that had not
already been repriced. The warrants repriced in April 1996 consisted of warrants
to acquire 150,000, 300,000 and 50,000 shares at exercise prices of $8.00 per
share, $9.33 per share and $9.00 per share, respectively. On March 26, 1997, the
Company increased its credit facility with Creditanstalt-Bankverein from
$10,000,000 to $20,000,000. Since January 1, 1997 the Company has paid
Creditanstalt-Bankverein $290,000 in fees as a lender in connection with
Company's credit facilities.
77
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed with, and as a part of, this Annual Report
on Form 10-K.
1. Financial Statements.
For a complete list of the Financial Statements filed with this Annual
Report on Form 10-K, see the Index to Financial Statements and
Schedules in Item 8 on Page 37.
2. Financial Statement Schedules.
The following Supplementary Schedules are filed with this Annual Report on
Form 10-K:
See Index to Financial Statements and Schedules on Page 37.
3. Exhibits.
(I) See Exhibit Index on Pages 80-82.
(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.
78
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PEOPLES TELEPHONE COMPANY, INC.
Date: March 31, 1998 /s/ E. Craig Sanders
-------------------------------
E. CRAIG SANDERS
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
---------- ------ ----
/s/ E. Craig Sanders President,
E. Craig Sanders Chief Executive Officer, Director March 31, 1998
/s/ William A. Baum Senior Vice President,
William A. Baum Chief Financial Officer March 31, 1998
/s/ Scott K. Ambler Controller
Scott K. Ambler Chief Accounting Officer March 31, 1998
/s/ Charles J. Delaney
Charles J. Delaney Director March 31, 1998
/s/ Jody Frank
Jody Frank Director March 31, 1998
/s/ Robert E. Lund
Robert E. Lund Director March 31, 1998
/s/ Justin S. Maccarone
Justin S. Maccarone Director March 31, 1998
79
<PAGE>
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)
80
<PAGE>
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)
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).
81
<PAGE>
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)
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
*23 Consent of Ernst & Young LLP
*27 Financial Data Schedule (for SEC use only)
____________________
* Filed with this Annual Report on Form 10-K.
82
EXHIBIT 21
Subsidiaries
- ------------
Peoples Telephone Company, Inc. South Carolina
Campus Telephone Inc. Texas
(d/b/a Telink Inc.)
PTC Cellular, Inc. Delaware
Silverado Communications, Inc. Colorado
Southwest Inmate Pay Telephone Systems, Inc. Texas
PTC Global Link, Inc. Florida
PTC Security Systems, Inc. Florida
Telink, Inc. Texas
Telink Telephone System, Inc. Georgia
Peoples Acquisition Corp. Pennsylvania
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 33-58607) and in the related prospectus of Peoples Telephone Company,
Inc., and in the Registration Statements (Forms S-8 Nos. 33-58603 and 333-40793)
pertaining to stock option and incentive plans of Peoples Telephone Company Inc.
of our report dated February 27, 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.
/s/ ERNST & YOUNG LLP
Miami, Florida
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 22834000
<SECURITIES> 0
<RECEIVABLES> 21997000
<ALLOWANCES> (4936000)
<INVENTORY> 2125000
<CURRENT-ASSETS> 45571000
<PP&E> 126375000
<DEPRECIATION> (78138000)
<TOTAL-ASSETS> 131317000
<CURRENT-LIABILITIES> 32438000
<BONDS> 100000000
0
16284000
<COMMON> 162000
<OTHER-SE> (17842000)
<TOTAL-LIABILITY-AND-EQUITY> 131317000
<SALES> 114880000
<TOTAL-REVENUES> 114880000
<CGS> 94232000
<TOTAL-COSTS> 115536000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13106000
<INCOME-PRETAX> (13762000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13762000)
<DISCONTINUED> 2092000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11670000)
<EPS-PRIMARY> (0.79)
<EPS-DILUTED> (0.79)
</TABLE>
