SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): December 23, 1998
Davel Communications, Inc.
(Exact name of registrant as specified in its charter)
Delaware 0-26610 59-3538257
- ------------------------------ ----------------- --------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
10120 Windhorst Road, Tampa, Florida 33619
----------------------------------------------------
(Address of principal executive offices)
(813) 628-8000
-----------------------
(Registrant's telephone number, including area code)
This Form 8-K/A amends the Company's Current Report on Form 8-K (dated December
23, 1998 and filed January 6, 1999).
Item 7. Financial Statements and Exhibits
On July 5, 1998, Davel Communications Group, Inc., an Illinois corporation ("Old
Davel"), and Old Davel's then wholly owned subsidiary, Davel Holdings, Inc., a
Delaware corporation formed for the purpose of completing a business combination
("New Davel"), entered into an Agreement and Plan of Merger (as amended, the
"Merger Agreement") with Peoples Telephone Company, Inc., a NewYork corporation
("Peoples"). The Merger Agreement was subsequently amended and restated on
October 22, 1998 primarily for the purpose of allowing Old Davel and New Davel
to enter into a reincorporation merger. The merger transactions contemplated by
the Merger Agreement (the "Transactions") were completed on December 23, 1998.
Pursuant to the Merger Agreement, New Davel and its wholly owned subsidiary,
Davel Financing Company, L.L.C., a Delaware limited liability company ("Davel
Finance Company"), acquired all of the issued and outstanding shares of the
common stock, par value $.01 per share, of Peoples (the "Peoples Common Stock")
through the issuance of 0.235 shares of the common stock, par value $.01 per
share, of New Davel (the "New Davel Common Stock") in exchange for each
outstanding share of Peoples Common Stock and the assumption of Peoples'
outstanding public debt of $100 million, which was simultaneously retired
through a cash tender offer for 100% of the outstanding debt.
Also pursuant to the Merger Agreement, New Davel and Davel Finance Company
acquired all of the issued and outstanding shares of the common stock, no par
value, of Old Davel (the "Old Davel Common Stock") through the issuance of one
share of New Davel Common Stock in exchange for each outstanding share of Old
Davel Common Stock. In order to finance the Transactions, New Davel, Davel
Finance Company and certain of its subsidiaries entered into a credit agreement
dated as of December 23, 1998, with NationsBank, N.A., as Administrative Agent,
BancBoston Robertson Stephens Inc., as Syndication Agent, The Chase Manhattan
Bank, as Documentation Agent, and NationsBanc Montgomery Securities LLC, as lead
arranger, and other lenders (collectively, the "Lenders"), pursuant to which the
Lenders made available to New Davel an initial revolving loan commitment of $60
million and aggregate term loan commitments of $220 million.
In connection with the completion of the Transactions, New Davel changed its
name to "Davel Communications, Inc."
(a) Financial Statements of Business Acquired
The following audited, consolidated financial statements of Peoples, together
with the applicable report of independent auditors, are filed with this
report:
(i) Consolidated Balance Sheets as of December 31, 1997 and December 31,
1996
(ii) Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995
(iii) Consolidated Statements of Shareholders' Equity/(Deficit) for the years
ended December 31, 1997, 1996 and 1995
(iv) Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
(v) Notes to Consolidated Financial Statements
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. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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.
As discussed in Note 1, the Company previously presented replacement parts
as inventory and has restated the 1997, 1996 and 1995 consolidated financial
statements to include replacement parts as a component of property and
equipment.
Ernst & Young LLP
Miami, Florida
February 27, 1998, except for the second and third paragraphs of Note 20, as to
which the date is October 27, 1998, and the fourth paragraph of Note 1, as to
which the date is November 6, 1998
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
--------------------
ASSETS 1997 1996
- ------------------------------------------------------------------------------------------------------ --------- ---------
Current assets:
Cash and cash equivalents............................................................................ $ 22,834 $ 12,556
Restricted cash...................................................................................... 920 --
Accounts receivable, net of allowance for doubtful accounts of $4,936 in 1997 and
$4,361 in 1996...................................................................................... 17,061 11,598
Prepaid expenses and other current assets............................................................ 2,631 2,547
Net assets of discontinued operations................................................................ -- 8,196
-------- --------
Total current assets............................................................................... 43,446 34,897
Property and equipment, net........................................................................... 50,362 61,541
Location contracts, net............................................................................... 23,936 26,498
Intangible assets, net................................................................................ 824 1,475
Goodwill, net......................................................................................... 4,084 4,788
Deferred income taxes................................................................................. 3,407 3,407
Other assets, net..................................................................................... 5,258 8,264
-------- --------
Total assets....................................................................................... $131,317 $140,870
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------
Current liabilities:
Notes payable and current maturities of long-term debt............................................... $ 634 $ 548
Current portion of obligations under capital leases.................................................. 536 952
Accounts payable and accrued expenses................................................................ 22,722 19,240
Accrued interest payable............................................................................. 5,702 5,697
Income and other taxes payable....................................................................... 2,844 2,418
-------- --------
Total current liabilities.......................................................................... 32,438 28,855
Notes payable and long-term debt...................................................................... 100,000 100,657
Obligations under capital leases...................................................................... 275 573
-------- --------
Total liabilities.................................................................................. 132,713 130,085
-------- --------
Commitments and contingencies (Notes 14 and 15)....................................................... -- --
Redeemable Preferred Stock:
Cumulative convertible preferred stock, Series C, $.01 par value; 160 shares
authorized; 150 shares issued and outstanding; $100 per share liquidation value..................... 13,711 13,556
Preferred stock dividends payable.................................................................... 2,573 1,523
-------- --------
Total preferred stock.............................................................................. 16,284 15,079
-------- --------
Common shareholders' deficit:
Preferred stock; $.01 par value, 4,240 shares authorized in 1997 and 4,140 shares
authorized in 1996; none issued and outstanding..................................................... -- --
Convertible preferred stock; Series B, $.01 par value; 600 shares authorized; none
issued and outstanding.............................................................................. -- --
Common stock; $.01 par value, 75,000 shares authorized in 1997 and 25,000
shares authorized in 1996; 16,209 shares in 1997 and 16,195 shares in 1996
issued and outstanding.............................................................................. 162 162
Capital in excess of par value....................................................................... 59,291 60,453
Accumulated deficit.................................................................................. (75,108) (63,438)
Unrealized loss on investments....................................................................... (2,025) (1,471)
-------- --------
Total common shareholders' deficit................................................................. (17,680) (4,294)
-------- --------
Total liabilities less shareholders' deficit....................................................... $131,317 $140,870
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the year ended December 31,
------------------------------------
1997 1996 1995
-------- -------- --------
Revenues:
Coin calls................................................................... $ 76,449 $ 77,389 $ 78,353
Non-coin calls, including 1997 dial-around compensation adjustment
(see Note 19).............................................................. 35,786 29,617 33,887
Service and other............................................................ -- -- 122
-------- -------- --------
Total revenues............................................................ 112,235 107,006 112,362
Costs and expenses:
Telephone charges............................................................ 29,310 30,107 35,582
Commissions.................................................................. 29,656 28,250 27,599
Field service and collection................................................. 19,598 19,130 21,134
Depreciation and amortization................................................ 21,304 20,466 19,180
Selling, general and administrative.......................................... 13,023 12,491 11,160
Other operating (income) expense............................................. -- (1,500) 6,177
-------- -------- --------
Total costs and expenses.................................................. 112,891 108,944 120,832
-------- -------- --------
Operating loss............................................................... (656) (1,938) (8,470)
Other (income) and expenses:
Interest expense, net........................................................ 13,106 12,875 10,355
(Gain) loss on disposal of prepaid calling card and international
telephone centers.......................................................... -- (545) 566
-------- -------- --------
Total other (income) and expenses, net.................................... 13,106 12,330 10,921
-------- -------- --------
Loss from continuing operations before income taxes and extraordinary
item.......................................................................... (13,762) (14,268) (19,391)
Benefit from income taxes...................................................... -- -- 217
-------- -------- --------
Loss from continuing operations before extraordinary item...................... (13,762) (14,268) (19,174)
Discontinued operations:
Loss from operations......................................................... (2,418) (1,724) (19)
Gain (loss) on dispositions.................................................. 4,510 -- (15,340)
-------- -------- --------
Gain (loss) from discontinued operations..................................... 2,092 (1,724) (15,359)
-------- -------- --------
Loss before extraordinary item................................................. (11,670) (15,992) (34,533)
Extraordinary loss from extinguishment of debt, net of income tax benefit of
$1,737........................................................................ -- -- (3,327)
-------- -------- --------
Net loss.................................................................. $(11,670) $(15,992) $(37,860)
======== ======== ========
Earnings per share (basic and diluted):
Loss from continuing operations.............................................. $(0.92) $(0.96) $(1.23)
Income (loss) from discontinued operations................................... 0.13 (0.10) (0.95)
Extraordinary loss, net...................................................... -- -- (0.20)
-------- -------- --------
Net loss.................................................................. $(0.79) $(1.06) $(2.38)
======== ======== ========
Weighted average common shares outstanding..................................... 16,198 16,188 16,091
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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
in Excess Unrealized
Common of Accumulated Loss on
Stock Par Value Deficit Investments Total
------ --------- ----------- ----------- --------
Balance at January 1, 1995............................ $158 $58,143 $ (9,586) $ -- $ 48,715
Exercise of 93 options at $2.00-$3.59 per share....... 1 306 -- -- 307
Issuance of 224 shares for prior acquisitions......... 2 1,302 -- -- 1,304
Peoples 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
previously charged to Capital in Excess of Par
Value................................................ -- 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
Peoples 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
Peoples Series C preferred stock dividends accrued.... -- (1,050) -- -- (1,050)
Preferred stock issuance cost accretion............... -- (156) -- -- (156)
Unrealized loss on investments........................ -- -- -- (554) (554)
Net loss.............................................. -- -- (11,670) -- (11,670)
---- ------- -------- ------- --------
Balance at December 31, 1997.......................... $162 $59,291 $(75,108) $(2,025) $(17,680)
==== ======= ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the year ended
-------------------------------
December 31
-------------------------------
1997 1996 1995
-------- -------- ---------
Cash flows from operating activities
Net loss...................................................................................... $(11,670) $(15,992) $ (37,860)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization.............................................................. 21,304 20,466 19,180
Amortization of deferred financing costs................................................... 611 906 390
Deferred income taxes...................................................................... -- -- (1,954)
Extraordinary loss on debt extinguishment.................................................. -- -- 5,064
(Gain) loss on disposition of assets, net.................................................. -- (545) 956
(Gain) loss on sale of discontinued operations, net........................................ (4,510) -- 15,340
Write-off of officer and director receivables.............................................. -- -- 3,555
Changes in operating assets and liabilities:
Accounts receivable..................................................................... (6,906) (4,381) 7,335
Prepaid expenses and other current assets............................................... (84) 1,101 1,156
Other assets............................................................................ 809 (470) 4,828
Accounts payable and accrued expenses................................................... 5,363 (478) (3,092)
Accrued interest payable................................................................ 5 94 4,542
Income and other taxes payable.......................................................... 45 (34) (239)
Net effect of discontinued operations and assets held for sale.......................... 2,081 5,304 (7,210)
-------- -------- ---------
Net cash provided by operating activities............................................ 7,048 5,971 11,991
-------- -------- ---------
Cash flows from investing activities
Property and equipment additions.............................................................. (2,181) (2,932) (5,637)
Proceeds from sale of assets.................................................................. 1,208 1,383 3,295
Proceeds from sale of discontinued operations................................................. 10,625 848 895
Payments for certain contracts................................................................ (3,163) (3,347) (2,806)
Restricted cash............................................................................... (920) -- --
Other......................................................................................... -- -- 127
-------- -------- ---------
Net cash provided by (used in) investing activities.................................. 5,569 (4,048) (4,126)
-------- -------- ---------
Cash flows from financing activities
Borrowings under long-term debt............................................................... -- -- 101,600
Principal payments on long-term debt.......................................................... (571) (560) (110,487)
Principal payments under capital lease obligations............................................ (1,594) (1,173) (3,384)
Debt issuance costs........................................................................... (218) -- (5,100)
Exercise of stock options and warrants........................................................ 44 -- 307
Proceeds from Peoples 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
======== ======== =========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest................................................................................... $ 13,541 $ 12,643 $ 7,357
======== ======== =========
Income taxes............................................................................... $ 135 $ 158 $ 242
======== ======== =========
Non-cash investing and financing activities
Fixed assets acquired under capital lease obligations......................................... $ 325 $ 224 $ 1,185
======== ======== =========
Fair value of common stock issued for acquisition............................................. $ -- $ 75 $ 1,304
======== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
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 classified as discontinued operations. Accordingly, operating results
and cash flows for these businesses have been segregated and reported as
discontinued operations in the accompanying consolidated financial statements
(see Note 17).
Restatement
The Company maintains replacement parts to service its base of payphones. The
Company previously reported replacement parts as inventory in its consolidated
balance sheets. On November 6, 1998, replacement parts were reclassified to
property and equipment for all periods presented.
Changes in business
During 1995, the Company sold its prepaid calling card business and
international telephone center operations for $6.3 million and $2.0 million,
respectively (see Note 16). Operations for these business for the year ended
December 31, 1995 were not significant.
On November 13, 1995, the Company sold its cellular telephone operations for
approximately $6.0 million (see Note 17).
On October 9, 1995, the Company sold a portion of its inmate telephone
operations for approximately $1.7 million. Included in discontinued operations
in the accompanying consolidated statement of operations in 1995 are
approximately $0.3 million of impairment losses and a $0.4 million loss on the
sale of these inmate telephone operations (see Note 17).
On December 19, 1997, the Company sold its remaining inmate telephone
operations for approximately $10.6 million. The Company recognized a net gain of
approximately $4.2 million as a result of this sale (see Note 17).
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 to be those highly liquid
investments purchased with an original maturity of three months or less. The
credit risk associated with cash and cash equivalents in banks is considered low
due to the credit quality of the financial institutions.
Restricted cash
Approximately $0.9 million of cash on the accompanying consolidated balance
sheet at December 31, 1997 is restricted and serves as collateral for the
Company's performance under an inmate payphone agreement and a letter of credit.
Property and equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets
commencing when the equipment is installed or placed in service. Installed
telephones and related equipment includes installation and other costs which are
capitalized and amortized over the estimated useful lives of the equipment. The
costs associated with maintenance, repair and refurbishment of telephone
equipment are charged to expense as incurred.
The capitalized cost of equipment and vehicles under capital leases is
amortized over the lesser of the lease term or the asset's estimated useful
life, and is included in depreciation and amortization expense in the
consolidated statements of operations.
Location Contracts and Other Intangible Assets
Location contracts and other intangible assets primarily result from business
combinations and signing bonuses paid to property owners and include acquisition
costs allocated to location owner contracts, agreements not to compete, and
other identifiable intangible assets. These assets are amortized on a straight-
line basis over their
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Options
The Company adopted the provisions of Statement No. 123 ("SFAS 123"),
Accounting for Stock-Based Compensation, on January 1, 1996, but as permitted by
SFAS 123 will continue to account for options issued to employees or directors
under the Company's stock option plans in accordance with Accounting Principles
Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees. The
exercise price of the Company's employee stock options equals or exceeds the
market price of the underlying stock on the date of grant; therefore, no
compensation expense is recognized under APB 25.
Earnings per share
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 128 ("SFAS 128"), Earnings per Share. SFAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the SFAS 128
requirements. Diluted earnings per share amounts are computed based upon the
weighted average number of common and common equivalent shares outstanding.
Earnings per share on a diluted basis were equal to basic earnings per share for
all periods presented, since exercise of outstanding options and warrants, and
the conversion of convertible preferred stock would be anti-dilutive.
Reclassification
Certain amounts for the prior years have been reclassified to conform with the
current year presentation.
New Accounting Standards
In 1997, the FASB issued Statement No. 130 ("SFAS 130"), "Reporting
Comprehensive Income" and Statement No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information." These statements are
effective beginning in 1998. SFAS 130 establishes standards for reporting and
displaying comprehensive income, while SFAS 131 abandons the "industry segment
approach" in favor of the "managing approach" for disclosure purposes.
Adoption of SFAS 130 is not expected to result in a significant change from the
current required disclosures and the adoption of SFAS 131 is not expected to
result in additional disclosures.
Note 3--Accounts Receivable
Accounts receivable at December 31, 1997 and 1996 consist primarily of amounts
currently due from long distance carriers for Dial-Around Compensation (as
defined in Note 19) and commissions from various operator service companies
which handle non-coin calls.
The balance due from one collection clearinghouse for Dial-Around Compensation
was approximately $4.1 million and $2.7 million at December 31, 1997 and 1996,
respectively. The balance due from one operator service company for commissions
was $4.3 million and $3.5 million at December 31, 1997 and 1996, respectively.
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4--Property and Equipment
Property and equipment is summarized as follows (in thousands):
Estimated
December 31, useful
---------------------- lives
1997 1996 (in years)
-------- -------- ----------
Installed telephones and related equipment............... $106,903 $103,060 10
Telephones and related equipment pending
installation........................................... 5,146 7,704
Land..................................................... 950 950
Building and improvements................................ 4,366 4,360 25
Furniture, fixtures and office equipment................. 7,086 6,190 5-7
Vehicles and equipment under capital leases.............. 3,027 3,906 4
Other.................................................... 1,022 1,019 5
-------- --------
128,500 127,189
Less accumulated depreciation and amortization,
including $2,042 and $2,198 for capital leases......... (78,138) (65,648)
-------- --------
$ 50,362 $ 61,541
======== ========
Depreciation expense for the years ended December 31, 1997, 1996 and 1995 was
approximately $14.2 million, $13.8 million and $12.9 million, respectively.
During 1995, the Company recorded obsolescence reserves of approximately $1.7
million for telephone and related equipment pending installation, which is
included in field service and collection expenses in the accompanying 1995
consolidated statement of operations.
The majority of the Company's assets are security for long-term bank debt (see
Note 6).
The Company has entered into various noncancellable leases which are
classified as capital leases. Future minimum lease payments, including imputed
interest, are as follows (in thousands):
For the year ending December 31:
1998................................................. $ 603
1999................................................. 188
2000................................................. 102
2001................................................. 18
2002................................................. 1
-----
912
Less amount representing interest....................... (93)
-----
Present value of obligations under capital leases....... 819
Less current interest payable........................... (8)
Less current portion.................................... (536)
-----
$ 275
=====
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5--Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following (in thousands):
December 31,
-------------------
1997 1996
------- -------
Telecommunication charges........... $ 2,676 $ 3,473
Commissions......................... 10,343 7,879
Employee costs...................... 3,282 2,023
Unearned revenue.................... 3,258 314
Other............................... 3,163 5,551
------- -------
$22,722 $19,240
======= =======
Note 6--Notes Payable and Long-Term Debt
Notes payable and long-term debt consist of the following (in thousands):
December 31,
----------------------
1997 1996
-------- --------
$100 million Senior Notes due 2002 with a stated interest
rate of 12 1/4%...................................................... $100,000 $100,000
$20 million revolving line of credit with interest rates ranging
from the Bank's prime rate plus 1.5% to LIBOR plus 3.0%.............. -- --
Various notes payable with interest rates ranging from prime
plus 1.25% to prime plus 1.5% and maturity dates ranging
from due on demand to October 1998................................... 634 1,205
-------- --------
100,634 101,205
Less current maturities.................................................. (634) (548)
-------- --------
$100,000 $100,657
======== ========
During July 1995, the Company completed the sale of $100.0 million of Senior
Notes due 2002 (the "Senior Notes") and the issuance of $15.0 million of Series
C Cumulative Convertible Preferred Stock (the "Preferred Stock") (see Note 7).
The Senior Notes bear interest at 12 1/4% per annum, payable semiannually
beginning January 15, 1996. The Senior Notes are senior unsecured obligations of
the Company and are redeemable at the option of the Company, in whole or in
part, on or after July 15, 2000, at pre-established redemption prices together
with accrued and unpaid interest to the redemption date. The Company paid
approximately $5.1 million in issuance costs, which was deferred and is being
amortized over the term of the Senior Notes.
Simultaneously with the sale of the Senior Notes and issuance of the Preferred
Stock, the Company executed the Fourth Amended and Restated Loan and Security
Agreement (the "Loan Agreement") with Creditanstalt Corporate Finance, Inc. (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.
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 of 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 Capital II LLC, a wholly owned subsidiary of
Union Bank of Switzerland, for proceeds of $15.0 million. The Preferred Stock
cumulates dividends at an annual rate of 7%. The dividends are payable in cash
or, at the Company's option during the first three years, will cumulate. The
Preferred Stock is immediately convertible into shares of Common Stock of the
Company at an initial conversion price of $5.25 per share and is mandatorily
redeemable by the Company in July 2005. The liquidation value and annual
dividends are $100 per share and $7 per share, respectively. Pursuant to the
terms of the Preferred Stock, the holders are entitled to elect two of the six
members of the Company's Board of Directors and have voting rights equal to
those of Common Shareholders. The Company paid issuance costs of approximately
$1.2 million.
In connection with the sale of the Preferred Stock, the Company issued
warrants to purchase 275,000 shares of Common Stock of the Company to a third
party which assisted with the transaction, for approximately $100,000. The
warrants are exercisable at $5.25 per share through the year 2005.
The net proceeds were allocated to the preferred stock and warrants based on
their respective fair values. The preferred stock is being accreted to its
redemption value, using the effective interest method through retained earnings,
or in the case of an accumulated deficit, capital in excess of par value over
the term of the Preferred Stock.
Note 8--Shareholders' Equity
In March 1997, the Company's shareholders approved an increase to the number
of authorized shares of the Company's Common Stock to 75 million shares. The
Company has a sufficient number of authorized common shares available to issue
upon the conversion of the outstanding preferred stock, warrants and stock
options.
Under the terms of the Company's loan agreement, as amended, the Company
granted its lender warrants to purchase 1,600,000 shares of Common Stock. The
exercise price of 900,000 of these shares is $3.17 per share and the remaining
700,000 shares is $5.25 per share. From 1992 through 1994, the Company's lender
exercised its right to purchase 900,000 shares of Common Stock at $3.17 per
share. All warrants expire in the year 2000.
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
Peoples Series C Preferred Stock............ 2,857,143
Employee stock options outstanding.......... 2,657,408
Warrants.................................... 975,000
---------
Total................................. 6,489,551
=========
Note 9--Stock Option Plans
The Company maintains five non-qualified stock option plans covering primarily
employees and directors. The Company continues to account for its stock options
issued under APB 25. Under APB 25, because the exercise price of the underlying
stock option equals or exceeds the market price of the common stock on the date
of grant, no compensation expense is recognized.
The 1987 Non Qualified Stock Option Plan and 1994 Stock Incentive Plan cover
substantially all employees and provide for the issuance of options to purchase
up to 2,100,000 shares and 100,000 shares of the Company's Common Stock,
respectively. The 1987 and 1993 Non-Employee Director Stock Option Plans allow
for the issuance of options for the purchase of 750,000 shares and 315,000
shares, respectively. Options are issued to non-employee members of the
Company's Board of Directors for their service. In addition, prior to February
of 1995, the Company, from time to time, issued options to purchase shares of
the Company's Common Stock outside of the established stock option plans. The
grants of these options have been approved by the Company's shareholders. The
1997 Incentive Plan allows for the issuance of options for the purchase of
1,350,000 shares.
Options to purchase shares of the Company's Common Stock are issuable at the
discretion of committees appointed by the Board of Directors which determine the
specific terms of options granted. Currently, options generally vest at rates of
10%, 20%, 33% and 100% per year from the date of issuance and generally expire
after 5 to 10 years of continued employment or within periods of up to 90 days
of the termination or resignation of the employee or director.
The following table summarizes information related to the Company's stock
option activity (in thousands, except for per share data):
1997 1996 1995
--------------------- --------------------- ---------------------
Number Wtd. Avg. Number Wtd. Avg. Number Wtd. Avg.
of Shares Ex. Price of Shares Ex. Price of Shares Ex. Price
---------- --------- ---------- --------- ---------- ---------
Outstanding at
beginning of year..................... 1,709 $6.05 2,272 $6.42 2,794 $6.33
Granted................................. 1,206 5.61 283 2.92 200 3.68
Exercised............................... (18) 2.82 -- -- (93) 3.27
Expired................................. (95) 5.75 (29) 3.45 (629) 5.59
Canceled................................ (145) 5.37 (817) 5.85 -- --
----- ----- -----
Outstanding at end of
year.................................. 2,657 5.96 1,709 6.05 2,272 6.42
===== ===== =====
Exercisable at end of
year.................................. 1,946 6.86 1,645 6.09 2,055 6.39
===== ===== =====
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The exercise prices for options outstanding as of December 31, 1997 ranged
from $2.00 to $11.38. The weighted average remaining contractual life of those
options is approximately 2.7 years.
The fair value of options granted during 1997, 1996 and 1995 were estimated
using a binomial valuation model. The following weighted-average assumptions
were used in calculating the fair value of options granted in 1997, 1996 and
1995, respectively: risk free interest rates of 5.6%, 6.3% and 6.1%; dividend
yields of 0%; volatility factors of 0.669, 0.706 and 0.846; and weighted average
expected life of the options of 2.7, 4.0 and 3.3 years.
Pro forma net loss and loss per share information is provided in accordance
with SFAS 123 as if the Company's stock options were accounted for under the
fair value method.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The following table
sets forth pro forma net loss and loss per share (in thousands, except for per
share data):
Year ended December 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Pro forma net loss................................. $(13,071) $(16,311) $(38,213)
Pro forma loss per share, basic and diluted........ $ (0.87) $ (1.07) $ (2.40)
The effect on pro forma net loss and loss per share of applying SFAS 123 is
not necessarily indicative of pro forma net loss and loss per share for future
periods until the new fair value method is applied to all non-vested awards.
Note 10--Employee Savings Plan
During November 1990, the Company established a savings plan under the
provisions of section 401(k) of the Internal Revenue Code (the "Plan"), which
covers substantially all employees. The Company's contributions to the Plan are
discretionary. Employees participating in the Plan vest in amounts contributed
by the Company over a period of 5 years. The Company matches 25% of employee
contributions. Employees may contribute up to 15% of their earnings each plan
year. The Company's contributions totaled approximately $0.1 million in each of
the years ended December 31, 1997, 1996 and 1995.
Note 11--Income Taxes
The components of the benefit from income taxes are as follows (in thousands):
Year ended December 31,
---------------------------
1997 1996 1995
----- ----- -----
Currently payable:
Federal.................... $ -- $ -- $ --
State...................... -- -- 107
Deferred................... -- -- (324)
----- ----- -----
$ -- $ -- $(217)
===== ===== =====
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation between the Company's effective income tax rate and federal
income tax statutory rate is as follows:
Year ended December 31,
------------------------------------
1997 1996 1995
------------ ---------- ----------
Statutory tax rate..................... (34.0)% (34.0)% (34.0)%
Change in valuation allowance.......... 37.5 37.5 35.4
Non-deductible expenses................ -- -- 1.0
State taxes and other, net............. (3.5) (3.5) (3.5)
----- ----- ------
0% 0% (1.1)%
===== ===== ======
Significant temporary differences included in the net deferred tax asset are
as follows (in thousands):
December 31,
------------------------
1997 1996
----------- -----------
Deferred tax assets:
Net operating loss carryforward................................. $21,854 $18,721
Alternative minimum tax credit carryforward..................... 30 218
Other........................................................... 8,626 6,012
------- -------
Total gross deferred tax assets.............................. 30,510 24,951
Less--valuation allowance.......................................... 18,364 15,017
------- -------
Total deferred tax assets.................................... 12,146 9,934
------- -------
Deferred tax liabilities:
Difference between book and tax bases of fixed assets........... (7,322) (5,105)
Other........................................................... (1,417) (1,422)
------- -------
Total deferred tax liabilities............................... (8,739) (6,527)
------- -------
Net deferred tax assets...................................... $ 3,407 $ 3,407
======= =======
At December 31, 1997, the Company has tax net operating loss carryforwards 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.
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12--Earnings Per Share
For the years ended December 31, 1997, 1996 and 1995, the treasury stock
method was used to determine the dilutive effect of the options and warrants on
earnings per share data. The following table summarizes the restated net loss
from continuing operations per share and the weighted average number of shares
outstanding used in the computations in accordance with SFAS No. 128 (in
thousands, except per share data):
1997 1996 1995
------------ ------------ --------------
Net loss from continuing operations........................ $(13,762) $(14,268) $(19,174)
Deduct:
Cumulative preferred stock dividend requirement......... 1,050 1,050 473
Preferred stock issuance cost accretion................. 156 144 69
-------- -------- --------
Net loss applicable to common shareholders........... $(14,968) $(15,462) $(19,716)
======== ======== ========
Weighted average common shares outstanding................. 16,198 16,188 16,091
======== ======== ========
Basic and diluted loss per share........................... $ (0.92) $ (0.96) $ (1.23)
======== ======== ========
Diluted earnings per share is equal to basic earnings per share since the
conversion of preferred shares and the exercise of outstanding options and
warrants would be anti-dilutive for all periods presented.
Note 13--Fair Value of Financial Instruments
The fair market values of financial instruments held by the Company at
December 31, 1997 and 1996 are based on a variety of factors and assumptions,
may not necessarily be representative of the actual gains or losses that will be
realized in the future, and do not include expenses that could be incurred in an
actual sale or settlement.
Long-Term Debt
The fair value of the Company's Senior Notes was estimated by obtaining quoted
market prices. The fair value of the Company's Senior Notes at December 31, 1997
and 1996 was approximately $106.5 million and $105.0 million, respectively.
The fair value of the Company's credit facility is assumed to be equal to its
carrying value. At December 31, 1997 and 1996 there were no amounts outstanding
under the credit facility.
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.
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 14--Leases
The Company leases office and warehouse space under various operating lease
agreements expiring through 2000. Rental expense under such leases aggregated
approximately $0.5 million, $0.5 million and $0.7 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
As of December 31, 1997, future minimum payments under noncancellable
operating leases with remaining terms in excess of one year are as follows (in
thousands):
Year ended:
1998.................... $308
1999.................... 174
2000.................... 41
----
$523
====
Note 15--Commitments and Contingencies
In March, 1997, the Company and WorldCom Network Services, Inc. amicably
settled and resolved litigation to the satisfaction of both parties involved. In
connection with that settlement, the Company paid approximately $240,000 to
WorldCom in full settlement and satisfaction of all claims raised, or which
could have been raised, by WorldCom against the Company arising from the
parties' prior business relationship.
During July 1995, the Company reached an agreement in principle for the
settlement (the "Settlement") of a lawsuit seeking class action certification
brought by two shareholders against the Company and certain of its officers and
directors in the United States District Court, Southern District of Florida,
alleging the violation of certain federal securities laws. The Company's share
of the Settlement of approximately $0.9 million was recorded in the accompanying
consolidated statement of operations for the year ended December 31, 1995. The
Settlement was approved by the United States District Court during January 1996.
During April 1995, the Company settled a dispute with one of its vendors which
resulted in a reduction of the amounts owed. Accounts payable and telephone
charges were reduced during the first quarter of 1995 by approximately $1.3
million to reflect this settlement.
In December 1995, Cellular World, Inc. filed a complaint in Dade County
Circuit Court against the Company and its subsidiary, PTC Cellular, Inc.,
alleging wrongful interference with Cellular World's advantageous business
relationship with Alamo Rent-A-Car, and alleged misappropriation of 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.
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has employment contracts with certain officers which expire through
December 31, 1999. The contracts provide for increases in annual base salary,
contingent upon the profitability of the Company, as well as bonus and stock
option provisions.
Note 16--Prepaid Calling Card and International Telephone Centers
During February 1995, the Company sold its prepaid calling card business to
Global Link Teleco Corporation ("Global Link") for approximately $6.3 million of
cash, promissory notes and shares of common stock of Global Link. The operations
of the prepaid calling card business for the year ended December 31, 1995 were
not significant.
On March 1, 1996, Global Link consummated a merger transaction (the "Merger")
with Global Telecommunications Solutions, Inc. ("GTS"). The Company exchanged
its outstanding notes and other receivables, including accrued interest, for
shares of GTS Common stock, $0.6 million in cash and $1.5 million of notes
receivable.
Included in other assets in the accompanying 1997 and 1996 consolidated
balance sheets is the fair value of the Company's investment in GTS common stock
of approximately $1.1 million and $1.7 million, net of approximately $2.0
million and $1.5 million of unrealized investment losses, respectively.
Prior to the Merger, the Company's investment in Global Link was accounted for
using the equity method. The Company's share of the results of operations of
Global Link from the divestiture date through December 31, 1995 are included in
"Other operating (income) expenses" in the accompanying consolidated statements
of operations.
On September 28, 1995, the Company sold its international telephone center
operations for $0.5 million in cash and a $1.5 million promissory note. The
operations of the international telephone center business for the year ended
December 31, 1995 were not significant. For financial accounting purposes, the
recovery of $2.0 million previously written off will be recognized as the cash
is received. Accordingly, a gain of approximately $0.3 million and $0.5 million
has been included in other income and expenses in the accompanying consolidated
statements of operations during the years ended December 31, 1996 and 1995,
respectively.
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 in 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.
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
The following tables set forth the results of operations and gain (loss) on
disposal of the cellular and inmate telephone operations as they are included in
the consolidated financial statements (in thousands):
Cellular Telephone Operations
For the year ended
-----------------------
December 31,
-----------------------
1997 1996 1995
---- ---- --------
Revenues.......................................................... $ -- $ -- $ --
Income (loss) from discontinued operations before income taxes.... -- -- --
Gain (loss) on disposal........................................... 268 -- (14,600)
---- ---- --------
Gain (loss) on discontinued operations before income taxes........ 268 -- (14,600)
Provision for income taxes........................................ -- -- --
---- ---- --------
Gain (loss) from discontinued operations.......................... $268 $ -- $(14,600)
==== ==== ========
Inmate Telephone Operations
For the year ended
-------------------------------------
December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
Revenues.......................................................... $11,931 $17,952 $26,029
Income (loss) from discontinued operations before income taxes.... (2,418) (1,724) (19)
Gain (loss) on disposal........................................... 4,242 -- (740)
------- ------- -------
Gain (loss) on discontinued operations before income taxes........ 1,824 (1,724) (759)
Provision for income taxes........................................ -- -- --
------- ------- -------
Gain (loss) from discontinued operations.......................... $ 1,824 $(1,724) $ (759)
======= ======= =======
Note 18--Related Party Transactions
During February 1995, the Company sold its prepaid calling card business to
Global Link for approximately $6.3 million. At the time of the transactions, a
former officer and director of the Company and two directors of the Company were
also directors of Global Link. Mr. Jeffrey Hanft, a former officer and director
of the Company, resigned as a director of Global Link in October 1995, and Mr.
Jody Frank, a former director of the Company, resigned as a director of Global
Link prior to the March 1996 transaction with GTS (see Note 16).
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 19--Provision for Dial-Around Compensation Adjustment
On September 20, 1996, the Federal Communications Commission ("FCC")
adopted rules in a docket entitled In the Matter of Implementation of the Pay
Telephone Reclassification and Compensation Provisions of the Telecommunications
Act of 1996, FCC 96-388 (the "1996 Payphone Order"), implementing the payphone
provisions of Section 276 of the Telecommunications Act of 1996 ("Telecom Act").
The 1996 Payphone Order, which became effective November 7, 1996, initially
mandated dial-around compensation for both access code calls and 800 subscriber
calls ("Dial-Around Compensation") at a flat rate of $45.85 per payphone per
month (131 calls multiplied by $0.35 per call). Commencing October 7, 1997 and
ending October 6, 1998, the $45.85 per payphone per month rate was to transition
to a per-call system at the rate of $0.35 per call. Several parties filed
petitions for judicial review of certain of the FCC regulations including the
Dial-Around Compensation rate. On July 1, 1997, the U.S. Court of Appeals for
the District of Columbia Circuit (the "Court") responded to appeals related to
the 1996 Payphone Order by remanding certain issues to the FCC for
reconsideration. These issues included, among other things, the manner in which
the FCC established the Dial-Around Compensation for 800 subscriber and access
code calls, the manner in which the FCC established the interim Dial-Around
Compensation plan and the basis upon which interexchange carriers ("IXCs") would
be required to compensate payphone service providers ("PSPs"). The Court
remanded the issues to the FCC for further consideration, and clarified on
September 16, 1997 that it had vacated certain portions of the FCC's 1996
Payphone Order, including the Dial-Around Compensation rate. Specifically, the
Court determined that the FCC did not adequately justify (i) the per-call
compensation rate for subscriber 800 and access code calls at the deregulated
local coin rate of $0.35, because it did not sufficiently justify its conclusion
that the costs of local coin calls are similar to those of subscriber 800 and
access code calls; and (ii) the allocation of the payment obligation among the
IXCs for the period from November 7, 1996 through October 6, 1997.
In accordance with the Court's mandate, on October 9, 1997, the FCC adopted
and released its Second Report and Order in the same docket, FCC 97-371 (the
"Remand Order"). This order addressed the per-call compensation rate for
subscriber 800 and access code calls that originate from payphones in light of
the decision of the Court which vacated and remanded certain portions of the
FCC's 1996 Payphone Order. The FCC concluded that the rate for per-call
compensation for subscriber 800 and access code calls from payphones is the
deregulated local coin rate adjusted for certain cost differences. Accordingly,
the FCC established a rate of $0.284 ($0.35-$0.066) per call for the first two
years of per-call compensation (October 7, 1997 through October 6, 1999). The
IXCs are required to pay this per-call amount to PSPs, including the Company,
beginning October 7, 1997. After the first two years of per-call compensation,
the market-based local coin rate, adjusted for certain costs defined by the FCC
as $0.066 per call, is the surrogate for the per-call rate for subscriber 800
and access code calls. These new regulations were made effective as of October
7, 1997; however, they are still subject to challenge.
In addition, the Remand Order tentatively concluded that the same $0.284
per call rate adopted on a going-forward basis should also govern compensation
obligations during the period from November 7, 1996 through October 6, 1997, and
that PSPs are entitled to compensation for all access code and subscriber 800
calls during this period. The FCC stated that the manner in which the payment
obligation of the IXCs for the period from November 7, 1996 through October 6,
1997 will be allocated among the IXCs will be addressed in a subsequent order.
Based on the FCC's tentative conclusion in the Remand Order, the Company
has adjusted the amounts of Dial-Around Compensation previously recorded related
to the period from November 7, 1996 through June 30, 1997 from the initial
$45.85 rate to $37.20 ($0.284 per call multiplied by 131 calls). As a result of
this adjustment, the Company recorded a provision in the third quarter of 1997
for reduced Dial-Around Compensation of approximately $2.1 million ($0.13 per
share). The Company previously reported this provision as a separate component
of costs and expenses. In the third quarter of 1998, the Company reclassified
the provision as a
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
reduction in non-coin revenue of approximately $2.6 million and a reduction in
commissions expense of approximately $0.5 million. For the period from July 1,
1997 through October 6, 1997, the Company has recorded Dial-Around Compensation
at the rate of $37.20 per payphone per month. The amount of dial-around revenue
recognized in the period from July 1, 1997 through October 6, 1997 is
approximately $4.7 million and such amount will be billed after final resolution
of the allocation obligations of the IXCs as determined by the FCC.
The Company's counsel, Latham & Watkins, is of the opinion that the Company
is legally entitled to fair compensation under the Telecom Act for Dial-Around
Calls the Company delivered to any carrier during the period from November 7,
1996 through October 6, 1997. Based on the information available, the Company
believes that the minimum amount it is entitled to as fair compensation under
the Telecom Act for the period from November 7, 1996 through October 6, 1997 is
$37.20 per payphone per month and the Company, based on the information
available to it, does not believe that it is reasonably possible that the amount
will be materially less than $37.20 per payphone per month. While the amount of
$0.284 per call constitutes the Company's position of the appropriate level of
fair compensation, certain IXCs have asserted in the past, have asserted in
petitions for reconsideration now pending before the FCC and in appeals pending
before the U.S. Court of Appeals for the District of Columbia Circuit, and are
expected to assert in the future that the appropriate level of fair compensation
should be lower than $0.284 per call. For example, in a letter to the FCC dated
August 15, 1997, AT&T stated its intention to make dial-around payments to PSPs
based on its imputed rate of $0.12 per call until the FCC issues a new order
setting the level of fair compensation.
Note 20--Subsequent Events
On January 12, 1998, the Company acquired the operating assets of Indiana
Telcom Corporation for approximately $11.3 million in cash. This transaction
added approximately 2,600 public pay telephones, located primarily in Indiana
and adjacent midwestern states.
On July 5, 1998, the Company entered into a definitive merger agreement
with Davel Communications Group, Inc. and Davel Holdings, Inc. (collectively
"Davel"). Under the terms of the agreement, which has been approved by the Board
of Directors of each company, holders of common stock of the Company will
receive 0.235 of a share of Davel common stock for each outstanding share of
Company common stock and the Company will become a wholly owned subsidiary of
Davel (the "Merger"). The transaction, which is intended to close in the fourth
quarter of 1998, is subject to the approval of the shareholders of both
companies, receipt of required regulatory approvals and other customary
conditions. Consummation of the Merger is conditioned on its eligibility for
pooling-of-interests accounting treatment. The transaction is also subject to
conversion of the Company's Series C Cumulative Convertible Preferred Stock into
common stock and receipt by Davel of financing for, and successful consummation
of, a cash tender offer for the Company's 12 1/4% Senior Notes due 2002 (the
"Senior Notes"), pursuant to which a minimum of 85% of the aggregate outstanding
principal amount of $100 million shall have been tendered. Davel plans to
refinance the Senior Notes through a new senior credit facility. No assurance
can be given that all of the conditions for the consummation of the proposed
Merger will be satisfied.
On June 12, 1998, Davel signed a definitive agreement to merge with
PhoneTel Technologies, Inc. ("PhoneTel"). On September 29, 1998, Davel announced
that it was exercising its contractual rights to terminate the Davel/PhoneTel
merger agreement based on breaches of representations, warranties and covenants
by PhoneTel. On October 1, 1998, Davel filed a lawsuit in Delaware Chancery
Court seeking damages, rescission of the Davel/PhoneTel merger agreement and a
declaratory judgment that such breaches occurred. On October 27, 1998, PhoneTel
answered the complaint and filed a counterclaim against Davel alleging that the
Davel/PhoneTel merger agreement had been wrongfully terminated, and also filed a
third party claim against the Company alleging that the Company wrongfully
caused the termination of the Davel/PhoneTel merger agreement. The counterclaim
and third
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
party claim seek specific performance by Davel of the transactions contemplated
by the Davel/PhoneTel merger agreement and damages and other equitable relief
from Davel and the Company. The Company believes that the third party claim is
without merit and intends to defend against it vigorously.
The following unaudited, consolidated financial statements of Peoples are filed
with this report:
(i) Consolidated Balance Sheets as of September 30, 1998
(ii) Consolidated Statements of Operations for the nine-months ended September
30, 1998 and 1997
(iii) Consolidated Statements of Cash Flows for the nine-months ended September
30, 1998 and 1997
(iv) Notes to Consolidated Financial Statements
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
September 30, December 31,
------------- ----------
ASSETS 1998 1997
- ------------------------------------------------------------------------------------------------------
(Unaudited)
Current assets:
Cash and cash equivalents........................................................................... $ 5,817 $ 22,834
Restricted cash..................................................................................... 929 920
Accounts receivable, net of allowance for doubtful accounts of $3,898 in 1998 and
$4,936 in 1997..................................................................................... 18,579 17,061
Prepaid expenses and other current assets........................................................... 2,149 2,631
-------- --------
Total current assets.............................................................................. 27,474 43,446
Property and equipment, net........................................................................... 49,809 50,362
Location contracts, net............................................................................... 22,215 23,936
Intangible assets, net................................................................................ 451 824
Goodwill, net......................................................................................... 8,442 4,084
Deferred income taxes................................................................................. 3,407 3,407
Other assets, net..................................................................................... 4,637 5,258
-------- --------
Total assets...................................................................................... $116,435 $131,317
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------
Current liabilities:
Notes payable and current maturities of long-term debt.............................................. $ 54 $ 634
Current portion of obligations under capital leases................................................. 604 536
Accounts payable and accrued expenses............................................................... 21,754 22,722
Accrued interest payable............................................................................ 2,578 5,702
Income and other taxes payable...................................................................... 2,772 2,844
Total current liabilities......................................................................... 27,762 32,438
Notes payable and long-term debt...................................................................... 100,000 100,000
Obligations under capital leases...................................................................... 1,488 275
-------- --------
Total liabilities................................................................................. 129,250 132,713
-------- --------
Commitments and contingencies......................................................................... -- --
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.................... 13,823 13,711
Preferred stock dividends payable................................................................... 3,756 2,573
-------- --------
Total preferred stock............................................................................. 17,579 16,284
-------- --------
Common shareholders' deficit:
Preferred stock; $.01 par value; 4,240 shares authorized; none issued and
outstanding........................................................................................ -- --
Convertible preferred stock; Series B, $.01 par value; 600 shares authorized; none
issued and outstanding............................................................................. -- --
Common stock; $.01 par value; 75,000 shares authorized; 16,213 shares in 1998 and
16,209 shares in 1997 issued and outstanding....................................................... 162 162
Capital in excess of par value...................................................................... 58,004 59,291
Accumulated deficit................................................................................. (85,671) (75,108)
Accumulated other comprehensive loss................................................................ (2,889) (2,025)
-------- --------
Total common shareholders' deficit................................................................ (30,394) (17,680)
-------- --------
Total liabilities less shareholders' deficit...................................................... $116,435 $131,317
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
For the nine months ended
---------------------------
September 30,
---------------------------
1998 1997
----------- -----------
Revenues:
Coin calls............................................................................ $ 59,222 $ 57,029
Non-coin calls........................................................................ 27,043 26,924
-------- --------
Total revenues..................................................................... 86,265 83,953
Costs and expenses:
Telephone charges..................................................................... 21,024 22,224
Commissions........................................................................... 24,535 21,593
Field service and collection.......................................................... 15,929 14,620
Depreciation and amortization......................................................... 16,641 15,984
Selling, general and administrative................................................... 8,996 9,453
-------- --------
Total costs and expenses........................................................... 87,125 83,874
-------- --------
Operating (loss) income............................................................... (860) 79
Other expenses:
Interest expense, net................................................................. 9,703 9,820
-------- --------
Loss from continuing operations before income taxes..................................... (10,563) (9,741)
Income taxes............................................................................ -- --
-------- --------
Loss from continuing operations......................................................... (10,563) (9,741)
Loss from discontinued operations....................................................... -- (2,018)
-------- --------
Net loss................................................................................ (10,563) (11,759)
Dividends and accretion on preferred stock.............................................. (1,300) (904)
-------- --------
Net loss applicable to common shareholders.............................................. $(11,863) $(12,663)
======== ========
Loss per common share (basic and diluted):
Loss from continuing operations....................................................... $ (0.73) $ (0.66)
Loss from discontinued operations..................................................... -- (0.12)
-------- --------
Net loss........................................................................... $ (0.73) $ (0.78)
======== ========
Weighted average common shares outstanding.............................................. 16,212 16,195
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
For the nine months
--------------------------
ended September 30,
--------------------------
1998 1997
----------- -----------
Cash flows from operating activities
Net loss $(10,563) $(11,759)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization...................................................... 16,641 15,984
Amortization of deferred financing costs........................................... 590 667
Changes in operating assets and liabilities:
Accounts receivable............................................................. (1,518) (4,240)
Prepaid expenses and other current assets....................................... 482 23
Other assets.................................................................... (832) 2,876
Accounts payable and accrued expenses........................................... (968) (982)
Accrued interest payable........................................................ (3,124) (3,083)
Income and other taxes payable.................................................. (72) 335
Net effect of discontinued operations and assets held for sale.................. -- 2,115
-------- --------
Net cash provided by operating activities................................ 636 1,936
Cash flows from investing activities
Property and equipment additions................................................... (2,886) (2,156)
Proceeds from sale of assets....................................................... -- 233
Payments for acquisition of Indiana Telcom assets.................................. (11,317) --
Payments for certain contracts..................................................... (2,292) (2,939)
Restricted cash.................................................................... (9) (898)
-------- --------
Net cash used in investing activities.................................... (16,504) (5,760)
Cash flows from financing activities
Principal payments on long-term debt............................................... (580) (426)
Principal payments under capital lease obligations................................. (577) (758)
Debt issuance costs................................................................ -- (218)
Exercise of stock options and warrants............................................. 8 --
-------- --------
Net cash used in financing activities.................................... (1,149) (1,402)
-------- --------
Net decrease in cash and cash equivalents............................................... (17,017) (5,226)
Cash and cash equivalents at beginning of period........................................ 22,834 12,556
-------- --------
Cash and cash equivalents at end of period.............................................. $ 5,817 $ 7,330
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
NOTE 1--UNAUDITED INTERIM INFORMATION
The accompanying interim consolidated financial data for Peoples Telephone
Company, Inc. (the "Company") and subsidiaries, are unaudited; however, in the
opinion of management, the interim data include all adjustments necessary for a
fair presentation of the results for the interim periods. 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.
The results of operations for the nine months ended September 30, 1998 are
not necessarily indicative of the results to be expected for the year ending
December 31, 1998.
The interim unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the year ended December 31, 1997 as set forth in the Company's 1997 Annual
Report on Form 10-K as amended by Form 10-K/A No. 1 ("Form 10-K").
NOTE 2--INVESTMENTS AND OTHER COMPREHENSIVE LOSS
Investments in debt and equity securities are accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting
for Certain Investments in Debt and Equity Securities ("SFAS 115"). The
Company's investment in Global Telecommunications Solutions, Inc. ("GTS") is
classified as "available for sale", and reported at fair value with unrealized
gains or losses, net of tax, recorded as a separate component of shareholders'
deficit. The Company's investment in GTS common stock at September 30, 1998 was
approximately $0.2 million, net of approximately $2.9 million of unrealized
losses.
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income ("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of SFAS 130 had no impact on the Company's net loss or shareholders'
deficit. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which, prior to adoption, were reported
separately in shareholders' deficit, to be included in other comprehensive loss.
Prior year financial statements have been reclassified to conform to the
requirements of SFAS 130.
The components of the comprehensive loss are as follows (in thousands):
For the nine months
-----------------------------
ended September 30,
-----------------------------
1998 1997
------------ ------------
Net loss.................................... $(10,563) $(11,759)
Unrealized (loss) gain on investment........ (863) 874
-------- --------
Comprehensive loss.......................... $(11,426) $(10,885)
======== ========
NOTE 3--EARNINGS PER SHARE
For the quarter and nine months ended September 30, 1998 and 1997, the
treasury stock method was used to determine the dilutive effect of options and
warrants on earnings per share data. The following table summarizes the loss
from continuing operations and the weighted average number of shares outstanding
used in the computation of loss from continuing operations per common share in
accordance with SFAS No. 128, Earnings Per Share (in thousands, except per share
data).
For the nine months
ended September 30,
----------------------
1998 1997
-------- --------
Loss from continuing operations........................................ $(10,563) $ (9,741)
Deduct:
Cumulative preferred stock dividend requirement.................. (849) (787)
Cumulative adjustment for preferred stock dividend
compounding.................................................... (334) --
Preferred stock issuance cost accretion.......................... (117) (117)
-------- --------
Loss from continuing operations applicable to
common shareholders.......................................... $(11,863) $(10,645)
======== ========
Weighted average common shares outstanding.................... 16,212 16,195
======== ========
Basic and diluted loss per share from continuing
operations................................................... $(0.73) $(0.66)
======== ========
Diluted loss per share is equal to basic loss 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 4--LONG-TERM DEBT
During June 1998, the Company executed an amendment to the Fourth Amended and
Restated Loan and Security Agreement which modified the Company's financial
covenants in the Company's $20 million credit facility with Bank Austria
Creditanstalt Corporate Finance, Inc., formerly known as "Creditanstalt-
Bankverein" (the "Credit Facility"), as of June 30, 1998. The interest rate on
balances outstanding under the Credit Facility varies based upon the leverage
ratio maintained by the Company. Outstanding principal balances are due in full
in the year 2000. 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 available balance of the Credit Facility. The
Credit Facility is secured by substantially all of the Company's assets and
contains certain 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 September 30, 1998, the
Company had no amounts borrowed under the Credit Facility and was in compliance
with the financial covenants.
NOTE 5--INCOME TAXES
For the three and nine months ended September 30, 1998, the Company recorded
deferred tax assets and deferred tax asset valuation allowances of approximately
$1.2 million and $4.0 million, respectively. Valuation allowances were provided
to reduce the deferred tax assets to a level which, more likely than not, will
be realized.
NOTE 6--LOSS FROM DISCONTINUED OPERATIONS
In the fourth quarter of 1997, the Company sold the operating assets of its
inmate telephone division. The accompanying Consolidated Statement of Operations
for the nine months ended September 30, 1997 and the
Consolidated Statement of Cash Flows for the nine months ended September 30,
1997 have been restated to present results of the former inmate telephone
division as discontinued operations. For the nine months ended September 30,
1997, the Company reported approximately $2.0 million in losses from
discontinued operations.
NOTE 7--ACQUISITION OF INDIANA TELCOM CORPORATION
On January 12, 1998, the Company acquired the operating assets of Indiana
Telcom Corporation for approximately $11.3 million in cash. The results of
operations for the Company include the operations of Indiana Telcom from January
12, 1998 forward. The acquisition was accounted for as a purchase, and,
accordingly, the purchase price was allocated to the assets acquired based on
appraisals and other estimates of their underlying fair values. The allocation
of the purchase price is preliminary, pending finalization of appraisals and
other estimates. The fair value of the assets acquired included $5.4 million of
installed payphones and related equipment and $0.3 million in location
contracts. No liabilities were assumed in the transaction. The excess of the
purchase price over the fair value of net assets acquired of $5.6 million was
recorded as goodwill and is being amortized over 5 years.
The following summarizes unaudited pro forma consolidated results of
operations for the nine months ending September 30, 1997 assuming the Indiana
Telcom acquisition occurred at the beginning of 1997. These pro forma results
are provided for comparative purposes only and do not purport to be indicative
of the results that would have been obtained if this acquisition had been
effected on the date indicated or which may be obtained in the future (in
thousands, except per share data).
Nine months ended
------------------
September 30, 1997
------------------
Total revenues........................ $ 87,760
Loss from continuing operations....... (10,494)
Loss from continuing operations
per common share.................... (0.70)
NOTE 8--DIAL-AROUND COMPENSATION
Effective November 6, 1996, pursuant to FCC regulations, the Company
derived additional revenues from dial-around calls placed from its public
payphones. Under the 1996 Payphone Order, from November 6, 1996 to June 30,
1997, the Company recorded gross dial-around revenue at the then-mandated rate
of $45.85 per payphone per month, as compared with the flat fee of $6.00 per
payphone per month in place prior to November 6, 1996. Pursuant to the Remand
Order, in the period from July 1 to October 6 of 1997 the Company recorded gross
dial-around compensation revenue at a rate of $37.20 per payphone per month and
recorded a charge of approximately $2.1 million, consisting of a reduction in
non-coin revenue of approximately $2.6 million and a reduction in commissions
expense of approximately $0.5 million, in the third quarter of 1997 for the
retroactive reduction in the dial-around compensation rate from $45.85 to $37.20
per payphone per month, applicable to the November 6, 1996 to June 30, 1997
period.
From October 7, 1997 to October 6, 1999, the Company is entitled to receive
dial-around compensation at a per-call rate of $0.284 based on the actual number
of dial-around calls placed from each of its payphones (or such other number of
calls as may be ultimately permitted by the FCC or the courts). Thereafter, the
dial-around compensation rate is anticipated to be at a per-call rate equal to
the local coin call rate less $0.066. For the period from October 7, 1997 to
September 30, 1998, the Company recorded dial-around compensation revenue using
an estimated 131 calls per month per payphone. The Company has based its
compensation on an estimated number of calls (i.e., 131) per payphone per month
because actual call counts are not available from the IXCs until four to nine
months after the calls are made. From October 7, 1997 forward, the estimated
amount may be adjusted for actual call counts provided by the IXCs.
The FCC, in its Order issued April 3, 1998, left in place the requirement
for payment of per-call compensation for payphones that do not transmit the
requisite payphone-specific coding digits, but gave the IXCs a choice for
computing the amount of compensation for payphones on local exchange carrier
lines not transmitting the payphone-specific coding digits of either accurately
computing per-call compensation from their databases or paying per-phone, flat-
rate compensation computed by multiplying the $0.284 per call rate by the
nationwide average number of 800 and 888 subscriber and access code calls placed
from regional Bell operating company payphones for corresponding payment
periods. Accurate payments made at the flat rate are not subject to subsequent
adjustment for actual call counts from the applicable payphone. Based on the
information available to it, including actual payments from IXCs for the fourth
quarter of 1997, the Company does not believe application of this order will
result in any material adjustment to the dial-around compensation revenues
recorded for the period from October 7, 1997 forward.
On May 15, 1998, the Court again remanded the per-call compensation rate to
the FCC for further explanation without vacating the $0.284 per call rate. The
Court stated that any resulting overpayment would be subject to refund and
directed the FCC to conclude its proceedings within a six-month period from the
effective date of the Court's decision. The Company believes that the FCC will
issue its ruling in the current proceeding within the six-month period
established by the Court. Based on the information available to it, the Company
does not believe that it is reasonably possible that the amount of compensation
for dial-around calls will be materially reduced from the amount recorded as
dial-around compensation. While the amount of $0.284 per call constitutes the
Company's position on the minimum appropriate level of fair compensation,
certain IXCs have challenged this rate level, asserting that the appropriate
level of fair compensation should be lower than $0.284 per call.
NOTE 9--COMMITMENTS AND CONTINGENCIES
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. The
Company successfully obtained dismissal of one count of the complaint early in
the proceedings, but the court allowed the remaining two counts to proceed
through discovery. Formal discovery is nearly completed. On July 31, 1998, the
court granted a summary judgment in the Company's favor, dismissing one of the
two remaining counts. Trial has been reset for February 1999. 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.
(b) Pro Forma Financial Information
The following unaudited, pro forma consolidated financial statements of the
Company are filed with this report:
(i) Pro Forma Condensed Consolidated Balance Sheets as of September 30,
1998
(ii) Notes to the Unaudited Pro Forma Condensed Cosolidated Balance
Sheets
(iii) Pro Forma Consolidated Statements of Operations for the nine months
ended September 30, 1998, and the years ended December 31, 1997,
1996 and 1995, respectively
(iv) Notes to the Unaudited Pro Forma Consolidated Statements of
Operations
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
September 30, 1998
(In thousands)
Old
Davel Peoples Pro Forma Pro Forma
ASSETS Historical Historical Combined Refinancing Pro Forma
- ------------------------------------------------ ---------- ---------- -------- ----------- ---------
Current assets:
Cash and cash equivalents...................... $ 4,247 $ 6,746 $ 10,993 $ -- (1) $ 10,993
Trade and other receivables.................... 25,111 18,579 43,690 -- 43,690
Other current assets........................... 3,890 2,149 6,039 -- 6,039
-------- -------- -------- -------- --------
Total current assets.......................... 33,248 27,474 60,722 -- 60,722
-------- -------- -------- -------- --------
Noncurrent assets:
Property, plant and equipment, net............. 87,434 49,809 137,243 -- 137,243
Intangibles and other assets................... 62,556 35,745 98,301 3,500 (1) 96,817
(4,984)(2)
Deferred tax assets............................ -- 3,407 3,407 8,396 (2) 11,803
-------- -------- -------- -------- --------
Total noncurrent assets....................... 149,990 88,961 238,951 6,912 245,863
-------- -------- -------- -------- --------
Total assets.................................. $183,238 $116,435 $299,673 $ 6,912 $306,585
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------
Accounts payable and accrued expenses........... $ 13,334 $ 21,754 $ 35,088 $ -- $ 35,088
Other current liabilities....................... 20,833 6,008 26,841 (3,173)(1) 23,668
Long-term debt, less current maturities......... 74,927 101,488 176,415 26,673 (1) 203,088
Deferred income taxes........................... 10,189 -- 10,189 -- 10,189
Redeemable preferred stock...................... -- 17,579 17,579 (17,579)(2) --
Total stockholders' equity...................... 63,955 (30,394) 33,561 991 (2) 34,552
-------- -------- -------- -------- --------
Total liabilities and stockholders' equity.... $183,238 $116,435 $299,673 $ 6,912 $306,585
======== ======== ======== ======== ========
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of September 30, 1998
(In thousands)
1. The net effect on cash and cash equivalents of the Transaction and the
concurrent debt refinancing reflects the following:
Total sources:
New Davel Line of Credit......................... $ 17,660
New Davel Term Loan.............................. 200,000
--------
$217,660
========
Total uses:
Repayment of Old Davel Term Loan................. $ 79,330
Repayment of Old Davel Line of Credit............ 14,830
Purchase of Peoples Notes........................ 100,000
Debt Refinancing Costs........................... 3,500
Debt Repayment Premiums.......................... 14,000
Merger-Related Transaction Costs................. 6,000
--------
$217,660
========
2. Represents the net change in stockholders' equity as a result of the
Transaction, the concurrent refinancing of certain Old Davel and Peoples debt
and the conversion of Peoples Series C Preferred Stock:
Conversion of Peoples Series C Preferred Stock to Peoples' Common Stock,
net of premium paid upon conversion and excess of redemption amount
over carrying amount of $1,289..................................................... $17,579
Write-off of Old Davel historical deferred financing costs, net of tax of
$807............................................................................... (1,317)
Write-off of Peoples historical deferred financing costs, net of tax of $1,087....... (1,773)
Estimated premiums related to repayment of Peoples debt, net of tax of
$5,320............................................................................. (8,680)
Estimated merger-related transaction costs, net of tax of $1,182..................... (4,818)
-------
Pro forma adjustment to stockholders' equity......................................... $ 991
=======
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1998
(In thousands, except per share data)
Old Davel Peoples Pro Forma
Pro Forma Historical Pro Forma Pro Forma Debt
(1) (2) Adjustments Combined Refinancing Pro Forma
--------- ---------- ----------- -------- ----------- ---------
Revenues:
Coin calls............................. $44,062 $ 59,222 $(1,243)(3) $102,041 $ -- $102,041
Non-coin............................... 29,153 27,043 -- 56,196 -- 56,196
------- -------- ------- -------- --------- --------
Total revenues........................ 73,215 86,265 (1,243) 158,237 -- 158,237
------- -------- ------- -------- --------- --------
Costs and expenses:
Telephone charges...................... 15,494 19,061 -- 34,555 -- 34,555
Commissions............................ 11,723 24,535 -- 36,258 -- 36,258
Service, maintenance, and network
costs................................. 18,294 17,892 -- 36,186 -- 36,186
Selling, general and administrative
costs................................. 12,946 8,996 (1,243)(3) 20,699 -- 20,699
Unusual charges........................ 825 -- -- 825 -- 825
Depreciation and amortization.......... 12,587 16,641 -- 29,228 (338)(4) 28,890
------- -------- ------- -------- --------- --------
Total costs and expenses.............. 71,869 87,125 (1,243) 157,751 (338) 157,413
------- -------- ------- -------- --------- --------
Operating income (loss)............... 1,346 (860) -- 486 338 824
------- -------- ------- -------- --------- --------
Interest expense........................ (7,074) (9,703) -- (16,777) 1,213 (5) (15,564)
Other................................... 152 -- -- 152 -- 152
------- -------- ------- -------- --------- --------
Income (loss) from continuing
operations before income taxes...... (5,576) (10,563) -- (16,139) 1,551 (14,588)
Provision for (benefit from) income
taxes.................................. (1,562) -- -- (1,562) 589 (6) (973)
------- -------- ------- -------- --------- --------
Income (loss) from continuing
operations.......................... (4,014) (10,563) -- (14,577) 962 (13,615)
Preferred stock dividends and
accretion.............................. -- (1,300) -- (1,300) 1,300 (7) --
------- -------- ------- -------- --------- --------
Income (loss) from continuing
operations applicable to
common shares....................... $(4,014) $(11,863) $ -- $(15,877) $ 2,262 $(13,615)
======= ======== ======= ======== ========= ========
Basic and diluted loss per share (8).... $ (0.80) $ (0.73) $ (1.80) $ (1.40)
======= ======== ======== ========
Weighted average common shares
outstanding (8)........................ 5,032 16,212 8,842 9,703
======= ======== ======== ========
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1998
(In thousands, except per share data)
1. The following Old Davel unaudited pro forma condensed combined statement of
operations is based on the historical financial statements of Old Davel and
CCI and has been prepared to illustrate the effects of the CCI Acquisition.
Old Davel 9
Months CCI
Ended Period from
September 30, January 1, 1998,
1998 to February 2,
Historical 1998 Pro Forma Old Davel
(a) (a) Adjustments Pro Forma
------------ ---------------- ----------- ---------
Revenues:
Coin calls............................................ $41,430 $2,632 $ -- $44,062
Non-coin.............................................. 27,753 1,400 -- 29,153
------- ------ ----- -------
Total revenue........................................ 69,183 4,032 -- 73,215
------- ------ ----- -------
Costs and expenses:
Telephone charges..................................... 15,019 475 -- 15,494
Commissions........................................... 10,943 780 -- 11,723
Service, maintenance and network costs................ 17,880 414 -- 18,294
Selling, general and administrative costs............. 10,869 2,077 -- 12,946
Unusual charges....................................... 825 -- -- 825
Depreciation and amortization......................... 11,683 821 83 (b) 12,587
------- ------ ----- -------
Total costs and expenses............................. 67,219 4,567 83 71,869
------- ------ ----- -------
Operating income (loss).............................. 1,964 (535) (83) 1,346
------- ------ ----- -------
Interest expense........................................ (6,295) (308) (471)(c) (7,074)
Other................................................... 152 -- -- 152
------- ------ ----- -------
Loss from continuing operations before
income taxes....................................... (4,179) (843) (554) (5,576)
Benefit from income taxes............................... (1,455) -- (107)(d) (1,562)
------- ------ ----- -------
Loss from continuing operations...................... (2,724) (843) (447) (4,014)
Preferred stock dividends and accretion................. -- -- -- --
------- ------ ----- -------
Loss from continuing operations applicable to
common shares...................................... $(2,724) $ (843) $(447) $(4,014)
======= ====== ===== =======
Basic and diluted loss per share........................ $ (0.54) $ (0.80)
======= =======
Weighted average common shares outstanding.............. 5,032 5,032
======= =======
- ---------------
(a) Certain reclassifications were made to Old Davel and CCI historical
information to conform the presentation of such information.
(b) Reflects additional depreciation and amortization expense related to the
CCI Acquisition.
(c) Reflects additional interest expense related to the incurrence of $120,000
in long-term debt under the $125,000 credit agreement related to the CCI
Acquisition.
(d) Reflects income tax effect of the CCI pro forma adjustments in Notes (b)
and (c) above.
2. Certain reclassifications were made to Peoples historical information to
conform the presentation of such information.
3. To present coin revenues net of related sales tax.
4. To adjust for the change in amortization of deferred financing costs as a
result of the refinancing of certain Old Davel and Peoples debt.
5. In connection with the Transaction, New Davel intends to refinance and
consolidate approximately $194,000 of existing indebtedness of Old Davel and
Peoples. The following table reflects the pro forma adjustments to interest
expense related to the refinancing of certain debt.
Amount included in historical pro forma statement of operations for
refinanced debt.............................................................. $ 15,432
Amounts for new facility and debt............................................. (14,219)
---------
Pro forma interest expense adjustment......................................... $ 1,213
=========
The pro forma adjustment to interest expense assumes a weighted average
interest rate of 8.71% per annum. A 0.125% increase or decrease in the
weighted average interest rate would change pro forma interest expense by
$204 for the nine months ended September 30, 1998.
6. The pro forma adjustment to the provision for income taxes is based upon a
tax rate of 38% applied to the pro forma income before income taxes.
7. Eliminates preferred stock accretion and dividends.
8. Reflects the Exchange Ratio of 0.235 of a share of New Davel Common Stock for
each issued and outstanding share of Peoples Common Stock.
The following table presents a reconciliation of the pro forma weighted
average number of shares outstanding used in calculating pro forma loss per
share of New Davel Common Stock:
Historical weighted average number of shares of Peoples Common Stock
outstanding for the nine months ended September 30, 1998............................. 16,212
Exchange Ratio........................................................................... 0.235
------
Pro forma number of shares of New Davel Common Stock issued to Peoples
Common Shareholders.................................................................. 3,810
Historical weighted average number of shares of Old Davel Common Stock
outstanding for the nine months ending September 30, 1998............................ 5,032
------
Pro forma number of shares of New Davel Common Stock prior to conversion
of Peoples Series C Preferred Stock.................................................. 8,842
------
Pro forma number of shares of Peoples Common Stock converted from
Peoples Preferred Stock, Preferred Stock Dividends Payable and Premium
Paid upon Conversion................................................................. 3,665
Exchange Ratio........................................................................... 0.235
------
Pro forma number of shares of New Davel Common Stock issued in
conversion of Peoples Series C Preferred Stock, Preferred Stock Dividends
Payable and Premium Paid upon Conversion to Peoples Common Stock..................... 861
------
Pro forma number of shares of New Davel Common Stock outstanding after
completion of the Transaction and conversion of Peoples Preferred Stock.............. 9,703
======
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
(In thousands, except per share data)
Old Davel Peoples Pro Pro Forma
--------- ---------- --------- -----------
Pro Forma Historical Pro Forma Forma Debt
--------- ---------- ----------- --------- -----------
(1) (2) Adjustments Combined Refinancing Pro Forma
--------- ---------- ----------- --------- ----------- ---------
Revenues:
Coin calls........................... $ 58,113 $ 76,449 $(757)(3) $133,805 $ -- $133,805
Non-coin............................. 44,804 35,786 -- 80,590 -- 80,590
-------- -------- ----------- -------- --------- --------
Total revenues...................... 102,917 112,235 (757) 214,395 -- 214,395
-------- -------- ----------- -------- --------- --------
Costs and expenses:
Telephone charges.................... 19,281 24,877 -- 44,158 -- 44,158
Commissions.......................... 15,179 29,656 -- 44,835 -- 44,835
Service, maintenance and
network costs....................... 33,746 24,031 -- 57,777 -- 57,777
Selling, general and
administrative costs................ 15,222 13,023 (757)(3) 27,488 -- 27,488
Depreciation and amortization........ 15,078 21,304 -- 36,382 (203)(4) 36,179
-------- -------- ----------- -------- --------- --------
Total costs and expenses............ 98,506 112,891 (757) 210,640 (203) 210,437
-------- -------- ----------- -------- --------- --------
Operating income (loss)............. 4,411 (656) -- 3,755 203 3,958
-------- -------- ----------- -------- --------- --------
Interest expense...................... (9,955) (13,106) -- (23,061) 3,224 (5) (19,837)
Other................................. 6,028 -- -- 6,028 -- 6,028
-------- -------- ----------- -------- --------- --------
Income (loss) from continuing
operations before income
taxes............................. 484 (13,762) -- (13,278) 3,427 (9,851)
Provision for income taxes............ 753 -- -- 753 1,302 (6) 2,055
-------- -------- ----------- -------- --------- --------
Income (loss) from continuing
operations........................ (269) (13,762) -- (14,031) 2,125 (11,906)
Preferred stock dividends and
accretion............................ -- (1,206) -- (1,206) (664)(7) (1,870)
-------- -------- ----------- -------- --------- --------
Income (loss) from continuing
operations applicable to
common shares..................... $ (269) $(14,968) $ -- $(15,237) $ 1,461 $(13,776)
======== ======== =========== ======== ========= ========
Basic and diluted loss per
share(8)............................. $ (0.06) $ (0.92) $ (1.81) $ (1.34)
======== ======== ======== ========
Weighted average common shares
outstanding(8)....................... 4,601 16,198 8,408 10,269
======== ======== ======== ========
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1997
(In thousands, except per share data)
1. The following Old Davel unaudited pro forma condensed combined statement of
operations is based on the historical financial statements of Old Davel and
CCI and has been prepared to illustrate the effects of the CCI Acquisition.
Old Davel
Year Ended CCI
December 31, Year Ended
1997 December 31,
Historical 1997 Pro Forma Old Davel
(a) (a) (b) Adjustments Pro Forma
------------ ------------ ----------- ---------
Revenues:
Coin calls....................................................... $25,211 $32,902 $ -- $ 58,113
Non-coin......................................................... 21,797 23,007 -- 44,804
------- ------- ------- --------
Total revenue................................................... 47,008 55,909 -- 102,917
------- ------- ------- --------
Costs and expenses:
Telephone charges................................................ 9,576 9,705 -- 19,281
Commissions...................................................... 6,202 8,977 -- 15,179
Service, maintenance and network costs........................... 17,040 16,706 -- 33,746
Selling, general and administrative costs........................ 3,175 12,047 -- 15,222
Depreciation and amortization.................................... 4,316 8,491 2,271 (c) 15,078
------- ------- ------- --------
Total costs and expenses........................................ 40,309 55,926 2,271 98,506
------- ------- ------- --------
Operating income (loss)......................................... 6,699 (17) (2,271) 4,411
------- ------- ------- --------
Interest expense................................................... (475) (3,983) (5,497) (d) (9,955)
Other.............................................................. 497 5,531 -- 6,028
------- ------- ------- --------
Income (loss) from continuing operations before
income taxes.................................................. 6,721 1,531 (7,768) 484
Provision for (benefit from) income taxes.......................... 2,459 -- (1,706) (e) 753
------- ------- ------- --------
Income (loss) from continuing operations........................ 4,262 1,531 (6,062) (269)
Preferred stock dividends and accretion............................ -- -- -- --
------- ------- ------- --------
Income (loss) from continuing operations
applicable to common shares................................... $ 4,262 $ 1,531 $(6,062) $ (269)
======= ======= ======= ========
Basic earnings (loss) per share.................................... $ 0.93 $ (0.06)
======= ========
Diluted earnings (loss) per share.................................. $ 0.90 $ (0.06)
======= ========
Weighted average common shares outstanding......................... 4,601 4,601
======= ========
- ---------------
(a) Certain reclassifications were made to Old Davel and CCI historical
information to conform the presentation of such information.
(b) CCI amounts do not include $32,487 of revenues, $40,485 of costs and
expenses, and $11,635 of loss from continuing operations related to CCI's
inmate operations which were sold to Talton Holdings, Inc. on October 1,
1997.
(c) Reflects additional depreciation and amortization expense related to the
CCI Acquisition.
(d) Reflects additional interest expense related to the incurrence by Old
Davel of $120,000 in long-term debt under the $125,000 credit agreement
related to the CCI Acquisition.
(e) Reflects income tax effect of the CCI pro forma adjustments described in
Notes (c) and (d) above.
2. Certain reclassifications were made to Peoples historical information to
conform the presentation of such information.
3. To present coin revenues net of related sales tax.
4. To adjust for the change in amortization of deferred financing costs as a
result of the refinancing of certain Old Davel and Peoples debt.
5. In connection with the Transaction, New Davel intends to refinance and
consolidate approximately $194,000 of existing indebtedness of Old Davel and
Peoples. The following table reflects the pro forma adjustments to interest
expense related to the refinancing of certain debt.
Amount included in historical pro forma statement of operations for
refinanced debt............................................................ $ 22,182
Amounts for new facility and debt............................................ (18,958)
---------
Pro forma interest expense adjustment....................................... $ 3,224
=========
The pro forma adjustment to interest expense assumes a weighted average
interest rate of 8.71% per annum. A 0.125% increase or decrease in the
weighted average interest rate would change pro forma interest expense by
$273 for the year ended December 31, 1997.
6. The pro forma adjustment to the provision for income taxes is based upon a
tax rate of 38% applied to the pro forma income before income taxes.
7. In connection with the Transaction, holders of Peoples Series C Preferred
Stock intend to convert their shares to Peoples Common Stock. In
consideration for the accrued but unpaid dividends and premium paid upon
conversion, the holders of Peoples Series C Preferred Stock will also be paid
an additional 190 shares of New Davel Common Stock (plus such additional
number as will equal in value (calculated based on the Exchange Ratio of
0.235 of a share of New Davel Common Stock multiplied by the closing price of
the common stock of Old Davel on the trading day immediately prior to the
date of the Merger Agreement) any additional dividends on the Preferred
Shares accruing after the date of the Merger Agreement and prior to the
Effective Time). These shares are valued at $3,154. The following table
reflects the pro forma adjustments to the net loss applicable to common
shares related to the conversion of the Peoples Series C Preferred Stock.
Amount included in historical net loss applicable to common shares for
preferred stock accretion and dividends.............................................. $ 1,206
Premium paid upon conversion of preferred stock to common stock and excess
of redemption amount over carrying amount............................................ (1,870)
-------
Pro forma adjustment to net loss applicable to common shares............................. $ (664)
=======
8. Reflects the Exchange Ratio of 0.235 of a share of New Davel Common Stock for
each issued and outstanding share of Peoples Common Stock.
The following table presents a reconciliation of the pro forma weighted
average number of shares outstanding used in calculating pro forma loss per
share of New Davel Common Stock:
Historical weighted average number of shares of Peoples Common Stock
outstanding for the year ended December 31, 1997...................................... 16,198
Exchange Ratio............................................................................ 0.235
------
Pro forma number of shares of New Davel Common Stock issued to Peoples
Common Shareholders................................................................... 3,807
Historical weighted average number of shares of Old Davel Common Stock
outstanding for the year ended December 31, 1997...................................... 4,601
------
Pro forma number of shares of New Davel Common Stock prior to the
conversion of Peoples Series C Preferred Stock........................................ 8,408
------
Pro forma number of shares of Peoples Common Stock converted from
Peoples Preferred Stock, Preferred Stock Dividends Payable and Premium
Paid upon Conversion.................................................................. 3,665
Exchange Ratio............................................................................ 0.235
------
Pro forma number of shares of New Davel Common Stock issued in
conversion of Peoples Series C Preferred Stock and Preferred Stock
Dividends Payable to Peoples Common Stock and Premium Paid upon
Conversion to Peoples Common Stock.................................................... 861
------
Pro forma number of shares of Davel Common Stock outstanding after
completion of Transaction and conversion of Peoples Series C Preferred
Stock................................................................................. 9,269
Pro forma number of shares of Old Davel Common Stock issued in connection
with the EGI Investment............................................................... 1,000
------
Pro forma number of shares of New Davel Common Stock outstanding after
completion of the Transaction, conversion of Peoples Series C Preferred
Stock and the EGI Investment.......................................................... 10,269
======
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
(In thousands, except per share data)
Old Davel Peoples
---------- -----------
Historical Historical Pro Forma Pro Forma
---------- ----------- --------------- ------------
(1) (1) Adjustments Combined
------- -------- --------------- ------------
Revenues:
Coin calls.................................................... $18,560 $ 77,389 $(557)(2) $ 95,392
Non-coin...................................................... 18,413 29,617 -- 48,030
------- -------- --------------- --------
Total revenues............................................... 36,973 107,006 (557) 143,422
------- -------- --------------- --------
Costs and expenses:
Telephone charges............................................. 7,501 25,263 -- 32,764
Commissions................................................... 6,286 28,250 -- 34,536
Service, maintenance and network costs........................ 12,245 23,974 -- 36,219
Selling, general and administrative costs..................... 2,703 12,491 (557)(2) 14,637
Unusual charges............................................... -- (1,500) -- (1,500)
Depreciation and amortization................................. 2,986 20,466 -- 23,452
------- -------- --------------- --------
Total costs and expenses..................................... 31,721 108,944 (557) 140,108
------- -------- --------------- --------
Operating income (loss)...................................... 5,252 (1,938) -- 3,314
------- -------- --------------- --------
Interest expense............................................... (289) (12,875) -- (13,164)
Other.......................................................... 100 545 -- 645
------- -------- --------------- --------
Income (loss) from continuing operations before income
taxes...................................................... 5,063 (14,268) -- (9,205)
Provision for income taxes..................................... 1,868 -- -- 1,868
------- -------- --------------- --------
Income (loss) from continuing operations..................... 3,195 (14,268) -- (11,073)
Preferred stock dividends and accretion........................ -- (1,194) -- (1,194)
------- -------- --------------- --------
Income (loss) from continuing operations applicable to
common shares.............................................. $ 3,195 $(15,462) $ -- $(12,267)
======= ======== =============== ========
Basic and diluted income (loss) per share (3).................. $ 0.70 $ (0.96) $ (1.47)
======= ======== ========
Weighted average common shares outstanding (3)................. 4,513 16,188 8,317
======= ======== ========
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
for the Year Ended December 31, 1996
(In thousands, except per share data)
1. Certain reclassifications were made to Old Davel and Peoples historical
information to conform the presentation of such information.
2. To present coin revenues net of related sales tax.
3. Reflects the Exchange Ratio of 0.235 of a share of New Davel Common Stock for
each issued and outstanding share of Peoples Common Stock.
The following table presents a reconciliation of the pro forma weighted
average number of shares outstanding used in calculating pro forma loss per
share of New Davel Common Stock.
Historical weighted average number of shares
of Peoples Common Stock outstanding for
the year ended December 31, 1996................................... 16,188
Exchange Ratio...................................................... 0.235
-----
Pro forma number of shares of New Davel Common Stock
issued to Peoples Common Shareholders.............................. 3,804
Historical weighted average number of shares
of Old Davel Common Stock outstanding for the year
ended December 31, 1996............................................ 4,513
-----
Pro forma number of shares of New Davel Common Stock
outstanding after completion of the Transaction.................... 8,317
======
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
(In thousands, except per share data)
Old Davel Peoples
---------- -----------
Historical Historical Pro Forma Pro Forma
---------- ----------- -------------- ------------
(1) (1) Adjustments Combined
---------- ----------- -------------- ------------
Revenues:
Coin calls.................................................... $14,357 $ 78,353 $ (431)(2) $ 92,279
Non-coin...................................................... 17,473 34,009 -- 51,482
------- -------- ------------- --------
Total revenues............................................... 31,830 112,362 (431) 143,761
------- -------- ------------- --------
Costs and expenses:
Telephone charges............................................. 6,076 29,304 -- 35,380
Commissions................................................... 4,968 27,599 -- 32,567
Service, maintenance and network costs........................ 10,138 27,412 -- 37,550
Selling, general and administrative costs..................... 2,366 11,160 (431)(2) 13,095
Unusual charges............................................... -- 6,177 -- 6,177
Depreciation and amortization................................. 2,136 19,180 -- 21,316
------- -------- ------------- --------
Total costs and expenses..................................... 25,684 120,832 (431) 146,085
------- -------- ------------- --------
Operating income (loss)...................................... 6,146 (8,470) -- (2,324)
------- -------- ------------- --------
Interest expense............................................... (48) (10,355) -- (10,403)
Other.......................................................... 125 (566) -- (441)
------- -------- ------------- --------
Income (loss) from continuing operations before income
taxes...................................................... 6,223 (19,391) -- (13,168)
Provision for (benefit from) income taxes...................... 2,403 (217) -- 2,186
------- -------- ------------- --------
Income (loss) from continuing operations..................... 3,820 (19,174) -- (15,354)
Preferred stock dividends and accretion........................ -- (542) -- (542)
------- -------- ------------- --------
Income (loss) from continuing operations applicable to
common shares.............................................. $ 3,820 $(19,716) $ -- $(15,896)
======= ======== ============= ========
Basic and diluted income (loss) per share (3).................. $ .85 $ (1.23) $ (1.93)
======= ======== ========
Weighted average common shares outstanding (3)................. 4,455 16,091 8,236
======= ======== ========
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
(In thousands, except per share data)
1. Certain reclassifications were made to Old Davel and Peoples historical
information to conform the presentation of such information.
2. To present coin revenues net of related sales tax.
3. Reflects the Exchange Ratio of 0.235 of a share of New Davel Common Stock for
each issued and outstanding share of Peoples Common Stock.
The following table presents a reconciliation of the pro forma weighted
average number of shares outstanding used in calculating pro forma loss per
share of New Davel Common Stock.
Historical weighted average number of shares of
Peoples Common Stock outstanding for the year
ended December 31, 1995....................................... 16,091
Exchange ratio.................................................... 0.235
------
Pro forma number of shares of New Davel Common Stock
issued to Peoples Common Shareholders........................... 3,781
Historical weighted average number of shares of
Old Davel Common Stock outstanding for the year
ended December 31, 1996....................................... 4,455
------
Pro forma number of shares of New Davel Common Stock
outstanding after completion of the Transaction.................. 8,236
======