1
PUBLIC TELEPHONE CORPORATION
Financial Statements
June 30, 1994
(With Independent Auditors' Report Thereon)
2
KPMG Peat Marwick LLP [LOGO]
2400 First Indiana Plaza
135 North Pennsylvania Street
Indianapolis, IN 46204-2452
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
PUBLIC TELEPHONE CORPORATION:
We have audited the accompanying balance sheet of Public
Telephone Corporation as of June 30, 1994, and the related
statements of operations, changes in stockholders' equity and
cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audit. The accompanying financial
statements of Public Telephone Corporation as of June 30, 1993,
and the related statements of operations, changes in
stockholders' equity and cash flows for the year then ended were
audited by other auditors whose report thereon dated August 13,
1993 referred to a change in the Company's depreciation method,
as discussed in note 2, and included an explanatory paragraph
related to the Company's ability to continue as a going concern.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Public Telephone Corporation as of June 30, 1994, and the
results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
August 9, 1994
3
PUBLIC TELEPHONE CORPORATION
Balance Sheets
June 30, 1994 and 1993
ASSETS 1994 1993
------ ---- ----
Current assets:
Cash and cash equivalents $ 508,016 45,031
Accrued revenue:
Coin 9,354 3,750
Non-coin 79,000 -
Prepaid expenses 10,730 1,916
Telephone parts 15,442 45,656
--------- ---------
TOTAL CURRENT ASSETS 622,542 96,353
--------- ---------
Furniture and equipment, at cost:
Telephone equipment 1,968,894 698,907
Furniture and fixtures 49,205 31,900
Vehicles 24,476 2,800
--------- ---------
2,042,575 733,607
Less accumulated depreciation and amortization 269,996 119,609
--------- ---------
1,772,579 613,998
Intangible assets, net of accumulated amortization of
$35,449 and $11,084 128,551 7,537
Security deposits 27,668
--------- ---------
$ 2,551,340 717,888
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to related parties 18,733 -
Current portion, long-term debt 316,791 90,977
Current portion, capital lease obligations 340,766 44,893
Accounts payable 27,622 1,080
Accrued expenses 94,524 3,316
--------- ---------
TOTAL CURRENT LIABILITIES 798,436 140,266
Long-term debt, less current portion 302,098 48,134
Capital lease obligations, less current portion 915,193 105,398
--------- ---------
TOTAL LIABILITIES 2,015,727 293,798
--------- ---------
Stockholders'equity:
Preferred stock, no stated value, 100,000 shares authorized,
none issued or outstanding - -
Class A common stock, no par value 10,000,000 shares authorized,
899 and 951 shares issued and 899 and 890 shares outstanding 899,000 951,000
Class B common stock, no par value, 100,000 shares authorized,
none issued and outstanding - -
Accumulated deficit (363,387) (465,910)
--------- ---------
535,613 485,090
Treasury stock, at cost, 61 Class A common shares - (61,000)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 535,613 424,090
--------- ---------
$ 2,551,340 717,888
========= ========
See accompanying notes to financial statements.
4
PUBLIC TELEPHONE CORPORATION
Statements of Operations
Years ended June 30, 1994 and 1993
1994 1993
---- ----
Revenues:
Coin calls $ 1,173,743 475,997
Non-coin calls 509,814 118,751
Service and other 89,497 35,215
-------- --------
1,773,054 629,963
-------- --------
Costs and operating expenses:
Telephone charges 417,791 145,236
Commissions 209,329 79,993
Field services and collection 80,083 52,285
Depreciation - telephone equipment 155,693 94,071
Selling, general and administrative 591,00O 401,838
-------- --------
1,453,896 773,423
-------- --------
OPERATING INCOME (LOSS) 319,158 (143,460)
Interest expense 144,682 24,649
Other expense 71,953 10,092
-------- --------
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF A CHANGE IN ACCOUNTING PRINCIPLE 102,523 (178,201)
Cumulative effect of change in depreciation method - 34,397
-------- --------
NET INCOME (LOSS) $ 102,523 (143,804)
======== ========
See accompanying notes to financial statements.
5
PUBLIC TELEPHONE CORPORATION
Changes in Stockholders' Equity
Years ended June 30, 1994 and 1993
PTC Class PTC Class PTC/IL PTC Common PTC/IL Retained
A Common B Common Common Stock Additional earnings Treasury
Stock Stock Stock Subscribed paid capital (deficit) Stock Total
Balance at June 30, 1992 $ 585,000 - 396 15,000 70,349 (167,851) - 502,894
Receipt of subscription receivable 15,000 - - (15,000) - - - -
Issuance of 126 shares at
$ 1,000 per share 126,000 - - - - - - 126,000
Purchase of 100 shares at
$ 1,000 per share - - - - - - (100,000) (100,000)
Merger of companies 225,000 - (396) - (70,349) (154,255) - -
Purchase of 65 shares at
$ 1,000 per share - - - - - - (65,000) (65,000)
Issuance of 104 treasury shares
at $ 1,000 per share - - - - - - 104,000 104,000
Net loss - - - - - (143,804) - (143,804)
-------- ------- ------- ------- ------- ------- ------- -------
Balance at June 30, 1993 951,000 - - - - (465,910) (61,000) 424,090
Retirement of treasury stock (61,000) - - - - - 61,000 -
Issuance of 9 shares at
$ 1,000 per share 9,000 - - - - - - 9,000
Net income - - - - - 102,523 - 102,523
-------- ------- ------- ------- ------- ------- ------- -------
Balance at June 30, 1994 $ 899,000 - - - - (363,387) - 535,613
======== ======= ======= ======= ======= ======== ======= ========
See accompanying notes to financial statements.
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PUBLIC TELEPHONE CORPORATION
Statements of Cash Flows
Years ended June 30, 1994 and 1993
1994 1993
------ -------
Cash flows from operating activities:
Net income (loss) $ 102,523 (143,804)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization 189,666 107,949
Loss on disposal of property and equipment 64,015 21,350
Cumulative effect of change in depreciation method - (34,397)
Changes in operating assets and liabilities:
Accrued revenue (84,604) 1,800
Prepaid expenses and other current assets 21,400 (2,067)
Accounts payable and accrued expenses 92,750 (7,495)
---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 385,750 (56,664)
---------- ----------
Cash flows from investing activities:
Acquisition of Aaron Communication Service, Inc. assets (115,252) -
Acquisition of TTC Investments assets (438,000) -
Other acquisitions of property and equipment (319,547) (388,403)
Proceeds from sale of property and equipment 10,140 42,249
Increase in security deposits (27,668) -
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (890,327) (346,154)
---------- ----------
Cash flows from financing activities:
Principal payments on notes payable (256,111) (68,166)
Proceeds received from notes payable 90,272 122,960
Proceeds received from notes payable, officers 18,733 -
Principal payments on notes payable-former stockholders for
repurchase of stock - (106,000)
Principal payments on capital leases (212,332) (17,695)
Proceeds received on sale-leaseback transactions 1,318,000 -
Proceeds from collection of notes receivable - 1,400
Proceeds received from issuance of stock 9,000 245,000
Payments made to repurchase stock - (15,000)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 967,562 162,499
---------- ----------
Net change in cash 462,985 (240,319)
Cash and cash equivalents, beginning of year 45,031 285,350
---------- ----------
Cash and cash equivalents, end of year $ 508,016 45,031
========== ==========
Supplemental disclosure of non-cash investing and financing activities:
Notes payable issued in connection with acquisition of assets 645,617 7,200
Capital lease obligations for new equipment - 153,480
Interest-bearing notes issued to reacquire 150 Class A common shares - 150,000
Deferred financing costs included in accounts payable 25,000 -
Cash paid during 1994 and 1993 for interest totaled $137,201 and $25,055, respectively.
See accompanying notes to financial statements.
7
PUBLIC TELEPHONE CORPORATION
Notes to Financial Statements
June 30, 1994 and 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
General
-------
Public Telephone Corporation (PTC or the Company) owns, operates and
maintains pay telephones connected to the network of regulated telephone
companies at various third-party property owner locations. The Company
also derives revenue from routing calls to operator service companies.
The Company commenced significant installation and operation of pay
telephones in April, 1992. The Company previously was incorporated and
operated under the name American Public Telephone Company. The name was
changed in year 1993 after a merger with a company whose operations are
similar to the Company's and which commenced operations in January, 1991.
Recognition of Revenue and Operating Expenses
---------------------------------------------
Revenues are recognized when earned. Coin call and non-coin call
(alternate operator service) revenues and related expenses are
recognized at the time the call is made. For other services,
revenue is recognized when services are rendered to the customer. Prior
to 1994, coin and non-coin call revenues were recognized as collected and
call related expenses were recognized as bills were received. The
cumulative effect of the change to the accrual basis for recognizing
call-related revenues and expenses at July 1, 1993 was not material.
Cash Equivalents
----------------
Cash equivalents include highly liquid investments purchased with an
original maturity of three months or less.
Intangible Assets
-----------------
Intangible assets include goodwill and covenants not to compete arising
from purchases of pay telephone operations, deferred financing costs and
organization and start-up costs. Amortization is provided on a
straight-line basis over the following periods:
Goodwill 3 years
Non-compete agreements 3 years
Other intangible assets 2 - 5 years
Property and Equipment
----------------------
Property and equipment are recorded at cost, including telephone,
installation and related costs. Assets acquired under capital leases are
recorded at the present value of lease payments, including bargain
purchase options expected to be exercised. Net gains or losses on sales
of telephone equipment leased back under capital lease arrangements are
deferred as a component of capital lease assets. Depreciation and
amortization are provided on the straight-line method over the estimated
useful lives of the assets commencing when the property or equipment is
installed and placed in service.
(Continued)
8
2
PUBLIC TELEPHONE CORPORATION
Notes to Financial Statements
Effective July 1, 1993, the Company extended the estimated useful lives
of its telephone assets from five to ten years to more properly reflect
the true economic lives of the assets and to better align the Company's
depreciable lives with industry practice. This change in estimate
resulted in 1994 depreciation expense being lower than amounts computed
assuming a five year life by approximately $165,000.
Income Taxes
------------
The Company provides income taxes in accordance with the Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS
109). SFAS 109 requires recognition of deferred tax liabilities and
assets for the differences between the financial statement and tax basis
amounts of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. Deferred tax
assets are reported net of a valuation allowance when realization is
uncertain.
(2) CHANGE IN ACCOUNTING PRINCIPLE
------------------------------
During 1993, PTC changed its method of depreciation from an accelerated
method to the straight-line method for all existing and newly acquired
property and equipment. Management feels that the straight-line method
more accurately depicts actual depreciation due to the nature of the
assets. The cumulative effect of this change in accounting method
reduced the 1993 net loss by $34,397.
(3) ACQUISITIONS
------------
On August 30, 1993, the Company acquired certain public pay telephone
operations of Aaron Communication Service, Inc. for approximately
$457,000. The purchase price was financed with capital leases and seller
financing of approximately $115,000 and $342,000, respectively.
On January 5, 1994, the Company acquired substantially all the assets
of TTC Investments, a public pay telephone company, for approximately
$742,000. The purchase price was financed with capital leases and seller
financing of approximately $438,000 and $304,000, respectively.
The acquisitions have been accounting for using the purchase method
and, accordingly, the acquired assets have been recorded at their fair
values at the date of acquisition. The purchase price allocations
resulted in goodwill of approximately $71,000 and covenants not to
compete of approximately $50,000.
(4) MERGER
------
On March 18, 1993, the Company merged with Public Telephone Corporation
(PTC/IL), an Illinois corporation whose operations are similar to those
of PTC. The transaction was affected through the issuance of 225 Class A
common shares of the Company stock for all of the issued and outstanding
shares of PTC/IL. The merger has been accounted for as a pooling of
interests and, accordingly, the 1993 statement of operations reflects the
companies combined results of operations for the full year.
(Continued)
9
3
PUBLIC TELEPHONE CORPORATION
Notes to Financial Statements
Net revenues and net loss of the individual entities are as follows:
Company PTC/IL Combined
-------- -------- --------
Nine months ended March 31, 1993:
Revenues $ 41,481 360,731 402,212
Net loss (164,113) (7,310) (171,423)
(5) LONG--TERM DEBT
Long-term debt at June 30, consists of the following:
1994 1993
------ -------
12% notes payable in varying monthly principal and
interest installments through November, 1996 $ 260,628 -
6% note payable in monthly principal and interest
installments of $10,755 through August, 1996 261,585 -
7.5% note payable in monthly principal and interest
installments of $2,548 through December, 1994 14,959 43,251
8% note payable in monthly principal and interest
installments of $896 through June, 1995 10,295 19,800
Non-interest bearing note payable in monthly princi-
pal installments of $960 through October, 1994 2,880 14,400
8% note payable July, 1994 35,182 -
7% notes payable in monthly principal and interest
payments of $371 through February, 1997 11,093 -
Other 2,267 10,460
--------- ---------
598,889 87,911
Notes payable to former stockholders:
8.5% due in monthly principal and interest
installments of $2,000 through April, 1995 20,000 44,000
Other - 7,200
--------- ---------
TOTAL LONG-TERM DEBT 618,889 139,111
Less current portion 316,791 90,977
--------- ---------
LONG-TERM DEBT, LESS CURRENT PORTION $ 302,098 48,134
========= =========
The long-term notes payable are generally secured by the
assets of the Company including property and equipment.
The aggregate maturities of long-term debt are as follows:
Fiscal year
ending
-----------
1995 $ 316,791
1996 252,733
1997 49,365
---------
$ 618,889
=========
(Continued)
10
4
PUBLIC TELEPHONE CORPORATION
Notes to Financial Statements
(6) CAPITAL LEASE AGREEMENTS
------------------------
Property and equipment at June 30 includes assets held under
capital leases including capital leases arising out of
sale-leaseback transactions as follows:
1994 1993
---- ----
Telephones and related equipment $1,378,038 169,633
Less accumulated amortization 184,572 12,805
---------- -------
$1,193,466 156 828
========== =======
Future lease payments, including bargain purchase options
expected to be exercised and the expected net cost of warrants
and related put options granted to the lessor (see note 12), for
each fiscal year ending June 30 follows:
1995 $ 526,699
1996 510,837
1997 406,707
1998 224,908
1999 106,032
----------
1,775,183
Less amount representing interest 519,224
----------
Present value of future lease payments 1,255,959
Current portion 340,766
----------
Capital lease obligations, less current $ 915,193
portion ==========
The capital lease agreements require the Company to pledge the
related telephone site leases as additional collateral. At June
30, 1994, approximately 650 such site leases were so pledged.
(7) OPERATING LEASES
----------------
PTC has operating leases for office space which require aggregate
monthly rental payments of $2,475. The lease terms expire
through January, 1995. Total rental expense for the year ended
June 30, 1994 was $24,872.
(8) INCOME TAXES
------------
In 1993, the Company incurred a loss for both tax and financial
statement purposes. In 1994, the Company also incurred a net
operating loss for tax purposes; for financial statement purposes, a
provision in lieu of income taxes of approximately $38,000 was offset
primarily by a decrease in the deferred tax assets valuation allowance.
(Continued)
11
5
PUBLIC TELEPHONE CORPORATION
Notes to Financial Statements
The tax effects of differences in financial statement and tax
basis amounts of assets and liabilities that result in
significant portions of deferred tax assets and liabilities at
June 30 are as follows:
1994 1993
---- ----
Deferred tax liabilities:
Property, plant and equipment, principally due
to depreciation
$ 159,000 38,000
------- ------
Deferred tax assets:
Net operating loss carryforward 206,000 152,000
Deferred compensation 8,000 -
Other 10,000 -
Valuation allowance (65,000) (114,000)
------- -------
TOTAL DEFERRED TAX ASSETS 159,000 38,000
------- -------
Net deferred tax asset (liability) $ - -
======= =======
At June 30, 1994, PTC had net operating loss (NOL) carryforwards for tax
purposes of approximately $556,000, which expire as follows:
Fiscal year
ending
------
2005 $ 43,000
2006 88,000
2007 43,000
2008 217,000
2009 165,000
--------
$556,000
========
Of these loss carryover amounts, approximately $138,000 are subject to
limitation on their use in accordance with Internal Revenue Code section
382. This section restricts the annual of loss carryovers when a
significant change in ownership has occurred, such as the merger discussed
in note 4. In the event of any future changes in ownership, loss carryovers
available for utilization could be further limited or restricted.
(9) CONTINGENT LIABILITIES
----------------------
The Company is involved in various claims and other legal actions
arising in the ordinary course of business. In the opinion of management,
the ultimate disposition of these matters will not have a material
adverse effect on the Company's financial position or results of
operations.
(10) RELATED PARTY TRANSACTIONS
--------------------------
The Company has two notes payable to officers and shareholders.
All such notes payable are due on demand with interest at 8%
payable monthly.
(Continued)
12
6
PUBLIC TELEPHONE CORPORATION
Notes to Financial Statements
(11) EMPLOYMENT AGREEMENTS
---------------------
The Company has employment agreements with two of its principal officers
through June 1996. The agreements provide for base compensation, a
portion of which may be deferred, annual bonuses aggregating 6% of income
before taxes, and incentive bonuses based on improvement in the Company's
book value per share. The incentive bonuses range from an aggregate of 40
shares upon achieving a book value of $637.50 per share to 320 shares upon
achieving a book value of $2,120.76 per share. The bonuses are payable in
cash or Class A common shares at the election of the Company. The
agreements contain specific provisions in the event the employees
voluntarily terminate for good reason or are terminated without cause or
within 18 months of a change in control, as defined. The aggregate
commitment for future salaries at June 30, 1994, excluding bonuses, under
these agreements is $415,000. The aggregate contingent liability at June
30, 1994 should the employees be terminated is $525,000, plus three times
the average annual bonus paid prior to the termination.
The employment agreements also grant the officers the right to purchase
a total of 157 Class A shares at 25 percent of the Company's June 30, 1994
book value. The officers are required to offer the Company a right of
first refusal upon sale of such shares at the greater of market value in
excess of $1,000 per share or 25% of the Company's book value per share at
the end of the preceding fiscal year.
The officers have an option to convert all Class A common shares issued
in connection with the stock purchase rights and annual and incentive
bonuses into Class B common stock at a rate of 2.2 Class B common shares
for each Class A common share. The conversion option is non assignable
and the officers must reconvert their Class B common shares to the Class
A common shares to liquidate them.
(12) WARRANTS TO PURCHASE COMMON STOCK
---------------------------------
In connection with certain capital lease financing, the Company issued
warrants to a lessor representing the right to purchase 25 shares of Class
A common stock for $1,000 per share. The warrants expire on June 30,
1998. The lessor has the option to require the Company to repurchase any
shares acquired through the exercise of the warrants for $4,000 per share.
The lessor's option expires May 31, 1998. If the lessor does not purchase
the shares covered by the warrants, the Company will be required to redeem
the warrants for $3,000 per warrant at the end of the lease term.