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Comptroller William C. Thompson, Jr. today released an audit identifying more than $5.2 million owed to the City in franchise fees from unreported revenue from advertising on public pay phone kiosks.

“My auditors determined that the Telebeam Telecommunications Corporation, its agents and 14 other public pay telephone operators did not properly report all advertising revenue and, as a result, the City must make every effort to recoup $5,250,707,” Thompson said.

The payments originate from a franchise agreement the City entered into with Telebeam in September 1999 to install, operate, repair, maintain, upgrade, remove and replace public pay phones. The City's Department of Information Technology and Telecommunications (DOITT) monitors compliance with the agreement.

Under the agreement, Telebeam places advertising on the rear and side panels of phone kiosks, and is required to pay the City 26 percent of its net commission advertising revenue. Telebeam contracted with media representatives Van Wagner Kiosk Advertising, L.L.C. and Vector Media Street Furniture to sell advertising, bill and collect fees from advertisers, and pay the City any money owed. Van Wagner represented six other public pay telephone providers, and Vector represented eight other public pay telephone providers.

Both collect advertising revenues from each provider, and then pay the City 26 percent of its net commission advertising revenue. During Calendar Year 2003 – the scope of the audit -, Van Wagner and Vector reported a total of $28,166,568 in net commission ad revenue and paid the City $7,323,308 in franchise fees. Of these amounts, Van Wagner and Vector allocated $8,250,646 in net commission ad revenue to Telebeam and paid the City $2,145,168 on its behalf.

However, Thompson's audit detected a pattern of unreported revenue, primarily that Telebeam did not ensure that its media representatives properly reported the total net commission ad revenue, or correctly calculated and paid fees owed to the City.

Auditors determined that the net commissions ad revenue reported to the City was understated by $16,218,332 for all 15 public pay phone operators, $4,781,564 of which was allocated to Telebeam. As a result, the operators owe the City $5,250,707, of which Telebeam owes $1,547,456 in fees and related interest.

Specifically, auditors found that:

• Van Wagner and Vector provided bonus free kiosk advertising to clients to induce them into advertising agreements, but failed to report the fair market value of these bonuses, $16,167,046, in Telebeam's net commission ad revenue to the City, of which Telebeam's portion amounted to $4,764,117.

• Vector deducted more in agency commissions than are allowed by Telebeam's franchise agreement. Auditors found that Vector deducted 16.35 percent for ad commissions and as a result, understated revenue by $11,901.

• Van Wagner provided free kiosk ad space to clients in exchange for non-cash items as health spa and ballet memberships and gift certificates. But Van Wagner did not report the fair market value of this free ad space. This understated net commission ad revenue by $22,100.

• Van Wagner did not report $17,285 of advertising production revenue it received from advertisers to the City.

“It is incumbent on DOITT to monitor this program aggressively and to establish better controls to ensure that the City is receiving appropriate compensation,” Thompson said.

The Comptroller recommended that Telebeam: pay $1,541,886 in additional franchise fees and related interest based on the rate card value of bonus free kiosk advertising or establish the fair market value of the bonus free kiosk advertising using an alternate methodology, and pay the City the franchise fees due including related interest; pay $5,569 in additional franchise fees and related interest associated with the excessive deductions for agency commissions, the value of the advertising exchanged for non-cash items not reported, and the unreported revenue for production of advertising; and, ensure that representatives are properly reporting their total net commission ad revenue and correctly calculating and paying fees.

Additionally, Thompson said DOITT should:

• Make sure Telebeam either pays the City $1,541,886 in additional franchise fees based on the rate card or pays additional fees and related interest based on an alternate methodology.

• Ensure that Telebeam pays the City $5,569 in additional franchise fees and related interest associated with the excessive deductions for agency commissions; the value of the advertising exchanged for non-cash items not report, and the unreported revenue for the production of advertising.

• Pursue the collection of either the franchise fees and related interest based on their fair market value determined above from the 14 other companies that Van Wagner and Vector represent, or the $3,692,449 calculated by using rate card information.

• Pursue the collection of the $10,802 in additional franchise fees and related interest associated with the excessive deductions for agency commissions, the value of advertising exchanged for non-cash items not reported, and the unreported revenue for production of advertising from the other 14 companies.

• Establish a system to monitor the discounting and bonusing of kiosk panels to ensure that the City is receiving its share of franchise fees in accordance with the franchise agreement.

In their responses to the audit, Telebeam, Van Wagner and Vector strongly disputed the report's principal findings regarding imputed revenue on bonused ad panels and stated that they should not have to pay additional franchise fees and related interest.

However, Thompson noted that: “It is appropriate under the franchise agreement to impute value to the free advertising provided by Telebeam's media representatives since bonusing provided the vendors with significant benefits that the City did not share, and in which it is entitled to share under the plain language of the franchise agreement.”

You can view the full report at the Comptroller's web site at www.comptroller.nyc.gov .