FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended: September 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
Commission File Number: 001-12443
PEOPLES TELEPHONE COMPANY, INC.
(Exact Name of registrant as specified in its charter)
NEW YORK 13-2626435
------------------------------- ------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2300 NORTHWEST 89TH PLACE, MIAMI, FLORIDA 33172
(Address of principal executive offices) (Zip Code)
(305) 593-9667
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock, $.01 Par Value,
outstanding at November 12, 1997: 16,202,434 shares.
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Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
September 30, December 31,
Assets 1997 1996
------------- -------------
(Unaudited)
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Current assets
Cash and cash equivalents ..................... $ 7,330 $ 12,556
Accounts receivable, net of allowance for
doubtful accounts of $4,164 and $4,361 ...... 15,735 11,598
Inventory ..................................... 2,340 2,412
Prepaid expenses and other current assets .... 2,832 2,665
---------- ---------
Total current assets ...................... 28,237 29,231
Property and equipment, net ..................... 55,353 65,067
Location contracts, net ......................... 25,906 27,465
Goodwill, net ................................... 4,371 5,660
Intangible assets, net .......................... 1,135 1,768
Other assets, net ............................... 4,215 6,610
Deferred income taxes ........................... 3,407 3,407
Investments ..................................... 1,376 1,662
---------- ---------
Total assets ............................... $ 124,000 $140,870
========== =========
Liabilities and Shareholders' Equity
Current liabilities
Notes payable and current maturities of long-
term debt ................................... $ 599 $ 548
Current portion of obligations under capital
leases ...................................... 606 952
Accounts payable and accrued expenses ......... 18,259 19,240
Accrued interest payable ...................... 2,614 5,697
Taxes payable ................................. 2,753 2,418
---------- ---------
Total current liabilities .................. 24,831 28,855
Notes payable and long-term debt ................ 100,180 100,657
Obligations under capital leases ................ 196 573
---------- ---------
Total liabilities .......................... 125,207 130,085
Commitments and contingencies ................... -- --
Preferred Stock
Cumulative convertible preferred stock, Series
C, $.01 par value, 160 shares authorized;
150 shares issued and outstanding .......... 13,672 13,556
Preferred stock dividends payable ............. 2,310 1,523
---------- ---------
Total preferred stock ..................... 15,982 15,079
Shareholders' equity
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; 16,195 shares issued and
outstanding ................................. 162 162
Capital in excess of par value ................ 59,551 60,453
Accumulated deficit ........................... (75,197) (63,438)
Unrealized loss on investments ................ (1,705) (1,471)
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Total shareholders' deficit ................ (17,189) (4,294)
---------- ---------
Total liabilities and shareholders' equity . $ 124,000 $ 140,870
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The accompanying notes are an integral part of these consolidated financial
statements.
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PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
For the three months ended
September 30,
---------------------------
1997 1996
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Revenues:
Coin calls .................................. $ 19,796 $ 20,093
Non-coin calls .............................. 12,225 10,901
----------- -----------
Total revenues .......................... 32,021 30,994
Costs and expenses:
Telephone charges ........................... 8,734 10,038
Commissions ................................. 7,630 8,317
Field service and collection ................ 5,214 5,155
Selling, general and administrative ......... 3,752 3,089
Depreciation and amortization ............... 6,293 6,042
Provision for dial-around compensation
adjustment ................................. 2,116 --
Other (income) expense ........................ -- (1,500)
----------- -----------
Total costs and expenses ................. 33,739 31,141
----------- -----------
Operating loss ................................ (1,718) (147)
Interest expense, net ......................... 3,192 3,257
----------- -----------
Loss before income taxes ...................... (4,910) (3,404)
Benefit from income taxes ..................... -- --
----------- -----------
Net loss ...................................... $ (4,910) $ (3,404)
=========== ===========
Loss per common share both primary and
fully diluted ............................... $ (.32) $ (.23)
=========== ===========
Weighted average common and common equivalent
shares outstanding ........................... 16,195 16,195
=========== ===========
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The accompanying notes are an integral part of these consolidated financial
statements.
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PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
For the nine months ended
September 30,
--------------------------
1997 1996
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Revenues:
Coin calls .................................. $ 57,029 $ 58,229
Non-coin calls .............................. 39,595 35,220
----------- -----------
Total revenues ........................... 96,624 93,449
Costs and expenses:
Telephone charges ........................... 26,882 29,784
Commissions ................................. 25,550 25,430
Field service and collection ................ 15,414 14,965
Selling, general and administrative ......... 9,896 9,885
Depreciation and amortization ............... 18,705 17,846
Provision for dial-around compensation
adjustment ................................. 2,116 --
Other (income) expense ..................... -- (1,500)
----------- -----------
Total costs and expenses ................ 98,563 96,410
----------- -----------
Operating loss ................................ (1,939) (2,961)
Other (income) and expenses:
Interest expense, net ....................... 9,820 9,667
Gain on disposal of prepaid calling card and
international telephone centers ........... -- (545)
----------- -----------
Total other (income) and expenses, net . 9,820 9,122
----------- -----------
Loss before income taxes ...................... (11,759) (12,083)
Benefit from income taxes ..................... -- --
----------- -----------
Net loss ...................................... $ (11,759) $ (12,083)
=========== ===========
Loss per common share both primary and
fully diluted ............................... $ (.77) $ (.79)
=========== ===========
Weighted average common and common equivalent
shares outstanding ........................... 16,195 16,185
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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PEOPLES TELEPHONE COMPANY, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited, in thousands)
For the nine months ended,
September 30,
---------------------------
1997 1996
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Cash flow from operating activities:
Net loss ....................................... $ (11,759) $ (12,083)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization ............... 18,705 17,846
Amortization of deferred financing costs .... 667 657
Gain on sale of assets ...................... -- (545)
Change in operating assets and liabilities:
Accounts receivable ..................... (4,680) (1,354)
Inventory ............................... 72 (12)
Prepaid expenses and other current assets (167) (376)
Other assets ............................ 566 203
Accounts payable and accrued
expenses ........................... 900 887
Accrued interest payable ............... (3,083) (2,966)
Taxes payable ........................... (46) 182
---------- -----------
Net cash provided by operating activities ........ 1,175 2,439
Cash flow from investing activities:
Payments for acquisitions and certain contracts (3,192) (3,045)
Property and equipment additions .............. (2,282) (1,895)
Proceeds from sale of assets .................. 1,373 1,746
Change in investments ......................... (898) 31
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Net cash used in investing activities ............. (4,999) (3,163)
Cash flow from financing activities:
Net payments under note payable to bank ....... (426) (426)
Principal payments under capital lease
obligations ................................. (758) (862)
Debt issuance costs ........................... (218) --
---------- -----------
Net cash used in financing activities ............ (1,402) (1,288)
Net decrease in cash and cash equivalents ......... (5,226) (2,012)
Cash and cash equivalents at beginning of period .. 12,556 12,366
---------- -----------
Cash and cash equivalents at end of period ........ $ 7,330 $ 10,354
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
(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 three months and nine months ended September
30, 1997 are not necessarily indicative of the results to be expected for the
year ending December 31, 1997.
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, 1996 as set forth in the Company's 1996 Annual
Report on Form 10-K. Certain amounts for 1996 have been reclassified to conform
with the current year presentation.
NOTE 2 - INVESTMENTS
Investments in debt and equity securities are accounted for in accordance with
Statement of Financial Accounting Standards No. 115 ("SFAS 115"), Accounting for
Certain Investments in Debt and Equity Securities. 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' Equity. The Company's
investment in GTS common stock at September 30, 1997 was approximately $0.5
million, net of approximately $1.7 million of unrealized losses.
At September 30, 1997, the Company had a $0.9 million investment in debt
securities classified as "held-to-maturity".
NOTE 3 - EARNINGS PER SHARE
For 1997 and 1996, common stock equivalents were excluded since their effect is
anti-dilutive. See primary and fully dilutive loss per common share calculation
as summarized on page 9.
NOTE 4 - LONG-TERM DEBT
During March 1997, the Company executed an amendment to the Fourth Amended and
Restated Loan and Security Agreement (the "Credit Facility") which increased the
Credit Facility from $10.0 million to $20.0 million. 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
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available balance of the Credit Facility. The Credit Facility is secured by
substantially all of the Company 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, 1997, the Company was in compliance with the covenants and had
no amounts borrowed under the Credit Facility.
NOTE 5 - SHAREHOLDERS' EQUITY
In March 1997, the Company's shareholders approved an increase in the number of
authorized shares of the Company's Preferred Stock and Common Stock to 5 million
and 75 million shares, respectively.
NOTE 6 - INCOME TAXES
For the three and nine months ended September 30, 1997, the Company recorded
deferred tax assets and deferred tax asset valuation allowances of approximately
$1.9 million and $4.5 million, respectively. Valuation allowances were provided
to reduce the deferred tax assets to a level which, more likely than not, will
be realized.
NOTE 7 -OTHER INCOME
Other income of $1.5 million in the quarter ended September 30, 1996 relates to
the resolution of then outstanding litigation.
NOTE 8 - 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 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.
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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 "1997
Payphone 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 rule provisions were made effective as of
October 7, 1997.
In addition, the 1997 Payphone 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 1997 Payphone Order, the Company
has adjusted the amounts of dial-around compensation previously recorded related
to the period from November 7, 1996 through June 30, 1997 from the initial
$45.85 rate to $37.20 ($0.284 per call multiplied by 131 calls). As a result of
this adjustment, the provision, net of applicable commissions, recorded in the
third quarter for reduced dial-around compensation is approximately $2.1 million
($0.13 per share). For the period from July 1, 1997 through October 6, 1997, the
Company has recorded (and will record) 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, are asserting and are
expected to assert in the future that the appropriate level of fair compensation
should be lower than $0.284 per call. 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.
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PEOPLES TELEPHONE COMPANY, INC.
COMPUTATION OF PRIMARY AND FULLY-DILUTED LOSS
PER COMMON SHARE
(unaudited, in thousands, except per share data)
For The
Three Months Ended
September 30,
------------------
1997 1996
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Net loss ............................................. $ (4,910) $ (3,404)
Less:
Cumulative preferred stock dividends ............... (262) (262)
--------- --------
Net loss for per share computations .................. $ (5,172) $ (3,666)
========= =========
Number of shares:
Weighted average shares used in the per share
computation ...................................... 16,195 16,195
========= =========
Primary and fully diluted loss per common and common
equivalent share ................................... $ (.32) $ (.23)
========= =========
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For The
Nine Months Ended
September 30,
-----------------
1997 1996
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Net loss ............................................. $(11,759) $(12,083)
Less:
Cumulative preferred stock dividends .............. (788) (788)
--------- --------
Net loss for per share computations .................. $(12,547) $(12,871)
========= =========
Number of shares:
Weighted average shares used in the per share
computation ...................................... 16,195 16,185
========= =========
Primary and fully diluted loss per common and common
equivalent share ................................... $ (.77) $ (.79)
========= =========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis compares the quarter and nine months
ended September 30, 1997 to the quarter and nine months ended September 30, 1996
and should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere in this Form 10-Q and in conjunction with
Management's Discussion and Analysis appearing in the Company's Form 10-K for
the year ended December 31, 1996.
Statements in Management's Discussion and Analysis relating to matters that
are not historical facts are forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors,
which may cause the actual results, performance or achievements of Peoples
Telephone Company, Inc. (the "Company") to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such known and unknown risks, uncertainties and
other factors include, but are not limited to, the following: the impact of
competition, especially in a deregulated environment (including the ability of
the Company to implement higher market-based rates for local coin calls),
uncertainties with respect to the implementation and effect of the
Telecommunications Act of 1996, including any new rule making by the Federal
Communications Commission ("FCC") or litigation which may seek to modify or
overturn the FCC's orders implementing such act or portions thereof, the ongoing
ability of the Company to deploy its phones in favorable locations, and the
Company's ability to continue to implement operational improvements. Such
factors and others are set forth more fully in the Company's 1996 Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
the consolidated financial statements and notes thereto appearing elsewhere in
this report.
Revenues
The Company primarily derives its revenues from coin and non-coin calls.
Coin revenue is generated exclusively from calls made by depositing coins in the
Company's public pay telephones. Coin revenue represented approximately 61.8%
and 64.8% of total revenues for the quarters ended September 30, 1997 and 1996
and 59.0% and 62.3% of total revenues for the nine months ended September 30,
1997 and 1996, respectively. Coin revenue decreased 1.5% to $19.8 million during
the quarter ended September 30, 1997 and decreased approximately 2.1% to $57.0
million for the nine months ended September 30, 1997, compared to the same
periods in 1996. The Company's average installed public pay telephone base was
approximately 39,000 phones and 38,400 phones for the nine month period ended
September 30, 1997 and 1996, respectively. Coin revenue on a per phone basis
decreased by 4.7% and 3.6% for the quarter and nine months ended September 30,
1997, respectively, as compared to the same periods in 1996. The Company
believes that this decrease can be attributed to a shift in call mix,
particularly away from coin and operator assisted long distance traffic to
access code and 1-800 calls. Also, the decline was magnified by a temporary
increase in the number of coin local and long distance calls in 1996 resulting
from the implementation and promotion of new coin calling programs during the
spring and summer months of 1996.
The Company believes that the number of coin calls made at its public pay
telephones may remain flat or decrease over time. The Company believes that,
among other things, the decreases will primarily result from the increased usage
of alternative methods of calling such as prepaid calling cards and wireless
technologies and from higher expected local coin calling rates. The Company
anticipates that coin revenue will begin increasing as a result of the recently
commenced phase in of higher market-based local coin calling rates nationwide
following the deregulation of those rates on October 7, 1997. The Company cannot
predict whether or to what extent the increased local coin calling rates will
impact the number of calls made.
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Non-coin revenue is derived from calling card calls, credit card calls,
collect calls and third-party billed calls placed through primary designated
operator service providers from the Company's public pay telephones and inmate
telephones, as well as from dial-around compensation as described below. The
Company currently uses AT&T and Sprint to act as its primary national operator
service providers. When calls are completed through the primary designated
operator service provider, the Company records as revenue the amount it receives
from the provider which represents a negotiated percentage of the total amount
the caller pays for the call. In May 1996, AT&T began paying a specified per
call amount for certain calls as opposed to a percentage of the revenue
generated by those calls. The Company estimates that the impact on non-coin
revenue of the change in the compensation structure under this earlier AT&T
contract was a decrease of approximately $1.9 million for the nine months ended
September 30, 1997. During the third quarter, the Company negotiated a new AT&T
contact under terms which the Company considers more favorable and complementary
to the Company's strategy of market differentiation by maintaining dual carrier
capability.
In addition to the change in compensation under the former AT&T contract,
the Company is continuing to experience a shift in call traffic from operator
assisted calls, for which the Company receives a percentage of the revenue
generated by those calls, to access code calls for which the Company receives a
flat rate per phone or per call compensation amount. Due to aggressive
advertising campaigns by long-distance companies promoting the use of access
code calls, the Company believes that the decrease in non-coin revenue due to
the changes in call traffic patterns is likely to continue. However, these
decreases in non-coin revenue are currently being more than offset by changes in
the amount of compensation received by the Company for access code calls as well
as (800) subscriber calls ("dial-around compensation"). See "Provision for
Dial-around Compensation Adjustment" below for further discussion of dial-around
compensation revenue recognition.
Non-coin revenue represented approximately 38.2 % and 35.2% of total
revenues for the quarters ended September 30, 1997 and 1996, respectively. For
the quarter ended September 30, 1997, revenues from non-coin calls increased
12.1% to approximately $12.2 million, compared to the quarter ended September
30, 1996. For the nine months ended September 30, 1997, non-coin revenue
increased approximately $4.4 million, or 12.4%, to approximately $39.6 million
as compared to the same period of the prior year. This increase was primarily
attributable to the increased dial-around compensation, offset by the change in
the Company's compensation structure under the former AT&T contract, the decline
in operator assisted calls, and the decrease in revenues in the inmate division.
During the nine month period ended September 30, 1997, the Company operated an
average of 1,564 inmate telephone lines compared to 2,035 during the same period
of 1996.
Operating Expenses
Operating expenses include telephone charges, commissions, field service
and collection expenses and selling, general and administrative expenses.
Telephone charges consist of local line and ancillary charges paid to Local
Exchange Carriers which include costs of basic service and transport of local
coin calls, long-distance transmission charges and network costs and billing,
collection and validation costs. Commissions represent payments to property
owners and correctional facilities for revenues generated by the Company's
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telephones located on their properties. Field service and collection expenses
represent the costs of servicing and maintaining the telephones on an ongoing
basis, costs of collecting coin from the telephones and other related
operational costs. Selling, general and administrative expenses primarily
consist of payroll and related costs, legal and other professional fees,
promotion and advertising expenses, property, gross receipts and certain other
taxes, corporate travel and entertainment and various other expenses. Total
operating expenses were approximately 79.1% and 85.8% of total revenues for the
quarters ended September 30, 1997 and 1996, respectively. For the nine months
ended September 30, 1997 total operating expenses were 80.5% of total revenues
as compared to 85.7 % for the same period in 1996.
Telephone charges decreased as a percentage of total revenues to 27.3% for
the quarter ended September 30, 1997, compared to 32.4% for the same period in
1996. The Company has experienced decreased telephone charges as a result of
regulatory changes and emerging competition within the local/intraLATA service
markets. For the nine months ended September 30, 1997 and 1996 telephone charges
were 27.8% and 31.9% of total revenues, respectively. In addition, the decrease
in telephone charges for the nine months ended September 30, 1997 can be
partially attributed to a decline in the number of calls placed through the
Company's private label operator service program. The Company pays the costs
incurred to transmit, bill, collect and validate the call when the call is
completed through its private label operator services. In contrast, the Company
incurs no such costs when a third-party operator service provider such as AT&T
or Sprint completes the call.
Commissions as a percentage of total revenues for the three months ended
September 30, 1997 decreased to 23.8% as compared to 26.8% in the same period of
the prior year. The decrease in commissions as a percentage of revenues for the
three months was primarily attributable to an adjustment for the renegotiation
of a lower commission percentage during the contract term under a joint venture
with AT&T for providing pay telephones at Atlanta's Hartsfield International
Airport and other adjustments totaling approximately $2.0 million. For the nine
month periods ended September 30, 1997 and 1996, commissions were 26.4 % and
27.2% of revenues, respectively, reflecting the same adjustment noted above for
the three month period.
Field service and collection expenses as a percentage of total revenues
were 16.3% and 16.6% for the third quarter of 1997 and 1996, respectively. For
the nine months ended September 30, 1997 field service and collection expenses
were 15.9% compared with 16.0% for the same period in 1996. Field service and
collection expenses increased approximately 1.1% to approximately $5.2 million
for the third quarter of 1997 and approximately 3.0% to $15.4 million for the
nine months ended September 30, 1997, as compared to the same period in 1996,
reflecting the growth in average pay telephones. Selling, general and
administrative expenses increased approximately $0.7 million for the third
quarter of 1997 to approximately $3.8 million as compared to the same period in
1996. This increase was primarily attributable to additional costs associated
with legal and regulatory work performed pertaining to the 1997 Payphone Order
and the settlement of an employment contract with a former executive. For the
nine months ended September 30, 1997 and 1996, selling, general and
administrative expenses were unchanged at approximately $9.9 million.
Depreciation and Amortization
Depreciation is based on the cost of the telephones, booths, pedestals and
other enclosures, related installation costs and line interconnection charges
and is calculated on a straight-line method using a ten-year useful life for
public pay telephones and a five-year useful life for inmate telephones.
Amortization is primarily based on acquisition costs including location
contracts, goodwill and non-competition provisions and is calculated on a
straight-line method using estimated useful lives ranging from five to twenty
years. Depreciation and amortization increased to $6.3 million for the quarter
ended September 30, 1997, compared to $6.0 million for the same period in 1996.
12
<PAGE>
For the nine months ended September 30, 1997 and 1996, depreciation and
amortization expense was approximately $18.7 million and $17.8 million,
respectively. These increases are primarily attributable to amortization expense
related to costs of acquiring and renewing location contracts.
Provision for Dial-Around Compensation Adjustment
On September 20, 1996, the Federal Communications Commission ("FCC")
adopted rules in a docket entitled In the Matter of Implementation of the Pay
Telephone Reclassification and Compensation Provisions of the Telecommunications
Act of 1996, FCC 96-388 (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 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
"1997 Payphone 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 rule provisions were made effective as of
October 7, 1997.
In addition, the 1997 Payphone 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.
13
<PAGE>
Based on the FCC's tentative conclusion in the 1997 Payphone Order, the
Company has adjusted the amounts of dial-around compensation previously recorded
related to the period from November 7, 1996 through June 30, 1997 from the
initial $45.85 rate to $37.20 ($0.284 per call multiplied by 131 calls). As a
result of this adjustment, the provision, net of applicable commissions,
recorded in the third quarter for reduced dial-around compensation is
approximately $2.1 million ($0.13 per share). For the period from July 1, 1997
through October 6, 1997, the Company has recorded (and will record) 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. The foregoing
sentence constitutes a forward-looking statement within the meaning of Section
21E of the Securities and Exchange Act of 1934, as amended. While the amount of
$0.284 per call constitutes the Company's position of the appropriate level of
fair compensation, certain IXCs have asserted in the past, are asserting and are
expected to assert in the future that the appropriate level of fair compensation
should be lower than $0.284 per call. 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.
Other Income
Other income of $1.5 million during the three months ended September 30,
1996 resulted from the favorable resolution of then outstanding litigation.
Operating Loss
The operating loss for the three months ended September 30, 1997 was
approximately $1.7 million as compared to $0.1 million for the third quarter of
1996. For the nine months ended September 30, 1997 and 1996, the operating
losses were approximately $1.9 million and $3.0 million, respectively.
Interest Expense
For the third quarter of 1997, interest expense was approximately $3.2
million which was nearly the same as the third quarter in 1996 of $3.3 million.
Interest expense increased approximately 1.6% to approximately $9.8 million for
the nine months ended September 30, 1997, as compared to the same period of the
prior year.
Gain on Disposal of Prepaid Calling Card and International Telephone Centers
The nine months ended September 30, 1996 includes a gain on disposal of
prepaid calling card and international telephone centers of approximately $0.3
million received in connection with the sale of the Company's international
telephone center operations and approximately $0.3 million recognized in
connection with the merger of Global Link Teleco Corporation and Global
Telecommunications Solutions, Inc.
14
<PAGE>
Benefit from Income Taxes
The Company recorded valuation allowances for 100% of the deferred tax
assets generated from operating losses for the three months and nine months
ended September 30, 1997. The Company recorded deferred tax assets and deferred
tax asset valuation allowances of approximately $1.9 million and $4.5 million
for the three months and nine months ended September 30, 1997, respectively.
Net Loss
The Company had a net loss of approximately $4.9 million and $11.8 million
for the three months and nine months ended September 30, 1997, respectively,
compared to a net loss of approximately $3.4 million and $12.1 million for the
same periods in 1996, respectively.
Earnings Before Interest, Income Taxes, Depreciation and Amortization
EBITDA is not presented as an alternative to operating results or cash flow
from operations as determined by Generally Accepted Accounting Principles
("GAAP"), but rather to provide additional information related to the ability of
the Company to meet current trade obligations and debt service requirements.
EBITDA should not be considered in isolation from, or construed as having
greater importance than, GAAP operating income or cash flows from operations as
a measure of an entity's performance.
EBITDA was approximately $4.6 million for the quarter ended September 30,
1997, compared to $5.9 million for the same period in 1996. EBITDA for the nine
months ended September 30, 1997 and 1996 was approximately $16.8 million and
$15.4 million, respectively. The decrease in EBITDA for the three month period
is primarily attributable to the provision for dial-around compensation in 1997
and other operating income in 1996, partially offset by higher dial-around
revenue and lower telephone charges in 1997.
Liquidity and Capital Resources
During the third quarter of 1997, the Company continued to finance its
operations from operating cash flow. For the nine months ended September 30,
1997, the Company's operating cash flow was $1.2 million compared to $2.4
million for the same period in 1996.
The Company's net working capital was approximately $3.4 million, with a
current ratio of 1.1 to 1, at September 30, 1997. This is compared to net
working capital of $0.4 million and a current ratio of 1.0 to 1 at December 31,
1996.
During March 1997, the Company executed an amendment to the Fourth Amended
and Restated Loan and Security Agreement (the "Credit Facililty") increasing the
Credit Facility from $10.0 million to $20.0 million. The interest rate on
balances outstanding under the credit facility varies based upon the leverage
ratio maintained by the Company. All 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 unused balance of the Credit Facility. The
Credit Facility is secured by substantially all of the Company 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, 1997, the
Company was in compliance with the covenants and had no amounts borrowed under
the Credit Facility.
15
<PAGE>
Based upon current expectations of the Company's operations and resolution
of certain regulatory issues, the Company believes that cash flow from
operations, together with amounts which may be borrowed under the Credit
Facility, will be adequate for it to meet its working capital requirements,
pursue its business strategy and service its obligations with respect to its 12
1/2% Senior Notes, although there can be no assurance that it will be able to do
so.
The preceding forward looking information is subject to a variety of
factors and uncertainties, including the impact of competition on the Company's
operations, the ultimate implementation and effect of the Telecommunications Act
of 1996, and the ongoing ability of the Company to deploy its phones in
favorable locations, implement higher deregulated local coin calling rates and
to continue to implement operational improvements.
16
<PAGE>
Part II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibits Description
- -------- ------------
27 Financial Data Schedule
(b) Reports on Form 8-K:
(i) A current report on Form 8-K dated July 10, 1997 related to Item 5 - Other
Information.
(ii) A current report on Form 8-K dated July 17, 1997 related to Item 5 - Other
Information.
(iii) A current report on Form 8-K dated September 24, 1997 related to Item 5 -
Other Information.
17
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEOPLES TELEPHONE COMPANY, INC.
Registrant
Date: November 14, 1997 /s/ William A. Baum
William A. Baum
On behalf of the Registrant and as
Chief Financial Officer
18
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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