<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A NO. 1
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended: MARCH 31, 1998
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) I.D. 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)
--------------------
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PART I. Item 1 of the Form 10-Q for the quarter ended March 31, 1998 is hereby
amended in its entirety to read as follows:
2
<PAGE> 3
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,939 $ 22,834
Restricted cash 920 920
Accounts receivable, net of allowance for doubtful
accounts of $5,117 in 1998 and $4,936 in 1997 17,742 17,061
Prepaid expenses and other current assets 2,501 2,631
--------- ---------
Total current assets 25,102 43,446
Property and equipment, net 53,337 50,362
Location contracts, net 23,624 23,936
Intangible assets, net 815 824
Goodwill, net 9,358 4,084
Deferred income taxes 3,407 3,407
Other assets, net 5,277 5,258
--------- ---------
Total assets $ 120,920 $ 131,317
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt $ 362 $ 634
Current portion of obligations under capital leases 470 536
Accounts payable and accrued expenses 19,307 22,722
Accrued interest payable 2,541 5,702
Income and other taxes payable 3,021 2,844
--------- ---------
Total current liabilities 25,701 32,438
Notes payable and long-term debt 100,000 100,000
Obligations under capital leases 500 275
--------- ---------
Total liabilities 126,201 132,713
--------- ---------
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 13,751 13,711
Preferred stock dividends payable 2,835 2,573
--------- ---------
Total preferred stock 16,586 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;
16,212 shares in 1998 and 16,209 shares in 1997 issued
and outstanding 162 162
Capital in excess of par value 58,996 59,291
Accumulated deficit (79,128) (75,108)
Accumulated other comprehensive loss (1,897) (2,025)
--------- ---------
Total common shareholders' deficit (21,867) (17,680)
--------- ---------
Total liabilities less shareholders' deficit $ 120,920 $ 131,317
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE> 4
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenues:
Coin calls ................................... $ 19,253 $ 17,940
Non-coin calls ............................... 8,641 10,111
-------- --------
Total revenues ............................ 27,894 28,051
Costs and expenses:
Telephone charges ............................ 7,298 7,413
Commissions .................................. 7,829 7,566
Field service and collection ................. 5,077 4,746
Depreciation and amortization ................ 5,478 5,256
Selling, general and administrative .......... 3,002 2,935
-------- --------
Total costs and expenses ................. 28,684 27,916
-------- --------
Operating (loss) income ...................... (790) 135
Other (income) and expenses:
Interest expense, net ........................ 3,230 3,348
-------- --------
Loss from continuing operations
before income taxes .......................... (4,020) (3,213)
Income taxes ................................... -- --
-------- --------
Loss from continuing operations ................ (4,020) (3,213)
Loss from discontinued operations .............. -- (685)
-------- --------
Net loss ....................................... $ (4,020) $ (3,898)
======== ========
Earnings per share (basic and diluted):
Loss from continuing operations ............. $ (0.27) $ (0.22)
Loss from discontinued operations ........... -- (0.04)
-------- --------
Net loss .................................. $ (0.27) $ (0.26)
======== ========
Weighted average common shares outstanding ..... 16,212 16,195
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
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PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .................................................. $ (4,020) $ (3,898)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................. 5,478 5,256
Amortization of deferred financing costs .................. 196 285
Changes in operating assets and liabilities:
Accounts receivable ............................ (681) (5,162)
Prepaid expenses and other current assets ...... 130 (53)
Other assets ................................... (87) (1,107)
Accounts payable and accrued expenses .......... (3,415) 1,909
Accrued interest payable ....................... (3,161) (3,065)
Income and other taxes payable ................. 177 (420)
Net effect of discontinued operations and assets
held for sale ................................ -- 578
-------- --------
Net cash used in operating activities ..................... (5,383) (5,677)
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment additions .......................... (775) (370)
Proceeds from sale of assets .............................. -- 233
Payments for acquisition of Indiana Telcom assets ......... (11,317) --
Payments for certain contracts ............................ (913) (1,658)
-------- --------
Net cash used in investing activities ..................... (13,005) (1,795)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt ...................... (272) (149)
Principal payments under capital lease obligations ........ (242) (352)
Debt issuance costs ....................................... -- (218)
Exercise of stock options and warrants .................... 7 2
-------- --------
Net cash used in financing activities ..................... (507) (717)
-------- --------
Net decrease in cash and cash equivalents ................. (18,895) (8,189)
Cash and cash equivalents at beginning of period .......... 22,834 12,556
-------- --------
Cash and cash equivalents at end of period ................ $ 3,939 $ 4,367
======== ========
</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
MARCH 31, 1998 AND MARCH 31, 1997
(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 ended March 31, 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.
NOTE 2 - INVESTMENTS AND OTHER COMPREHENSIVE LOSS
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 March 31, 1998 was approximately $1.3 million,
net of approximately $1.9 million of unrealized losses.
As of January 1, 1998, the Company adopted SFAS 130, REPORTING COMPREHENSIVE
INCOME. 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 income. 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):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------
1998 1997
----------- ---------
<S> <C> <C>
Net loss.................................................. $ (4,020) $ (3,898)
Unrealized gain on investment, net of income taxes........ 128 128
---------- ---------
Comprehensive loss........................................ $ (3,892) $ (3,770)
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
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PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND MARCH 31, 1997
(UNAUDITED)
NOTE 3 - EARNINGS PER SHARE
For the quarters ended March 31, 1998 and 1997, 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 loss from continuing
operations and the weighted average number of shares outstanding used in the
computation of earnings per common share in accordance with the Financial
Accounting Standards Board's Statement No. 128, EARNINGS PER SHARE (in
thousands, except per share data).
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net loss from continuing operations ................................. $ (4,020) $ (3,213)
Deduct:
Cumulative preferred stock dividend requirement ............ (262) (262)
Preferred stock issuance cost accretion .................... (39) (39)
-------- --------
Net loss applicable to common shareholders ................. $ (4,321) $ (3,514)
======== ========
Weighted average common shares outstanding ................. 16,212 16,195
======== ========
Basic and diluted loss per share from continuing operations $ (0.27) $ (0.22)
======== ========
</TABLE>
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 March 1997, the Company executed an amendment to the Fourth Amended and
Restated Loan and Security Agreement (the "Credit Facility") which increased the
Company's Credit Facility with Creditanstalt-Bankverein 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 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 March 31, 1998, the Company had no amounts borrowed
under the Credit Facility.
NOTE 5 - INCOME TAXES
For the three months ended March 31, 1998 and March 31, 1997, the Company
recorded deferred tax assets and deferred tax asset valuation allowances of
approximately $1.5 million. Valuation allowances were provided to reduce the
deferred tax assets to a level which, more likely than not, will be realized.
7
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PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND MARCH 31, 1997
(UNAUDITED)
NOTE 6 - LOSS FROM DISCONTINUED OPERATIONS
In the last quarter of 1997, the Company sold the operating assets of its inmate
telephone division. The accompanying Statement of Income and Statement of Cash
Flows for the first quarter ended March 31, 1997 have been restated to present
results of the former inmate telephone division as discontinued operations. In
the three months ended March 31, 1997, the Company reported approximately $0.7
million loss from discontinued operations.
NOTE 7 - ACQUISITION
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
preliminary 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 three months ending March 31, 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).
Three months ended March 31, 1997:
Total revenues...................................... $29,337
Loss from continuing operations..................... (3,356)
Loss from continuing operations per common share.... (0.23)
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 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
8
<PAGE> 9
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND MARCH 31, 1997
(UNAUDITED)
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 March 31, 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 (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 IXC's 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.
NOTE 10 - 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 in progress. 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.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis compares the quarter ended March 31,
1998 to the quarter ended March 31, 1997 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, 1997.
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. 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 orders implementing such
act or portions thereof, the ongoing ability of the Company to deploy its public
pay phones in favorable locations, the Company's ability to continue to
implement operational improvements and the ability of the Company to efficiently
integrate acquisitions of other telephone companies. Such factors and others are
set forth more fully in the Company's 1997 Annual Report on Form 10-K and the
consolidated financial statements and notes there to appearing elsewhere in this
Form 10-Q.
OVERVIEW
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, and was largely financed with the proceeds from
the sale of the Company's inmate division in December 1997.
DIAL-AROUND COMPENSATION
Effective November 6, 1996, pursuant to FCC regulations, the Company
derived additional revenues from access code and 1-800 subscriber, or
dial-around, calls placed from its public payphones. Under the Initial Payphone
Orders, 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 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.
(See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing in the Company's 1997 Form 10-K.)
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
March 31, 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 per payphone per month because
actual call counts are not provided by the IXCs for as much
10
<PAGE> 11
as 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.
For the period from October 7, 1997 to December 31, 1997, Peoples did not begin
to receive detail call count reporting from the carriers until July 1998. That
reporting is still not complete. AT&T, in particular, has not provided accurate
call count reporting for this period and has therefore agreed to pay Peoples on
all of its payphones at a surrogate flat rate for this period. Until detailed
information is available to support higher estimates, Peoples continues to
accrue dial-around compensation at an estimated 131 call average per payphone
per month based on the FCC's original industry average figures.
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 LEC 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 RBOC
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.
As part of non-coin revenue, the Company recorded dial-around compensation
revenue of approximately $3.2 million for the period from November 7, 1996
through December 31, 1996, approximately $17.2 million for the period from
January 1, 1997 through December 31, 1997, and approximately $4.8 million for
the period from January 1, 1998 through March 31, 1998.
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 69.0%
and 64.0% of total revenues for the quarters ended March 31, 1998 and 1997,
respectively. Coin revenue increased 7.3% to $19.3 million during the quarter
ended March 31, 1998, compared to the same period in 1997. The Company's average
installed public pay telephone base was approximately 42,400 phones and 38,400
phones for the three month periods ended March 31, 1998 and 1997, respectively.
Coin revenue on a per phone basis decreased by 2.8% for the quarter ended March
31, 1998, as compared to the same period in 1997. The decrease in coin revenue
on a per phone basis is primarily attributable to the higher than expected
call-suppression resulting from the implementation of higher market-based local
calling rates following local coin rate deregulation. Management believes the
magnitude of the call suppression should decrease as the public payphone
consumer becomes accustomed to the market-based local coin rates, although there
can be no assurances that this will occur. The Company also believes that the
decrease is the result of, among other things, the increased usage of
alternative methods of calling such as prepaid calling cards and wireless
technologies and the operation of more public pay telephones in closer proximity
to the Company's telephones.
On November 8, 1996, the FCC issued its final order on reconsideration (the
"Initial Payphone Order") setting forth and affirming regulations implementing
Section 276 of the Federal Telecommunications Act of 1996, previously issued on
September 20, 1996. The Initial Payphone Order initially mandated compensation
for access code and 1-800 subscriber calls ("Dial-Around Compensation") at a
flat rate of $45.85 per payphone per month (an assumed 131 calls multiplied by
$0.35 per call). The Company recorded Dial-Around Compensation at this rate in
the first quarter of 1997. On October 9, 1997, in response to the remand of
certain issues by the U.S. Court of Appeals for the District of Columbia, the
FCC released its SECOND REPORT AND ORDER
11
<PAGE> 12
(the "Remand Order") which established a rate of $0.284 per call for per call
compensation from October 7, 1997 forward. The Remand Order tentatively
concluded that the same $0.284 per call rate should govern compensation
obligations during the period from November 7, 1996 through October 6, 1997 and
that the allocation method between long-distance carriers would be determined in
a separate order. The Company recorded the net effect of this rate change as a
Provision for Dial-Around Compensation Adjustment in the third quarter of 1997.
For the period from November 7, 1996 through October 6, 1997, the Company has
collected approximately $9.9 million from carriers for Dial-Around Compensation.
At March 31, 1998, the Company's accounts receivable include approximately $6.5
million of accrued revenue for Dial-Around Compensation from this period which
will be billed after final resolution of the allocation obligations of the IXCs
as determined by the FCC. See "Business - Public Pay Telephone Industry
Overview", "Business - Regulation" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Provision for Dial-Around
Compensation Adjustment" appearing in the Company's Form 10-K for the year ended
December 31, 1997 for a more complete discussion.
Non-coin revenue is derived from calling card calls, credit card calls,
collect calls and third-party billed calls placed from the Company's public pay
telephones. The Company currently uses AT&T and Sprint to act as its primary
national operator service providers. When the call is completed through the
third-party operator service provider, the Company records as revenue the amount
it receives from the third-party operator service provider which represents a
negotiated percentage of the total amount the caller pays for the call.
Effective July 1, 1998, new FCC rules regarding Billed Party Preference
require payphone operators to give payphone users the option of receiving a rate
quote before a call is connected when making a O+ interstate call. These rules
could reduce revenues earned by the Company on long-distance calls placed from
payphones by encouraging more consumers to dial around the OSP utilized by the
Company. The Company cannot currently assess what impact the new rules will have
on its financial performance.
The Company is continuing to experience a shift in call traffic from
operator service 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 Dial-Around 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. Subject to
possible changes resulting from the appeal of the Remand Order, these decreases
in non-coin revenue are currently being offset to some extent by changes in the
amount of compensation due to the Company for access code calls as well as (800)
subscriber calls, as required under the Remand Order. The Remand Order mandates
Dial-Around Compensation to public pay telephone providers for both types of
calls at a rate of $0.284 per call beginning October 7, 1997.
Non-coin revenue represented approximately 31.0% and 36.0% of total
revenues for the quarters ended March 31, 1998 and 1997, respectively. For the
quarter ended March 31, 1998, revenues from non-coin calls decreased 14.5%, to
approximately $8.6 million, compared to the quarter ended March 31, 1997. This
decrease was primary attributable to the decrease in the compensation rate for
dial-around calls as a result of the implementation of the Remand Order. After
adjusting for the rate change for Dial-Around Compensation from $0.35 to $0.284
per call, 1997's first quarter non-coin revenues would have been $1.0 million
lower. Using these adjusted figures, non-coin revenues in the first quarter of
1998 would have been approximately $0.5 million, or 5.0%, lower than the first
quarter of 1997.
OPERATING EXPENSES
Operating expenses include telephone charges, commissions, field
service and collection expenses and selling, general and administrative
expenses. Telephone charges consist of local line charges paid to Local
12
<PAGE> 13
Exchange Carriers which include the costs of basic service and transport of
local coin calls, long-distance transmission charges and network costs and
billing, collection and validation costs. Commissions represent payments to
property owners for revenues generated by the Company's 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 83.2% and 80.8% of total revenues for the quarters ended March 31,
1998 and 1997, respectively.
Telephone charges decreased as a percentage of total revenues to 26.2%
for the quarter ended March 31, 1998, compared to 26.4% for the same period in
1997. The Company continues to experience decreased telephone charges as a
result of regulatory changes and competition within the local/intraLATA service
market.
Commissions as a percentage of total revenues for the three months ended
March 31, 1998 increased to approximately 28.1% as compared to 27.0% for the
same period of the prior year. The increase in commissions as a percentage of
revenues for the three months was primarily attributable to increased commission
rates for new and renewed contracts.
Field service and collection expenses as a percentage of total revenues
from continuing operations were 18.2% and 16.9% for the first quarters of 1998
and 1997, respectively. Field service and collection expenses increased
approximately 7.0%, to approximately $5.1 million for the first quarter of 1998,
as compared to the same period in 1997. This increase was primarily attributable
to the increase in the average number of installed payphones and to additional
costs incurred for the addition of certain key operations employees who are
needed to implement certain initiatives which are intended to achieve further
operational efficiencies. Selling, general and administrative expenses were
consistent at approximately $3.0 million and $2.9 million for the first quarter
of 1998 and 1997, respectively.
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. Amortization is primarily based on acquisition costs
including location contracts, goodwill and non-competition provisions and is
calculated on a straight-line method using estimated useful lives ranging from
three to twenty years. Depreciation and amortization increased to $5.5 million
for the quarter ended March 31, 1998, compared to $5.3 million for the same
period in 1997, primarily due to additional depreciation and amortization
expense related to the Indiana Telcom acquisition and to the renewal costs of
location contracts.
INTEREST EXPENSE
For the first quarter of 1998, interest expense was approximately $3.2
million which is relatively consistent with interest expense in the same quarter
in 1997.
BENEFIT FROM INCOME TAXES
The Company currently records valuation allowances for 100% of the
deferred tax assets generated from operating losses. The Company recorded
deferred tax assets and deferred tax asset valuation allowances of approximately
$1.5 million for the three months ended March 31, 1998 and 1997.
13
<PAGE> 14
NET LOSS
Net loss for the three months ended March 31, 1998 was approximately
$4.0 million as compared to $3.9 million for the first quarter of 1997. After
adjusting for the rate change for Dial-Around Compensation, 1997's first quarter
net loss would have been approximately $0.8 million greater. Using this adjusted
figure for comparison, the net loss for the first quarter of 1998 would have
been approximately $0.7 million, or 14.7%, lower than the first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1998, the Company continued to finance its
operations from current and prior period operating cash flow. For the three
months ended March 31, 1998, the Company's operating cash flow was $(5.4)
million compared to $(5.7) million for the same period in 1997.
The Company's net working capital was approximately $(0.6) million,
with a current ratio of 0.98 to 1.0, at March 31, 1998. This compares with a net
working capital of $11.0 million at December 31, 1997. $11.3 million of cash was
used in January, 1998 to acquire the assets of Indiana Telcom Corporation.
Based upon current expectations, the Company believes that cash flow
from operations, together with amounts which may be borrowed under the amended
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 1/4% Senior Notes through December 31, 1999, although there
can be no assurances 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 and to
continue to implement operational improvements.
14
<PAGE> 15
PART II. Item 6 of the Form 10-Q for the quarter ended March 31, 1998 is hereby
amended in its entirety to read as follows:
15
<PAGE> 16
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K:
None
16
<PAGE> 17
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 6, 1998 /s/ William A. Baum
----------------------------------
William A. Baum
On behalf of the registrant and as
Chief Financial Officer
17
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