<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act
of 1934
For the Quarterly Period Ended: SEPTEMBER 30, 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)
---------
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 (or for such shorter period that the
registrant was required to file such reports) 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 9, 1998: 16,212,935 shares.
<PAGE> 2
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
---------- ----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ..................................... $ 5,817 $ 22,834
Restricted cash ............................................... 929 920
Accounts receivable, net of allowance for doubtful
accounts of $3,898 in 1998 and $4,936 in 1997 .............. 18,579 17,061
Prepaid expenses and other current assets .................... 2,149 2,631
---------- ----------
Total current assets ...................................... 27,474 43,446
Property and equipment, net ..................................... 49,809 50,362
Location contracts, net ......................................... 22,215 23,936
Intangible assets, net .......................................... 451 824
Goodwill, net ................................................... 8,442 4,084
Deferred income taxes ........................................... 3,407 3,407
Other assets, net ............................................... 4,637 5,258
---------- ----------
Total assets ............................................... $ 116,435 $ 131,317
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt ........ $ 54 $ 634
Current portion of obligations under capital leases ........... 604 536
Accounts payable and accrued expenses ......................... 21,754 22,722
Accrued interest payable ...................................... 2,578 5,702
Income and other taxes payable ................................ 2,772 2,844
---------- ----------
Total current liabilities .................................. 27,762 32,438
Notes payable and long-term debt ................................ 100,000 100,000
Obligations under capital leases ................................ 1,488 275
---------- ----------
Total liabilities .......................................... 129,250 132,713
---------- ----------
Commitments and contingencies ................................... -- --
Redeemable Preferred Stock:
Cumulative convertible preferred stock; Series C,
$.01 par value; 160 shares authorized;
150 shares issued and outstanding,
$100 per share liquidation value ......................... 13,823 13,711
Preferred stock dividends payable ............................. 3,756 2,573
---------- ----------
Total preferred stock ..................................... 17,579 16,284
---------- ----------
Common shareholders' deficit:
Preferred stock; $.01 par value; 4,240 shares authorized;
none issued and outstanding ................................ -- --
Convertible preferred stock; Series B, $.01 par value;
600 shares authorized; none issued and outstanding ......... -- --
Common stock; $.01 par value; 75,000 shares authorized;
16,213 shares in 1998 and 16,209 shares in 1997 issued
and outstanding ........................................... 162 162
Capital in excess of par value ................................ 58,004 59,291
Accumulated deficit ........................................... (85,671) (75,108)
Accumulated other comprehensive loss .......................... (2,889) (2,025)
---------- ----------
Total common shareholders' deficit ......................... (30,394) (17,680)
---------- ----------
Total liabilities less shareholders' deficit ............... $ 116,435 $ 131,317
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 3
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the three months ended
September 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues:
Coin calls .................................................... $ 19,694 $ 19,796
Non-coin calls ................................................ 9,323 6,640
---------- ----------
Total revenues ............................................. 29,017 26,436
Costs and expenses:
Telephone charges ............................................. 6,877 7,484
Commissions ................................................... 8,248 6,029
Field service and collection .................................. 5,361 4,960
Depreciation and amortization ................................. 5,539 5,376
Selling, general and administrative ........................... 2,933 3,592
---------- ----------
Total costs and expenses .................................. 28,958 27,441
---------- ----------
Operating income (loss) ....................................... 59 (1,005)
Other expenses:
Interest expense, net ........................................ 3,208 3,192
---------- ----------
Loss from continuing operations
before income taxes ........................................... (3,149) (4,197)
Income taxes .................................................... -- --
---------- ----------
Loss from continuing operations ................................. (3,149) (4,197)
Loss from discontinued operations ............................... -- (713)
---------- ----------
Net loss ........................................................ (3,149) (4,910)
Dividends and accretion on preferred stock ...................... (363) (301)
---------- ----------
Net loss applicable to common shareholders ...................... $ (3,512) $ (5,211)
========== ==========
Loss per common share (basic and diluted):
Loss from continuing operations............................... $ (0.22) $ (0.28)
Loss from discontinued operations ............................ -- (0.04)
---------- ----------
Net loss......................................................... $ (0.22) $ (0.32)
========== ==========
Weighted average common shares outstanding ...................... 16,213 16,195
========== ==========
</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 nine months ended
September 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues:
Coin calls .................................................... $ 59,222 $ 57,029
Non-coin calls ................................................ 27,043 26,924
---------- ----------
Total revenues ............................................. 86,265 83,953
Costs and expenses:
Telephone charges ............................................. 21,024 22,224
Commissions ................................................... 24,535 21,593
Field service and collection .................................. 15,929 14,620
Depreciation and amortization ................................. 16,641 15,984
Selling, general and administrative ........................... 8,996 9,453
---------- ----------
Total costs and expenses .................................. 87,125 83,874
---------- ----------
Operating (loss) income ....................................... (860) 79
Other expenses:
Interest expense, net ........................................ 9,703 9,820
---------- ----------
Loss from continuing operations
before income taxes ........................................... (10,563) (9,741)
Income taxes .................................................... -- --
---------- ----------
Loss from continuing operations ................................. (10,563) (9,741)
Loss from discontinued operations ............................... -- (2,018)
---------- ----------
Net loss ........................................................ (10,563) (11,759)
Dividends and accretion on preferred stock ...................... (1,300) (904)
---------- ----------
Net loss applicable to common shareholders ...................... $ (11,863) $ (12,663)
========== ==========
Loss per common share (basic and diluted):
Loss from continuing operations .............................. $ (0.73) $ (0.66)
Loss from discontinued operations ............................ -- (0.12)
---------- ----------
Net loss ........................................................ $ (0.73) $ (0.78)
========== ==========
Weighted average common shares outstanding ...................... 16,212 16,195
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ..................................................... $ (10,563) $ (11,759)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization ................................ 16,641 15,984
Amortization of deferred financing costs ..................... 590 667
Changes in operating assets and liabilities:
Accounts receivable .................................... (1,518) (4,240)
Prepaid expenses and other current assets .............. 482 23
Other assets ........................................... (832) 2,876
Accounts payable and accrued expenses .................. (968) (982)
Accrued interest payable ............................... (3,124) (3,083)
Income and other taxes payable ......................... (72) 335
Net effect of discontinued operations and assets
held for sale ........................................ -- 2,115
---------- ----------
Net cash provided by operating activities .................... 636 1,936
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment additions ............................. (2,886) (2,156)
Proceeds from sale of assets ................................. -- 233
Payments for acquisition of Indiana Telcom assets ............ (11,317) --
Payments for certain contracts ............................... (2,292) (2,939)
Restricted cash .............................................. (9) (898)
---------- ----------
Net cash used in investing activities ........................ (16,504) (5,760)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt ......................... (580) (426)
Principal payments under capital lease obligations ........... (577) (758)
Debt issuance costs .......................................... -- (218)
Exercise of stock options and warrants ....................... 8 --
---------- ----------
Net cash used in financing activities ........................ (1,149) (1,402)
---------- ----------
Net decrease in cash and cash equivalents .................... (17,017) (5,226)
Cash and cash equivalents at beginning of period ............. 22,834 12,556
---------- ----------
Cash and cash equivalents at end of period ................... $ 5,817 $ 7,330
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 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 and nine months ended September
30, 1998 are not necessarily indicative of the results to be expected for the
year ending December 31, 1998.
The interim unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto for the year ended December 31, 1997 as set forth in the Company's 1997
Annual Report on Form 10-K as amended by Form 10-K/A No.1 ("Form 10-K").
NOTE 2 - INVESTMENTS AND OTHER COMPREHENSIVE LOSS
Investments in debt and equity securities are accounted for in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES ("SFAS 115"). The Company's
investment in Global Telecommunications Solutions, Inc. ("GTS") is classified
as "available for sale", and reported at fair value with unrealized gains or
losses, net of tax, recorded as a separate component of shareholders' deficit.
The Company's investment in GTS common stock at September 30, 1998 was
approximately $0.2 million, net of approximately $2.9 million of unrealized
losses.
As of January 1, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME ("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of SFAS 130 had no impact on the Company's net loss or shareholders'
deficit. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which, prior to adoption, were reported
separately in shareholders' deficit, to be included in other comprehensive
loss. Prior year financial statements have been reclassified to conform to the
requirements of SFAS 130.
The components of the comprehensive loss are as follows (in thousands):
<TABLE>
<CAPTION>
For the three months ended
September 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net loss ........................................................ $ (3,149) $ (4,910)
Unrealized (loss) gain on investment ............................ (373) 320
---------- ----------
Comprehensive loss .............................................. $ (3,522) $ (4,590)
========== ==========
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended
September 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net loss ........................................................ $ (10,563) $ (11,759)
Unrealized (loss) gain on investment ............................ (863) 874
---------- ----------
Comprehensive loss .............................................. $ (11,426) $ (10,885)
========== ==========
</TABLE>
6
<PAGE> 7
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 3 - EARNINGS PER SHARE
For the quarter and nine months ended September 30, 1998 and 1997, the treasury
stock method was used to determine the dilutive effect of options and warrants
on earnings per share data. The following table summarizes the loss from
continuing operations and the weighted average number of shares outstanding
used in the computation of loss from continuing operations per common share in
accordance with SFAS No. 128, EARNINGS PER SHARE (in thousands, except per
share data).
<TABLE>
<CAPTION>
For the three months ended
September 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Loss from continuing operations ................................. $ (3,149) $ (4,197)
Deduct:
Cumulative preferred stock dividend requirement ........ (324) (262)
Preferred stock issuance cost accretion ................ (39) (39)
---------- ----------
Loss from continuing operations
applicable to common shareholders ............... $ (3,512) $ (4,498)
========== ==========
Weighted average common shares outstanding ............. 16,213 16,195
========== ==========
Basic and diluted loss per share from continuing operations $ (0.22) $ (0.28)
========== ==========
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended
September 30,
-------------------------
1998 1997
---------- ----------
<S> <C> <C>
Loss from continuing operations ................................. $ (10,563) $ (9,741)
Deduct:
Cumulative preferred stock dividend requirement ........ (849) (787)
Cumulative adjustment for preferred stock
dividend compounding ............................ (334) --
Preferred stock issuance cost accretion ................ (117) (117)
---------- ----------
Loss from continuing operations
applicable to common shareholders ............... $ (11,863) $ (10,645)
========== ==========
Weighted average common shares outstanding ............. 16,212 16,195
========== ==========
Basic and diluted loss per share from continuing operations $ (0.73) $ (0.66)
========== ==========
</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.
7
<PAGE> 8
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 4 - LONG-TERM DEBT
During June 1998, the Company executed an amendment to the Fourth Amended and
Restated Loan and Security Agreement which modified the Company's financial
covenants in the Company's $20 million credit facility with Bank Austria
Creditanstalt Corporate Finance, Inc., formerly known as
"Creditanstalt-Bankverein", (the "Credit Facility") as of June 30, 1998. The
interest rate on balances outstanding under the Credit Facility varies based
upon the leverage ratio maintained by the Company. Outstanding principal
balances are due in full in the year 2000. Interest is payable monthly for
loans based on the prime rate and quarterly for loans based on the LIBOR rate.
A commitment fee of 1/2 of 1% is charged on the aggregate daily available
balance of the Credit Facility. The Credit Facility is secured by substantially
all of the Company's assets and contains certain covenants which, among other
things, require the Company to maintain certain cash flow levels and interest
coverage ratios and places certain restrictions on the payment of dividends. At
September 30, 1998, the Company had no amounts borrowed under the Credit
Facility and was in compliance with the financial covenants.
NOTE 5 - INCOME TAXES
For the three and nine months ended September 30, 1998, the Company recorded
deferred tax assets and deferred tax asset valuation allowances of
approximately $1.2 million and $4.0 million, respectively. Valuation allowances
were provided to reduce the deferred tax assets to a level which, more likely
than not, will be realized.
NOTE 6 - LOSS FROM DISCONTINUED OPERATIONS
In the fourth quarter of 1997, the Company sold the operating assets of its
inmate telephone division. The accompanying Consolidated Statement of
Operations for the three and nine months ended September 30, 1997 and the
Consolidated Statement of Cash Flows for the nine months ended September 30,
1997 have been restated to present results of the former inmate telephone
division as discontinued operations. For the three months and nine months ended
September 30, 1997, the Company reported approximately $0.7 million and $2.0
million in losses from discontinued operations, respectively.
NOTE 7 - ACQUISITION OF INDIANA TELCOM CORPORATION
On January 12, 1998, the Company acquired the operating assets of Indiana
Telcom Corporation for approximately $11.3 million in cash. The results of
operations for the Company include the operations of Indiana Telcom from
January 12, 1998 forward. The acquisition was accounted for as a purchase and,
accordingly, the purchase price was allocated to the assets acquired based on
appraisals and other estimates of their underlying fair values. The allocation
of the purchase price is preliminary, pending finalization of appraisals and
other estimates. The fair value of the assets acquired included $5.4 million of
installed payphones and related equipment and $0.3 million in location
contracts. No liabilities were assumed in the transaction. The excess of the
purchase price over the fair value of net assets acquired of $5.6 million was
recorded as goodwill and is being amortized over 5 years.
8
<PAGE> 9
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 7 - ACQUISITION OF INDIANA TELCOM CORPORATION (CON'T)
The following summarizes unaudited pro forma consolidated results of operations
for the nine months ending September 30, 1997 assuming that the Indiana Telcom
acquisition occurred at the beginning of 1997. These pro forma results are
provided for comparative purposes only and do not purport to be indicative of
the results that would have been obtained if this acquisition had been effected
on the date indicated or which may be obtained in the future (in thousands,
except per share data).
Nine months ended September 30, 1997:
Total revenues..............................................$87,760
Loss from continuing operations.............................(10,494)
Loss from continuing operations per common share..............(0.70)
NOTE 8 - MERGER AGREEMENT WITH DAVEL COMMUNICATIONS GROUP
The Company has entered into an amended and restated merger agreement with
Davel Communications Group, Inc. ("Old Davel") and Davel Holdings, Inc. ("New
Davel"). Under the terms of the agreement, which has been approved by the Board
of Directors of each company, holders of common stock of the Company will
receive 0.235 of a share of New Davel common stock for each outstanding share
of Company common stock and the Company and Old Davel will each become a wholly
owned subsidiary of New Davel (the "Merger").
The transaction, which is intended to close in the fourth quarter of 1998, is
subject to the approval of the shareholders of both Old Davel and the Company,
receipt of required regulatory approvals and other customary conditions.
Consummation of the Merger is conditioned on its eligibility for
pooling-of-interests accounting treatment. The transaction is also subject to
conversion of the Company's Series C Cumulative Convertible Preferred Stock
into common stock and receipt of financing for, and successful consummation of,
a cash tender offer for the Company's 12 1/4% Senior Notes due 2002 (the
"Senior Notes"), pursuant to which a minimum of 85% of the aggregate
outstanding principal amount of $100 million shall have been tendered. As of
November 11, 1998, substantially all of the principal amount had been tendered,
thereby satisfying that condition. Old Davel plans to refinance the Senior
Notes through a new senior credit facility. No assurance can be given that all
of the conditions for the consummation of the proposed Merger will be
satisfied.
As of September 30, 1998, the Company had incurred approximately $0.9 million
in accounting, legal and advisory costs relating to the pending business
combination. These costs have been recorded in other assets on the Company's
Consolidated Balance Sheet and will be recognized in results of operations upon
the consummation of the Merger.
9
<PAGE> 10
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 9 - DIAL-AROUND COMPENSATION
Effective November 6, 1996, pursuant to FCC regulations, the Company derived
additional revenues from dial- around calls placed from its public payphones.
Under the 1996 Payphone Order, from November 6, 1996 to June 30, 1997, the
Company recorded gross dial-around revenue at the then-mandated rate of $45.85
per payphone per month, as compared with the flat fee of $6.00 per payphone per
month in place prior to November 6, 1996. Pursuant to the Remand Order, in the
period from July 1 to October 6 of 1997, the Company recorded gross dial-
around compensation revenue at a rate of $37.20 per payphone per month and
recorded a charge of approximately $2.1 million, consisting of a reduction in
non-coin revenue of approximately $2.6 million and a reduction in commissions
expense of approximately $0.5 million, in the third quarter of 1997 for the
retroactive reduction in the dial-around compensation rate from $45.85 to
$37.20 per payphone per month, applicable to the November 6, 1996 to June 30,
1997 period.
From October 7, 1997 to October 6, 1999, the Company is entitled to receive
dial-around compensation at a per- call rate of $0.284 based on the actual
number of dial-around calls placed from each of its payphones (or such other
number of calls as may be ultimately permitted by the FCC or the courts).
Thereafter, the dial-around compensation rate is anticipated to be at a
per-call rate equal to the local coin call rate less $0.066. For the period
from October 7, 1997 to September 30, 1998, the Company recorded dial-around
compensation revenue using an estimated 131 calls per month per payphone. The
Company has based its compensation on an estimated number of calls (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.
On May 15, 1998, the Court again remanded the per-call compensation rate to the
FCC for further explanation without vacating the $0.284 per call rate. The
Court stated that any resulting overpayment would be subject to refund and
directed the FCC to conclude its proceedings within a six-month period from the
effective date of the Court's decision. The Company believes that the FCC will
issue its ruling in the current proceeding within the six-month period
established by the Court. Based on the information available to it, the Company
does not believe that it is reasonably possible that the amount of compensation
for dial-around calls will be materially reduced from the amount recorded as
dial-around compensation. While the amount of $0.284 per call constitutes the
Company's position on the minimum appropriate level of fair compensation,
certain IXCs have challenged this rate level, asserting that the appropriate
level of fair compensation should be lower than $0.284 per call.
10
<PAGE> 11
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
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 nearly completed. On
July 31, 1998, the court granted a summary judgment in the Company's favor,
dismissing one of the two remaining counts. Trial has been reset for February
1999. Based on the discovery conducted to date, the Company continues to
believe that it has several meritorious legal and factual defenses. Based upon
the incomplete status of discovery, the Company is unable to predict the final
outcome of the litigation.
NOTE 11 - SUBSEQUENT EVENTS
On June 12, 1998, Old Davel (see Note 8) signed a definitive agreement (the
"Davel/PhoneTel Merger Agreement") to merge with PhoneTel Technologies, Inc.
("PhoneTel"). On September 29, 1998, Old Davel announced that it was exercising
its contractual rights to terminate the Davel/PhoneTel Merger Agreement, based
on breaches of representations, warranties and covenants by PhoneTel. On
October 1, 1998, Old Davel filed a lawsuit in Delaware Chancery Court seeking
damages, rescission of the Davel/PhoneTel Merger Agreement and a declaratory
judgment that such breaches occurred. On October 27, 1998, PhoneTel answered
the complaint and filed a counterclaim against Old Davel alleging that the
Davel/PhoneTel Merger Agreement had been wrongfully terminated, and also filed
a third-party claim against the Company alleging that the Company wrongfully
caused the termination of the Davel/PhoneTel Merger Agreement. The counterclaim
and third party claim seek specific performance by Old Davel of the
transactions contemplated by the Davel/PhoneTel Merger Agreement and damages
and other equitable relief from Old Davel and the Company. The Company believes
that the third party claim is without merit and intends to defend against it
vigorously.
11
<PAGE> 12
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, 1998 to the quarter and nine months ended September
30, 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 Annual Report on Form 10-K as amended by Form 10-K/A No.1 for the
year ended December 31, 1997 ("Form 10-K").
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 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 as well as competition from
alternative telecommunications services, such as wireless communications),
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, particularly
in the area of Dial-Around Compensation , the ongoing ability of the Company to
deploy its public payphones in favorable locations, the Company's ability to
continue to implement operational improvements, the ability of the Company to
efficiently integrate acquisitions of other telephone companies and the
Company's ability to consummate the planned business combination with Davel
Communications Group, Inc. Such factors and others are set forth more fully in
the Form 10-K and the consolidated financial statements and notes thereto
appearing elsewhere in this Form 10-Q. Capitalized terms not defined here are
defined in the Form 10-K.
OVERVIEW
On January 12, 1998, the Company acquired the operating assets of
Indiana Telcom Corporation ("Indiana Telcom") 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
assets in December 1997.
The Company has entered into an amended and restated merger agreement
with Davel Communications Group, Inc. ("Old Davel") and Davel Holdings, Inc.
("New Davel"). Under the terms of the agreement, which has been approved by the
Board of Directors of each company, holders of common stock of the Company will
receive 0.235 of a share of New Davel common stock for each outstanding share
of Company common stock and the Company and Old Davel will each become a wholly
owned subsidiary of New Davel (the "Merger").
The transaction, which is intended to close in the fourth quarter of
1998, is subject to the approval of the shareholders of both Old Davel and the
Company, receipt of required regulatory approvals and other customary
conditions. Consummation of the Merger is conditioned on its eligibility for
pooling-of-interests accounting treatment. The transaction is also subject to
conversion of the Company's Series C Cumulative Convertible Preferred Stock
into common stock and receipt of financing for, and successful consummation of,
a cash tender offer for the Company's 12 1/4% Senior Notes due 2002 (the
"Senior Notes"), pursuant to which a minimum of 85% of the aggregate
outstanding principal amount of $100 million shall have been tendered. As of
November 11, 1998, substantially all of the principal amount had been tendered,
thereby satisfying that condition. Old Davel plans to refinance the Senior
Notes through a new senior credit facility. No assurance can be given that all
of the conditions for the consummation of the proposed Merger will be
satisfied.
12
<PAGE> 13
As of September 30, 1998, the Company had incurred approximately $0.9
million in accounting, legal and advisory costs relating to the pending
business combination. These costs have been recorded in other assets on the
Company's Consolidated Balance Sheet and will be recognized in results of
operations upon the consummation of the Merger.
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 Compensation 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 (the "Provision for Dial-Around
Compensation Adjustment"), consisting of a reduction in non-coin revenue of
approximately $2.6 million and a reduction in commissions expense of
approximately $0.5 million, in the third quarter of 1997 for the retroactive
reduction in the Dial-Around Compensation rate from $45.85 to $37.20 per
payphone per month, applicable to the November 6, 1996 to June 30, 1997 period.
(See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" appearing in the 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 September 30, 1998, the Company recorded Dial-Around
Compensation revenue using an estimated 131 calls per month per payphone. The
Company has based its compensation on an estimated number of calls per payphone
per month because actual call counts are not provided by the IXCs for as much
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 periods subsequent to October 7, 1997, the Company 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 and has therefore agreed to pay the Company on all of its
payphones at a surrogate flat rate for the period from October 7, 1997 through
March 31, 1998. Until detailed information is available to support higher
estimates, the Company 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 and the
first two quarters of 1998, the Company does not believe application of this
order will result in any material adjustment to the Dial-Around Compensation
revenues recorded for the period from October 7, 1997 forward.
On May 15, 1998, the Court again remanded the per-call compensation
rate to the FCC for further explanation without vacating the $0.284 per call
rate. The Court stated that any resulting overpayment would
13
<PAGE> 14
be subject to refund and directed the FCC to conclude its proceedings within a
six-month period from the effective date of the Court's decision. The Company
believes that the FCC will issue its ruling in the current proceeding within
the six-month period established by the Court. Based on the information
available to it, the Company does not believe that it is reasonably possible
that the amount of compensation for dial-around calls will be materially
reduced from the amount recorded as Dial-Around Compensation. While the amount
of $0.284 per call constitutes the Company's position on the minimum
appropriate level of fair compensation, certain IXCs have challenged this rate
level asserting that the appropriate level of fair compensation should be lower
than $0.284 per call.
As part of the 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 $14.4 million
for the period from January 1, 1998 through September 30, 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 67.9% and 74.9% of total revenues for the quarters ended
September 30, 1998 and 1997, respectively, and 68.7% and 67.9% of total
revenues for the nine months ended September 30, 1998 and 1997, respectively.
Coin revenue decreased 0.5% to $19.7 million during the quarter ended September
30, 1998, and increased approximately 3.8% to $59.2 million for the nine months
ended September 30, 1998, as compared to the same periods in 1997. The
Company's average installed public pay telephone base was approximately 42,800
phones and 39,000 phones for the nine month periods ended September 30, 1998
and 1997, respectively. Coin revenue on a per phone basis decreased by 8.4% and
5.4% for the quarter and the nine months ended September 30, 1998. 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. The
Company 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
close proximity to the Company's telephones.
A significant portion of the Company's revenues is derived from
Dial-Around Compensation mandated by the FCC under the Telecommunications Act
of 1996. In accordance with the FCC's initial orders thereunder, the Company
recorded Dial-Around Compensation at the rate of $45.85 per pay phone per month
(an assumed 131 calls multiplied by $0.35 per call) during the first and second
quarters of 1997. As a result of court challenges, the FCC modified this rate
during the fourth quarter of 1997 to $0.284 per call for per call compensation
from October 7, 1997 forward. The FCC also 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 (see
"Dial-Around Compensation" above). For the period from November 7, 1996 through
October 6, 1997, the Company has collected approximately $10.1 million from
carriers for Dial-Around Compensation. At September 30, 1998, the Company's
accounts receivable include approximately $6.3 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.
A future order from the FCC to resolve the allocation of compensation
obligations among the carriers is expected during the first six months of 1999.
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 Form 10-K for a more complete discussion.
14
<PAGE> 15
Non-coin revenue, in addition to Dial-Around Compensation, 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 ("OSP"), 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 FCC's Dial-Around
Compensation orders, 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 Dial-Around Compensation.
Additional one-time non-coin revenue of approximately $0.4 million was
recorded in the third quarter of 1998, primarily from the Company's joint
venture which provides payphones at Atlanta's Hartsfield International Airport.
This additional revenue is related to joint venture payphones not previously
included in the joint venture reporting system.
Non-coin revenue represented approximately 32.1 % and 25.1% of total
revenues for the quarters ended September 30, 1998 and 1997, respectively, and
approximately 31.3% and 32.1% for the nine months ended September 30, 1998 and
1997, respectively. For the quarter ended September 30, 1998, revenues from
non-coin calls increased 40.4%, to approximately $9.3 million, compared to the
quarter ended September 30, 1997. This increase was primarily attributable to
the Provision for Dial-Around Compensation Adjustment recorded during the third
quarter of 1997 and the increased revenue from the Atlanta Hartsfield joint
venture in the third quarter of 1998, as noted above. For the nine months ended
September 30, 1998 and 1997, non-coin revenues increased 0.4%, to approximately
$27.0 million, compared to the nine months ended September 30, 1997, primarily
due to the increased revenue from the Atlanta Hartsfield joint venture and the
increased number of payphones from the Indiana Telcom acquisition, offset by
the lower revenue received by the Company for operator service calls.
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
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 80.7% and 83.5% of total revenues for
15
<PAGE> 16
the quarters ended September 30, 1998 and 1997, respectively. For the nine
months ended September 30, 1998, total operating expenses were 81.7% of total
revenue as compared to 80.9% for the same period in 1997.
Telephone charges decreased as a percentage of total revenues to 23.7%
for the quarter ended September 30, 1998, compared to 28.3% for the same period
in 1997. For the nine months ended September 30, 1998 and 1997, telephone
charges were 24.4% and 26.5% of total revenues, respectively. 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 September 30, 1998 increased to approximately 28.4% as compared to 22.8%
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 an
adjustment recorded in the third quarter of 1997 as a result of 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 $1.5
million. For the nine months ended September 30, 1998 and 1997, commissions
were approximately 28.4% and 25.7% of total revenues, respectively, again
increasing primarily because of the same adjustment noted above for the three
month period.
Field service and collection expenses as a percentage of total
revenues were 18.5% and 18.8% for the third quarters of 1998 and 1997,
respectively, and 18.5% and 17.4% for the nine months ended September 30, 1998
and 1997, respectively. Field service and collection expenses decreased as a
percentage of revenue for the three months due to the revenue adjustment as
part of the Provision for Dial-Around Compensation Adjustment. Field service
and collection expenses increased as a percent of revenue for the nine months
primarily as a result of the increased number of phones coupled with the
decrease in revenue per phone, as discussed above. Field service and collection
expenses increased approximately 8.1%, to approximately $5.4 million for the
third quarter of 1998, as compared to the same period in 1997 and approximately
9.0%, to approximately $15.9 million for the nine months ended September 30,
1998, as compared to the same period in 1997, due to the increase in the average
number of phones.
Selling, general and administrative expenses decreased approximately
$0.7 million for the third quarter of 1998 to approximately $2.9 million, as
compared to the same period in 1997. This decrease was primarily attributable
to additional costs in 1997 associated with legal and regulatory work performed
pertaining to the Remand Order and the settlement of an employment contract
with a former executive. Additionally, the Company received approximately $0.3
million as payment of a loan from a former director, which had previously been
fully reserved by the Company.
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, non-competition provisions,
signing bonuses and sales commissions which are 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
September 30, 1998, compared to $5.4 million for the same period in 1997. For
the nine months ended September 30, 1998 and 1997, depreciation and
amortization expense was approximately $16.6 million and $16.0 million,
respectively. These increases are primarily attributable to additional
depreciation and amortization expenses related to the Indiana Telcom
acquisition and to the renewal costs of location contracts.
16
<PAGE> 17
INTEREST EXPENSE
For the third quarter of 1998, net interest expense was approximately
$3.2 million, which was the same as interest expense in the same quarter in
1997. For the first nine months of 1998, net interest expense remained
consistent with net interest expense in the same period of 1997, at
approximately $9.7 million and $9.8 million, respectively.
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 $1.2 million and $4.0 million for the three and nine months ended
September 30, 1998.
NET LOSS
Net loss for the three months ended September 30, 1998 was
approximately $3.1 million as compared to $4.9 million for the third quarter of
1997. For the nine months ended September 30, 1998 and 1997, the Company had
net losses of approximately $10.6 million and $11.8 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the third quarter of 1998, the Company continued to finance its
operations from current and prior period operating cash flow. For the nine
months ended September 30, 1998, the Company's operating cash flow was $0.6
million compared to $1.9 million for the same period in 1997, due primarily to
increases in accounts receivable and other assets (primarily costs related to
the Merger), offset to some extent by a reduced net loss and increased
depreciation. Accounts receivable, primarily due from carriers for Dial-Around
Compensation, increased during the nine months ended September 30, 1998,
primarily due to payment delays as carriers implemented new payment systems for
per-call compensation under the FCC's Dial-Around Compensation orders.
Subsequent to September 30, the Company has received approximately $5.1 million
in Dial-Around Compensation payments from various carriers primarily with
respect to obligations from the first and second quarters of 1998.
The Company's net working capital was approximately $(0.3) million,
with a current ratio of 0.99 to 1.0, at September 30, 1998. This compares with
a net working capital of $11.0 million at December 31, 1997. The Company used
$11.3 million of cash in January, 1998 to acquire the assets of Indiana Telcom.
Under terms of the Company's Series C Cumulative Convertible Preferred
Stock Agreement, the Preferred Stock cumulates dividends at an annual rate of
7%. The dividends are payable in cash, or, at the Company's option during the
first three years, will cumulate. The Company's Indenture Agreement for its
Senior Notes due 2002 allows cash payment of these dividends only in the event
that the Company's fixed charge coverage ratio exceeds a certain value. As of
September 30, 1998, the fixed charge coverage ratio did not exceed that value.
As a result, and as permitted under the Preferred Stock Agreement, these
dividends will continue to cumulate, until the Company's fixed charge coverage
ratio exceeds the required value.
During June, 1998, the Company executed an amendment to the Fourth
Amended and Restated Loan and Security Agreement modifying certain financial
covenants. At September 30, 1998, the Company was in compliance with the
amended covenants and had no amounts borrowed under this $20 million credit
facility.
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
17
<PAGE> 18
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, the collectibility of amounts owed for
Dial-Around Compensation and the ongoing ability of the Company to deploy its
phones in favorable locations and to continue to implement operational
improvements.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure, disruption of operations, and/or a temporary inability to conduct
normal business activities.
The Company's Year 2000 project is broken into seven major
sub-projects, including: 1) Telecommunications Equipment, 2) Computer
Equipment, 3) Software, 4) Databases, 5) Data Services, 6) Network
Infrastructure, and 7) Telephone Equipment. Each sub-project is divided into 4
phases: a) Analysis/Assessment, b) Plan Development, c) Implementation, and d)
Testing. As each phase and sub-project is completed, project progress will be
tracked against planned targets, and resource adjustments made as necessary.
Two subprojects, Telecommunications Equipment and Software, began in the third
quarter of 1998. The remaining sub-projects will all be underway by the fourth
quarter of 1998. The project is estimated to be complete by August of 1999,
which is prior to any anticipated impact on the Company's operating systems.
The Company believes that, with modifications to existing software, conversions
to new software and replacement or modification of certain embedded systems,
the Year 2000 issue will not pose significant operational problems. However, if
such modifications and conversions are not made, or are not completed on a
timely basis, the Year 2000 issue would have a material adverse impact on the
Company's business, financial condition and results of operations. In addition,
formal communications with all significant suppliers and customers have been
initiated to determine the extent to which related interfaces with the
Company's systems are vulnerable if these third parties fail to remediate their
own Year 2000 issues. There can be no assurance that these third parties'
systems will be converted on a timely basis and will not adversely affect the
Company' systems.
The Company has completed the initial assessment of the Year 2000
issue with respect to internal business systems, and believes that it has
secured sufficient resources to implement new and modified computer systems to
address the issue. As a result, the Company has not identified a need for
contingency planning with respect to those systems at this time. The assessment
of embedded systems is nearing completion and, due to the manageable quantity
of embedded devices encountered in the Company' facilities, the Company does
not believe that findings in the assessment warrant contingency planning at
this time. The assessment of third parties external to the Company is underway,
and may reveal the need for contingency planning based on the progress and
findings of the Year 2000 project.
The Company will utilize both internal and external resources to
complete and test the Year 2000 project. At the present time, the total
estimated cost of this project is in a range of $0.5 million to $1.0 million
and is being funded through operating cash flows. Approximately 20% of the
total will relate to purchased software and hardware and will be capitalized.
The remainder will be expensed as incurred. Through September 30, 1998, the
Company has incurred costs of approximately $0.1 million. Project costs and the
targeted completion date are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, the ability to locate and correct
all relevant computer codes, third party modification plans and other factors.
There can be no assurance these estimates will be achieved or that the actual
results will not differ materially from those anticipated.
18
<PAGE> 19
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Notes 10 and 11 to the Company's Consolidated Financial
Statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT DESCRIPTION
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K:
Current report on Form 8-K dated July 5, 1998 related to Item 1 -
Changes in Control of Registrant and Item 7 - Financial Statements and
Exhibits.
19
<PAGE> 20
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 13, 1998 /s/ William A. Baum
-----------------------------------
William A. Baum
On behalf of the registrant and as
Chief Financial Officer
20
<PAGE> 21
EXHIBIT INDEX
EXHIBITS
27 Financial Data Schedule (for SEC use only)
21
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