FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended: June 30, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934
Commission File Number: 0-16479
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 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 August 12, 1996 : 16,194,684 shares.
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Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(in thousands)
June 30, December 31,
Assets 1996 1995
--------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents............................ $ 12,636 $ 12,366
Accounts receivable, net of allowance for
doubtful accounts of $4,919 and $5,108............. 9,180 7,100
Inventory ........................................... 1,687 1,990
Prepaid expenses and other current assets .......... 2,383 3,764
-------- ---------
Total current assets ............................. 25,886 25,220
Property and equipment, net ........................... 72,084 78,201
Location contracts, net ............................... 29,203 29,270
Goodwill, net ......................................... 7,095 8,904
Intangible assets, net ................................ 2,195 2,620
Other assets, net ..................................... 8,364 8,713
Deferred income taxes ................................. 3,407 3,407
Investments ........................................... 2,014 3,736
-------- --------
Total assets...................................... $150,248 $160,071
======== ========
Liabilities And Shareholders' Equity
Current liabilities
Notes payable and current maturities
of long-term debt................................... $ 517 $ 506
Current portion of obligations under capital leases.. 1,091 1,156
Accounts payable and accrued expenses................ 19,702 19,603
Accrued interest payable ............................ 5,696 5,603
Income and other taxes payable ...................... 2,940 2,452
-------- --------
Total current liabilities ........................ 29,946 29,320
Notes payable and long-term debt ...................... 100,954 101,259
Obligations under capital leases ...................... 867 1,318
-------- --------
Total liabilities ................................ 131,767 131,897
-------- --------
Commitments and contingencies ......................... -- --
Preferred Stock
Cumulative convertible preferred stock Series C,
$.01 par value; 160 shares authorized; 150 shares
issued and outstanding ........................... 13,479 13,413
Preferred stock dividends payable ................... 997 473
------- -------
Total preferred stock ........................... 14,476 13,886
Shareholders' equity
Preferred stock; $.01 par value; 4,140 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; 25,000 shares authorized;
16,194 and 16,108 shares issued and outstanding... 162 161
Capital in excess of par value ...................... 61,055 61,573
Accumulated deficit ................................. (56,125) (47,446)
Unrealized loss on investments ...................... (1,087) --
-------- --------
Total shareholders' equity ....................... 4,005 14,288
-------- --------
Total liabilities and shareholders' equity........ $150,248 $160,071
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
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<TABLE>
<CAPTION>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
For the
Three months ended
June 30,
----------------------
1996 1995
-------- ---------
<S> <C> <C>
Revenues
Coin calls ........................................ $ 19,995 $ 19,871
Non-coin calls .................................... 11,964 16,959
-------- --------
Total revenues ................................. 31,959 36,830
Costs and expenses
Telephone charges ................................. 9,883 13,032
Commissions ....................................... 8,846 8,916
Field service and collection ...................... 5,020 5,605
Selling, general and administrative ............... 3,265 2,747
Depreciation and amortization ..................... 6,184 5,456
Interest .......................................... 2,940 2,249
(Gain) loss on disposal of prepaid calling card
and international telephone centers ............. -- --
Other ............................................. -- 1,034
-------- --------
Total costs and expenses ....................... 36,138 39,039
Loss from continuing operations before income taxes (4,179) (2,209)
Benefit from income taxes ........................... -- 50
-------- --------
Loss from continuing operations ..................... (4,179) (2,159)
-------- --------
Discontinued operations
Loss from operations ............................... -- --
(Loss) income on disposition, net of income taxes
of $50 ........................................... -- 84
-------- --------
Loss from discontinued operations .................. -- 84
Extraordinary loss from extinguishment of debt, net . -- --
-------- --------
Net loss......................................... $ (4,179) $ (2,075)
========= =========
Earnings (loss) per common share
Loss from continuing operations..................... $ (.28) $ (.13)
Loss from discontinued operations .................. -- --
Extraordinary loss from extinguishment of debt, net -- --
--------- ---------
Net loss......................................... $ (.28) $ (.13)
========= =========
Weighted average common and common equivalent shares
outstanding ........................................ 16,188 16,094
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
<TABLE>
<CAPTION>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
For the
Six months ended
June 30,
----------------------
1996 1995
-------- ---------
<S> <C> <C>
Revenue
Coin calls.......................................... $ 38,136 $ 38,932
Non-coin calls ..................................... 24,319 33,822
Service and other .................................. -- 122
------- ------
Total revenues .................................. 62,455 72,876
Costs and expenses
Telephone charges .................................. 19,746 26,002
Commissions ........................................ 17,113 17,198
Field service and collection ....................... 9,800 10,790
Selling, general and administrative................. 6,255 5,389
Depreciation and amortization ...................... 12,213 11,092
Interest ........................................... 6,002 4,051
(Gain) loss on disposal of prepaid calling card and
international telephone centers ................... (545) --
Other .............................................. 550 1,061
------- --------
Total costs and expenses ........................ 71,134 75,583
Loss from continuing operations before income taxes... (8,679) (2,707)
Benefit from income taxes ............................ -- 238
------- --------
Loss from continuing operations ...................... (8,679) (2,469)
------- --------
Discontinued operations
Loss from operations, .............................. -- --
(Loss) income on disposition, net of income taxes
of $21 ............................................ -- 33
-------- --------
Loss from discontinued operations................... -- 33
Extraordinary loss from extinguishment of debt, net -- (2,894)
-------- --------
Net loss ....................................... $ (8,679) $ (5,330)
======== =========
Earnings (loss) per common share
Loss from continuing operations...................... $ (.57) $ (.15)
Loss from discontinued operations ................... -- --
Extraordinary loss from extinguishment of debt, net . -- (.18)
-------- ---------
Net loss......................................... $ (.57) $ (.33)
======== =========
Weighted average common and common equivalent shares
outstanding ......................................... 16,181 16,074
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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<TABLE>
<CAPTION>
PEOPLES TELEPHONE COMPANY, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(unaudited, in thousands)
For the
Six Months Ended,
June 30,
-----------------------
1996 1995
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<S> <C> <C>
Cash flow from operating activities:
Net loss............................................ $ (8,679) $ (5,330)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization ................. 12,213 11,092
Deferred income taxes ......................... -- (1,954)
Extraordinary loss from extinguishment of debt. -- 4,631
Equity in losses of Global Link ............... -- 136
Gain on sale of assets ........................ (545) --
Change in assets and liabilities:
(Increase) decrease in accounts receivable.... (1,580) 1,653
Decrease (increase) in inventory ............ 503 (845)
Increase in prepaid expenses and other
current assets ............................ (23) (943)
Decrease in other assets .................... 219 417
Increase in accounts payable and accrued
expenses................................... 1,092 256
Increase (decrease) in accrued interest..... 93 (6)
Increase (decrease) in taxes payable......... 488 (17)
Net effect of discontinued operations ....... -- (3,320)
------ ------
Net cash provided by operating activities............ 3,781 5,770
Cash flow from investing activities:
Payments for acquisitions and certain contracts.. (2,384) (806)
Property and equipment additions ................ (1,873) (3,094)
Proceeds from sale of assets .................... 1,580 1,000
Decrease in investments.......................... 31 127
------ ------
Net cash used in investing activities ............... (2,646) (2,773)
Cash flow from financing activities:
Net payments under note payable to bank ......... (294) (6,055)
Principal payments under capital lease
obligations.................................... (571) 1,098
Exercise of stock options and warrants........... -- 307
Officer loans ................................... -- (190)
------ ------
Net cash used in financing activities ............... (865) (4,840)
------ ------
Net increase (decrease) in cash and cash equivalents. 270 (1,843)
Cash and cash equivalents at beginning of period .... 12,366 7,663
------ -----
Cash and cash equivalents at end of period........... $ 12,636 $ 5,820
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 AND JUNE 30, 1995
(unaudited)
NOTE 1 - UNAUDITED INTERIM INFORMATION
The accompanying interim consolidated financial data 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 six months ended June 30,
1996 are not necessarily indicative of the results to be expected for the year
ending December 31, 1996.
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, 1995 as set forth in the Company's Form 10-K.
During the third quarter of 1995, the Company decided to retain the remaining
portion of its inmate telephone operations. The accompanying consolidated
statements of operations for the three and six months and of cash flows for the
six months ended June 30, 1995 have been reclassified to present the inmate
telephone operations as part of continuing operations. In addition, certain
other amounts for the prior year have been reclassified to conform with current
year presentation.
NOTE 2 - CHANGES IN ACCOUNTING POLICIES
Intangible Assets
During the first quarter of 1996, the Company adopted Statement No. 121 ("SFAS
121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. SFAS 121 also addresses the accounting
for long-lived assets that are expected to be disposed of. The effect of
adoption did not have a material impact on the financial results of the Company
for the three months or the six months ended June 30, 1996.
Stock Options
In October 1995, the FASB issued Statement No. 123 ("SFAS 123"), Accounting for
Stock-Based Compensation, which requires companies to either recognize expense
for stock-based awards based on their fair value on the date of grant or provide
footnote disclosures regarding the impact of such changes. The Company adopted
the provisions of SFAS 123 on January 1, 1996 but will continue to account for
options issued to employees or directors under the Company's non-qualified stock
option plans in accordance with Accounting Principles Board Opinion No. 25 ("APB
25"), Accounting for Stock Issued to Employees. The exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant; therefore, no compensation expense is recognized under APB
25.
6
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Depreciation and Amortization
Effective January 1, 1996, the Company revised its depreciation and amortization
policy for certain fixed and intangible assets used in the inmate telephone
operations. Based on increased competition and certain other changes within the
inmate telephone industry, the Company reduced the useful lives of various
assets to five years. This change in accounting estimate resulted in an increase
in depreciation and amortization expense and net loss for the three months and
six months ended June 30, 1996 of approximately $0.3 million and $0.6 million or
$.02 and $.04 per common share, respectively.
NOTE 3 - PREPAID CALLING CARD AND INTERNATIONAL TELEPHONE CENTERS
On September 28, 1995, the Company sold its international telephone center
operations for $2.0 million in cash and notes receivable. For financial
accounting purposes, the recovery of $2.0 million previously written off will be
recognized as the cash is received. During the first quarter of 1996, the
Company received a payment of approximately $0.3 million which is included in
"Gain on disposal of prepaid calling card and international telephone centers"
in the accompanying Consolidated Statement of Operations.
On March 1, 1996, Global Link Teleco Corporation ("Global Link") consummated a
merger transaction (the "Merger") with Global Telecommunications Solutions, Inc.
("GTS"). The Company exchanged its outstanding notes and other receivables
including accrued interest for shares of GTS Common stock, $0.6 million in cash
and $1.5 million of notes receivables with various due dates through September
1997. The Company's 19.99% equity interest in Global Link was converted in the
Merger into GTS shares. For financial accounting purposes, a net gain of
approximately $1.0 million will be deferred until the outstanding receivable
balances are collected. In addition, a gain of approximately $0.3 million was
recorded in the first quarter of 1996 related to amounts collected at the time
of this transaction.
NOTE 4 - INVESTMENTS
The Company's investment in GTS is accounted for in accordance with Statement
No. 115 ("SFAS 115"), Accounting for Certain Investments in Debt and Equity
Securities. Investments in debt and equity securities, other than those
accounted for under the equity method, are reported at fair value with
unrealized gains or losses, net of tax, recorded as a separate component of
Shareholders' Equity. As of the merger date, the fair value of the investment
was approximately $3.1 million. The fair value of the Company's investment in
GTS common stock at June 30, 1996 was approximately $2.0 million which is net of
approximately $1.1 million of unrealized investment losses.
NOTE 5 - EARNINGS PER SHARE
The treasury stock method was used to determine the dilutive effect of options
and warrants on earnings per share data. For 1996 and 1995, common stock
equivalents were excluded since the effect would be anti-dilutive. Therefore,
fully diluted earnings per share are not presented.
See earnings (loss) per common share calculation as summarized on page 9.
NOTE 6 - LONG-TERM DEBT
During April 1996, the Company amended the Fourth Amended Loan and Security
Agreement (the "Amendment") with Creditanstalt-Bankverein (the "Bank"). In
connection with the Amendment, the Bank waived the Company's non-compliance with
certain restrictive covenants contained in the agreement for the three month
period ended December 31, 1995. The Amendment, among other things, decreased the
facility to $10.0 million and reduced the requirements of the financial
covenants. The amended credit facility bears interest at the Bank's prime rate
plus 2% and requires all outstanding principal balances to be repaid in
September 1997. At the same time, the Company
7
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decreased to $5.25 the exercise price of the warrants held by Creditanstalt
American Corporation to acquire Common Stock or Series B Preferred Stock of the
Company that had not already been repriced. At June 30, 1996, the Company was in
compliance with the amended covenants and had no amounts borrowed under the
facility.
NOTE 7 - INCOME TAXES
At June 30, 1996, the Company recorded valuation allowances of approximately
$1.6 million and $3.3 million against deferred tax assets generated during the
three months and six months ended June 30, 1996, respectively. A valuation
allowance was provided to reduce the deferred tax assets to a level which, more
likely than not, will be realized.
NOTE 8 - SUBSEQUENT EVENTS
In July 1996, litigation with BellSouth Telecommunications, Inc. was amicably
resolved to the satisfaction of the parties.
8
<PAGE>
<TABLE>
<CAPTION>
PEOPLES TELEPHONE COMPANY, INC.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(unaudited, in thousands, except per share data)
For The
Three Months Ended
June 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Loss from continuing operations........................... $ (4,179) $ (2,159)
Less:
Cumulative preferred stock dividends .................... (263) --
-------- --------
Loss from continuing operations for per share computations (4,442) (2,159)
(Loss) income from discontinued operations................ -- 84
Extraordinary loss from extinguishment of debt, net ...... -- --
-------- --------
Net loss for per share computations.................... $ (4,442) $ (2,075)
======== ========
Number of shares:
Weighted average shares used in the per share computation . 16,188 16,094
======== ========
Earnings (loss) per common and common equivalent share:
Loss from continuing operations............................ $ (.28) $ (.13)
(Loss) income from discontinued operations................. -- --
Extraordinary loss from extinguishment of debt, net ....... -- --
-------- --------
Net loss ............................................... $ (.28) $ (.13)
======== ========
</TABLE>
<TABLE>
<CAPTION>
For The
Six Months Ended
June 30,
-------------------
1996 1995
--------- --------
<S> <C> <C>
Loss from continuing operations............................ $ (8,679) $ (2,469)
Less:
Cumulative preferred stock dividends ..................... (525) --
-------- --------
Loss from continuing operations for per share
computations............................................. (9,204) (2,469)
(Loss) income from discontinued operations................. -- 33
Extraordinary loss from extinguishment of debt, net ....... -- (2,894)
-------- --------
Net loss for per share computations..................... $ (9,204) $ (5,330)
======== ========
Number of shares:
Weighted average shares used in the per share computation . 16,181 16,074
======== ========
Earnings (loss) per common and common equivalent share:
Loss from continuing operations............................ $ (.57) $ (.15)
(Loss) income from discontinued operations................. -- --
Extraordinary loss from extinguishment of debt, net ....... -- (.18)
-------- --------
Net loss ............................................... $ (.57) $ (.33)
======== ========
</TABLE>
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis compares the quarter and six months
ended June 30, 1996 to the quarter and six months ended June 30, 1995 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, 1995.
The financial results discussed below relate to continuing operations which
primarily consist of the public pay telephone business and inmate telephone
operations. The accompanying consolidated statements of operations for the three
months and six months and cash flows for the six months ended June 30, 1995,
have been reclassified to present the inmate telephone operations as part of
continuing operations.
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 62.6%
and 54.0% of total revenues from continuing operations for the quarters ended
June 30, 1996 and 1995 and 61.1% and 53.4% of total revenues from continuing
operations for the six months ended June 30, 1996 and 1995, respectively. Coin
revenue increased 0.6% to $20.0 million during the quarter ended June 30, 1996
and decreased approximately 2.0% to $38.1 million for the six months ended June
30, 1996, compared to the same periods in 1995. The Company's average installed
public pay telephone base was approximately 38,300 phones and 39,800 phones for
the six month period ended June 30, 1996 and 1995, respectively. Coin revenue on
a per phone basis increased by 3.3% and 1.6% for the quarter and six months
ended June 30, 1996, respectively, as compared to the same periods in 1995. The
Company believes that the increase can be attributed, in part, to emphasis on
maintenance programs which have improved the up-time of the Company's phones,
the implementation and promotion of new coin calling programs and the company's
continued efforts to remove low revenue phones.
While the Company is currently experiencing positive trends in coin
revenue, the Company believes that the number of coin calls made at its public
pay telephones may remain flat or decrease over time. The Company believes that,
among other things, the decreases will primarily result from the increased usage
of alternative methods of calling such as prepaid calling cards and wireless
technologies and the operation of more public pay telephones in closer proximity
to the Company's telephones. The Company also believes that these decreases may
be offset, over time, by increases in local coin call rates as a result
of potential regulatory changes.
During the second quarter of 1995, the Company signed a contract with AT&T
to act as its primary third-party operator service provider. Prior to the
execution of this agreement, non-coin calls were routed through the Company's
private label operator service program. The Company uses its private label
operator service or a third-party operator service provider based on which
service the Company believes nets it the highest gross margin from the call. The
Company records as revenue the total amount the end user pays for the call (net
of taxes) when the call is completed through the Company's private label
operator service. In contrast, 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. In May
1996, AT&T began paying a specified per call amount for interLATA (800) dial
around calls as opposed to a percentage of the revenue generated by those calls.
Non-coin revenue represented approximately 37.4% and 46.0% of total
revenues from continuing operations for the quarters ended June 30, 1996 and
1995, respectively. 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 and inmate telephones. For the quarter ended June 30,
1996, revenues from non-coin calls decreased 29.5% to approximately $12.0
million, compared to the quarter ended June 30, 1995. For the six months ended
June 30, 1996 non-coin
10
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revenue decreased approximately $9.5 million or 28.1% to approximately $24.3
million as compared to the same period of the prior year. This decrease was
primarily attributable to: (i) the method of recording revenue for certain
non-coin calls as a result of the change to AT&T as the Company's primary
national operator service provider; (ii) the change in the Company's
compensation structure under the AT&T contract; and (iii) the decrease in the
number of inmate telephone lines operated by the Company. During the six month
period ended June 30, 1996, the Company operated an average of 2,100 inmate
telephone lines compared to approximately 3,200 during the same period of 1995.
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 costs of basic service and transport of local coin calls,
long-distance transmission charges and network costs and billing, collection and
validation costs. Commissions represent payments to property owners and
correctional facilities for revenues generated by the Company's 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.
The switch by the Company to a third-party operator service resulted in a
decreased revenue base due to the method of recording revenue for calls made
through that service as compared to calls placed through the Company's private
label operator service program (see above). As a result, operating expenses as a
percentage of revenues for the six months ended June 30, 1996 increased compared
to the same periods in 1995. Total operating expenses were approximately 84.5%
and 82.3% of total revenues from continuing operations for the quarters ended
June 30, 1996 and 1995, respectively. For the six months ended June 30, 1996
total operating expenses were 84.7% of total revenues from continued operations
as compared to 81.5% for the same period in 1995.
Telephone charges decreased as a percentage of total revenues from
continuing operations to 30.9% for the quarter ended June 30, 1996, compared to
35.4% for the same period in 1995. For the six months ended June 30, 1996 and
1995 telephone charges were 31.6% and 35.7% of total revenues from continuing
operations, respectively. The decrease in telephone charges is primarily due to
a decline in the number of calls placed through the Company's private label
operator service program. The Company paid the costs incurred to transmit, bill,
collect and validate the call when the call was completed through its private
label operator services. In contrast, the Company incurred no such costs when a
third-party operator service provider completed the call. In addition, the
Company continues to experience decreased telephone charges as a result of
regulatory changes and competition within the local/intraLATA service market
which began in the third quarter of 1995. Telephone charges for the six months
ended June 30, 1995 include a reduction of interexchange carrier expenses
related to the settlement with a service provider for certain billing errors and
underpayment of operator service revenue of approximately $1.3 million.
Commissions as a percentage of total revenues from continuing operations
for the three months ended June 30, 1996 and 1995 were approximately 27.7% and
24.2%, respectively. For the six month periods ended June 30, 1996 and 1995,
commissions were approximately 27.4% and 23.6% of revenues from continuing
operations, respectively. The increase in commissions as a percentage of
revenues was primarily attributable to: (i) the method of recording revenue for
certain non-coin calls as a result of the change to AT&T as the Company's
primary national operator service provider; (ii) higher commission rates paid in
connection with the Atlanta Hartsfield International Airport account; and (iii)
higher commission rates for new and renewed contracts due to increasing
competition in the public pay telephone and inmate telephone markets.
11
<PAGE>
Field service and collection expenses as a percentage of total revenues
from continuing operations were 15.7% and 15.2% for the second quarter of 1996
and 1995, respectively. For the six months ended June 30, 1996, field service
and collection expenses were 15.7% compared with 14.8% for the same period in
1995. This increase was primarily attributable to the reduced revenue base as
described above. Field service and collection expenses decreased approximately
$0.6 million to approximately $5.0 million for the second quarter of 1996
compared to the same period in 1995. For the six months ended June 30, 1996
field service and collection expenses decreased approximately $1.0 million to
$9.8 million from approximately $10.8 million for the same period in 1995. This
decrease was primarily attributable to cost savings resulting from office and
route consolidations and a focus on achieving further operating efficiencies.
Selling, general and administrative expenses increased 18.9% to approximately
$3.3 million in the second quarter 1996 versus the second quarter 1995. For the
six months ended June 30, 1996, selling, general and administrative expenses
increased approximately 16.1% to $6.3 million as compared to the same period of
1995. This increase was primarily attributable to an increase in insurance
premiums, the salary associated with the addition of an internal sales force and
increases in industry association dues and filing fees.
Depreciation and Amortization
Depreciation is based on the cost of the telephones, booths, pedestals and
other enclosures, related installation costs and line interconnection charges
and is calculated on a straight-line method using a ten-year useful life for
public pay telephones and a five-year useful life for inmate telephones.
Amortization is primarily based on acquisition costs including location
contracts, goodwill and non-competition provisions and is calculated on a
straight-line method using estimated useful lives ranging from five to twenty
years. Depreciation and amortization increased to $6.2 million for the quarter
ended June 30, 1996, compared to $5.5 million for the same period in 1995. For
the six months ended June 30, 1996 and 1995, depreciation and amortization
expense was approximately $12.2 million and $11.1 million, respectively. The
increase in depreciation and amortization is primarily attributable to the
revision of the depreciation and amortization policy for certain inmate assets.
Based on increased competition and certain other changes within the inmate
telephone industry, the Company reduced the useful lives of various assets to
five years. As a result of this change in accounting estimate, depreciation and
amortization expense increased approximately $0.3 million and $0.6 million for
the three month and six month periods ended June 30, 1996, respecitvely.
Interest Expense
In the second quarter of 1996, interest expense increased 30.7% to $2.9
million as compared to the same quarter in 1995. For the first six months of
1996, interest expense increased approximately 48.2% to approximately $6.0
million as compared to the first six months of the prior year. This increase is
primarily attributable to: (i) the higher interest rate on the Company's $100.0
million of Senior Notes as compared to the rates in effect on the Company's
revolving line of credit during the comparable periods of 1995; and (ii) the
inclusion of interest expense in continuing operations which was previously
allocated to the Company's cellular operations which were included in
discontinued operations.
Gain on Disposal of Prepaid Calling Card and International Telephone Centers
The six months ended June 30, 1996 includes a gain on disposal of prepaid
calling card and international telephone centers of approximately $0.3 million
received in connection with the sale of the Company's international telephone
center operations and approximately $0.3 million recognized in connection with
the merger of Global Link Teleco Corporation and Global Telecommunications
Solutions, Inc. (see Note 3 to the accompanying consolidated financial
statements).
Other
Other expense for the six months ended June 30, 1996 includes
approximately $0.6 million of severance obligations incurred under employment
agreements with certain key executives. Other expenses for the three month and
six
12
<PAGE>
month periods ended June 30, 1995 included a legal settlement expense of
approximately $0.9 million and the Company's equity in the operating losses of
its unconsolidated affiliate.
Benefit from Income Taxes
The Company's benefit from income taxes decreased approximately $0.1
million for the quarter ended June 30, 1996 and decreased approximately $0.2
million for the six months ended June 30, 1996 compared to the same periods in
1995. These decreases are primarily attributable to the fact that for the 1996
period the Company recorded valuation allowances for 100% of the deferred tax
assets generated from operating losses in the period. The Company recorded
deferred tax assets and deferred tax asset valuation allowances of approximately
$1.6 million and $3.3 million for the three months and six months ended June 30,
1996.
Net Loss from Continuing Operations before Extraordinary Item
The Company had a net loss from continuing operations of approximately $4.2
million and $8.7 million for the three months and six months ended June 30,
1996, respectively, compared to a net loss from continuing operations of
approximately $2.2 million and $2.5 million for the same periods in 1995.
Extraordinary Loss
As a result of a March 1995 amendment to the Company's revolving line of
credit agreement, the Company recorded extraordinary losses from the write-off
of deferred financing costs associated with the early extinguishment of debt of
approximately $4.6 million, before the related income tax benefit of $1.7
million, which is included in the financial results of the Company for the six
months ended June 30, 1995. There were no such items recorded in 1996.
Earnings Before Interest, Taxes, Depreciation and Amortization
EBITDA is not presented as an alternative to operating results or cash flow
from operations as determined by Generally Accepted Accounting Principles
("GAAP"), but rather to provide additional information related to the ability of
the Company to meet current trade obligations and debt service requirements.
EBITDA should not be considered in isolation from, or construed as having
greater importance than, GAAP operating income or cash flows from operations as
a measure of an entity's performance.
EBITDA from continuing operations was approximately $4.9 million for the
quarter ended June 30, 1996, compared to $5.5 million for the same period in
1995. Cash flow for the second quarter of 1995 included approximately $1.0
million of expenses related to the settlement of litigation and the Company's
share of losses of Global Link. EBITDA for the six months ended June 30, 1996
was approximately $9.5 million, compared to $12.4 million for the same period in
the prior year. Cash flow for the six months ended June 30, 1995 included
approximately $1.3 million of one-time income related to a settlement with a
vendor as well as the items previously noted. The remaining decreases are
primarily attributable to a decrease in the Company's installed base of inmate
telephone lines and public pay telephones, increased commissions and higher
selling, general and administrative expenses offset in part by decreases in
telephone charges and field service and collection expenses as noted above.
Liquidity and Capital Resources
During the second quarter of 1996, the Company continued to finance its
operations from operating cash flow. For the six months ended June 30, 1996, the
Company's operating cash flow was $3.4 million compared to $5.8 million for the
same period in 1995.
The Company's working capital deficit was approximately $(4.1) million,
with a current ratio of .86 to 1, at June 30, 1996. This is consistent with a
working capital deficit of $(4.1) million and a current ratio of .86 to 1 at
December 31, 1995.
13
<PAGE>
In April 1996, the Company amended certain terms contained in the Fourth
Amended Loan and Security Agreement (the "Amendment"). In connection with the
Amendment, the Bank waived the Company's non- compliance with certain
restrictive covenants contained in the agreement for the three month period
ended December 31, 1995. The Amendment, among other things, decreased the
facility to $10.0 million and reduced the requirements of the financial
covenants. The amended credit facility bears interest at the Bank's prime rate
plus 2% and requires all outstanding principal balances to be repaid in
September 1997. At the same time, the Company decreased to $5.25 the exercise
price of the warrants held by Creditanstalt American Corporation to acquire
Common Stock or Series B Preferred Stock of the Company that had not already
been repriced. At June 30, 1996, the Company was in compliance with the amended
covenants and had no amounts borrowed under the 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 Notes, although there can be no assurance that it will be able to
do so.
The preceding forward looking information is subject to a variety of
factors and uncertainties, including the impact of competition on the Company's
operations, the ultimate implementation and impact of the Telecommunications Act
of 1996, the ongoing ability of the Company to deploy its phones in favorable
locations and to continue to implement operational improvements.
14
<PAGE>
Part II OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3 Legal Proceeding of the Company's Form 10-K for the
year ended December 31, 1995. See Note 8 to the accompanying Consolidated
Financial Statements appearing elsewhere in this Form 10-Q.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on July 15, 1996, the
shareholders of the Company voted to elect Jody Frank, Robert E. Lund and E.
Craig Sanders as Directors of the Company.
The number of the votes cast for or withheld, and the number of broker
non-votes, with respect to each of the nominees were as follows:
<TABLE>
<CAPTION>
Withhold
Nominee For Against Authority Abtensions Broker Non-Votes
- ------------- ---------- -------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Jody Frank 16,144,840 -- 288,821 -- --
Robert E. Lund 16,337,746 -- 95,915 -- --
E. Craig Sanders 16,353,984 -- 79,677 -- --
</TABLE>
The holders of the Company's Series C Cumulative Convertible Preferred Stock
("Preferred Stock") are entitled to elect two members of the Company's five
member Board of Directors. Mr. Charles J. Delaney had been elected a director on
July 19, 1995 to fill a vacancy and Mr. Justin S. Maccarone was elected as of
June 10, 1996 to fill a vacancy. Both were re-elected by the holders of the
Preferred Stock on July 15, 1996 and continue as directors. The Preferred Stock
is entitled to vote on all matters submitted to the shareholders for a vote
together with the holders of the Company's Common Stock voting as a single class
with each share of Preferred Stock entitled to one vote for each share of Common
Stock issuable upon conversion.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Description
27 Financial Data Schedule
(b) Reports on Form 8-K:
(i) A current report on Form 8-K dated May 2, 1996 related to Item 5 -
Other Events.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEOPLES TELEPHONE COMPANY, INC.
Registrant
Date: August 13, 1996 /s/ Bonnie S. Biumi
--------------------------------------------
Bonnie S. Biumi
Chief Financial Officer
16
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