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, 1997
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 11, 1997: 16,195,434 shares.
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Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED BALANCE SHEET
(in thousands)
June 30, December 31,
Assets 1997 1996
---------- -------------
(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents ................. $ 7,424 $ 12,556
Accounts receivable, net of allowance
for doubtful accounts of $4,318 and $4,361. 18,732 11,598
Inventory .................................. 1,852 2,412
Prepaid expenses and other current assets . 2,855 2,665
---------- -------------
Total current assets ................... 30,863 29,231
Property and equipment, net .................. 59,209 65,067
Location contracts, net ...................... 26,743 27,465
Goodwill, net ................................ 4,780 5,660
Intangible assets, net ....................... 1,346 1,768
Other assets, net ............................ 5,809 6,610
Deferred income taxes ........................ 3,407 3,407
Investments .................................. 1,993 1,662
---------- -------------
Total assets ............................ $134,150 $ 140,870
========== =============
Liabilities and Shareholders' Equity
Current liabilities
Notes payable and current maturities of long
-term debt ................................ $ 582 $ 548
Current portion of obligations under capital
leases .................................... 722 952
Accounts payable and accrued expenses ...... 20,697 19,240
Accrued interest payable ................... 5,705 5,697
Taxes payable .............................. 2,386 2,418
---------- -------------
Total current liabilities ............... 30,092 28,855
Notes payable and long-term debt ............. 100,338 100,657
Obligations under capital leases ............. 337 573
---------- -------------
Total liabilities ....................... 130,767 130,085
Commitments and contingencies ............... -- --
Preferred Stock
Cumulative convertible preferred stock,
Series C, $.01 par value,160 shares
authorized; 150 shares issued and outstanding 13,616 13,556
Preferred stock dividends payable............ 2,047 1,523
---------- -------------
Total preferred stock ................... 15,663 15,079
Shareholders' equity
Preferred stock; $.01 par value; 4,240 shares
authorized; none issued and outstanding ..... -- --
Convertible preferred stock; Series B, $.01
par value; 600 shares authorized; none issued
and outstanding ............................ -- --
Common stock; $.01 par value; 75,000 shares
authorized;16,195 shares issued and
outstanding ............................... 162 162
Capital in excess of par value .............. 59,870 60,453
Accumulated deficit ......................... (70,287) (63,438)
Unrealized loss on investments .............. (2,025) (1,471)
---------- -------------
Total shareholders' deficit .............. (12,280) (4,294)
---------- -------------
Total liabilities and shareholders' equity $134,150 $140,870
========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
For the three months ended
June 30,
---------------------------
1997 1996
--------- ----------
<S> <C> <C>
Revenues
Coin calls ............................... $ 19,293 $ 19,995
Non-coin calls ........................... 13,702 11,964
--------- ----------
Total revenues ....................... 32,995 31,959
Costs and expenses
Telephone charges ........................ 8,994 9,883
Commissions .............................. 9,156 8,846
Field service and collection ............. 5,188 5,020
Selling, general and administrative ...... 3,071 3,265
Depreciation and amortization ............ 6,257 5,994
Other .................................... -- --
--------- ----------
Total costs and expenses .............. 32,666 33,008
--------- ----------
Operating income (loss) ................... 329 (1,049)
Other (income) and expenses:
Interest expense, net .................... 3,280 3,130
(Gain) loss on disposal of prepaid calling
card and International telephone centers. -- --
--------- ----------
Total other (income) and expenses, net. 3,280 3,130
--------- ----------
Loss before income taxes .................... (2,951) (4,179)
Benefit from income taxes ................... -- --
Net loss .................................... $ (2,951) $ (4,179)
========= ==========
Earnings (loss) per common share both primary
and fully diluted ........................ $ (0.20) $ (0.28)
========= ==========
Weighted average common and common equivalent
shares outstanding ........................ 16,195 16,188
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data)
For the six months ended
June 30,
---------------------------
1997 1996
--------- ----------
<S> <C> <C>
Revenues
Coin calls ................................ $ 37,233 $ 38,136
Non-coin calls ............................ 27,370 24,319
--------- ----------
Total revenues ........................ 64,603 62,455
Costs and expenses
Telephone charges ......................... 18,148 19,746
Commissions ............................... 17,920 17,113
Field service and collection .............. 10,200 9,811
Selling, general and administrative ....... 6,144 6,245
Depreciation and amortization ............. 12,412 11,804
Other ..................................... -- 550
--------- ----------
Total costs and expenses ............... 64,824 65,269
--------- ----------
Operating income (loss)...................... (221) (2,814)
Other (income) and expenses:
Interest expense, net ..................... 6,628 6,410
(Gain) loss on disposal of prepaid calling
card and international telephone centers. -- (545)
--------- ----------
Total other (income) and expenses, net.. 6,628 5,865
--------- ----------
Loss before income taxes .................... (6,849) (8,679)
Benefit from income taxes ................... -- --
--------- ----------
Net loss .................................... $ (6,849) $ (8,679)
========= ==========
Earnings (loss) per common share both primary
and fully diluted ........................ $ (0.46) $ (0.57)
========= ==========
Weighted average common and common equivalent
shares outstanding ......................... 16,195 16,181
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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PEOPLES TELEPHONE COMPANY, INC.
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited, in thousands)
For the six months ended
June 30,
---------------------------
1997 1996
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<S> <C> <C>
Cash flow from operating activities:
Net loss .................................. $ (6,849) $ (8,679)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization ......... 12,412 11,804
Amortization of deferred financing costs 510 409
Gain on sale of assets ................ -- (545)
Change in assets and liabilities:
Increase in accounts receivable... (6,909) (1,580)
Decrease in inventory............. 561 503
Increase in prepaid expenses
and other current assets.......... (190) (23)
(Increase) decrease in other assets (167) 219
Increase in accounts payable
and accrued expenses........... 1,457 1,092
Increase in accrued interest....... 8 93
(Decrease) increase in taxes payable (31) 488
--------- ----------
Net cash provided by operating activities... 802 3,781
Cash flow from investing activities:
Payments for acquisitions and certain
contracts................................. (2,057) (2,384)
Property and equipment additions.......... (2,368) (1,873)
Proceeds from sale of assets.............. 233 1,580
Increase in investments................... (886) 31
--------- ----------
Net cash used in investing activities......... (5,078) (2,646)
Cash flow from financing activities:
Net payments under note payable to bank... (286) (294)
Principal payments under capital lease
obligations............................. (571) (571)
Exercise of stock options and warrants.... 1 --
--------- ----------
Net cash used in financing activities........ (856) (865)
Net decrease in cash and cash equivalents..... (5,132) 270
Cash and cash equivalents at beginning of
period...................................... 12,556 12,366
--------- ----------
Cash and cash equivalents at end of period.... $ 7,424 $ 12,636
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997 AND JUNE 30, 1996
(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,
1997 are not necessarily indicative of the results to be expected for the year
ending December 31, 1997.
The interim unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the year ended December 31, 1996 as set forth in the Company's 1996 Annual
Report on Form 10-K.
NOTE 2 - INVESTMENTS
Investments in debt securities and equity securities in which the Company has
less than a twenty percent ownership interest are generally accounted for under
the cost method in accordance with Statement No. 115 ("SFAS 115"), Accounting
for Certain Investments in Debt and Equity Securities. Accordingly, the
Company's investment in Global Telecommunications Solutions, Inc. ("GTS"), which
is classified as "available for sale," is reported at fair value with unrealized
gains or losses, net of tax, recorded as a separate component of Shareholders'
Equity. The fair value of the Company's investment in GTS common stock at June
30, 1997 was approximately $1.1 million which is net of approximately $2.0
million of unrealized investment losses.
At June 30, 1997 the Company had an investment in debt securities which is
classified as "held-to-maturity" and stated at amortized cost of approximately
$0.9 million.
NOTE 3 - EARNINGS PER SHARE
The treasury stock method was used to determine the dilutive effect of options
and warrants on earnings per share data. For 1997 and 1996, common stock
equivalents were excluded since the effect would be anti-dilutive.
See primary and fully diluted earnings (loss) per common share calculation as
summarized on page 8.
NOTE 4 - LONG-TERM DEBT
During March 1997, the Company executed an amendment to the Fourth Amended and
Restated Loan and Security Agreement increasing the credit facility to $20.0
million. The interest rate on balances outstanding under the credit facility
varies based upon the leverage ratio maintained by the Company. All outstanding
principal balances are due in full in 2000. Interest is payable monthly for
loans based on the prime rate and quarterly for loans based on the LIBOR rate. A
commitment fee of 1/2 of 1% is charged on the aggregate daily unused balance of
the credit facility under the Loan Agreement. The Loan Agreement is secured by
substantially all of the Company assets and contains certain covenants which,
among other things, require the Company to maintain certain cash flow levels and
interest coverage ratios and places certain restrictions on the payment of
dividends.
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At June 30, 1997, the Company was in compliance with the covenants and had no
amounts borrowed under the facility.
NOTE 5 - SHAREHOLDERS' EQUITY
In March 1997, the Company's shareholders approved an increase in the number of
authorized shares of the Company's Preferred Stock and Common Stock to 5 million
and 75 million shares, respectively.
NOTE 6 - INCOME TAXES
For the quarter and six months ended June 30, 1997, the Company recorded
deferred tax assets and deferred tax asset valuation allowances of approximately
$1.1 million and $2.6 million, respectively. Valuation allowances were provided
to reduce the deferred tax assets to a level which, more likely than not, will
be realized.
7
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PEOPLES TELEPHONE COMPANY, INC.
COMPUTATION OF PRIMARY AND FULLY-DILUTED EARNINGS (LOSS)
PER COMMON SHARE
(unaudited, in thousands, except per share data)
For The
Three Months Ended
June 30,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Net loss .................................. $ (2,951) $ (4,179)
Less:
Cumulative preferred stock dividends...... (263) (263)
-------- ---------
Net loss for per share computations..... $ (3,214) $ (4,442)
========= =========
Number of shares:
Weighted average shares used in the per
share computation......................... 16,195 16,188
========= =========
Primary loss per common and common equivalent
share..................................... $ (.20) $ (.28)
========= =========
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For The
Six Months Ended
June 30,
-------------------
1997 1996
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<S> <C> <C>
Net loss .................................. $ (6,849) $ (8,679)
Less:
Cumulative preferred stock dividends....... (525) (525)
-------- ---------
Net loss for per share computations...... $ (7,374) $ (9,204)
========= =========
Number of shares:
Weighted average shares used in the per
share computation.......................... 16,195 16,181
========= =========
Fully diluted loss per common and common
equivalent share........................... $ (.46) $ (.57)
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis compares the quarter and six months
ended June 30, 1997 to the quarter and six months ended June 30, 1996 and should
be read in conjunction with the consolidated financial statements and notes
thereto appearing elsewhere in this Form 10-Q and in conjunction with
Management's Discussion and Analysis appearing in the Company's Form 10-K for
the year ended December 31, 1996.
Statements in Management's Discussion and Analysis relating to matters that
are not historical facts are forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of Peoples
Telephone Company, Inc. 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, 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") in response to
a court order issued as a result of litigation which sought to modify or
overturn the FCC's order implementing such act, or portions thereof, the ongoing
ability of the Company to deploy its phones in favorable locations and the
Company's ability to continue to implement operational improvements. Such
factors and others are set forth more fully in the Company's 1996 Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
the consolidated financial statements and notes thereto appearing elsewhere in
this report.
Revenues
The Company primarily derives its revenues from coin and non-coin calls.
Coin revenue is generated exclusively from calls made by depositing coins in the
Company's public pay telephones. Coin revenue represented approximately 58.5%
and 62.6% of total consolidated revenues for the quarters ended June 30, 1997
and 1996 and 57.6% and 61.1% of total revenues for the six months ended June 30,
1997 and 1996, respectively. Coin revenue decreased 3.5% to $19.3 million during
the quarter ended June 30, 1997 and decreased approximately 2.4% to $37.2
million for the six months ended June 30, 1997, as compared to the same periods
in 1996. The Company's average installed public pay telephone base was
approximately 38,650 phones and 38,300 phones for the six month periods ended
June 30, 1997 and 1996, respectively. Coin revenue on a per phone basis
decreased by 4.9% and 3.2% for the quarter and six months ended June 30, 1997,
respectively, as compared to the same periods in 1996. The Company believes that
the decrease can be attributed to, among other things, the increased usage of
alternative methods of calling such as long distance carrier access code calls,
(800) subscriber calls and prepaid calling card calls, increased deployment of
public pay telephones and the use of wireless technologies. 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, although there can
be no assurances.
On November 8, 1996, the FCC issued its final order on reconsideration (the
"Order") setting forth and affirming regulations implementing Section 276 of the
federal Telecommunications Act of 1996, previously issued on September 20, 1996.
Based upon a July 1, 1997 ruling by the United States Court of Appeals for the
District of Columbia ("Appeals Court") certain provisions of the Order were
upheld while others were remanded to the FCC for further proceedings and may be
subject to change upon further review by the FCC. See "Business - Public Pay
Telephone Industry Overview" and "Business - Regulation" appearing in the
Company's Form 10-K for the year ended December 31, 1996 and its Current Report
on Form 8-K dated July 10, 1997. The regulations in the Order, among other
things, set forth a plan for the deregulation of local coin calling rates by
October 1997. This portion of the Order, which was upheld by the Appeals Court,
also allows state regulators to request modification of or exemption from the
coin rate deregulation upon a detailed showing in support of such request by the
state. To date no such requests have been filed by the states. Although neither
the Company nor the industry can predict exactly what will happen in such a
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deregulated environment, trends indicate that there should be a move by the
public pay telephone operators toward increased local coin calling rates in
states where deregulation is implemented. This trend is evidenced by the fact
that five states (Iowa, Nebraska, Wyoming, Michigan and South Dakota) have
deregulated local coin calling rates and four of those five states now have
local coin calling rates of $0.35. In addition, Illinois and Wisconsin, although
still under regulation, have also increased their local coin calling rates to
$0.35 through approval of rate/tariff applications filed by pay telephone
operators in such states.
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. The Company currently uses AT&T and Sprint to
act as its primary national operator service providers. When calls are completed
through the third-party operator service provider, the Company records as
revenue the amount it receives from the provider which represents a negotiated
percentage of the total amount the caller pays for the call. In May 1996, AT&T
began paying a specified per call amount for interLATA (800) dial around calls
as opposed to a percentage of the revenue generated by those calls. The Company
estimates that the impact on non-coin revenue of the change in the compensation
structure under the AT&T contract was a decrease of approximately $0.5 million
and $1.9 million for the three months and six months ended June 30, 1997,
respectively as compared to the same periods of the prior year.
In addition to the change in compensation under the AT&T contract, the
Company is continuing to experience a shift in call traffic from 0+/0- calls,
for which the Company receives a percentage of the revenue generated by those
calls, to access code calls for which the Company receives a flat rate per phone
or per call compensation amount. Due to continued 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. These decreases in non-coin revenue
are currently being offset by changes in the amount of compensation received by
the Company for access code calls as well as (800) subscriber calls, as required
under the Order. The Order currently mandates dial around compensation to public
pay telephone providers for both types of calls at a flat-rate of $45.85 per pay
telephone per month beginning November 6, 1996. This flat rate is scheduled to
be effective through October 1997, at which time, compensation will begin on a
per call basis at a rate of $0.35 per call or such other rate negotiated by the
pay telephone provider and the carriers. The portion of the Order related to
dial-around compensation was remanded to the FCC for further review of rate and
structure and may be subject to change. The Company believes that there is
sufficient industry information available to justify the current dial-around
rate and structure, although there can be no assurances.
Non-coin revenue represented approximately 41.5 % and 37.4% of total
consolidated revenues for the quarters ended June 30, 1997 and 1996,
respectively. For the quarter ended June 30, 1997, revenues from non-coin calls
increased 14.5% to approximately $13.7 million, compared to the quarter ended
June 30, 1996. For the six months ended June 30, 1997 and 1996 non-coin revenues
were approximately $27.4 million and $24.3 million, respectively. These
increases were primarily attributable to the increase in compensation received
for dial-around calls as a result of the implementation of the Order, partially
offset by (i) the change in the Company's compensation structure under the AT&T
contract discussed above, (ii) the shifting of call traffic discussed above, and
(iii) the decrease in the number of inmate telephone lines operated by the
Company. During the six month period ended June 30, 1997, the Company operated
an average of approximately 1,660 inmate telephone lines compared to
approximately 2,110 during the same period of 1996.
Operating Expenses
Operating expenses include telephone charges, commissions, field service
and collection expenses and selling, general and administrative expenses.
Telephone charges consist of local line charges paid to Local Exchange Carriers
10
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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 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. Total operating expenses were
approximately 80.0% and 84.5% of total consolidated revenues for the quarters
ended June 30, 1997 and 1996, respectively. For the six months ended June 30,
1997 total operating expenses were 81.1% of the total consolidated revenues as
compared to 84.7% for the same period in 1996.
Telephone charges decreased as a percentage of total consolidated revenues
to 27.3% for the quarter ended June 30, 1997, compared to 30.9% for the same
period in 1996. For the six months ended June 30, 1997 and 1996 telephone
charges were 28.1% and 31.6% of total consolidated revenues, respectively. The
decrease in telephone charges as a percentage of total consolidated revenue can
be primarily attributed to the increase in non-coin revenue related to
dial-around compensation earned in 1997 for which no telephone charges are
incurred. In addition, the Company continues to experience decreased telephone
charges as a result of regulatory changes and emerging competition within the
local/intraLATA service market.
Commissions as a percentage of total consolidated revenues for the three
months ended June 30, 1997 of approximately 27.8% remained relatively consistent
as compared to 27.7% for the same period of the prior year. For the six months
ended June 30, 1997 and 1996, commissions were approximately 27.7% and 27.4% of
total consolidated revenues respectively. Higher commission rates for new and
renewed contracts due to increasing competition in the public pay telephone and
inmate telephone markets were partially offset by lower average commission rates
paid on certain non-coin revenue sources.
Field service and collection expenses increased approximately 3.3% to
approximately $5.2 million for the quarter and approximately 4.0% to
approximately $10.2 million for the six months ended June 30, 1997, as compared
to the same periods in 1996. This increase was primarily attributable to
additional costs incurred for the addition of certain key operations employees
who are needed to implement certain initiatives which are intended to result in
achieving further operational efficiencies. Selling, general and administrative
expenses decreased approximately 5.9 % to $3.1 million for the second quarter of
1997 as compared to the same period in 1996. For the six months ended June 30,
1997, selling, general and administrative expenses decreased approximately 1.6%
to $ 6.1 million as compared to the prior year. Selling, general and
administrative expense reductions are primarily the result of certain cost
saving efforts and temporary headcount decreases.
Depreciation and Amortization
Depreciation is based on the cost of the telephones, booths, pedestals and
other enclosures, related installation costs and line interconnection charges
and is calculated on a straight-line method using a ten-year useful life for
public pay telephones and a five-year useful life for inmate telephones.
Amortization is primarily based on acquisition costs including location
contracts, goodwill and non-competition provisions and is calculated on a
straight-line method using estimated useful lives ranging from five to twenty
years. Depreciation and amortization increased to $6.3 million for the quarter
ended June 30, 1997, compared to $6.0 million for the same period in 1996. For
the six months ended June 30, 1997 and 1996, depreciation and amortization
expense was approximately $12.4 million and $11.8 million, respectively. These
increases are primarily attributable to additional amortization expense related
to acquisition and renewal costs of location contracts.
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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 executive officers.
Operating Income (Loss)
For the three months ended June 30, 1997 the Company had operating income
of approximately $0.3 million as compared to $(1.0) million for the second
quarter of 1996. For the six months ended June 30, 1997 and 1996 operating
losses were $(0.2) million and $(2.8) million, respectively.
Interest Expense, net
For the second quarter of 1997, net interest expense was approximately $3.3
million as compared to $3.1 million in the same quarter in 1996. For the first
six months of 1997, net interest expense increased approximately 3.4% to
approximately $6.6 million as compared to the first six months of the prior
year. The increase in net interest expense was due primarily to the reduction of
interest income on cash balances and certain notes receivable.
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.
Benefit from Income Taxes
The Company recorded 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 $1.1 million and
$2.6 million for the three and six months ended June 30, 1997.
Net Loss
The Company had consolidated net losses of approximately $3.0 million and
$6.8 million for the three months and six months ended June 30, 1997, compared
to consolidated net losses of approximately $4.2 million and $8.7 million for
the same periods 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 $6.6 million for the
quarter ended June 30, 1997, compared to $4.9 million for the same period in
1996. EBITDA for the six months ended June 30, 1997 was approximately $12.2
million, compared to $9.5 million for the same period in the prior year. The
increases in EBITDA are attributable to the net impact of increased dial-around
compensation, partially offset by the net effect of: (i) decreases in coin
revenue; (ii) changes in non-coin calling patterns and decreased compensation
received under the AT&T contract, and (iii) the decrease in the Company's
installed base of inmate telephone lines, as noted above.
12
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Liquidity and Capital Resources
During the second quarter of 1997, the Company continued to finance its
operations from operating cash flow. For the six months ended June 30, 1997, the
Company's operating cash flow was $0.8 million compared to $3.8 million for the
same period in 1996. The decrease in the Company's operating cash flow is
primarily attributable to an increase of approximately $6.9 million of accounts
receivable related to the accrual of dial-around compensation, partially offset
by increases in accounts payable and accrued expenses.
The Company's working capital was approximately $0.8 million, with a
current ratio of 1.0 at June 30, 1997. This compares with a working capital of
$0.4 million and a current ratio of 1.0 at December 31, 1996.
During March 1997, the Company executed an amendment to the Fourth Amended and
Restated Loan and Security Agreement increasing the credit facility to $20.0
million. The interest rate on balances outstanding under the credit facility
varies based upon the leverage ratio maintained by the Company. All outstanding
principal balances are due in full in 2000. Interest is payable monthly for
loans based on the prime rate and quarterly for loans based on the LIBOR rate. A
commitment fee of 1/2 of 1% is charged on the aggregate daily unused balance of
the credit facility under the Loan Agreement. The Loan Agreement is secured by
substantially all of the Company assets and contains certain restrictive
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 June 30, 1997, the Company was in compliance with
the amended covenants and had no amounts borrowed under the facility.
Based upon current expectations of the Company's operations and resolution
of certain regulatory issues, the Company believes that cash flow from
operations, together with amounts which may be borrowed under the 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 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 ongoing ability of the Company to deploy its phones in favorable
locations and to continue to implement operational improvements.
13
<PAGE>
<TABLE>
<CAPTION>
Part II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Shareholders held on July 14, 1997, the
shareholders of the Company voted:
(a) 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:
Withhold Broker
Nominee For Against Authority Abstentions Non-Votes
- --------------- ---------- -------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Jody Frank 16,481,783 - 127,924 - -
Robert E. Lund 16,488,963 - 120,744 - -
E. Craig Sanders 16,495,960 - 113,747 - -
</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 and Mr. Justin S. Maccarone,
who were incumbent directors, were re-elected by the holders of the Preferred
Stock on July 14, 1997 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.
(b) to approve the adoption of the 1997 Incentive Plan.
<TABLE>
<CAPTION>
For Against Withhold Authority Abstentions Broker Non-Votes
- ---------- --------- ------------------- ------------ ----------------
<S> <C> <C> <C> <C>
13,026,331 295,873 - 32,080 3,255,423
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibits Description
10.1 Letter Agreements dated February 25, 1997 and March 17, 1997 between the
Company and David Arvizu
10.2 Letter Agreement dated July 15, 1997 between the Company and William A.
Baum
27 Financial Data Schedule
(b) Reports on Form 8-K:
(i) A current report on Form 8-K dated July 10, 1997 related to Item 5 - Other
Information.
(ii) A current report on Form 8-K dated July 17, 1997 related to Item 5 - Other
Information.
14
<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 12, 1997 /s/ William A. Baum
William A. Baum
Chief Financial Officer
15
