<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1995 Commission File Number 1-8261
PAY-FONE SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
State of Incorporation California IRS Employer ID Number 95-2660545
8100 Balboa Boulevard, Van Nuys, California 91406
(818) 997-0808
(Address and Telephone of Principal Executive Offices)
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
--- ---
Number of shares outstanding of common stock:
COMMON STOCK $.10 PAR VALUE -- 1,484,233 as of March 31, 1995
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed Financial Statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in Financial Statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. It is suggested that the condensed Financial Statements included
herein be read in conjunction with the Financial Statements and the notes
thereto included in the Company's Annual Report for the year ended June 30,
1994.
The following condensed Financial Statements for the three (3) and nine (9)
months ended March 31, 1995 and 1994 reflect all adjustments which, in the
opinion of management, are necessary to present fairly the financial position
for the period presented.
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<PAGE> 3
PAY-FONE SYSTEMS, INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
CURRENT ASSETS: 3/31/95 6/30/94
----------- -----------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 399,182 $ 740,734
Short term investments 1,256,941 1,382,203
Accounts receivable, less $8,000 allowance
for doubtful accounts 567,429 516,704
Prepaid supplies and other 454,392 347,824
----------- -----------
TOTAL CURRENT ASSETS 2,677,944 2,987,465
----------- -----------
PROPERTY AND EQUIPMENT, at Cost:
Building 3,001,540 3,001,540
Terminals and computer equipment 2,024,671 2,020,258
Other 1,484,724 1,231,633
----------- -----------
6,510,935 6,253,431
Less: Accumulated depreciation
and amortization (3,925,789) (3,753,268)
----------- -----------
2,585,146 2,500,163
----------- -----------
Intangible assets, net of amortization 131,920 111,920
----------- -----------
$ 5,395,010 $ 5,599,548
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES: 3/31/95 6/30/94
----------- -----------
(Unaudited)
Accounts payable $ 40,560 $ 76,892
Accrued wages and other related costs 138,474 111,152
Other accrued liabilities 141,977 25,118
Customer security deposits 400 35,785
Income taxes payable -- --
----------- -----------
TOTAL CURRENT LIABILITIES 321,411 248,947
----------- -----------
DEFERRED INCOME TAXES 143,047 143,047
SHAREHOLDERS' EQUITY:
Common stock 92,423 90,781
Additional paid-in capital 2,804,607 2,755,826
Retained earnings 2,073,522 2,360,947
Unrealized loss on debt and equity securities (40,000) --
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 4,930,552 5,207,554
----------- -----------
$ 5,395,010 $ 5,599,548
=========== ===========
</TABLE>
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<PAGE> 4
PAY-FONE SYSTEMS, INC.
STATEMENTS OF OPERATION
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended March 31
1995 1994
------------ ------------
<S> <C> <C>
Revenues $ 1,347,086 $ 1,265,310
Direct costs 636,890 459,958
------------ ------------
Gross profit 710,196 805,352
Selling, general and administrative expenses 712,431 631,801
Miscellaneous merger costs 117,500 --
------------ ------------
Income (loss) from operations (119,735) 173,551
Interest income, net 12,331 5,023
------------ ------------
Income (loss) before income taxes (107,404) 178,574
Income tax expenses (benefit) (38,500) 73,000
------------ ------------
Net income (loss) $ (80,904) $ 105,574
============ ============
Net income (loss) per common share * $ (0.05) $ 0.07
============ ============
<CAPTION>
For the Nine Months Ended March 31
1995 1995
------------ ------------
<S> <C> <C>
Revenues $ 3,612,130 $ 3,371,475
Direct costs 1,652,861 1,248,252
------------ ------------
Gross profit 1,959,269 2,123,223
Selling, general and administrative expenses 2,277,914 1,890,318
Miscellaneous merger costs 117,500 --
------------ ------------
Income (loss) from operations (436,145) 232,905
Interest income, net 53,220 39,535
------------ ------------
Income (loss) before income taxes (382,925) 272,400
Income tax expense (benefit) (95,500) 105,000
------------ ------------
Net income (loss) $ (287,425) $ 167,440
============ ============
Net income (loss) per common share * $ (0.19) $ 0.11
============ ============
</TABLE>
*Net income per common share has been computed based on the weighted average of
outstanding shares and common stock equivalents of 1,475,054 and 1,467,813 for
the nine months ended March 31, 1995 and March 31, 1994, respectively, and the
three months ended March 31, 1995 and March 31, 1994, respectively.
-4-
<PAGE> 5
PAY-FONE SYSTEMS, INC.
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ (287,425) $ 167,440
----------- -----------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 182,522 219,021
Change in assets and liabilities:
Accounts receivable (50,725) (72,218)
Prepaid supplies and other (106,568) (146,853)
Accounts payable (36,332) 12,357
Accrued wages and other related costs 27,322 15,706
Other accrued liabilities 116,859 (11,518)
Customer security deposits (35,385) (20,076)
Income taxes payable -- 192,401
----------- -----------
Total adjustments 97,693 188,820
----------- -----------
Net cash provided by operating activities (189,732) 356,260
----------- -----------
Cash flows from investing activities:
Short term investments 85,262 649,934
Capital expenditures (257,505) (256,375)
Payments for acquired company
(net of cash acquired) (30,000) --
----------- -----------
Net cash provided by (used in) investing activities: (202,243) 393,559
----------- -----------
Cash flows from financing activities:
Option exercise 50,423 --
----------- -----------
Net cash provided financing activities 50,423 --
Net increase (decrease) in cash and cash equivalents (341,552) 749,819
Cash and cash equivalents at beginning of period 740,734 1,116,949
----------- -----------
Cash and cash equivalents at end of period $ 399,182 $ 1,866,768
=========== ===========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Income taxes paid $ -- $ 33,980
=========== ===========
Interest paid $ -- $ --
=========== ===========
</TABLE>
NONCASH TRANSACTION (Unaudited) - During the nine months ended March 31, 1995,
the Company wrote down its short term investments and recorded an unrealized
loss of $40,000.
-5-
<PAGE> 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements of Pay-Fone contained elsewhere in this Proxy
Statement/Prospectus.
Results of Operations
Three and Nine Months ended March 31, 1995 and 1994.
Pay-Fone experienced net losses of $80,904 and $287,425, respectively,
for the three and nine months ended March 31, 1995 compared to net income of
$105,574 and $167,440, respectively, for the three and nine months ended March
31, 1994. These losses were primarily due to expenditures associated with
Pay-Fone's introduction of in-house tax filing services and entrance into the
large-employer market as well as approximately $120,000 of expenses in the third
quarter of fiscal 1995 attributed to a proposed merger between the Company and
Paychex, Inc. Management anticipated that the increased expenditures in these
areas and increased marketing expenses would have a negative impact on earnings
in the first half of the fiscal year, but that the expenditures would position
Pay-Fone for continued revenue growth in fiscal 1995 and beyond.
Gross revenues for the three and nine months ended March 31, 1995
increased $81,776 (6.5%) and $240,655 (7.1%), respectively, compared to the
three and nine months ended March 31, 1994. This increase in revenues is
attributable primarily to Pay-Fone's acquisition of Concentric Computer
Corporation in February 1994 and additional revenues generated by Pay-Fone's
introduction of in-house tax filing services and entrance into the
large-employer market.
Direct operating costs as a percentage of revenues increased to 46% in
the nine months ended March 31, 1995 as compared to 37% in the same nine months
in the prior year due to the costs associated with the establishment of
Pay-Fone's second branch located in Northern California and Pay-Fone's
introduction of in-house tax filing services and entrance into the
large-employer market.
Selling, general and administrative expenses as a percentage of
revenues increased to 53% and 63% in the three and nine month periods ended
March 31, 1995, respectively, as compared to 50% and 56% in the same periods of
the prior year. Again, this increase is due to the expenditures related to the
introduction of in-house tax filing services and entrance into the
large-employer marketing, including increased staffing and marketing expenses.
Additionally, Pay-Fone incurred approximately $120,000 of Merger
related costs in the third quarter of fiscal 1995. The Company expects to incur
additional legal and other costs associated with the Merger during the balance
of the fiscal year.
Liquidity and Capital Resources
Pay-Fone relies on cash flow from operations and working capital to
finance its business and operations. Pay-Fone's overall financial position
continues to be strong with a current ratio of 8.3 at March 31, 1995. This
compares to a current ratio of 12.0 at June 30, 1994 and 7.1 at March 31, 1994.
At March 31, 1995, Pay-Fone had $2.4 million in working capital. Pay-Fone has no
legal obligation for material capital commitments. In management's opinion,
current working capital together with normal positive operating cash flow are
sufficient to meet its normal operating requirements. Pay-Fone does not have any
long-term debt, lines of credit or other material financing arrangements.
-6-
<PAGE> 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no lawsuits pending against the Company.
Item 2. Change in Securities
Inapplicable
Item 3. Defaults upon Senior Securities
Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable
Item 5. Other Materially Important Events
Inapplicable
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed herewith:
27.1 Financial Data Schedule
b) During the period covered by this Report, a Report on Form 8-K was
filed to report the Company's entering into an Agreement and Plan of Merger with
Paychex, Inc. No financial statements were filed with this report, which was
filed on March 17, 1995.
-7-
<PAGE> 8
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 hereunto duly authorized.
PAY-FONE SYSTEMS, INC.
Date: May 19, 1995
/s/ MARK LEEKLEY
---------------------------
Mark Leekley
President/Chief Executive Officer
Chief Financial Officer
-8-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> MAR-31-1995
<CASH> 399,182
<SECURITIES> 1,256,941
<RECEIVABLES> 567,429
<ALLOWANCES> 8,000
<INVENTORY> 454,392
<CURRENT-ASSETS> 2,677,944
<PP&E> 3,001,540
<DEPRECIATION> 182,522
<TOTAL-ASSETS> 5,395,010
<CURRENT-LIABILITIES> 321,411
<BONDS> 0
<COMMON> 92,423
0
0
<OTHER-SE> 4,838,129
<TOTAL-LIABILITY-AND-EQUITY> 5,395,010
<SALES> 3,612,130
<TOTAL-REVENUES> 3,612,130
<CGS> 1,652,861
<TOTAL-COSTS> 2,277,914
<OTHER-EXPENSES> 117,500
<LOSS-PROVISION> 8,000
<INTEREST-EXPENSE> 53,220
<INCOME-PRETAX> (382,925)
<INCOME-TAX> (95,500)
<INCOME-CONTINUING> (287,425)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (287,425)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
