<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB/A-1
(Mark One)
[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
-------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE TRANSITION PERIOD FROM _____ TO ________.
COMMISSION FILE NUMBER 0-16715
PHONETEL TECHNOLOGIES, INC.
-----------------------------------------------------------
(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
OHIO 34-1462198
------------------------------- ------------------------------------
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1127 EUCLID AVENUE, SUITE 650, STATLER OFFICE TOWER 44115-1601
--------------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(216) 241-2555
------------------------------------------------
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: AS OF SEPTEMBER 20, 1996, 7,639,709
SHARES OF THE REGISTRANT'S COMMON STOCK $.01 PAR VALUE, WERE OUTSTANDING.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
page 1 of 27 pages
<PAGE> 2
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-QSB/A-1
QUARTER ENDED JUNE 30, 1996
INDEX
<TABLE>
<CAPTION>
PAGE NO.
PART I. FINANCIAL INFORMATION
<S> <C> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1995
and June 30, 1996 .................................................3
Statements of Consolidated Operations for the Six and
Three Months Ended June 30, 1995 and 1996 .........................4
Statements of Consolidated Cash Flows for the Six
Months Ended June 30, 1995 and 1996 ...............................5
Statements of Changes in Mandatorily Redeemable Preferred
Stock and Non-Mandatorily Redeemable Preferred Stock,
Common Stock and Other Shareholders' Equity .......................6
Notes to Consolidated Financial Statements ..........................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ....................17
PART II. OTHER INFORMATION
Item 2. Changes in Securities .............................................22
Item 4. Submission of Matters to a Vote of Security Holders ...............23
Item 6. Exhibits and Reports on Form 8-K ..................................24
SIGNATURES.........................................................................27
</TABLE>
page 2 of 27 pages
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
December 31 June 30
1995 1996
------------------ ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $713,462 $1,025,382
Accounts receivable, net of allowance for doubtful
of $40,000 and $100,961, respectively 901,508 1,570,576
Other current assets 185,634 302,469
------------------ ------------------
Total current assets 1,800,604 2,898,427
Property and equipment, net 14,099,111 22,995,039
Intangible assets, net 11,592,157 24,286,302
Other assets 1,425,384 1,863,716
------------------ ------------------
$28,917,256 $52,043,484
================== ==================
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt - related parties - $3,548,454
Current portion of long-term debt - others $1,010,412 1,502,653
Current portion of obligation under capital leases 288,972 73,510
Accounts payable 2,772,306 2,039,122
Accrued expenses 1,610,100 3,338,419
Deferred revenues - 900,000
Obligations relating to contractual settlements
and other unusual charges 962,338 480,551
------------------ ------------------
Total current liabilities 6,644,128 11,882,709
Long-term debt - related parties (amounts due at
maturity $1,732,500 and $29,000,000, respectively) 1,732,500 23,149,508
Long-term debt - others 7,586,001 287,556
Obligations under capital leases 3,243,965 202,557
14% cumulative preferred stock mandatorily redeemable
(redemption amount $6,742,960, due June 30, 2000) - 6,404,228
Non-mandatorily redeemable preferred stock,
common stock and other shareholders' equity 9,710,662 10,116,926
================== ==================
$28,917,256 $52,043,484
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
page 3 of 27 pages
<PAGE> 4
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Six Months Ended June 30 Three Months Ended June 30
1995 1996 1995 1996
----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
REVENUES:
Coin calls $4,995,329 $10,411,344 $2,664,224 $5,959,549
Non-coin 2,305,495 5,292,530 1,004,207 3,383,648
Other 577,238 1,101,636 436,316 855,709
----------------- ------------------ ------------------ ------------------
7,878,062 16,805,510 4,104,747 10,198,906
----------------- ------------------ ------------------ ------------------
OPERATING EXPENSES:
Line and transmission charges 2,100,427 3,866,207 1,287,084 2,260,838
Location commissions 1,516,365 2,536,730 886,665 1,377,263
Other operating expenses 2,682,710 5,047,451 1,132,493 2,906,855
Depreciation and amortization 1,432,491 5,312,885 731,591 3,227,617
Selling, general & administrative 1,345,427 2,398,724 767,934 1,295,041
Contractual settlements and
other unusual charges - 5,334,514 - 531,149
----------------- ------------------ ------------------ ------------------
9,077,420 24,496,511 4,805,767 11,598,763
----------------- ------------------ ------------------ ------------------
Loss from operations (1,199,358) (7,691,001) (701,020) (1,399,857)
OTHER INCOME (EXPENSE):
Interest expense - related parties - (1,816,890) - (1,537,174)
Interest expense - others (220,230) (274,221) (116,939) (50,266)
Interest income 6,588 1,976 6,038 2,142
----------------- ------------------ ------------------ ------------------
(213,642) (2,089,135) (110,901) (1,585,298)
----------------- ------------------ ------------------ ------------------
Loss before extraordinary item (1,413,000) (9,780,136) (811,921) (2,985,155)
Extraordinary item:
Loss on debt restructuring - (267,281) - (90,571)
----------------- ------------------ ------------------ ------------------
NET LOSS ($1,413,000) ($10,047,417) ($811,921) ($3,075,726)
================= ================== ================== ==================
Earnings per share calculation:
Preferred dividend payable in cash (154,834) - (77,417) -
Preferred dividend payable in kind - (110,622) - (83,372)
Accretion of 14% Preferred to its
redemption value - (24,119) - (24,119)
Premium on redemption of 10%
Preferred, 8% Preferred and
7% Preferred - (2,002,386) - -
----------------- ------------------ ------------------ ------------------
Net loss applicable to
common shareholders ($1,567,834) ($12,184,544) ($889,338) ($3,183,217)
================= ================== ================== ==================
Net loss per common share before
extraordinary item ($0.99) ($3.33) ($0.54) ($0.74)
================= ================== ================== ==================
Net loss per common share ($0.99) ($3.41) ($0.54) ($0.76)
================= ================== ================== ==================
Weighted average number of shares 1,586,142 3,576,381 1,648,058 4,196,868
================= ================== ================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
page 4 of 27 pages
<PAGE> 5
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended June 30
------------------------
1995 1996
------------------ ------------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss ($1,413,000) ($10,047,417)
Adjustments to reconcile net loss to net
cash flow from operating activities:
Depreciation and amortization 1,432,491 5,312,885
Issuance of Nominal Value Warrants - 3,886,140
Stock issued in lieu of cash payments 61,160 20,620
Accretion of related parties debt - 561,008
Accretion of other debt 45,921
Loss on debt restructuring - 338,546
Increase in allowance for doubtful accounts - 60,961
Amortization of deferred revenues - (300,000)
Changes in assets and liabilities:
Accounts receivable (233,352) (584,429)
Other current assets 94,429 (116,835)
Accounts payable 575,257 (703,756)
Accrued expenses (51,711) 1,610,819
Obligations relating to contractual
settlements and other unusual charges - (481,787)
----------------
------------------
465,274 (397,324)
------------------ ----------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of International Pay Phones, Inc. - (4,826,335)
Acquisition of Paramount Communications Systems - (9,780,644)
Deferred charges on pending acquisitions - (44,747)
Deferred revenues - signing bonus - 1,200,000
Purchases of intangible assets (185,087) (662,436)
Change in other assets (79,209) 236,668
Acquisition deposits - (1,600,000)
Purchases of property and equipment (220,626) (1,065,496)
------------------ ----------------
(484,922) (16,542,990)
------------------ ----------------
CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Proceeds from debt issuances 200,000 -
Proceeds from related party debt - 32,223,454
Proceeds from shareholder debt - 575,000
Principal payments on borrowings (918,141) (10,272,477)
Proceeds from issuance of preferred and
common stock and other 690,000 -
Dividends paid (40,375) -
Debt financing costs - (4,166,097)
Redemption of 10% Preferred and 8% Preferred - (1,117,371)
Equity financing costs (52,935) -
Proceeds from warrant and option exercises 20,000 9,725
------------------ ----------------
(101,451) 17,252,234
------------------ ----------------
(Decrease) increase in cash (121,099) 311,920
Cash at beginning of period 478,756 713,462
------------------ ----------------
Cash at end of period $357,657 $1,025,382
================== ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
page 5 of 27 pages
<PAGE> 6
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN MANDATORILY REDEEMABLE PREFERRED STOCK AND
NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
Year Ended December 31 Six Months Ended June 30
1995 1996
--------------------------------------------------------------------
Shares Amount Shares Amount
------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
MANDATORILY REDEEMABLE PREFERRED STOCK
14 % CUMULATIVE REDEEMABLE
CONVERTIBLE PREFERRED STOCK
Balance at beginning of year - - - -
Redemption of 7% Preferred - - 3,625.00 $217,500
Redemption of 8% Preferred - - 14,143.33 848,600
Redemption of 10% Preferred - - 16,668.00 1,000,000
Conversion of debt - - 59,695.39 3,581,723
Acquisition of Paramount Communications - - 8,333.33 375,768
Acquisition of International Payphones - - 5,453.14 245,896
Dividends payable-in-kind - - 4,464.48 110,622
Accretion of carrying value to amount
payable at redemption [June 30, 2000] - - - 24,119
TOTAL MANDATORILY REDEEMABLE
================ ================ ================= ===============
PREFERRED STOCK - - 112,382.67 $6,404,228
================ ================ ================= ===============
NON-MANDATORILY REDEEMABLE PREFERRED
STOCK, COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY
7 % CUMULATIVE CONVERTIBLE
REDEEMABLE PREFERRED STOCK
Balance at beginning of year 2,500 $200,000 2,500 $200,000
Redemption of 7% Preferred - - (2,500) (200,000)
================ ---------------- ================= ---------------
Balance at end of period 2,500 $200,000 - -
================ ---------------- ================= ---------------
8 % CUMULATIVE REDEEMABLE
PREFERRED STOCK
Balance at beginning of year 12,200 $981,084 12,200 $981,084
Redemption of 8% Preferred - - (12,200) (981,084)
================ ---------------- ================= ---------------
Balance at end of period 12,200 $981,084 - -
================ ---------------- ================= ---------------
10 % CUMULATIVE REDEEMABLE
PREFERRED STOCK
Balance at beginning of year 1,496 $1 1,496 $1
Redemption of 10% Preferred - - (1,496) (1)
================ ---------------- ================= ---------------
Balance at end of period 1,496 $1 - -
================ ---------------- ================= ---------------
10 % CUMULATIVE NON-VOTING
REDEEMABLE PREFERRED STOCK
Balance at beginning of year - - 530,534 $5,305,340
Acquisition of World Communications, Inc. 530,534 $5,305,340 - -
Redemption of 10% Preferred - - (530,534) 5,305,340)
================ ================ ================= ===============
Balance at end of period 530,534 $5,305,340 - -
================ ================ ================= ===============
SERIES A SPECIAL CONVERTIBLE
PREFERRED STOCK
Balance at beginning of year - - - -
================ ---------------- ================= ---------------
Balance at end of period - - - -
================ ---------------- ================= ---------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 6 of 27 pages
<PAGE> 7
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN MANDATORILY REDEEMABLE PREFERRED STOCK AND
NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
Year Ended December 31 Six Months Ended June 30
1995 1996
---------------------------------------------------------------------
Shares Amount Shares Amount
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
(CONTINUED)
SERIES B SPECIAL CONVERTIBLE
PREFERRED STOCK
Balance at beginning of year - - - -
================ ---------------- ================ ----------------
Balance at end of period - - - -
================ ---------------- ================ ----------------
COMMON STOCK
Balance at beginning of year 1,522,158 $15,222 2,855,350 $28,554
Issuance of stock for services 91,383 914 4,400 44
Private sales of stock 472,056 4,720 - -
Exercise of warrants and options 8,333 83 972,487 9,725
Acquisition of World Communications, Inc. 402,500 4,025 - -
Conversion of debt to equity 30,231 303 - -
Acquisition of Public Telephone Corporation 304,879 3,049 - -
Acquisition escrow deposits 23,810 238 (23,810) (238)
Acquisition of International Payphones - - 555,589 5,555
Redemption of 10% Non-Voting Preferred - - 884,214 8,842
================ ---------------- ================ ----------------
Balance at end of period 2,855,350 $28,554 5,248,230 $52,482
================ ---------------- ================ ----------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year $8,755,364 $16,649,559
Issuance of stock for services 528,532 20,576
Private sales of stock 2,010,067 -
Exercise of warrants and options 34,917 -
Acquisition of World Communications, Inc. 2,712,852 -
Conversion of debt to equity 137,375 -
Acquisition of Public Telephone Corporation 2,054,902 -
Acquisition escrow deposits 149,762 (149,762)
Financing costs (83,212) -
Acquisition of International Payphones - 2,790,042
Acquisition of Paramount Communications - 443,510
Warrants issued with debt 349,000 6,411,500
Issuance of Nominal Value Warrants - 4,240,941
Redemption of 10% Non-voting Preferred - 5,296,498
---------------- ----------------
Balance at end of period $16,649,559 $35,702,864
---------------- ----------------
ACCUMULATED DEFICIT
Balance at beginning of year ($7,303,804) ($13,453,876)
Net loss for the period (6,109,697) (10,047,417)
Dividends paid on 7% and 8% Preferred (40,375) -
14% Preferred dividend payable-in-kind - (110,622)
Accretion of 14% Preferred carrying value - (24,119)
Redemption of 7% Preferred - (17,500)
Redemption of 8% Preferred - (293,516)
Redemption of 10% Preferred - (1,691,370)
---------------- ----------------
Balance at end of period ($13,453,876) ($25,638,420)
---------------- ----------------
TOTAL NON-MANDATORILY REDEEMABLE
PREFERRED STOCK, COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY $9,710,662 $10,116,926
================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Page 7 of 27 pages
<PAGE> 8
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
- -------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB
and Item 310(b) of Regulation S-B. Accordingly, they do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three and six months ended June 30, 1996 are
not necessarily indicative of the results that may be expected for the
year ended December 31, 1996. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB and subsequently amended on Form
10-KSB\A-1 for the year ended December 31, 1995.
Certain amounts relating to the three and six months ended June 30, 1995
have been reclassified to conform to the current quarter presentation.
The reclassifications have no impact on total assets, shareholders'
equity or net loss as previously reported.
2. ACQUISITIONS AND MERGERS
On March 15, 1996, the Company completed the acquisition of the
outstanding common stock of International Pay Phones, Inc. (a South
Carolina company) and International Pay Phones, Inc. (a Tennessee
company) (collectively "IPP"), companies affiliated through common
ownership and management. In connection with the acquisition of IPP, the
Company acquired 2,101 installed telephones for a purchase price
consisting of: (i) $3,496,487 in cash; (ii) 555,589 unregistered shares
of the Company's Common Stock, par value $.01, ("Common Stock"); (iii)
5,453.14 unregistered shares of 14% Convertible Cumulative Redeemable
Preferred Stock ("14% Preferred"); and (iv) warrants to purchase 117,785
shares of the Company's Common Stock at a nominal exercise price per
share ("Nominal Value Warrants"). Additionally, the Company assumed
approximately $1,757,000 in liabilities, of which $1,551,796 was repaid
by the Company on March 15, 1996. The cash purchase price included three
five year non-compete agreements, with an aggregate value of $60,000,
with three of IPP's former officers.
On March 15, 1996, the Company completed a Share Purchase Agreement with
Paramount Communications Systems, Inc. (a Florida corporation)
("Paramount"). Under the terms of the Agreement, the Company acquired
2,528 installed telephones for a purchase price consisting of: (i)
$9,618,553 in cash; (ii) 8,333.33 shares of 14% Preferred; and (iii)
Nominal Value Warrants to purchase 179,996 shares of the Company's Common
Stock.
Page 8 of 27 pages
<PAGE> 9
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
- --------------------------------------------------------------------------------
2. ACQUISITIONS AND MERGERS (CONTINUED)
In addition, the Company assumed outstanding liabilities of approximately
$733,000, of which $697,947 was repaid on March 15, 1996. The purchase
price included a five year consulting and non-compete agreement, valued
at $50,000, with one of Paramount's former officers.
The IPP and Paramount acquisitions were recorded as purchases and the
differences between the fair values of the tangible assets acquired and
the total purchase price, aggregating $9,531,404, were recorded as
intangibles and are being amortized over the average life of the acquired
location contracts which have been estimated to be 60 months.
On October 16, 1995, the Company consummated its acquisition of the
outstanding common stock of Public Telephone Corporation (an Indiana
corporation) ("Public Telephone") in a transaction accounted for as a
purchase. The Company acquired current assets of $54,742, approximately
1,200 installed telephones, assumed approximately $2,800,000 in debt and
outstanding liabilities of Public Telephone and issued 224,879
unregistered shares of the Company's Common Stock to the shareholders of
Public Telephone. In connection with the acquisition, the Company entered
into five year non-compete agreements with two of Public Telephone's
former owners which require both cash payments and the issuance, in the
aggregate, of 80,000 unregistered shares of the Company's Common Stock.
On September 22, 1995, the Company consummated its merger with World
Communications, Inc. (a Missouri corporation) ("World") in a transaction
accounted for as a purchase. The Company acquired current assets of
$256,571, 3,237 installed telephones, assumed approximately $6,900,000 in
debt and outstanding liabilities of World and issued 402,500 unregistered
shares of the Company's Common Stock and 530,534 shares of the Company's
10% Non-Voting Redeemable Preferred Stock, which was subsequently
converted to 884,214 unregistered shares of Common Stock on June 28,
1996.
The Public Telephone and World acquisitions were recorded as purchases
and the differences between the fair values of the tangible assets
acquired and the total purchase price, aggregating $9,305,168, were
recorded as intangibles and are being amortized over the average life of
the acquired location contracts which have been estimated to be 36
months.
Page 9 of 27 pages
<PAGE> 10
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
- -------------------------------------------------------------------------------
2. ACQUISITIONS AND MERGERS (CONTINUED)
Set forth below is the Company's unaudited pro forma condensed statement of
operations data as though the World, Public, IPP and Paramount acquisitions
had occurred at the beginning of 1995 and as though the IPP and Paramount
acquisitions had occurred at the beginning of 1996.
<TABLE>
<CAPTION>
Pro Forma Selected Results of Operations Data
Six Months Ended June 30 Three Months Ended June 30
1995 1996 1995 1996
------------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
Total revenues $ 18,386,972 $ 19,294,190 $ 9,602,762 $ 10,198,906
Net loss before
extraordinary item (7,072,374) (9,835,846) (3,468,918) (2,985,155)
Net loss applicable
to common shareholders (7,492,475) (10,210,618) (3,678,969) (3,183,217)
Net loss per common share $ (2.63) $ (2.69) $ (1.26) $ (0.76)
</TABLE>
The unaudited pro forma results above are not necessarily indicative of
either actual results of operations that would have occurred had the
acquisitions been made at the beginning of 1995 or 1996, or of future
results. The pro forma statement of operations data includes adjustments
related to the amortization of intangible assets, reductions in certain
selling, general, and administrative expenses, interest expense on
borrowings used to finance the acquisitions and the weighted average
number of common shares outstanding after giving effect to the
acquisitions.
PENDING ACQUISITIONS (COMPLETED IN SEPTEMBER 1996)
On June 26, 1996, the Company entered into an Asset Purchase Agreement
with ACI-HDT Supply Company, Amtel Communications Services, Amtel
Communications Correctional Facilities, Amtel Communications, Inc. and
Amtel Communications Payphones, Inc. (all California corporations and
Debtors-in-Possession) collectively referred to as "Amtel" for the
purchase of approximately 8,435 telephones, of which 7,335 are installed
telephones, for a purchase price consisting of: (i) $7,000,000 in cash;
(ii) 2,162,163 shares of the Company's Common Stock, valued at the
average of the BID and ASK (as reported by The NASDAQ Stock Market
("NASDAQ") on September 13, 1996, less an unregistered and block discount
and for the effects of net dilution of 20% as determined by Key Trust
Company of Ohio, N.A. ("Key Trust")) $4,637,840, or $2.15 per share; and
(iii) approximately $675,122 in related acquisition expenses. The Amtel
acquisition closed on September 13, 1996.
On September 16, 1996, the Company completed the acquisition of Payphones
of America, Inc. ("POA"), pursuant to which the Company acquired
approximately 3,115 installed pay telephones for a purchase price,
consisting of: (i) $500,000 in cash; (ii) 166,666 unregistered shares of
the Company's Common Stock, valued at the average of the BID and ASK
(as reported by NASDAQ
Page 10 of 27 pages
<PAGE> 11
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
- -------------------------------------------------------------------------------
2. ACQUISITIONS AND MERGERS (CONTINUED)
on September 16, 1996, less an unregistered and block discount and for
the effects of net dilution of 30.5% as determined by Key Trust)
$311,665, or $1.87 per share; (iii) assumption of capital lease
obligations of $7,750,000; (iv) notes payable to the selling
shareholders of POA, $3,634,114; (v) assumption of other debt, $234,890;
(vi) two five year non-competition and consulting agreements with two of
the selling shareholders, $307,264; and (vii) approximately $166,748
in related acquisition expenses.
The Amtel and POA acquisitions will be recorded as purchases and the
differences between the aggregate fair values of the tangibles assets
acquired and the total purchase price, $15,865,835, will be recorded as
acquired pay telephone location contracts and will be amortized over the
life of the estimated average remaining life of the acquired location
contracts (54 months for Amtel's contracts and 72 months for POA's
contracts).
3. PROPERTY AND EQUIPMENT
As of December 31, 1995 and June 30, 1996, property and equipment
consisted of the following:
<TABLE>
<CAPTION>
Estimated
Useful Lives December 31 June 30
(in years) 1995 1996
------------------ --------------- ----------
<S> <C> <C> <C>
Telephones, boards, enclosures and cases 3-7 $16,386,987 $27,228,267
Furniture, fixtures and other equipment 3-5 989,300 1,312,548
Leasehold improvements 2-5 231,466 235,422
--------------- -----------
17,607,753 28,776,237
Less - accumulated depreciation (3,508,642) (5,781,198)
--------------- -----------
$14,099,111 $22,995,039
=============== ===========
</TABLE>
Page 11 of 27 pages
<PAGE> 12
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
- -------------------------------------------------------------------------------
4. INTANGIBLE ASSETS
As of December 31, 1995 and June 30, 1996, intangible assets consisted of
the following:
<TABLE>
<CAPTION>
Amortization
Period December 31 June 30
(in months) 1995 1996
----------- ----------- -------
<S> <C> <C> <C>
Costs incurred in the acquisition and
installation of telephones 36-120 $ 13,403,126 $ 23,459,098
Debt restructuring costs 40 - 5,495,898
Non-compete agreements 24-60 1,513,765 1,623,765
State operating certifications 60 466,796 466,796
---------- ----------
15,383,687 31,045,557
Less: Accumulated amortization (3,791,530) (6,759,255)
---------- ----------
$ 11,592,157 $ 24,286,302
========== ==========
</TABLE>
5. LONG-TERM DEBT - RELATED PARTIES
In a transaction consummated on March 15, 1996, the Company borrowed
$30,530,954 (out of a total credit facility ("Credit Facility")
commitment of $37,250,000) from Internationale Nederlanden (U.S.) Capital
Corporation and one other lender (collectively known as "Lenders").
Subsequent to March 15, 1996, the Company borrowed an additional
$1,692,500 against the Credit Facility. As of June 30, 1996, $5,026,546
was available to the Company under the Credit Facility to fund
acquisitions and for general working capital purposes, subject to certain
conditions (including availability of additional collateral). The initial
borrowings under the Credit Facility were used to complete the Paramount
and IPP acquisitions, to repay $8,503,405 of outstanding debt and
$3,173,931 of outstanding obligations under capital leases, to redeem the
10% Cumulative Redeemable Preferred Stock ("10% Preferred"), 8%
Cumulative Redeemable Preferred Stock ("8% Preferred"), and 7% Cumulative
Convertible Redeemable Preferred Stock ("7% Preferred"), and to pay
related transactions fees. The additional borrowings of $1,692,500 were
used for an acquisition deposit ($1,300,000) classified as a non-current
asset and working capital.
On September 13, 1996, concurrent with the acquisitions of Amtel and POA,
the Lenders further amended the Credit Facility, increasing the maximum
borrowings available under the Credit Facility to $41,000,000. The
Company then borrowed an additional $8,776,546 and used $5,950,000 of the
proceeds to complete the Amtel and POA acquisitions and the remaining
portion of the proceeds, $2,826,546 was used for working capital and
payment of certain related acquisition expenses.
The Credit Facility requires monthly interest payments at the Alternate
Base Rate (as defined therein) plus 5% and contains various covenants
restricting the Company's ability to pay dividends or incur additional
debt, among other conditions, and also contains financial covenants
requiring
Page 12 of 27 pages
<PAGE> 13
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
- -------------------------------------------------------------------------------
5. LONG-TERM DEBT - RELATED PARTIES (CONTINUED)
minimum net worth, working capital and earnings before interest,
depreciation and amortization among other covenants. The Credit Facility
also contains a subjective acceleration clause which states that in the
event of a material adverse change in the business, as determined by the
Lenders, the Lenders can call the debt at their discretion. The Lenders
have waived their right to exercise this subjective acceleration clause
through November 15, 1997. Pursuant to the Credit Facility amendments
dated September 13, 1996, principal payments commence in March 1997, and
continue monthly and/or quarterly through June 1999 at which time the
remaining principal balance is due. The amount of the principal payment
is contingent upon numerous factors, including the borrowing base and
cash flow of the Company.
Based on amounts borrowings under the Credit Facility as of September 13,
1996, the estimated principal payment due March 31, 1997 would be
$2,225,000, with monthly principal payments of $166,666 thereafter till
December 31, 1997, and quarterly principal payments of $634,375
commencing September 30, 1997, increasing to $996,875 quarterly for 1998.
All of the Company's installed telephones are pledged as collateral to
the Credit Facility. On June 30, 1996, the Company did not meet certain
financial loan covenants. The Lenders have waived compliance with these
loan covenants.
The majority of the Credit Facility (currently $29,000,000) can be
converted into Series B Special Convertible Preferred Stock ("Series B
Preferred"), at the ratio of 833 shares for each $100,000 in outstanding
debt and accrued interest. Additionally, the Lenders received warrants to
purchase 204,824 shares of Series A Special Convertible Preferred Stock
("Series A Preferred"), at an exercise price of $0.20 per share for the
initial borrowings under the Credit Facility. Pursuant to the loan
agreement, the Lenders will receive additional warrants to purchase
Series A Preferred for providing the $1,300,000 acquisition deposit. Each
share of Series A Preferred and Series B Preferred is convertible into 20
shares of Common Stock. The debt under the Credit Facility was initially
recorded net of an allocation of the fair value of the warrants, such
fair value was determined using the Black-Scholes valuation model. The
Company recorded non-cash interest expense (accretion of debt) of
$480,864 for the three months ended June 30, 1996 and $561,008 for the
six months ended June 30, 1996.
Page 13 of 27 pages
<PAGE> 14
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
- -------------------------------------------------------------------------------
6. PREFERRED STOCK MANDATORILY REDEEMABLE
As of December 31, 1995 and June 30, 1996, preferred stock mandatorily
redeemable consisted of the following:
<TABLE>
<CAPTION>
December 31 June 30
1995 1996
----------- ----------
<S> <C> <C>
14% Cumulative Redeemable Convertible Preferred Stock ($60 stated value
- 200,000 shares authorized; 107,918.19 shares issued and
outstanding at June 30, 1996; cumulative dividends issuable of
4,464.48 shares, valued at $110,622; mandatory
redemption amount of $6,742,960 due June 30, 2000) - $6,404,228
</TABLE>
The Company records dividends, declared and undeclared, at their fair
market value and recognizes the difference between the carrying value of
the 14% Preferred and the mandatory redemption amount, through monthly
accretions, using the interest method. For the six and three months ended
June 30, 1996, the carrying value of the 14% Preferred was increased by
$24,119 through accretions. Each share of 14% Preferred is entitled to
receive a quarterly dividend of 0.035 shares of 14% Preferred. Each share
of 14% Preferred is convertible into 10 shares of Common Stock.
7. NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY
As of December 31, 1995 and June 30, 1996, non-mandatorily redeemable
preferred stock, common stock, and other shareholders' equity consisted
of the following:
<TABLE>
<CAPTION>
December 31 June 30
1995 1996
----------- -------
<S> <C> <C> <C>
10% Cumulative Nonvoting Redeemable Preferred Stock ($10 stated value -
550,000 shares authorized; 530,534 shares issued and outstanding at
December 31, 1995, redeemed on June 28, 1996) $ 5,305,340 -
Series A Special Convertible Preferred Stock ($0.20 par value, $0.20
stated value - 250,000 shares authorized; no shares issued) - -
Series B Special Convertible Preferred Stock ($0.20 par value, $120
stated value - 250,000 shares authorized; no shares issued) - -
</TABLE>
Page 14 of 27 pages
<PAGE> 15
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
- -------------------------------------------------------------------------------
7. NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
December 31 June 30
1995 1996
------------- -------------
<S> <C> <C> <C>
10% Cumulative Redeemable Preferred Stock ($1,000 stated value - 3,880
shares authorized; 1,496 shares issued and outstanding at December
31, 1995, redeemed on March 15, 1996) 1 -
8% Cumulative Redeemable Preferred Stock ($100 stated value - 16,000
shares authorized; 12,200 shares issued and outstanding at December
31, 1995, redeemed on March 15, 1996) 981,084 -
7% Cumulative Convertible Redeemable Preferred Stock ($100 stated
value - 2,500 shares authorized, issued and outstanding at December
31, 1995, redeemed on March 15, 1996) 200,000 -
Common Stock
($0.01 par value - 50,000,000 shares authorized; 2,855,350 and
5,248,230 shares issued and outstanding at December 31, 1995 and
June 30, 1996) 28,554 52,482
Additional paid-in capital 16,649,559 35,702,864
Accumulated deficit (13,453,876) (25,638,420)
------------- -------------
$ 9,710,662 $ 10,116,926
============= ============
</TABLE>
On February 23, 1996, the Company created three new classes of preferred
stock: (i) Series A Preferred; (ii) Series B Preferred; and (iii) 14%
Preferred.
On March 15, 1996, concurrent with the Lenders Credit Facility, the
Company redeemed the 10% Preferred, 8% Preferred, and 7% Preferred. The
redemption price was cash payments aggregating $1,117,371 and 34,436.33
shares of 14% Preferred. In the aggregate, $6,269,487 of the Company's
outstanding obligations, including portions of the purchase price for the
IPP and Paramount acquisitions, was liquidated by issuing 107,918.19
shares of 14% Preferred.
Page 15 of 27 pages
<PAGE> 16
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER AND SIX MONTHS ENDED JUNE 30, 1996
- -------------------------------------------------------------------------------
7. NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY (CONTINUED)
The $2,002,386 excess of the redemption price of the preferred issues
redeemed over their aggregate carrying value was recorded as a reduction
of earnings available to common shareholders as of March 31, 1996.
On March 15, 1996, Nominal Value Warrants to purchase 2,018,942 shares of
Common Stock were issued in conjunction with the IPP and Paramount
acquisitions, redemption of the 10% Preferred, 8% Preferred and 7%
Preferred, and conversion of certain related party debt of the Company to
the 14% Preferred. Certain holders of the 14% Preferred are deemed
related parties pursuant to the rules and regulations of the Securities
and Exchange Commission. The warrants expire on March 13, 2001. Watson,
Wyatt & Company have estimated the fair market value of the Nominal Value
Warrants to be $4,974,673, using the Black-Scholes valuation method, of
which $3,886,139 (the amount attributable to the warrants provided to
related parties in connection with the redemption of the 10% Preferred,
8% Preferred, and 7% Preferred shares and conversion of certain debt) was
recorded as an unusual charge in the Company's statement of operations
for the three month ended March 31, 1996.
During the April and May 1996, warrants representing 972,487 shares of
Common Stock were exercised, and total proceeds to the Company were
$9,725. Of the total warrants exercised, 539,989 shares of Common Stock
were issued to an officer of the Company. On July 22, 1996, Nominal Value
Warrants representing 62,650 shares of Common Stock were exercised by an
officer of the Company, and total proceeds to the Company were $627.
On June 27, 1996, the shareholders of the Company approved an amendment
to the Articles of Incorporation which authorizes the Company to have
outstanding 60,000,000 shares; of which 50,000,000 shares are to be
classified as Common Stock and 10,000,000 shares as Preferred Stock. The
shareholders also approved conversion rights to the 10% Preferred. Each
share of 10% Preferred is convertible into 1.6667 shares of Common Stock
at any time by the shareholder or the Company. On June 28, 1996, the
Company converted the outstanding 10% Preferred into 884,214 shares of
Common Stock.
Page 16 of 27 pages
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ACQUISITIONS AND MERGERS
PENDING ACQUISITIONS (COMPLETED IN SEPTEMBER 1996)
On June 26, 1996, the Company entered into an Asset Purchase Agreement with
ACI-HDT Supply Company, Amtel Communications Services, Amtel Communications
Correctional Facilities, Amtel Communications, Inc. and Amtel Communications
Payphones, Inc. (all California corporations and Debtors-in-Possession)
collectively referred to as "Amtel" for the purchase of approximately 8,435
telephones, of which 7,335 are considered revenue producing telephones, for a
purchase price consisting of: (i) $7,000,000 in cash; (ii) 2,162,163 shares of
the Company's Common Stock, valued at the average of the BID and ASK (as
reported by NASDAQ on September 13, 1996, less an unregistered and block
discount and for the effects of net dilution of 20% as determined by Key
Trust) $4,637,840, or $2.15 per share; and (iii) approximately $675,122 in
related acquisition expenses. The Amtel acquisition closed on September 13,
1996.
On September 16, 1996, the Company completed the acquisition of Payphones of
America, Inc. ("POA"), pursuant to which the Company acquire approximately 3,115
installed pay telephones for a purchase price, consisting of: (i) $500,000 in
cash; (ii) 166,666 unregistered shares of the Company's Common Stock, valued at
the average of the BID and ASK (as reported by NASDAQ on September 16, 1996,
less an unregistered and block discount and for the effects of net dilution
of 30.5 as determined by Key Trust) $311,665, or $1.87 per share; (iii)
assumption of capital lease obligations of $7,750,000; (iv) notes payable to
the selling shareholders of POA, $3,634,114; (v) assumption of other debt,
$234,890; (vi) two five year non-competition and consulting agreements with two
of the selling shareholders, $307,264; and (vii) approximately $166,748
in related acquisition expenses.
The Amtel and POA acquisitions will be recorded as purchases and the differences
between the aggregate fair values of the tangibles assets acquired and the
total purchase price, $15,865,835, will be recorded as acquired pay telephone
location contracts and will be amortized over the life of the estimated average
remaining life of the acquired location contracts (54 months for Amtel's
contracts and 72 months for POA contracts).
OTHER ACQUISITIONS AND MERGERS COMPLETED DURING 1996
On March 15, 1996 the Company completed the acquisition of the outstanding
common stock of IPP. The Company acquired 2,101 installed telephones for a
purchase price consisting of: (i) $3,496,487 in cash; (ii) 555,589 unregistered
shares of the Company's Common Stock; (iii) 5,453.14 shares of 14% Preferred
(immediately convertible into 54,530 shares of Common Stock); and (iv) Nominal
Value Warrants to purchase 117,785 shares of the Company's Common Stock.
Additionally, the Company assumed approximately $1,757,000 in liabilities, of
which $1,551,796 was repaid by the Company on March 15, 1996. The cash purchase
price included three five year non-compete agreements, with an aggregate value
of $60,000, with three of IPP's former officers.
On March 15, 1996, the Company completed a Share Purchase Agreement with
Paramount. Under the terms of the Agreement, the Company acquired 2,528
installed telephones for a purchase price consisting of: (i)$9,618,553 in cash;
(ii) 8,333.33 shares of 14% Preferred Stock (immediately convertible into 83,330
shares of Common Stock); and (iii) Nominal Value Warrants to purchase 179,996
shares of the
Page 17 of 27 pages
<PAGE> 18
Company's Common Stock. In addition, the Company assumed outstanding liabilities
of approximately $733,000, of which $697,947 was repaid on March 15, 1996. The
purchase price included a five year consulting and non-compete agreement, valued
at $50,000, with one of Paramount's former officers.
The IPP and Paramount acquisitions were recorded as purchases and the
differences between the fair values of the tangible assets acquired and the
total purchase price, aggregating $9,531,404, were recorded as intangibles and
are being amortized over the average life of the acquired location contracts
which have been estimated to be 60 months. The results of operations of each
acquired company are included in the results of operations of the Company from
March 15, 1996.
LIQUIDITY AND CAPITAL RESOURCES
On September 13, 1996, concurrent with the acquisitions of Amtel and POA, the
Lenders further amended the Credit Facility, increasing the maximum borrowings
available under the Credit Facility to $41,000,000. The Company then borrowed
an additional $8,776,546 and used $5,950,000 of the proceeds to complete the
Amtel and POA acquisitions and the remaining of the proceeds, $2,826,546 was
used for working capital and payment of certain related acquisition expenses.
In a transaction consummated on March 15, 1996, the Company borrowed $30,530,954
(out of a total Credit Facility commitment of $37,250,000, subsequently
increased to $41,000,000) from the Lenders. Subsequent to March 15, 1996, the
Company borrowed an additional $1,692,500 against the credit facility. As of
September 16, 1996, their were no additional borrowings available under the
Credit Facility. The initial borrowings under the Credit Facility were used to
complete the Paramount and IPP acquisitions, to repay $8,503,405 of outstanding
debt and $3,173,931 of outstanding obligations under capital leases, to redeem
the 10% Preferred, 8% Preferred, and 7% Preferred, and to pay related
transactions fees. The additional borrowings of $1,692,500 were used for an
acquisition deposit ($1,300,000) classified as a non-current asset and working
capital.
The Credit Facility requires monthly interest payments at the Alternate Base
Rate (as defined therein) plus 5% and contains various covenants restricting the
Company's ability to pay dividends or incur additional debt, among other
conditions, and also contains financial covenants requiring minimum net worth,
working capital and earnings before interest, depreciation and amortization
among other covenants. The Credit Facility also contains a subjective
acceleration clause which states that in the event of a material adverse change
in the business, as determined by the Lenders, the Lenders can call the debt at
its discretion. The Lenders have waived their right to exercise this subjective
acceleration clause through November 15, 1997. Pursuant to the Credit Facility
amendments dated September 13, 1996, principal payments commence March 1997, and
continue monthly and/or quarterly through June 1999 at which time the remaining
principal balance is due. The amount of the principal payment is contingent upon
numerous factors, including the borrowing base and cash flow of the Company.
Based on amounts borrowings under the Credit Facility as of September 13, 1996,
the estimated principal payments due March 31, 1997 would be $2,225,000, with
monthly principal payments of $166,666 thereafter till December 31, 1997, and
quarterly principal payments of $634,375 commencing September 30, 1997,
increasing to $996,875 quarterly for 1998. All of the Company's installed
telephones are pledged as collateral to the Credit Facility. On June 30, 1996,
the Company did not meet certain financial loan covenants. The Lenders have
waived compliance with these loan covenants.
Page 18 of 27 pages
<PAGE> 19
The majority of the Credit Facility (currently $29,000,000) can be converted
into Series B Preferred at the ratio of 833 shares for each $100,000 in
outstanding debt and accrued interest. Additionally, the Lenders received
warrants to purchase 204,824 shares of Series A Preferred at an exercise price
of $0.20 per share. Each share of Series A Preferred and Series B Preferred is
convertible into 20 shares of Common Stock. The debt under the Credit Facility
was recorded net of the fair value of the warrants. The Company has recorded
non-cash interest expense (accretion of debt) of $480,864 for the three months
ended June 30, 1996 and $561,008 for the six months ended June 30, 1996.
On March 15, 1996, concurrent with the consummation of the Credit Facility, the
Company redeemed the 10% Preferred, 8% Preferred, and 7% Preferred. The
redemption price was cash payments aggregating $1,117,371 and 34,436.33 shares
of 14% Preferred. In the aggregate, $6,269,487 of the Company's outstanding
obligations, including portions of the purchase price for the IPP and Paramount
acquisitions, was liquidated by issuing 107,918.19 shares of 14% Preferred. The
$2,002,386 excess of the redemption price of the preferred issues redeemed over
their aggregate carrying value was recorded as a reduction of earnings available
to common shareholders on March 15, 1996.
On March 15, 1996, Nominal Value Warrants to purchase 2,018,942 shares of Common
Stock were issued in conjunction with the IPP and Paramount acquisitions,
redemption of the 10% Preferred, 8% Preferred, and 7% Preferred, and conversion
of certain debt of the Company to the 14% Preferred. The warrants expire on
March 13, 2001. Watson, Wyatt & Company have estimated the fair value market
value of the Nominal Value Warrants to be $4,974,673, using the Black-Scholes
valuation model, of which $3,886,139 (the amount attributable to the warrants
provided to related parties in connection with the redemption of the preferred
shares and the conversion of certain debt) was recorded as an unusual charge in
the Company's statement of operations for the three months ended March 31, 1996.
At June 30, 1996, long-term debt consisted of: (i) related party debt (payable
to the Lenders and an officer of the Company), including the current portion and
excluding the portion allocated to the Lenders warrants, of $26,697,962 compared
to $1,732,500 at December 31, 1995, an increase of $24,965,462; and (ii) other
long-term debt, including the current portion, of $1,790,209 as compared to
$8,596,413 at December 31, 1995, a decrease of $6,806,204. Obligations under
capital leases, including the current portion, amounted to $276,067 compared
with $3,532,937 at December 31, 1995, a decrease of $3,256,870. Total long-term
debt and obligations under capital leases, including the current portion and the
amount allocated to the Lenders warrants, was $34,614,730 at June 30, 1996. The
overall increase is mostly attributable to debt incurred in connection with the
IPP and Paramount acquisitions.
The Company had a working capital deficit of $8,984,282 at June 30, 1996,
compared to a working capital deficit of $4,843,524 at December 31, 1995, an
increase in the deficit of $4,140,758. Income before interest, taxes,
depreciation and amortization, contractual settlements and other unusual
charges, and the extraordinary loss on debt restructuring ("EBITDA") was
$2,956,398 for the six months ended June 30, 1996, compared to $233,133 for the
six months ended June 30, 1995, an increase of $2,723,265, or 1,168.1%. EBITDA
is not intended to represent an alternative to operating income (as defined in
accordance with generally accepted accounting principles) as an indicator of the
Company's operating performance, or as an alternative to cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles) as a measure of liquidity. Cash flows used in operating
activities amounted to $397,324 a decrease of $862,598 over cash provided by
operations for the six months ended June 30, 1995 of $465,274, mostly due to the
larger loss in the first and second quarter of 1996, and the
Page 19 of 27 pages
<PAGE> 20
repayment of contractual and other obligations offset by the issuance of the
Nominal Value Warrants, depreciation and amortization, and accretion of debt.
Management believes, but cannot assure, that cash flows from operations, the
proceeds and the availability under the Credit Facility and other financial
alternatives, including a contemplated equity offering, will be sufficient to
allow the Company to sustain its operations and meet its obligations over the
next twelve months.
RESULTS OF OPERATIONS
At June 30, 1996, the Company had approximately 14,826 installed telephones
(excluding pending acquisitions) compared to 5,038 at June 30, 1995, an increase
of 9,788 installed telephones, or 194.3%. The increase in installed telephones
is attributable to telephones acquired in acquisitions and internal growth.
REVENUES. Total revenues from all product lines increased $8,927,448, or 113.3%,
from $7,878,062 for the six months ended June 30, 1995 to $16,805,510 for the
six months ended June 30, 1996.
Revenues from coin calls increased $5,416,015, or 108.4%, from $4,995,329
for the six months ended June 30, 1995 to $10,411,344 for the six months
ended June 30, 1996. This increase is attributable primarily to an increase
in the number of installed pay telephones, which increased by 9,788, with
the majority of the increase occurring in the fourth quarter of 1995 and the
first quarter of 1996 and attributable to the Company's recent acquisitions.
Non-coin revenues increased $2,987,035, or 129.6%, from $2,305,495 for the
six months ended June 30, 1995 to $5,292,530 for the six months ended June
30, 1996. The increase was primarily due to the acquisition and installment
of additional revenues producing pay telephones. However, this increase was
offset in part by a reduction in operator assisted calls as a result of
aggressive dial-around advertising by long distance carriers such as
American Telephone & Telegraph Company ("AT&T") and MCI Communications
Corporation ("MCI"). In addition, in December 1995 the Company decided to
focus on the ownership and maintenance of its pay telephone business and
outsourced its operator service center.
Other revenues increased $524,398, or 90.8%, from $577,238 for the six
months ended June 30, 1995 to $1,101,636 for the six months ended June 30,
1996. This increase was primarily the result of increased telephones and
dial-around compensation.
OPERATING EXPENSES. Total operating expenses increased $15,419,091, or 169.9%,
from $9,077,420 for the six months ended June 30, 1995 to $24,496,511 for the
six months ended June 30, 1996. Operating expenses represented 115.2% of total
revenues for the six months ended June 30, 1995 and 145.8% of total revenues for
the six months ended June 30, 1996.
Line and transmission charges increased $1,765,780, or 84.1%, from
$2,100,427 for the six months ended June 30, 1995 to $3,866,207 for the six
months ended June 30, 1996. Line charges represented 26.7% of total revenues
for the six months ended June 30, 1995 and 23.0% of total revenues for the
six months ended June 30, 1996, a decrease of 3.7%. The dollar increase in
line charges was, in part,
Page 20 of 27 pages
<PAGE> 21
due to additional telephones acquired from IPP and Paramount, the increases
in coin calls resulting from the continuation of the 1994 program which
offered customers a three minute long-distance call anywhere in the
continental United States for $0.75 (the "$0.75 Long Distance Call Program"
subsequently changed to $1.00 for the first three minutes), as well as
increases in certain local telephone company line charges.
Location commissions increased $1,020,365, or 67.3%, from $1,516,365 for the
six months ended June 30, 1995 to $2,536,730 for the six months ended June
30, 1996. Location commissions represented 19.2% of total revenues for the
six months ended June 30, 1995 and 15.1% of total revenues for the six
months ended June 30, 1996, a decrease of 4.1%. The dollar increase is due
to location agreements from pay telephones acquired in the acquisitions of
World and Public and due to increased competition in obtaining new
locations.
Other operating expenses, (consisting of personnel costs, rents, utilities,
repair and maintenance of the phones, operator services processing fees and
property/sales taxes), increased $2,364,741, or 88.1%, from $2,682,710 for
the six months ended June 30, 1995 to $5,047,451 for the six months ended
June 30, 1996. Other operating expenses represented 34.1% of total revenues
for the six months ended June 30, 1995 and 30.0% of total revenues for the
six months ended June 30, 1996, a decrease of 4.1%. The dollar increase was
primarily the result of higher personnel costs, rent, utilities and service
related expenses attributable to the outsourcing of operator services and to
the acquisitions of World and Public Telephone completed in September and
October 1995, respectively, and to a lesser extent, the acquisitions of IPP
and Paramount completed in March 1996, the increase in the Company's pay
telephone base, and the additional field personnel to accommodate the
increased business. Management anticipates economies of scale resulting from
these acquisitions will be realized in 1996, resulting in the decrease of
other operating expenses as a percentage of total revenues.
Depreciation and amortization increased $3,880,394, or 270.9%, from
$1,432,491 for the six months ended June 30, 1995 to $5,312,885 for the six
months ended June 30, 1996. Depreciation and amortization represented 18.2%
of total revenues for the six months ended June 30, 1995 and 31.6% of total
revenues for the six months ended June 30, 1996, an increase of 13.4%. This
dollar increase was primarily due to the Company's acquisitions and
expansion of its pay telephone base, purchases of additional computer
equipment, service vehicles and software to accommodate the Company's
growth.
Selling, general and administrative ("SG&A") expenses increased $1,053,297,
or 78.3%, from $1,345,427 for the six months ended June 30, 1995 to
$2,398,724 for the six months ended June 30, 1996. SG&A represented 17.1% of
total revenues for the six months ended June 30, 1995 and 14.3% of total
revenues for the six months ended June 30, 1996, a decrease of 2.8%. The
dollar increase was primarily the result of the acquisitions of World,
Public Telephone, IPP and Paramount.
Contractual settlements and other unusual charges consists primarily of: (i)
the settlement of contractual obligations under certain employment
contracts, $325,000; (ii) the settlement of other contractual obligations,
$210,599; (iii) the write-off of selected assets in connection with the
continued evaluation of the Company's operations and certain one-time
charges for changes to the operations of the Company, $282,131; (iv) losses
recognized on the early pay-off of obligations under capital leases and
other debt concurrent with the debt restructuring completed on March 15,
1996, $630,645; and (v)
Page 21 of 27 pages
<PAGE> 22
the estimated fair market value of the Nominal Value Warrants charged to
operations on March 15, 1996, $3,886,139. In the aggregate, contractual
settlements and other unusual charges were $5,334,514, or 31.7% of total
revenues, for the six months ended June 30, 1996.
OTHER EXPENSE AND INCOME. Other expense and income is comprised of interest
expense incurred on debt with related parties and others and interest income.
Total other expense (net of interest income) increased $1,875,493, or 877.9%,
from $213,642 for the six months ended June 30, 1995 to $2,089,135 for the six
months ended June 30, 1996. Other expenses represented 2.7% of total revenues
for the six months ended June 30, 1995 and 12.4% of total revenues for the six
months ended June 30, 1996, an increase of 9.7%. The dollar increase was due to
the financing obtained for the recent acquisitions. Related party interest
expense was $1,816,890 for the six months ended June 30, 1996, representing
10.8% of total revenues. Included in related party interest expense was non-cash
interest expense of $561,008, or 3.3% of revenues, for the six months ended June
30, 1996, representing the accretion of the debt under the Credit Facility to
its maturity amount.
EXTRAORDINARY ITEM. The Company recorded an extraordinary loss of $267,281, or
1.6% of total revenues, for the six months ended June 30, 1996. The
extraordinary loss related to one-time costs that were incurred in connection
with the restructuring of the Company's long-term debt. Concurrent with the
restructuring of the Company's debt and the redemption of the 10% Preferred, 8%
Preferred, and 7% Preferred, the Company recorded the difference between the
carrying value of the 10% Preferred, 8% Preferred, and 7% Preferred and the
redemption price as an increase to the accumulated deficit of $2,002,386.
IMPACT OF SEASONALITY
Since a large concentration of the Company's telephones are located in shopping
malls, the greatest portion of revenues are earned in the fourth quarter due to
the increased holiday traffic. Company telephones located outdoors in the
northern and western states, will experience reduced revenues during periods of
adverse weather.
PART II.OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
WORKING CAPITAL RESTRICTIONS AND OTHER LIMITATIONS UPON THE PAYMENT OF DIVIDENDS
The Lenders Credit Facility contains various covenants restricting the Company's
ability to pay dividends or incur additional debt, among other conditions, and
also contains financial covenants requiring the Company to maintain certain
financial ratios, including, among other things, minimum net worth, working
capital and earnings before interest, depreciation and amortization. On June 30,
1996, the Company did not meet certain financial loan covenants. The Lenders
have waived compliance with these loan covenants.
Page 22 of 27 pages
<PAGE> 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 27, 1996, the Company held it's Annual Meeting of Shareholders. Total
shares eligible to vote as of the record date were 4,364,016 and total shares
voted were 2,913,956 or 66.77%. The following nominees for director of the
Company, as listed in the proxy statement, were elected:
<TABLE>
<CAPTION>
For Abstain
--- -------
<S> <C> <C> <C> <C>
Peter Graf 2,871,366 65.80% 42,590 0.98%
Steven Richman 2,871,366 65.80% 42,590 0.98%
George Henry 2,900,118 66.46% 13,838 0.32%
Joseph Abrams 2,871,366 65.80% 42,590 0.98%
Stuart Hollander 1,847,700 42.34% 1,066,256 24.43%
Nickey Maxey 2,897,460 66.39% 16,496 0.38%
Aron Katzman 2,856,208 65.45% 57,748 1.32%
</TABLE>
The following proposals were approved by the shareholders at the Annual Meeting
of Shareholders:
Amendment to the Articles of Incorporation of the Company to increase
the number of shares that the Company shall have authority to issue
from 50,000,000 to 60,000,000 of which 50,000,000 shall be classified
as Common Stock and 10,000,000 shall be classified as Preferred Stock.
<TABLE>
<CAPTION>
Abstain/
For Against withheld Broker Non-Votes
--- ------- -------- ----------------
<S> <C> <C> <C> <C>
2,860,919 25,463 27,574 -
65.56% 0.58% 0.63% -
</TABLE>
Amendment to the Company's Code of Regulations increasing the maximum
size of the Board of Directors to nine.
<TABLE>
<CAPTION>
Abstain/
For Against withheld Broker Non-Votes
--- ------- -------- ----------------
<S> <C> <C> <C> <C>
2,756,684 21,828 27,432 108,012
63.17% 0.50% 0.63% 2.48%
</TABLE>
Amendment to the Articles of Incorporation to grant conversion rights to
the Company's 10% Cumulative Nonvoting Redeemable Preferred Stock so that
each share of 10% Cumulative Nonvoting Redeemable Preferred Stock shall
be convertible into shares of the Company's Common Stock, whereby 530,534
shares of 10% Cumulative Nonvoting Redeemable Preferred Stock would be
convertible, at any time, into 884,214 shares of Common Stock.
<TABLE>
<CAPTION>
Abstain/
For Against withheld Broker Non-Votes
--- ------- -------- ----------------
<S> <C> <C> <C> <C>
By a vote of the Common stockholders:
2,264,624 29,908 38,334 581,090
51.89% 0.69% 0.88% 13.32%
</TABLE>
Page 23 of 27 pages
<PAGE> 24
By a vote of the 10% Cumulative Nonvoting Redeemable Preferred
stockholders:
<TABLE>
<S> <C> <C> <C> <C>
463,691 - 12,039 -
87.40% - 2.27% -
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
(27) Financial Data Schedule
(b) REPORTS ON FORM 8-K
The following reports on Form 8-K were filed by the Company during the
first quarter of 1996.
FORM 8-K/A-2 AMENDING FORM 8-K DATED OCTOBER 16, 1995:
(b) Pro Forma Financial Information:
1. Public Telephone Corporation and PhoneTel Technologies, Inc.
Unaudited Pro Forma Combined Condensed Balance Sheet at September
30, 1995.
2. Public Telephone Corporation and PhoneTel Technologies, Inc.
Unaudited Pro Forma Combined Condensed Income Statements for the
Year Ended December 31, 1994, and Six Months Ended September 30,
1995.
3. Public Telephone Corporation and PhoneTel Technologies, Inc.
Pro Forma Combined Condensed Financial Information - Footnotes to
Financial Information.
FORM 8-K DATED MARCH 15, 1996:
(a) Financial Statements of Business Acquired:
1. International Pay Phones, Inc. of South Carolina Financial
Statements For the Year Ended December 31, 1994
2. International Payphones, Inc. of Tennessee Financial Statements
For the Year Ended December 31, 1994 and for the Nine Months
Ended September 30, 1995
3. Paramount Communications Systems, Inc. Financial Statements For
the Years Ended December 31, 1994, 1993, and 1992.
(c) Other Exhibits:
1. Agreement and Plan of Merger between PhoneTel Technologies, Inc.
and International Pay Phones, Inc. (a South Carolina company)
dated November 22, 1995, and all amendments
Page 24 of 27 pages
<PAGE> 25
thereto.
2. Agreement and Plan of Merger between PhoneTel Technologies, Inc.
and International Pay Phones, Inc. (a Tennessee company) dated
November 22, 1995, and all amendments thereto.
3. Share Purchase Agreement between PhoneTel Technologies, Inc. and
Paramount Communications Systems, Inc., dated November 16, 1995,
and all amendments thereto.
4. Credit Agreement dated as of March 15, 1996 among PhoneTel
Technologies, Inc., Various Lenders and Internationale
Nederlanden (U.S.) Capital Corporation.
5. Security Agreement dated as of March 15, 1996 among PhoneTel
Technologies, Inc., Public Telephone Corporation, World
Communications, Inc., Northern Florida Telephone Corporation and
Paramount Communications Systems, Inc. and Internationale
Nederlanden (U.S.) capital Corporation as Agent for itself and
certain other lenders.
6. Warrant Purchase Agreement dated as of March 15, 1996 between
PhoneTel Technologies, Inc. and Internationale Nederlanden (U.S.)
Capital Corporation and Cerberus Partners, L.P.
7. Registration Rights Agreement dated March 15, 1996 between
PhoneTel Technologies, Inc. and Internationale Nederlanden (U.S.)
Capital Corporation and Cerberus Partners, L.P.
FORM 8-K/A-1 AMENDING FORM 8-K DATED MARCH 15, 1996:
(a) Financial Statements of Business Acquired:
1. International Payphones, Inc. of Tennessee Financial Statements
For the Years Ended December 31, 1995 and 1994
(b) Pro Forma Financial Information:
1. Introduction to Unaudited Pro Forma Combined Condensed Financial
Information
2. International Payphones, Inc. of South Carolina, International
Payphones, Inc. of Tennessee, Paramount Communication Systems,
Inc. and PhoneTel Technologies, Inc. - Unaudited Pro Forma
Combined Condensed Balance Sheet at December 31, 1995.
3. International Payphones, Inc. of South Carolina, International
Payphones, Inc. of Tennessee, Paramount Communication Systems,
Inc. and PhoneTel Technologies, Inc. - Unaudited Pro Forma
Combined Condensed Statement of Operations for the Year Ended
December 31, 1995.
4. International Payphones, Inc. of South Carolina, International
Payphones, Inc. of Tennessee, Paramount Communication Systems,
Inc. and PhoneTel Technologies, Inc. - Unaudited Pro Forma
Combined Condensed Financial Information - Footnotes to Financial
Information.
Page 25 of 27 pages
<PAGE> 26
FORM 8-K/A-2 AMENDING FORM 8-K/A-1 AND FORM 8-K DATED MARCH 15, 1996:
(a) Financial Statements of Business Acquired:
1. International Payphones, Inc. (a South Carolina corporation)
Financial Statements For the Year Ended December 31, 1995
2. Paramount Communications Systems, Inc. Financial Statements
For the Year Ended December 31, 1995
(b) Pro Forma Financial Information:
1. Introduction to Unaudited Pro Forma Combined Condensed Financial
Information
2. International Payphones, Inc. (a South Carolina corporation),
International Payphones, Inc. (a Tennessee corporation),
Paramount Communication Systems, Inc. and PhoneTel Technologies,
Inc. - Unaudited Pro Forma Combined Condensed Balance Sheet at
December 31, 1995.
3. International Payphones, Inc. (a South Carolina corporation),
International Payphones, Inc. (a Tennessee corporation),
Paramount Communication Systems, Inc. and PhoneTel Technologies,
Inc. - Unaudited Pro Forma Combined Condensed Statement of
Operations for the Year Ended December 31, 1995.
4. International Payphones, Inc. (a South Carolina corporation),
International Payphones, Inc. (a Tennessee corporation),
Paramount Communication Systems, Inc. and PhoneTel Technologies,
Inc. - Unaudited Pro Forma Combined Condensed Financial
Information - Footnotes to Financial Information.
Page 26 of 27 pages
<PAGE> 27
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PHONETEL TECHNOLOGIES, INC.
September 27, 1996 By: /s/ Peter G. Graf
---------------------
Peter G. Graf
Chairman of the Board and
Chief Executive Officer
Chief Accounting Officer
Page 27 of 27 pages
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1996, AND THE STATEMENT OF
CONSOLIDATED OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND THE
ACCOMPANYING NOTES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,025,382
<SECURITIES> 0
<RECEIVABLES> 1,671,537
<ALLOWANCES> (100,961)
<INVENTORY> 0
<CURRENT-ASSETS> 2,898,427
<PP&E> 28,776,237
<DEPRECIATION> (5,781,198)
<TOTAL-ASSETS> 52,043,484
<CURRENT-LIABILITIES> 11,882,709
<BONDS> 23,639,621
<COMMON> 52,482
6,404,228
0
<OTHER-SE> 10,064,444
<TOTAL-LIABILITY-AND-EQUITY> 52,043,484
<SALES> 0
<TOTAL-REVENUES> 16,805,510
<CGS> 0
<TOTAL-COSTS> 24,496,511
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,089,135
<INCOME-PRETAX> (9,780,136)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,780,136)
<DISCONTINUED> 0
<EXTRAORDINARY> (267,281)
<CHANGES> 0
<NET-INCOME> (10,047,417)
<EPS-PRIMARY> (3.41)
<EPS-DILUTED> 0
</TABLE>
