<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
[ ] 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 (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF 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 NOVEMBER 13, 1997,
16,360,829 SHARES OF THE REGISTRANT'S COMMON STOCK $.01 PAR VALUE, WERE
OUTSTANDING.
Transitional Small Business Disclosure Format (check one): Yes __ No _X_
1
<PAGE> 2
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-QSB
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1996
and September 30, 1997.......................................................... 3
Statements of Consolidated Operations for the Three and Nine
Months Ended September 30, 1996 and 1997........................................ 4
Statements of Changes in Mandatorily Redeemable Preferred
Stock for the Year Ended December 31, 1996 and Nine Months
Ended September 30, 1997........................................................ 5
Statements of Changes in Non-mandatorily Redeemable Preferred Stock,
Common Stock and Other Shareholders' Equity for the Year Ended
December 31, 1996 and Nine Months Ended September 30, 1997...................... 6
Statements of Consolidated Cash Flows for the Nine
Months Ended September 30, 1996 and 1997........................................ 7
Notes to Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 1997.......................... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................... 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................................... 18
Signatures...................................................................................................... 19
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(Unaudited)
December 31, September 30,
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 46,438 $ 12,888
Accounts receivable, net of allowance for doubtful
accounts of $92 and $787, respectively 3,749 13,446
Other current assets 283 1,011
-------- --------
Total current assets 50,470 27,345
Property and equipment, net 19,243 29,173
Intangible assets, net 52,144 118,755
Other assets 283 355
Acquisition deposits 520 -
Restricted cash equivalents 37,110 -
-------- --------
$159,770 $175,628
======== ========
LIABILITIES AND EQUITY
Current liabilities:
Current portion:
Long-term debt - others $ 501 $ 559
Long-term debt - related parties 508 14
Obligations under capital leases 138 110
Accounts payable 4,137 5,627
Accrued expenses:
Location commissions 1,767 1,104
Line and transmission charges 866 1,187
Personal property and sales tax 1,071 3,606
Interest 774 4,800
Salaries, wages and benefits 574 575
Other 643 152
-------- --------
Total current liabilities 10,979 17,734
Long-term debt - others 125,274 125,350
Long-term debt - related parties - 21,700
Obligations under capital leases 104 25
Commitments and contingencies - -
14% cumulative preferred stock mandatorily redeemable, redemption
amount of $7,476 and $8,009, respectively, due June 30, 2000 6,708 7,402
Non-mandatorily redeemable preferred stock,
common stock and other shareholders' equity 16,705 3,417
-------- --------
$159,770 $175,628
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------------ ----------- -------------
1996 1997 1996 1997
----------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Coin calls $ 16,989 $ 43,884 $ 6,578 $ 15,742
Non-coin telecommunication services 10,711 40,644 4,616 13,746
Other 616 468 316 129
----------- ------------ ----------- ------------
28,316 84,996 11,510 29,617
----------- ------------ ----------- ------------
OPERATING EXPENSES:
Line and transmission charges 6,800 17,734 2,934 5,901
Telecommunication and validation fees 3,562 9,400 1,226 3,464
Location commissions 3,746 10,577 1,575 4,076
Field operations 5,364 16,723 1,992 5,665
Selling, general and administrative 3,289 7,819 1,186 3,192
Depreciation and amortization 8,877 16,621 3,563 6,068
Provision for dial-around compensation adjustment - 2,361 - 2,361
Other unusual charges and contractual settlements 5,518 7,862 183 7,862
----------- ------------ ----------- ------------
37,156 89,097 12,659 38,589
----------- ------------ ----------- ------------
Loss from operations (8,840) (4,101) (1,149) (8,972)
OTHER INCOME (EXPENSE):
Interest expense - related parties (3,588) (791) (1,771) (639)
Interest expense - others (551) (11,493) (277) (3,865)
Interest income (1) 468 (3) 21
Other - 15 - 5
----------- ------------ ----------- ------------
(4,140) (11,801) (2,051) (4,478)
----------- ------------ ----------- ------------
Loss before extraordinary item (12,980) (15,902) (3,200) (13,450)
Extraordinary item:
Loss on debt restructuring (267) - - -
----------- ------------ ----------- ------------
NET LOSS ($13,247) ($15,902) ($3,200) ($13,450)
=========== ============ =========== ============
Earnings per share calculation:
Net loss ($13,247) ($15,902) ($3,200) ($13,450)
Preferred dividend payable in kind (212) (400) (101) (121)
Accretion of 14% Preferred to its redemption value (58) (294) (34) (180)
Premium on redemption of 10%, 8% and 7% Preferred (2,002) - - -
----------- ------------ ----------- ------------
Net loss applicable to common shareholders ($15,519) ($16,596) ($3,335) ($13,751)
=========== ============ =========== ============
Net loss per common share before extraordinary item ($3.54) ($1.04) ($0.58) ($0.85)
=========== ============ =========== ============
Net loss per common share ($3.60) ($1.04) ($0.58) ($0.85)
=========== ============ =========== ============
Weighted average number of shares 4,305,130 15,937,973 5,746,785 16,176,477
=========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN MANDATORILY REDEEMABLE PREFERRED STOCK
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(Unaudited)
Year Ended Nine Months Ended
December 31, 1996 September 30, 1997
------------------- -------------------
Shares Amount Shares Amount
------- -------- ------- -------
<S> <C> <C> <C> <C>
14% CUMULATIVE REDEEMABLE
CONVERTIBLE PREFERRED STOCK
Balance at beginning of year - - 120,387 $6,708
Redemption of 7%, 8%, and 10% Preferred 34,436 $2,066 - -
Conversion of debt 59,695 3,581 - -
Acquisitions 13,787 622 - -
Dividends payable-in-kind 12,469 337 13,088 400
Accretion of carrying value to amount
payable at redemption on June 30, 2000 - 102 - 294
Total Mandatorily Redeemable
------- ------ ------- ------
Preferred Stock 120,387 $6,708 133,475 $7,402
======= ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN NON-MANDATORILY REDEEMABLE PREFERRED STOCK,
COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
(Unaudited)
Year Ended Nine Months Ended
December 31, 1996 September 30, 1997
------------------------------- ----------------------------
Shares Amount Shares Amount
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Series A Special Convertible
Preferred Stock
Balance at beginning of year - - - -
Exercise of warrants - - 12,500 $3
Conversion to common stock - - (12,500) (3)
---------- ---------- ---------- ----------
Balance at end of period - - - -
========== ---------- ========== ----------
Common Stock
Balance at beginning of year 2,855,350 $29 14,488,828 145
Company Equity Offering 6,750,000 68 1,012,500 10
Exercise of warrants and options 1,035,137 10 409,754 4
Acquisitions 2,860,608 28 - -
Conversion of 10% Non-voting Preferred 884,214 9 - -
Conversion of Series A Preferred - - 250,000 3
Other issuances of stock 103,519 1 124,747 1
---------- ---------- ---------- ----------
Balance at end of period 14,488,828 145 16,285,829 163
========== ---------- ========== ----------
Additional Paid-in Capital
Balance at beginning of year 16,650 59,104
Company Equity Offering 18,228 2,815
Acquisitions 8,010 -
Warrants issued with debt 6,412 -
Conversion of 10% Non-voting Preferred 5,296 -
Issuance of Nominal Value Warrants 4,241 -
Other issuances of stock 267 474
---------- ----------
Balance at end of period 59,104 62,393
---------- ----------
Accumulated Deficit
Balance at beginning of year (13,454) (42,544)
Net loss for the period (26,649) (15,902)
14% Preferred dividends payable-in-kind
and accretion (439) (693)
Redemption of 7%, 8%, and 10% Preferred (2,002) 0
---------- ----------
Balance at end of period (42,544) (59,139)
---------- ----------
Total Non-mandatorily Redeemable
Preferred Stock, Common Stock and
Other Shareholders' Equity $16,705 $3,417
========== ==========
</TABLE>
The accompanying notes are an ntegral part of these financial statements.
6
<PAGE> 7
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
(Unaudited)
Nine Months Ended
September 30,
------------------------
1996 1997
-------- ---------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss ($13,247) ($15,902)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 8,877 16,621
Amortization of deferred revenues (600) (300)
Issuance of Nominal Value Warrants 3,886 -
Stock issued in lieu of cash payments 21 -
Accretion of related party debt 1,183 -
Loss on debt restructuring 339 -
Increase in allowance for doubtful accounts 61 693
Other noncash charges 56 (10)
Equity in earnings of affiliate - -
Changes in current assets and current liabilities,
net of assets acquired (1,222) (317)
-------- --------
(646) 785
-------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisitions (22,380) (85,115)
Restricted funds - 37,110
Purchases of property and equipment (2,359) (4,979)
Deferred revenues - signing bonus 1,200 -
Purchases of intangible assets (626) (1,051)
Change in other assets (426) (71)
Proceeds from sale of assets - 734
Other deferred charges (187) -
-------- --------
(24,778) (53,372)
-------- --------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from debt issuance's - 110
Proceeds from related party debt 41,575 21,700
Principal payments on borrowings (10,540) (1,441)
Proceeds from issuance of stock - 2,825
Expenses from issuance of common stock (88) -
Debt issuance costs (4,473) (4,265)
Redemption of 10% Preferred and 8% Preferred (1,117) -
Proceeds from warrant and option exercises 10 108
-------- --------
25,367 19,037
-------- --------
Decrease in cash (57) (33,550)
Cash at beginning of period 713 46,438
-------- --------
Cash at end of period $ 656 $ 12,888
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS EXCEPT FOR INSTALLED PUBLIC PAY TELEPHONE, SHARE AND PER SHARE
- ----------------------------------------------------------------------------
AMOUNTS)
- -------
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 adjustments) considered necessary for a fair presentation
have been included. Operating results for the three and nine months ended
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1997. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB for the year ended December 31, 1996.
Certain amounts relating to 1996 have been reclassified to conform to
the current quarter presentation. The reclassifications have had no impact on
total assets, shareholders' equity or net loss as previously reported.
2. ACQUISITIONS AND MERGERS
Acquisitions completed during the nine months ended September 30, 1997:
London Communications, Inc. - June 10, 1997 ("London") 2,519 installed
public pay telephones for $9,672.
Advance Pay Systems, Inc. - May 30, 1997 ("Advance") 800 installed public
pay telephones for $2,734.
American Public elecom, Inc. - May 30, 1997 ("American") 859 installed
public pay telephones for $3,307.
Coinlink, LLC - February 14, 1997 ("Coinlink") 300 installed public pay
telephones for $942.
RSM Communications, Inc. - January 31, 1997 ("RSM") 292 installed public
pay telephones for $1,061.
Americom, Inc. - January 17, 1997 ("Americom") 99 installed public pay
telephones for $274.
Texas Coinphone - January 14, 1997 ("Texas Coinphone") 1,250 installed
public pay telephones for $3,746.
Cherokee Communications, Inc. - January 1, 1997 ("Cherokee") 13,131 public
pay telephones for a purchase price consisting of: $53,953; $1,250 for
non-competition agreements; $4,174 for acquired outstanding accounts
receivable, prepaid expenses, deposits and coin in the installed pay
telephones; and the assumption of $5,443 in liabilities. Additionally,
the Company incurred approximately $1,656 in acquisition related
expenses.
Acquisitions completed during the year ended December 31, 1996:
Amtel Communications Services - September 13, 1996 ("Amtel") 6,872
installed public pay telephones and inventory consisting of 728 public
pay telephones and related parts. Amtel's assets were acquired for a
purchase price consisting of $7,000 and 2,162,163 shares of Common
Stock (valued by an independent consultant at $2.15 per share, or
$4,638). Additionally, the Company incurred approximately $783 in
related acquisition expenses.
Pay Phones of America, Inc. - August 1, 1996 ("POA") 3,115 installed public
pay telephones for a purchase price consisting of: $500; 166,666 shares
of Common Stock (valued by an independent consultant at $1.87 per
share, or $312); assumption of $7,783 in capital lease obligations;
$3,634 in notes payable to the sellers; the assumption of $1,779 in
current liabilities and other debt; and two five-year non-competition
and consulting agreements for an aggregate value of $360. Additionally,
the Company incurred approximately $50 in related acquisition expenses.
8
<PAGE> 9
International Pay Phones, Inc. of South Carolina ("IPP SC") and
International Payphones, Inc. of Tennessee ("IPP TN") - March 15, 1996
(referred to as "IPP") 2,101 installed public pay telephones for a
purchase price consisting of: $4,829; 555,589 shares of Common Stock
(valued at $4.51 per share, or $2,506); 5,453 shares of 14% Preferred,
valued at $246; and 117,785 warrants to purchase shares of Common Stock
at a nominal exercise price per share ("Nominal Value Warrants"),
valued at $139; $57 for three five year non-competition agreements; and
the assumption of approximately $588 in liabilities.
Paramount Communications, Inc. - March 15, 1996 ("Paramount") 2,528
installed public pay telephones for a purchase price consisting of:
$10,397; 8,333 shares of 14% Preferred, valued at $376; 179,996 Nominal
Value Warrants, valued at $443; the assumption of $245 in liabilities;
and included a five year consulting and non-competition agreement,
valued at $50.
PURCHASE PRICE ACCOUNTING
The above transactions have been accounted for as purchases and have
been included in the results of operations from the respective dates of
acquisition. The difference between the total purchase price and the current
assets and liabilities assumed has been allocated to property and equipment,
location contracts and non-compete agreements based on the relative fair values:
fair values of location contracts being determined using discounted cash flows
over the remaining estimated economic lives of the acquired location contracts.
The amount of the location contracts and non-competition agreements recorded for
each acquisition and the estimated economic life of the acquired location
contracts are as follows: London $8,563, 102 months; Advance $2,356, 120 months;
American $2,914, 103 months; Coinlink $838, 103 months; RSM $956, 112 months;
Americom $246, 120 months; Texas Coinphone $3,143, 101 months; Cherokee $53,858,
113 months; Amtel $10,136, 99 months; POA $12,054, 103 months; IPP $6,959, 97
months; and Paramount $10,116, 109 months. Acquired property and equipment is
depreciated over three to five years.
PRO FORMA FINANCIAL DATA (UNAUDITED)
Set forth below is the Company's unaudited pro forma condensed
statement of operations data as though the IPP, Paramount, POA, Amtel, Cherokee,
Texas Coinphone, Americom, RSM, Coinlink, American, Advance, and London
acquisitions had occurred at the beginning of 1996 and as though the Texas
Coinphone, Americom, RSM, Coinlink, American, Advance, and London acquisitions
had occurred at the beginning of 1997.
<TABLE>
<CAPTION>
Pro Forma Selected Results of Operations Data
---------------------------------------------
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------- --------------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total revenues $ 79,855 $ 89,991 $ 27,739 $ 29,617
Net loss before extraordinary item (21,604) (16,757) (5,107) (13,450)
Net loss (21,872) (16,757) (5,107) (13,450)
Net loss applicable to
common shareholders (24,144) (17,450) (5,242) (13,751)
Net loss per common share (1.65) (1.10) (1.77) (0.85)
</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 1996 or 1997, or of future results.
The pro forma statement of operations data includes adjustments related to the
depreciation and amortization of tangible and intangible assets, interest
expense on borrowings used to finance the acquisitions and the weighted average
number of common shares outstanding after giving effect to the acquisitions and
excludes the assets and results of operations not acquired.
EXPIRED TENDER OFFER AND RELATED MERGER AGREEMENT
Communications Central Inc. ("CCI") On March 14, 1997, (and
subsequently amended on May 15, 1997) the Company tendered an offer pursuant to
a merger agreement whereby the Company would acquire all the outstanding shares
of common stock and associated rights to purchase such common stock for $12.85
per share in cash. The total cost of the transaction, including debt to be
assumed or refinanced and excluding related fees, was estimated to be
approximately $172,000. The tender offer was conditioned upon, among other
things, 75% of the outstanding CCI shares, on a fully diluted basis, being
tendered and the receipt by the Company of financing
9
<PAGE> 10
sufficient to enable it to consummate the transaction. Pursuant to the merger
agreement and the subsequent amendment dated May 15, 1997, the Company
deposited $6,000 with CCI. This amount was refundable only under certain
limited conditions. The Company's successful consummation of the CCI
acquisition was dependent upon, among other things, its ability to raise
sufficient debt and/or equity to finance the tender offer.
On July 22, 1997, the Company and CCI jointly announced that they were
engaged in discussions concerning a possible restructuring of the terms of the
acquisition in light of the July 1, 1997 court decision (See Note 10). On
August 5, 1997 the Company announced that it had extended the tender offer to
August 18, 1997. By August 18, 1997 the Company had not obtained the necessary
financing to complete the merger thereby forfeiting the $6,000 deposit upon
expiration of the tender offer. In addition, the Company had incurred
professional fees and related expenses of approximately $1,818 in connection
with the CCI expired tender offer and related merger agreement and related
offerings. Accordingly, the Company recorded a charge of $7,818 to Other
Unusual Charges and Contractual Settlements in the three months ended September
30, 1997.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
Estimated
Useful Lives December 31, September 30,
(in years) 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Telephones, boards, enclosures and cases 3-10 $ 25,784 $ 39,641
Furniture, fixtures and other equipment 3-5 1,751 2,718
Leasehold improvements 2-5 249 299
---------- ---------
27,784 42,658
Less - accumulated depreciation (8,541) (13,485)
---------- ---------
$ 19,243 $ 29,173
========== =========
</TABLE>
4. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
Amortization Period December 31, September 30,
(In months) 1996 1997
----------- ---- ----
<S> <C> <C> <C>
Value assigned to location contracts
acquired and installation of public
pay telephones 60-120 $ 53,862 $ 125,855
Deferred financing costs 120 5,851 10,117
Non-competition agreements 24-60 2,099 3,731
State operating certifications 60 524 548
---------- ---------
62,336 140,251
Less - accumulated amortization (10,192) (21,496)
---------- ---------
$ 52,144 $ 118,755
========== =========
</TABLE>
5. RELATED PARTY DEBT
On May 30, 1997, the Company entered into a Credit Agreement with various
lenders which were or may become thereafter, parties thereto (collectively
referred to as the "Lenders"). ING (U.S.) Capital Corporation ("ING") is Agent
for the Lenders and Transamerica Business Credit Corporation and Finova Capital
Corporation are Co-Agents for the Lenders (the "Credit Facility"). ING is a
significant shareholder of the Company's common equity. The Credit Facility
provides a $75,000 commitment comprised of $60,000 for future acquisitions, and
$15,000 for general working capital requirements. Borrowings accrue interest at
the ING Alternate Base Rate (as defined in the Credit Facility) plus 1.50%. The
Credit Facility matures on May 20, 2000 and all the Company's installed public
pay telephones are pledged as collateral. The Company borrowed $17,700 (of the
$60,000 acquisition commitment) to complete the acquisitions
10
<PAGE> 11
of Advance, American, and London and to pay related acquisition and credit
facility fees. The Company also borrowed $4,000 (of the $15,000 general working
capital commitment) for interest payments due under the $125,000,000 12% Senior
Notes. Subsequent to the September 16, 1997 Court ruling which vacated
dial-around compensation (see Note 10), and pursuant to certain terms of the
Credit Facility, the agent has given notice that the Company is prohibited from
making additional borrowings under the Credit Facility without prior approval of
the Lenders.
The Credit Facility includes covenants which, among other things, require
the Company to maintain ratios as to fixed charges, debt to EBITDA, current
ratio and interest coverage (all as defined in the Credit Facility). Other
covenants limit incurrence of additional long-term debt, the level of capital
expenditures, the incurrence of lease obligations and permitted investments.
6. PREFERRED STOCK MANDATORILY REDEEMABLE
Mandatorily redeemable preferred stock consisted of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---- ----
<S> <C> <C>
14% Cumulative Redeemable Convertible Preferred Stock ($60 stated value
- 200,000 shares authorized; 107,918 shares issued and outstanding,
cumulative dividends issuable of 12,469 shares at December 31, 1996
(valued at $337) and 25,557 shares at September 30, 1997, (valued at
$736); mandatory redemption
amount of $7,476 and $8,009, respectively, due June 30, 2000 $ 6,708 $ 7,402
</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 nine months ended September 30, 1997, the carrying
value of the 14% Preferred was increased by $294 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
Non-mandatorily redeemable preferred stock, common stock, and other
shareholders' equity consisted of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
---- ----
<S> <C> <C>
Series A Special Convertible Preferred Stock
($0.20 par value, $0.20 stated value - 250,000
shares authorized; no shares outstanding) - -
Common Stock
($0.01 par value - 50,000,000 shares authorized; 14,488,828 and
16,285,829 shares issued and outstanding at December 31, 1996 and
September 30, 1997, respectively) $ 145 $ 163
Additional paid-in capital 59,104 62,393
Accumulated deficit (42,544) (59,139)
-------- -------
$ 16,705 $ 3,417
======== =======
</TABLE>
11
<PAGE> 12
During January 1997, the Company's underwriters exercised their
Over-Allotment Option (pursuant to the Company's Equity Offering completed on
December 18, 1996, wherein the Company sold 6,750,000 shares of Common Stock at
a price to the public of $3.00 per share) and sold an additional 1,012,500
shares of Common Stock for $2,825 in net proceeds. During the three months ended
March 31, 1997, directors of the Company exercised 221,125 options with net
proceeds to the Company of $2 and a former lender to the Company exercised
options for 12,500 shares of Series A Special Convertible Preferred (with net
proceeds to the Company of $3) which were immediately converted into
250,000 shares of Common Stock. On January 2, 1997, an executive officer of the
Company converted an outstanding loan and accrued interest of $374 to 124,747
shares of Common Stock. During the three months ended September 30, 1997, one
individual and the Company's underwriter exercised 88,629 options with net
proceeds to the Company of $1, and a former officer of the Company exercised
100,000 options with net proceeds to the Company of $102. On October 22, 1997,
the Company issued 75,000 shares of Common Stock to the five non-employee
directors of the Company for services rendered for the two years ended May 1997.
8. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1997, the Financial Accounting Standard Board ("FASB") issued
Statement No. 128, "Earnings per Share" which specifies the computation,
presentation, and disclosure requirements for earnings per share ("EPS") for
publicly held entities. This Statement is effective for financial statements for
both interim and annual periods ending after December 15, 1997. Earlier
application is not permitted. The fully diluted per share amount is not expected
to be materially different than the earnings per share amount currently
disclosed.
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", ("SFAS No. 130"), was issued. This statement
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. This Statement
is effective for fiscal years beginning after December 15, 1997. Adoption of
SFAS No. 130 is not expected to have a material impact on the Company.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information", ("SFAS No. 131"). This
statement requires that a public business enterprise report a measure of segment
profit or loss, certain specific revenue and expense items, and segment assets
utilizes the management of internal reporting methodologies. This Statement is
effective for financial statements for the periods beginning after December 15,
1997. Management has not evaluated the impact of this Statement.
9. CONDENSED CONSOLIDATING FINANCIAL STATEMENT DATA
The Company's wholly-owned subsidiary, Cherokee Communications, Inc.
("Cherokee") which was acquired January 1, 1997, is a guarantor of the $125,000
12% Senior Notes, due 2006. The following are the condensed consolidating
financial statements of PhoneTel and Cherokee as of September 30, 1997 and for
the nine months ended September 30, 1997.
12
<PAGE> 13
<TABLE>
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
(IN THOUSANDS)
<CAPTION>
Balance Sheet, at September 30, 1997
PhoneTel Cherokee(a) Eliminations Consolidated
-------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Current assets $ 20,226 $ 7,119 $ - $ 27,345
Property and equipment, net 22,635 6,538 - 29,173
Intangible assets, net 68,499 50,256 - 118,755
Other non-current assets 65,584 0 (65,229) 355
-------- -------- ------- --------
Total 176,944 63,913 (65,229) 175,628
======== ======== ======= ========
Current liabilities 15,958 1,776 - 17,734
Inter-company debt - 65,229 (65,229) -
Long-term debt and capital leases 146,261 814 - 147,075
14% Preferred stock 7,402 - - 7,402
Other equity 7,323 (3,906) - 3,417
-------- -------- ------- --------
Total 176,944 63,913 (65,229) 175,628
======== ======== ======= ========
Income Statement, for the nine months ended September 30, 1997
Total revenues 76,035 8,961 - 84,996
Operating expenses 78,945 10,151 - 89,097
-------- -------- ------- --------
Income (loss) from operations (2,911) (1,190) - (4,101)
Other income (expense), net (9,818) (1,983) - (11,801)
-------- -------- ------- --------
Net income (loss) ($12,729) ($3,173) - ($15,902)
======== ======== ======= ========
</TABLE>
(a) The Cherokee separate financial statement data reflects the push
down of the Company's debt, related interest expense and allocable
debt issue costs associated with the Company's acquisition of
Cherokee.
10. PROVISION FOR DIAL-AROUND COMPENSATION ADJUSTMENTS
On September 20, 1996, the Federal Communications Commission ("FCC")
adopted rules in a docket entitled IN THE MATTER OF IMPLEMENTATION OF THE PAY
TELEPHONE RECLASSIFICATION AND COMPENSATION PROVISIONS OF THE TELECOMMUNICATIONS
ACT OF 1996, FCC 96-388 (the "1996 Payphone Order"), implementing the payphone
provisions of Section 276 of the Telecommunications Act of 1996 ("Telecom Act").
The 1996 Payphone Order, which became effective November 7, 1996, initially
mandated dial-around compensation for both access code calls and 800 subscriber
calls at a flat rate of $45.85 per payphone per month (131 calls multiplied by
$0.35 per call). Commencing October 7, 1997 and ending October 6, 1998 the
$45.85 per payphone per month rate was to transition to a per-call system at the
rate of $0.35 per call. Several parties filed petitions for judicial review of
certain of the FCC regulations, including the dial-around compensation rate. On
July 1, 1997, the U.S. Court of Appeals for the District of Columbia Circuit
(the "Court") responded to appeals related to the 1996 Payphone Order by
remanding certain issues to the FCC for reconsideration. These issues included,
among other things, the manner in which the FCC established the dial-around
compensation for 800 subscriber and access code calls, the manner in which the
FCC established the interim dial-around compensation plan and the basis upon
which interexchange carriers ("IXCs") would be required to compensate payphone
service providers ("PSPs"). The Court remanded the issue to the FCC for further
consideration, and clarified on September 16, 1997 that it had vacated certain
portions of the FCC's 1996 Payphone Order, including the dial-around
compensation rate. Specifically, the Court determined that the FCC did not
adequately justify (i) the per-call compensation rate for subscriber 800 and
access code calls at the deregulated local coin rate of $0.35, because it did
not sufficiently justify its conclusion that the costs of local coin calls are
similar to those of subscriber 800 and access code calls; and (ii) the
allocation of the payment obligation among the IXCs for the period from
November 7, 1996 through October 6, 1997.
In accordance with the Court's mandate, on October 9, 1997, the FCC
adopted and released its SECOND REPORT AND ORDER in the same docket, FCC 97-371
(the "1997 Payphone Order"). This order addressed the per-call compensation rate
for subscriber 800 and access code calls that originate from payphones in light
of the decision of the Court which vacated and remanded certain portions of the
FCC's 1996 Payphone Order. The FCC concluded that the rate for per-call
compensation for subscriber 800 and access code calls from payphones is the
deregulated local coin rate adjusted for certain cost differences. Accordingly,
the FCC established a rate of $0.284 ($0.35-$0.066) per call for the first two
years of per-call compensation. The IXCs are required to pay this per-call
amount to PSPs, including the Company, beginning October 7, 1997. After the
first two years of per-call compensation, the market-based local coin
rate, adjusted for certain costs defined by the FCC as $0.066 per call, is the
surrogate for the per-call rate for subscriber 800 and access code calls. These
new rule provisions were made effective as of October 7, 1997.
In addition, the 1997 Payphone Order tentatively concluded that the
same $0.284 per call rate adopted on a going-forward basis should also govern
compensation obligations during the period from November 7, 1996 through October
6, 1997, and that PSPs are entitled to compensation for all access code and
subscriber 800 calls during this period. The FCC stated that the manner in which
the payment obligation of the IXCs for the period from November 7, 1996 through
October 6, 1997 will be allocated among the IXCs will be addressed in a
subsequent order.
Based on the FCC's tentative conclusion in the 1997 Payphone Order, the
Company has adjusted the amounts of dial-around compensation previously recorded
related to period from November 7, 1996 through June 30, 1997 from the initial
$45.85 rate to $37.20 (the $0.284 per call multiplied by 131 calls). As a result
of this adjustment, the net provision recorded in the third quarter for reduced
dial-around compensation is approximately $2,361 ($0.15 per share). For the
period from July 1, 1997 through October 6, 1997, the Company has recorded (and
will record) dial-around compensation at the rate of $37.20 per payphone per
month. The amount of dial-around revenue recognized in the period from July 1,
1997 through October 6, 1997 is $4,952 and such amount will be billed after
final resolution of the allocation obligations of the IXCs as determined by the
FCC.
The Company's counsel, Skadden, Arps, Slate, Meagher & Flom LLP, is of
the opinion that the Company is legally entitled to fair compensation under the
Telecom Act for dial-around calls the Company delivered to any carrier during
the period from November 7, 1996 through October 6, 1997. Based on the
information available, the Company believes that the minimum amount it is
entitled to as fair compensation under the Telecom Act for the period from
November 7, 1996 through October 6, 1997 is $37.20 per payphone per month and
the Company, based on the information available to it, does not believe that it
is reasonably possible that the amount will be materially less than $37.20 per
payphone per month. While the amount of $0.284 per call constitutes the
Company's position of the appropriate level of fair compensation, certain IXCs
have asserted in the past, are asserting and are expected to assert in the
future that the appropriate level of fair compensation should be lower than the
$0.284 per call. In a letter to the FCC dated August 15, 1997, AT&T stated its
intentions to make dial-around payments to PSPs based on its imputed rate of
$0.12 per call until the FCC issues a new order setting the level of fair
compensation.
11. OTHER LEGAL MATTERS
The Company is a defendant in various lawsuits incident to the ordinary
course of business. It is not possible to determine with precision the probable
outcome or the amount of liability, if any, under these lawsuits; however, in
the opinion of the Company and its counsel, the disposition of these lawsuits
will not have a material adverse affect on the consolidated financial statements
of the Company.
On September 5, 1997 a complaint against the Company was filed in the
Common Pleas Court of Cuyahoga County, Ohio by Infosystems Resources, Inc.
alleging breach of contract, tortious interference with contract and conversion
of trade secrets. The suit involves a dispute regarding commissions payable
under an operator services agreement. Each of the four counts included a prayer
for damages in the amount of $260,161, and three of the counts included
requests for $10,000 in punitive damages. An additional claim for injunctive
relief also was included. On October 24, 1997, the Company filed its motion to
dismiss for lack of subject matter jurisdiction indicating that the case
involved a contract for telephone services and other issues subject to Federal
Communication Commission regulations which are not within the jurisdiction of
the Ohio courts. As of November 13, 1997, the court had not ruled on that
motion. Management intends to vigorously contest the allegations set forth in
the complaint, believes the allegations contained therein are without merit and
is of the opinion that this suit will not have a materially adverse effect on
the business, financial conditions or results of operations of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (IN THOUSAND OF DOLLARS EXCEPT FOR PUBLIC PAY TELEPHONES,
PER CALL, SHARE AND PER SHARE AMOUNTS)
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
Statements, other than historical facts, contained in this Quarterly
Report on Form 10-QSB, are "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and section 21E of the
Securities Exchange Act of 1934, as amended. Although the Company believes that
its forward looking statements are based on reasonable assumptions, it cautions
that such statements are subject to a wide range of risks and uncertainties with
respect to the Company's operations in fiscal 1997 as well as over the long term
such as, without limitation, (i) a downturn in the public pay telephone industry
which is dependent on consumer spending and subject to the impact of domestic
economic conditions, changes in technology, and regulations and policies
regarding the telecommunications industry; (ii) the ability of the Company to
accomplish its strategic objectives with respect to external expansion through
selective acquisitions and internal expansion; and (iii) increases in the
dial-around compensation rate and the coin drop rate. Any or all of these risks
and uncertainties could cause actual results to differ materially from those
reflected in the forward-looking statements. These forward looking statements
are based on certain assumptions and analyses made by the Company in light of
its experience and its perception of historical trends, current conditions,
expected future developments and other factors it believes are appropriate in
the circumstances. In addition, such statements are subject to a number of
assumptions, risks and uncertainties, including, without limitation, the risks
and uncertainties identified in this Report, general economics and business
conditions, the business opportunities (or lack thereof) that may be presented
to and pursued by the Company, changes in laws or regulations and other factors,
many of which are beyond the control of the Company. Investors and prospective
investors are cautioned that any such statements are not guarantees of future
performance and that actual results or developments may differ materially from
those projected in the forward looking statements.
13
<PAGE> 14
EXPIRED TENDER OFFER AND RELATED MERGER AGREEMENT
Communications Central Inc. ("CCI") On March 14, 1997, (and
subsequently amended on May 15, 1997) the Company tendered an offer pursuant to
merger agreement whereby the Company would acquire all the outstanding shares of
common stock and associated rights to purchase such common stock for $12.85 per
share in cash. The total cost of the transaction, including debt to be assumed
or refinanced and excluding related fees, was estimated to be approximately
$172,000. The tender offer was conditioned upon, among other things, 75% of the
outstanding CCI shares, on a fully diluted basis, being tendered and the receipt
by the Company of financing sufficient to enable it to consummate the
transaction. Pursuant to the merger agreement and the subsequent amendment
dated May 15, 1997, the Company deposited $6,000 with CCI. This amount was
refundable only under certain limited conditions. The Company's successful
consummation of the CCI acquisition was dependent upon, among other things, its
ability to raise sufficient debt and/or equity to finance the tender offer.
On July 22, 1997, the Company and CCI jointly announced that they were
engaged in discussions concerning a possible restructuring of the terms of the
acquisition in light of the July 1, 1997 court decision (see Note 10). On
August 5, 1997 the Company announced that it had extended the tender offer to
August 18, 1997. By August 18, 1997 the Company had not obtained the necessary
financing to complete the merger thereby forfeiting the $6,000 deposit upon
expiration of the tender offer. In addition, the Company had incurred
professional fees and related expenses of approximately $1,818 in connection
with the expired tender offer and related merger agreement and related
offerings. Accordingly, the Company recorded a charge of $7,818 to Other
Unusual Charges and Contractual Settlements in the three months ended September
30, 1997.
COMPLETED ACQUISITIONS
Acquisitions completed during the nine months ended September 30, 1997:
London - June 10, 1997, 2,519 installed public pay telephones for $9,672.
Advance - May 30, 1997, 800 installed public pay telephones for $2,734.
American - May 30, 1997, 859 installed public pay telephones for $3,307.
Coinlink - February 14, 1997, 300 installed public pay telephones for $942.
RSM - January 31, 1997, 292 installed public pay telephones for $1,061.
Americom - January 17, 1997, 99 installed public pay telephones for $274.
Texas Coinphone - January 14, 1997, 1,250 public installed pay telephones
for $3,746.
Cherokee Communications, Inc. - January 1, 1997 ("Cherokee") 13,131 public
pay telephones for a purchase price consisting of: $53,953; $1,250 for
non-competition agreements; $4,174 for acquired outstanding accounts
receivable, prepaid expenses, deposits and coin in the installed pay
telephones; and the assumption of $5,443 in liabilities. Additionally,
the Company incurred approximately $1,656 in acquisition related
expenses.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
Revenues. Revenues increased $56,680, or 200%, from $28,316 for the
nine months ended September 30, 1996 to $84,996 for the nine months ended
September 30, 1997. This increase is attributable primarily to the number of
installed public pay telephones, which increased by 19,273, or 78%, from 24,732
at September 30, 1996 to 44,005 at September 30, 1997, with the majority of the
increase occurring in the third quarter of 1996 and the first quarter of 1997
due to the Company's recent acquisitions, and the increase in the mandated
monthly dial-around rate. The weighted average number of installed public pay
telephones increased by 27,723, or 193%, from 14,352 for the nine months ended
September 30, 1996 to 42,075 for the nine months ended September 30, 1997.
Revenues from coin calls increased $26,895, or 158%, from $16,989 for
the nine months ended September 30, 1996 to $43,884 for the nine months ended
September 30, 1997. Coin calls represented 60% of total revenues for the nine
months ended September 30, 1996 and 51% of total revenues for the nine months
ended September 30, 1997, a decrease of 9%. Non-coin telecommunication services
(including dial-around revenues) increased $29,933,
14
<PAGE> 15
or 279%, from $10,711 for the nine months ended September 30, 1996 to $40,644
for nine months ended September 30, 1997. The increases were primarily the
result of the Company's recent acquisitions which produced additional revenues
and the increase in the monthly dial-around compensation rate. Non-coin
telecommunication services represented 38% of total revenues for the nine months
ended September 30, 1996 and 48% of total revenues for the nine months ended
September 30, 1997, an increase of 10%. Dial-around revenues increased $15,407,
or 1,668%, from $924 for the nine months ended September 30, 1996 to $16,331 for
the nine months ended September 30, 1997. Dial-around revenues represented 3% of
total revenues for the nine months ended September 30, 1996 and 19% of total
revenues for the nine months ended September 30, 1997, an increase of 16%. This
increase was due to the increase in the number of public pay telephones owned
and operated by the Company. The FCC mandated changes in the dial-around rate
and compensation, pursuant to the February 8, 1996 enactment of Section 276 of
the Telecommunications Act.
On September 20, 1996, the Federal Communications Commission
("FCC") adopted rules in a docket entitled IN THE MATTER OF IMPLEMENTATION OF
THE PAY TELEPHONE RECLASSIFICATION AND COMPENSATION PROVISIONS OF THE
TELECOMMUNICATIONS ACT OF 1996, FCC 96-388 (the "1996 Payphone Order"),
implementing the payphone provisions of Section 276 of the Telecommunications
Act of 1996 ("Telecom Act"). The 1996 Payphone Order, which became effective
November 7, 1996, initially mandated dial-around compensation for both access
code calls and 800 subscriber calls at a flat rate of $45.85 per payphone per
month (131 calls multiplied by $0.35 per call). Commencing October 7, 1997 and
ending October 6, 1998 the $45.85 per payphone per month rate was to transition
to a per-call system at the rate of $0.35 per call. Several parties filed
petitions for judicial review of certain of the FCC regulations, including the
dial-around compensation rate. On July 1, 1997, the U.S. Court of Appeals for
the District of Columbia Circuit (the "Court") responded to appeals related to
the 1996 Payphone Order by remanding certain issues to the FCC for
reconsideration. These issues included, among other things, the manner in which
the FCC established the dial-around compensation for 800 subscriber and access
code calls, the manner in which the FCC established the interim dial-around
compensation plan and the basis upon which interexchange carriers ("IXCs")
would be required to compensate payphone service providers ("PSPs"). The Court
remanded the issue to the FCC for further consideration, and clarified on
September 16, 1997 that it had vacated certain portions of the FCC's 1996
Payphone Order, including the dial-around compensation rate. Specifically, the
Court determined that the FCC did not adequately justify (i) the per-call
compensation rate for subscriber 800 and access code calls at the deregulated
local coin rate of $0.35, because it did not sufficiently justify its
conclusion that the costs of local coin calls are similar to those of
subscriber 800 and access code calls; and (ii) the allocation of the payment
obligation among the IXCs for the period from November 7, 1996 through
October 6, 1997.
In accordance with the Court's mandate, on October 9, 1997, the FCC
adopted and released its SECOND REPORT AND ORDER in the same docket, FCC 97-371
(the "1997 Payphone Order"). This order addressed the per-call compensation rate
for subscriber 800 and access code calls that originate from payphones in light
of the decision of the Court which vacated and remanded certain portions of the
FCC's 1996 Payphone Order. The FCC concluded that the rate for per-call
compensation for subscriber 800 and access code calls from payphones is the
deregulated local coin rate adjusted for certain cost differences. Accordingly,
the FCC established a rate of $0.284 ($0.35-$0.066) per call for the first two
years of per-call compensation. The IXCs are required to pay this per-call
amount to PSPs, including the Company, beginning October 7, 1997. After the
first two years of per-call compensation, the market-based local coin rate,
adjusted for certain costs defined by the FCC as $0.066 per call, is the
surrogate for the per-call rate for subscriber 800 and access code calls.
These new rule provisions were made effective as of October 7, 1997.
In addition, the 1997 Payphone Order tentatively concluded that the
same $0.284 per call rate adopted on a going-forward basis should also govern
compensation obligations during the period from November 7, 1996 through October
6, 1997, and that PSPs are entitled to compensation for all access code and
subscriber 800 calls during this period. The FCC stated that the manner in which
the payment obligation of the IXCs for the period from November 7, 1996 through
October 6, 1997 will be allocated among the IXCs will be addressed in a
subsequent order.
Based on the FCC's tentative conclusion in the 1997 Payphone Order, the
Company has adjusted the amounts of dial-around compensation previously recorded
related to period from November 7, 1996 through June 30, 1997 from the initial
$45.85 rate to $37.20 (the $0.284 per call multiplied by 131 calls). As a result
of this adjustment, the net provision recorded in the third quarter for reduced
dial-around compensation is approximately $2,361 ($0.15 per share). For the
period from July 1, 1997 through October 6, 1997, the Company has recorded (and
will record) dial-around compensation at the rate of $37.20 per payphone per
month. The amount of dial-around revenue recognized in the period from July 1,
1997 through October 6, 1997 is $4,952 and such amount will be billed after
final resolution of the allocation obligations of the IXCs as determined by the
FCC.
The Company's counsel, Skadden, Arps, Slate, Meagher & Flom LLP, is of
the opinion that the Company is legally entitled to fair compensation under the
Telecom Act for dial-around calls the Company delivered to any carrier during
the period from November 7, 1996 through October 6, 1997. Based on the
information available, the Company believes that the minimum amount it is
entitled to as fair compensation under the Telecom Act for the period from
November 7, 1996 through October 6, 1997 is $37.20 per payphone per month and
the Company, based on the information available to it, does not believe that it
is reasonably possible that the amount will be materially less than $37.20 per
payphone per month. While the amount of $0.284 per call constitutes the
Company's position of the appropriate level of fair compensation, certain IXCs
have asserted in the past, are asserting and are expected to assert in the
future that the appropriate level of fair compensation should be lower than the
$0.284 per call. In a letter to the FCC dated August 15, 1997, AT&T stated its
intentions to make dial-around payments to PSPs based on its imputed rate of
$0.12 per call until the FCC issues a new order setting the level of fair
compensation.
The foregoing sentence constitutes a forward-looking statement within
the meaning of Section 21E of the Securities and Exchange Act of 1934, as
amended.
Other revenues decreased $148 from $616 for the nine months ended
September 30, 1996 to $468 for the nine months ended September 30, 1997.
Operating Expenses. Total operating expenses increased $51,941, or
140%, from $37,156 for the nine months ended September 30, 1996 to $89,097 for
the nine months ended September 30, 1997. Operating expenses represented 131% of
total revenues for the nine months ended September 30, 1996 and 105% of total
revenues for the nine months ended September 30, 1997, a decrease of 26%. The
percentage decrease was due to the lower line and transmission, location
commissions and administrative costs (as a percentage of total revenues) offset
by higher depreciation and amortization resulting from the acquisitions, the
loss resulting from the expiration of the tender offer and related merger
agreement and the provision recorded for dial-around compensation to recognize
the change in the mandated dial-around compensation rates.
Line and transmission charges increased $10,934, or 161%, from $6,800
for the nine months ended September 30, 1996 to $17,734 for the nine months
ended September 30, 1997. Line charges represented 24% of total revenues for the
nine months ended September 30, 1996 and 21% of total revenues for the nine
months ended September 30, 1997, a decrease of 3%. The dollar increase in line
and transmission charges was due principally to the increase in the number of
public pay telephones owned and operated by the Company as a result of its
recent acquisitions. The percentage decrease was due to higher dial-around
revenues.
Telecommunication and validation fees (consisting primarily of
processing costs relating to operator services) increased $5,838, or 164%, from
$3,562 for the nine months ended September 30, 1996 to $9,400 for the nine
months ended September 30, 1997. Telecommunication and validation fees
represented 13% of total revenues for the nine months ended September 30, 1996
and 11% for the nine months September 30, 1997, a decrease of 2%. The dollar
increase was primarily the result of the increase in the number of installed
public pay telephones owned and operated by the Company as a result of its
recent acquisitions and the elimination of the Company's operator service
center and the related outsourcing of said services during the second quarter of
1996. The percentage decrease was mostly due to the effect of the increase in
dial-around revenues on total revenues.
Location commissions increased $6,831, or 182%, from $3,746 for the
nine months ended September 30, 1996 to $10,577 for the nine months ended
September 30, 1997. Location commissions represented 13% of total revenues for
the nine months ended September 30, 1996 and 12% of total revenues for the nine
months ended September 30, 1997, a decrease of 1%. The dollar increase is the
result of the increased number of location providers receiving commissions due
to the increased number of location agreements owned by the Company as a result
of the recent acquisitions. The percentage decrease is due to the effect of the
increase in dial-around revenues.
Field operations (consisting principally of field operations personnel
costs, rents and utilities of the local service facilities and repair and
maintenance of the installed public pay telephones) increased $11,359, or 212%,
from $5,364 for the nine months ended September 30, 1996 to $16,723 for the nine
months ended September 30, 1997. Field operations represented 19% of total
revenues for the nine months ended September 30, 1996 and 1997. The dollar
increase was primarily the result of higher operating and service costs
attributable to the Company's recent acquisitions and the resulting increased
number of public pay telephones owned and operated by the Company base and the
additional field personnel needed to accommodate that increase.
Selling, general and administrative ("SG&A") expenses increased $4,530,
or 138%, from $3,289 for the nine months ended September 30, 1996 to $7,819 for
the nine months ended September 30, 1997. SG&A represented 12% of total revenues
for the nine months ended September 30, 1996 and 9% of total revenues for the
nine months ended September 30, 1997, a decrease of 3%. The dollar increase was
primarily the result of the
15
<PAGE> 16
Company's recent acquisitions and the percentage decrease reflects the
economies of scale realized by the Company from those acquisitions and the
effect of the increase in dial-around compensation revenues.
Depreciation and amortization increased $7,744, or 87%, from $8,877 for
the nine months ended September 30, 1996 to $16,621 for the nine months ended
September 30, 1997. Depreciation and amortization represented 31% of total
revenues for the nine months ended September 30, 1996 and 19% of total revenues
for the nine months ended September 30, 1997, a decrease of 12%. The dollar
increase was primarily due to the Company's recent acquisitions, expansion of
its public pay telephone base and purchases of additional computer equipment,
service vehicles and software to accommodate the Company's growth. The
percentage decrease is due, in part, to a change in the estimated remaining
economic life of acquired location contracts, which became effective in the
fourth quarter of 1996. This change is expected to decrease depreciation and
amortization by $2,645 each year.
Other unusual charges and contractual settlements increased $2,344, or
42%, from $5,518 for the nine months ended September 30, 1996 to $7,862 for the
nine months ended September 30, 1997. For the nine months ended September 30,
1996, other unusual charges and contractual settlements consisted primarily of:
(i) the settlement of contractual obligations under certain employment
contracts, $331; (ii) 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, $460; (iii) 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; (iv) the
estimated fair market value of certain warrants charged to operations, $3,886;
and (v) the settlement of other contractual obligations, $211. For the nine
months ended September 30, 1997, other unusual charges and contractual
settlements consisted of forfeited deposits relating to the proposed acquisition
of CCI and expenses of the related proposed offerings.
Other income (expense). Other income (expense) is comprised principally
of interest expense incurred on debt and interest income. Total interest expense
increased $8,145, or 197%, from $4,139 for the nine months ended September 30,
1996 to $12,284 for the nine months ended September 30, 1997. Interest expense
represented 15% of total revenues for the nine months ended September 30, 1996
and 14% of total revenues for the nine months ended September 30, 1997, a
decrease of 1%. The dollar amount and percentage increase resulted from the
additional debt from an offering of debt by the Company in December 1996.
Interest income was $468 for the nine months ended September 30, 1997, or 1% of
total revenues for the nine months ended September 30, 1997, and resulted from
the investment of acquisition deposits and excess operating cash.
Extraordinary item. The Company recorded an extraordinary loss of $267;
representing 1% of total revenues for the nine months ended September 30, 1996.
The extraordinary loss related to one-time costs that were incurred in
connection with the refinancing of the Company's long-term debt. Concurrent with
the refinancing of the Company's debt and the redemption of the 10%, 8% and 7%
Preferred, the Company recorded the difference between the carrying value of the
10%, 8% and 7% Preferred and the redemption price as an increase to the
accumulated deficit of $2,002.
EBITDA. EBITDA (income before interest income, interest expense, taxes,
depreciation and amortization, other unusual charges and contractual
settlements, and the extraordinary loss on debt refinancing) increased $14,827,
or 267%, from $5,555 for the nine months ended September 30, 1996 to $20,382 for
the nine months ended September 30, 1997. EBITDA represented 20% of total
revenues for the nine months ended September 30, 1996 and 24% of total revenues
for the nine months ended September 30, 1997, an increase of 4%. The increase in
EBITDA both in dollars and as a percentage of revenues, is attributable
primarily to the increase in dial-around compensation and the increase in
telephones owned and operated by the Company as a result of recent acquisitions.
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. The Company believes
that EBITDA is a meaningful measure of performance because it is commonly used
in the public pay
16
<PAGE> 17
telephone industry to analyze comparable public pay telephone companies on the
basis of operating performance, leverage and liquidity.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows. The Company had a working capital deficit of $12,089 at
September 30, 1997, compared to $39,491 at December 31, 1996, a decrease of
$51,580, resulting from the acquisitions completed in 1997, the reclassification
of debt under the Credit Agreement to current and the forfeiture of the CCI
acquisition deposits. Net cash provided by (used in) operating activities during
the nine months ended September 30, 1996 and 1997 were ($646) and $785,
respectively. Net cash provided by operations resulted primarily from the
increased dial-around compensation.
Cash used in investing activities during the nine months ended
September 30, 1996 and 1997 were $24,778 and $53,372, respectively. Cash used in
investing activities consisted primarily of payments and deposits to acquire
companies and purchases of property and equipment, offset (in 1997 only) by the
release of the escrowed cash equivalents for the closing of the Cherokee
acquisition.
Cash flows provided by financing activities during the nine months
ended September 30, 1996, and 1997 were $25,367 and $19,037, respectively. The
decrease was due to a reduction in related party borrowings and principal
payments on borrowings offset by the net proceeds from the exercise of the
underwriters' Over-Allotment Option (wherein the underwriters' purchased
1,012,500 additional shares of Common Stock, at a net purchase price of $2.79
per share pursuant to the Company Equity Offering completed on December 18,
1996, wherein the Company sold 6,750,000 shares of Common Stock at a price to
the public of $3.00 per share.
As of November 13, 1997, the Company has borrowed $21,700 of the
$75,000 Credit Facility (see Note 5). The Credit Facility includes covenants
which, among other things, require the Company to maintain ratios as to fixed
charges, debt to EBITDA, current ratio and interest coverage (all as defined in
the Credit Facility). Other covenants limit the incurrence of additional
long-term debt, the level of capital expenditures, the incurrence of lease
obligations and permitted investments. Pursuant to certain terms of the Credit
Facility, the agent has also given notice that the Company is prohibited from
making waivers of additional borrowing under the Credit Facility without prior
approval of the Lenders.
Management believes, (subject to obtaining written covenant
noncompliance from the Lenders), but cannot assure, that cash flows from
operations and other financial alternatives, will be sufficient to meet the
Company's cash requirements for working capital, capital expenditures and debt
service over the next twelve months.
CAPITAL EXPENDITURES
For the nine months ended September 30, 1997, the Company had capital
expenditures (exclusive of acquisitions) of $4,979, which were financed through
cash flows from operations and net proceeds from an offering of debt and equity
by the Company. Capital expenditures are principally for the expansion of the
Company's installed public pay telephone base and include purchases of
telephones, related equipment, site contracts, operating equipment and computer
hardware.
SEASONALITY
The Company completed five acquisitions, which added 14,616 public pay
telephones, in the first nine months of 1996, and eight acquisitions, that added
19,250 public pay telephones, during the first nine months of 1997. The
seasonality of the Company's historical operating results has been reduced by
shifts in the geographic concentrations of its public pay telephones resulting
from such acquisitions which are located principally in the southeastern,
southwestern, and western United States compared to the historical concentration
in the mid-western United States.
17
<PAGE> 18
YEAR 2000 ISSUES
The Company expects to meet the management system requirements of the
year 2000 as they relate to its financial reporting and pay telephone systems
with current systems in place.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(10.1) Settlement Agreement as of August 8, 1997 together with the
Release and Termination of escrow agent between PhoneTel Technologies,
Inc. and Bill H. Bailey, Jr. and J. Bruce Duty, as duly authorized
agents on behalf of Bill H. Bailey, Jr., Edward L. Marshall, Jerry T.
Beddow, C. Nelson Trimble, Berthel Fisher & Company Investments, Inc.
Capital Southwest Corporation, Capital Southwest Venture Corporation,
and Bank One Capital Partners, L.P, and Comerica Bank-Texas as escrow
agent.
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on October 21, 1997.
18
<PAGE> 19
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.
November 13, 1997 By:
----------------------------------
Peter G. Graf
Chairman of the Board and
Chief Executive Officer
November 13, 1997 By:
----------------------------------
Richard Kebert
Chief Financial Officer and
Treasurer
(Principal Financial Officer and
Accounting Officer)
19
<PAGE> 20
EXHIBITS
(10.1) Settlement Agreement as of August 8, 1997 together with the
Release and Termination of escrow agent between PhoneTel Technologies,
Inc. and Bill H. Bailey, Jr. and J. Bruce Duty, as duly authorized
agents on behalf of Bill H. Bailey, Jr., Edward L. Marshall, Jerry T.
Beddow, C. Nelson Trimble, Berthel Fisher & Company Investments, Inc.
Capital Southwest Corporation, Capital Southwest Venture Corporation,
and Bank One Capital Partners, L.P, and Comerica Bank-Texas as escrow
agent.
(27) Financial Data Schedule
20
<PAGE> 1
Exhibit 10.1
RELEASE AND TERMINATION
-----------------------
This RELEASE AND TERMINATION ("Release") is made and entered
into as of August 8, 1997 by and among Comerica Bank-Texas (the "Escrow Agent"),
PhoneTel Technologies, Inc., an Ohio corporation ("PhoneTel"), and Bill H.
Bailey, Jr. and J. Bruce Duty, as duly authorized agents (collectively, the
"Sellers' Representatives") on behalf of Bill H. Bailey, Jr., Edward L.
Marshall, Jerry T. Beddow, C. Nelson Trimble, Berthel Fisher & Company
Investments, Inc., Capital Southwest Corporation, Capital Southwest Venture
Corporation, Bank One Capital Partners, L.P. (collectively, the "Sellers").
WHEREAS, the parties hereto are parties to an Escrow Agreement
dated as of November 21, 1996, as amended by the Amendment to Escrow Agreement
dated as of December 31, 1996 (the "Escrow Agreement");
WHEREAS, the parties hereto desire to direct the Escrow Agent
to release the remainder of the Escrow Amounts; and
WHEREAS, the parties hereto further desire to terminate the
Escrow Agreement and to release the Escrow Agent from any further obligations or
responsibilities thereunder.
NOW, THEREFORE, in consideration of the premises and intending
to be legally bound hereby, the parties hereto agree as follows:
Section 1. DEFINED TERMS. Capitalized terms used but not
otherwise defined herein shall have the meanings ascribed to such terms in the
Escrow Agreement.
Section 2. DISBURSEMENT OF FUNDS. The Sellers' Representatives
and PhoneTel hereby authorize and direct the Escrow Agent to release the
remainder of the Escrow Amounts and the earnings and interest thereon as
follows:
(a) to the Sellers' Representatives, after deduction of 50% of
the Escrow Agent's fee (as contemplated by Section 7 of the Escrow
Agreement):
<PAGE> 2
(i) the remainder of the Merger Escrow Amount, (ii) the earnings and
interest (adjusted for any increase or decrease in the principal value
of any investment or any capital gain or loss, as the case may be) on
the Merger Escrow Amount, and (iii) $1.8 million of the Rate Cap Escrow
Amount; and
(b) to PhoneTel, after deduction of 50% of the Escrow Agent's
fee (as contemplated by Section 7 of the Escrow Agreement): (i) $4.2
million of the Rate Cap Escrow Amount and (ii) the earnings and
interest (adjusted for any increase or decrease in the principal value
of any investment or any capital gain or loss, as the case may be) on
the Rate Cap Escrow Amount.
Section 3. RELEASE OF ESCROW AGENT. Effective immediately upon
the disbursement of funds as contemplated by Section 2 hereof, the Sellers'
Representatives and PhoneTel hereby (i) discharge the Escrow Agent from its
duties under the Escrow Agreement, and (ii) subject to such disbursement,
release the Escrow Agent from any loss or claim whatsoever (including attorneys'
fees) in conjunction with the performance of its duties under the Escrow
Agreement.
Section 4. TERMINATION. Upon the final distribution of funds
contemplated by Section 2 hereof, but subject to Section 3 hereof, the Escrow
Agreement shall be terminated, except for the provisions therein which, by their
express terms, are to survive the termination of the Escrow Agreement.
Section 5. COUNTERPARTS. This Release may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which shall together constitute one and the same instrument.
Section 6. GOVERNING LAW. This Release shall be construed in
accordance with and governed by the internal laws of the State of Texas without
giving effect to the principles of conflicts of law thereof.
Section 7. BENEFIT. This Release shall be binding upon and
inure to the benefit of the parties hereto and the successors and assigns of
each of them.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have affixed their
signatures to this Release upon the date first set forth above.
COMERICA BANK-TEXAS
By: /s/ Charles D. Holmes
----------------------------------
Name: Charles D. Holmes
Title: Vice President and Trust
Officer
PHONETEL TECHNOLOGIES, INC.
By: /s/ Peter G. Graf
----------------------------------
Name: Peter G. Graf
Title: Chairman and Chief
Executive Officer
SELLERS' REPRESENTATIVES, ON
BEHALF OF THE SELLERS:
BILL H. BAILEY, JR., individually
EDWARD L. MARSHALL, individually
JERRY T. BEDDOW, individually
C. NELSON TRIMBLE, individually
BERTHEL FISHER & COMPANY
INVESTMENTS, INC.
CAPITAL SOUTHWEST CORPORATION
CAPITAL SOUTHWEST VENTURE
CORPORATION
BANC ONE CAPITAL PARTNERS, L.P.
By: /s/ BILL H. BAILEY, JR.
----------------------------------
BILL H. BAILEY, JR.,
as Sellers' Representative
By: /s/ J. BRUCE DUTY,
----------------------------------
J. BRUCE DUTY,
as Sellers' Representative
3
<PAGE> 4
AGREEMENT
---------
This AGREEMENT ("Agreement") is made and entered into as of
August 8, 1997 by and among PhoneTel Technologies, Inc., an Ohio corporation
("Buyer"), Cherokee Communications, Inc., formerly known as PhoneTel CCI,
Inc., a Texas corporation and wholly owned subsidiary of the Buyer ("CCI"), and
Bill H. Bailey, Jr. and J. Bruce Duty, as duly authorized agents (collectively,
the "Sellers' Representatives") on behalf of Bill H. Bailey, Jr., Edward L.
Marshall, Jerry T. Beddow, C. Nelson Trimble, Berthel Fisher & Company
Investments, Inc., Capital Southwest Corporation, Capital Southwest Venture
Corporation, Bank One Capital Partners, L.P. (collectively, the "Sellers").
WHEREAS, the Buyer, CCI and the Sellers entered into that
certain Agreement and Plan of Merger, dated as of November 21, 1996, as amended
by the Amendment to Agreement and Plan of Merger, dated as of December 31, 1996
(the "Merger Agreement");
WHEREAS, the Buyer, the Sellers' Representatives and Comerica
Bank-Texas (the "Escrow Agent") entered into that certain Escrow Agreement dated
as of November 21, 1996, as amended by the Amendment to Escrow Agreement, dated
as of December 31, 1996 (the "Escrow Agreement");
WHEREAS, pursuant to and in accordance with Section 1.5(a) of
the Merger Agreement, the Buyer submitted to the Sellers' Representatives, by
letter dated May 23, 1997 (the "Adjustment Schedule Letter"), an Adjustment
Schedule which included the calculation of the Consideration as adjusted
pursuant to Section 1.4 of the Merger Agreement;
WHEREAS, pursuant to and in accordance with Section 1.5(b) of
the Merger Agreement, the Sellers' Representatives submitted to the Buyer, by
letter dated June 19, 1997 (the "Sellers' Response Letter"), their response,
good faith objections and dollar amount of each objection to the Adjustment
Schedule received by the Sellers' Representatives from the Buyer;
<PAGE> 5
WHEREAS, pursuant to and in accordance with Section 1.5(c) of
the Merger Agreement, the Buyer submitted to the Sellers' Representatives, by
letter dated July 17, 1997 (the "Buyer's Response Letter"), the Buyer's good
faith response to the Sellers' Response
Letter;
WHEREAS, in accordance with Section 1.5(d) of the Merger
Agreement, the Buyer and the Sellers' Representatives desire to resolve all
objections to the Adjustment Schedule and agree on the amount of the adjustment
to the Consideration; and
WHEREAS, the Buyer and the Sellers' Representatives have
agreed to amend the Escrow Agreement to provide for the distribution of the
funds reflecting the agreed upon adjustment to the Consideration.
NOW, THEREFORE, in consideration of the premises and intending
to be legally bound hereby, the parties hereto agree as follows:
Section 1. DEFINED TERMS. Capitalized terms used but not
otherwise defined herein shall have the meanings ascribed to such terms in the
Merger Agreement.
Section 2. ESCROW AMENDMENT. Simultaneously with the execution
and delivery of this Agreement, the Buyer, the Sellers' Representatives and the
Escrow Agent are entering into a Release and Termination of the Escrow
Agreement, in the form attached to this Agreement as Exhibit A (the "Release"),
pursuant to which the remaining Escrow Amount, and the earnings and interest
thereon, are to be released to the Sellers' Representatives and PhoneTel.
Section 3. PAYMENT OF THE ADJUSTMENT TO THE CONSIDERATION.
Notwithstanding anything to the contrary contained in the Merger Agreement, the
parties hereto agree that the distributions to be made by the Escrow Agent in
accordance with the terms and conditions of the Release reflect the parties'
agreement with respect to the adjustment to the Consideration (including,
without limitation, with respect to the tax matters set forth in the Adjustment
Schedule Letter and the Buyer's Response Letter), pursuant to the terms and
provisions of the Merger Agreement (including, without limitation, Sections
2
<PAGE> 6
1.4 and 1.5 therein). Buyer hereby acknowledges that it waives, solely with
respect to the tax matters set forth in the Adjustment Schedule Letter and the
Buyer's Response Letter, any right to make any other claims against the Sellers
for indemnification pursuant to Section 7.7 of the Merger Agreement. Buyer also
acknowledges that the Seller Representatives are entitled to receive any tax
refunds relating to the exercise by certain Sellers of stock options prior to
the Effective Time.
Section 4. CLAIMS AGAINST THE SELLERS. As of the date hereof,
Buyer has no additional claims against the Sellers, jointly or severally, with
respect to the transactions contemplated under the Merger Agreement.
Section 5. PARTIES IN INTEREST; NO THIRD PARTY BENEFICIARIES.
(a) This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the parties hereto and their respective successors and permitted
assigns. This Agreement and the rights and obligations of the parties hereunder
may not be assigned by any of the parties hereto without the prior written
consent of the other parties.
(b) This Agreement is not intended, nor shall it be construed,
to confer upon any Person except the parties hereto and their heirs, successors
and permitted assigns any rights or remedies under or by reason of this
Agreement.
Section 6. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.
Section 7. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of Texas without giving
effect to the conflicts of law principles of such jurisdiction.
3
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement, on the day and year first above written.
PHONETEL TECHNOLOGIES, INC.
By: /s/ Peter G. Graf
---------------------------------
Peter G. Graf
Chairman and
Chief Executive Officer
CHEROKEE COMMUNICATIONS, INC.
By: /s/ Peter G. Graf
---------------------------------
Peter G. Graf
Chairman and
Chief Executive Officer
SELLERS' REPRESENTATIVES, ON
BEHALF OF THE SELLERS:
BILL H. BAILEY, JR., individually
EDWARD L. MARSHALL, individually
JERRY T. BEDDOW, individually
C. NELSON TRIMBLE, individually
BERTHEL FISHER & COMPANY
INVESTMENTS, INC.
CAPITAL SOUTHWEST CORPORATION
CAPITAL SOUTHWEST VENTURE
CORPORATION
BANC ONE CAPITAL PARTNERS, L.P.
By: /s/ BILL H. BAILEY, JR.
---------------------------------
BILL H. BAILEY, JR.,
as Sellers' Representative
By: /s/ J. BRUCE DUTY
---------------------------------
J. BRUCE DUTY,
as Sellers' Representative
4
<PAGE> 8
AGREEMENT
This AGREEMENT ("Agreement") is made and entered into as of
August 8, 1997 by and among PhoneTel Technologies, Inc., an Ohio corporation
("Buyer"), Cherokee Communications, Inc., formerly known as PhoneTel CCI,
Inc., a Texas corporation and wholly owned subsidiary of the Buyer ("CCI"), and
Bill H. Bailey, Jr. and J. Bruce Duty, as duly authorized agents (collectively,
the "Sellers' Representatives") on behalf of Bill H. Bailey, Jr., Edward L.
Marshall, Jerry T. Beddow, C. Nelson Trimble, Berthel Fisher & Company
Investments, Inc., Capital Southwest Corporation, Capital Southwest Venture
Corporation, Bank One Capital Partners, L.P. (collectively, the "Sellers").
WHEREAS, the Buyer, CCI and the Sellers entered into that certain
Agreement and Plan of Merger, dated as of November 21, 1996, as amended by the
Amendment to Agreement and Plan of Merger, dated as of December 31, 1996 (the
"Merger Agreement");
WHEREAS, the Buyer, the Sellers' Representatives and Comerica
Bank-Texas (the "Escrow Agent") entered into that certain Escrow Agreement dated
as of November 21, 1996, as amended by the Amendment to Escrow Agreement, dated
as of December 31, 1996 (the "Escrow Agreement");
WHEREAS, pursuant to and in accordance with Section 1.5(a) of the
Merger Agreement, the Buyer submitted to the Sellers' Representatives, by letter
dated May 23, 1997 (the "Adjustment Schedule Letter"), an Adjustment Schedule
which included the calculation of the Consideration as adjusted pursuant to
Section 1.4 of the Merger Agreement;
WHEREAS, pursuant to and in accordance with Section 1.5(b) of the
Merger Agreement, the Sellers' Representatives submitted to the Buyer, by letter
dated June 19, 1997 (the "Sellers' Response Letter"), their response, good faith
objections and dollar amount of each objection to the Adjustment Schedule
received by the Sellers' Representatives from the Buyer;
<PAGE> 9
WHEREAS, pursuant to and in accordance with Section 1.5(c) of
the Merger Agreement, the Buyer submitted to the Sellers' Representatives, by
letter dated July 17, 1997 (the "Buyer's Response Letter"), the Buyer's good
faith response to the Sellers' Response
Letter;
WHEREAS, in accordance with Section 1.5(d) of the Merger
Agreement, the Buyer and the Sellers' Representatives desire to resolve all
objections to the Adjustment Schedule and agree on the amount of the adjustment
to the Consideration; and
WHEREAS, the Buyer and the Sellers' Representatives have
agreed to amend the Escrow Agreement to provide for the distribution of the
funds reflecting the agreed upon adjustment to the Consideration.
NOW, THEREFORE, in consideration of the premises and intending
to be legally bound hereby, the parties hereto agree as follows:
Section 1. DEFINED TERMS. Capitalized terms used but not
otherwise defined herein shall have the meanings ascribed to such terms in the
Merger Agreement.
Section 2. ESCROW AMENDMENT. Simultaneously with the execution
and delivery of this Agreement, the Buyer, the Sellers' Representatives and the
Escrow Agent are entering into a Release and Termination of the Escrow
Agreement, in the form attached to this Agreement as Exhibit A (the "Release"),
pursuant to which the remaining Escrow Amount, and the earnings and interest
thereon, are to be released to the Sellers' Representatives and PhoneTel.
Section 3. PAYMENT OF THE ADJUSTMENT TO THE CONSIDERATION.
Notwithstanding anything to the contrary contained in the Merger Agreement, the
parties hereto agree that the distributions to be made by the Escrow Agent in
accordance with the terms and conditions of the Release reflect the parties'
agreement with respect to the adjustment to the Consideration (including,
without limitation, with respect to the tax matters set forth in the Adjustment
Schedule Letter and the Buyer's Response Letter), pursuant to the terms and
provisions of the Merger Agreement (including, without limitation, Sections
2
<PAGE> 10
1.4 and 1.5 therein). Buyer hereby acknowledges that it waives, solely with
respect to the tax matters set forth in the Adjustment Schedule Letter and the
Buyer's Response Letter, any right to make any other claims against the Sellers
for indemnification pursuant to Section 7.7 of the Merger Agreement. Buyer also
acknowledges that the Seller Representatives are entitled to receive any tax
refunds relating to the exercise by certain Sellers of stock options prior to
the Effective Time.
Section 4. CLAIMS AGAINST THE SELLERS. As of the date hereof,
Buyer has no additional claims against the Sellers, jointly or severally, with
respect to the transactions contemplated under the Merger Agreement.
Section 5. PARTIES IN INTEREST; NO THIRD PARTY BENEFICIARIES.
(a) This Agreement shall be binding upon, inure to the benefit of, and be
enforceable by, the parties hereto and their respective successors and permitted
assigns. This Agreement and the rights and obligations of the parties hereunder
may not be assigned by any of the parties hereto without the prior written
consent of the other parties.
(b) This Agreement is not intended, nor shall it be construed,
to confer upon any Person except the parties hereto and their heirs, successors
and permitted assigns any rights or remedies under or by reason of this
Agreement.
Section 6. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original but all of
which together shall constitute one and the same instrument.
Section 7. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of Texas without giving
effect to the conflicts of law principles of such jurisdiction.
3
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement, on the day and year first above written.
PHONETEL TECHNOLOGIES, INC.
By: /s/ Peter G. Graf
---------------------------------
Peter G. Graf
Chairman and
Chief Executive Officer
CHEROKEE COMMUNICATIONS, INC.
By: /s/ Peter G. Graf
---------------------------------
Peter G. Graf
Chairman and
Chief Executive Officer
SELLERS' REPRESENTATIVES, ON
BEHALF OF THE SELLERS:
BILL H. BAILEY, JR., individually
EDWARD L. MARSHALL, individually
JERRY T. BEDDOW, individually
C. NELSON TRIMBLE, individually
BERTHEL FISHER & COMPANY
INVESTMENTS, INC.
CAPITAL SOUTHWEST CORPORATION
CAPITAL SOUTHWEST VENTURE
CORPORATION
BANC ONE CAPITAL PARTNERS, L.P.
By: /s/ Bill H Bailey, Jr.
--------------------------------
BILL H. BAILEY, JR.,
as Sellers' Representative
By: J. Bruce Duty
--------------------------------
J. BRUCE DUTY,
as Sellers' Representative
4
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10QSB FOR
THE QUARTERLY PERIOD ENDED SPETEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 12,888
<SECURITIES> 0
<RECEIVABLES> 14,233
<ALLOWANCES> (787)
<INVENTORY> 0
<CURRENT-ASSETS> 27,345
<PP&E> 42,658
<DEPRECIATION> (13,485)
<TOTAL-ASSETS> 175,628
<CURRENT-LIABILITIES> 17,734
<BONDS> 125,350
6,708
0
<COMMON> 145
<OTHER-SE> 16,560
<TOTAL-LIABILITY-AND-EQUITY> 175,628
<SALES> 84,996
<TOTAL-REVENUES> 84,996
<CGS> 0
<TOTAL-COSTS> 89,097
<OTHER-EXPENSES> 483
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (12,284)
<INCOME-PRETAX> (15,902)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,902)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,902)
<EPS-PRIMARY> (1.04)
<EPS-DILUTED> (1.04)
</TABLE>
