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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report
0-16715
Commission File Number
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
October 9, 1997
Date of Report
(Date of Earliest Event Reported)
PHONETEL TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-1462198
(State of Incorporation) (I.R.S. Identification No.)
1127 Euclid Avenue
650 Statler Office Tower
Cleveland, Ohio 44115-1601
Address and zip code of principal executive offices
(216) 241-2555
Registrant's telephone number
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ITEM 5. OTHER EVENTS
DIAL-AROUND COMPENSATION
BACKGROUND
On September 20, 1996, the Federal Communications Commission ("FCC")
adopted rules (the "Payphone Order") implementing the public pay telephone
provisions of Section 276 of the Telecommunications Act enacted on February 8,
1996. Included in the adopted rules were mandated changes to the compensation
for access provided callers to any carrier other than the presubscribed carrier
(commonly referred to as "dial-around"). Beginning November 6, 1996,
dial-around compensation was mandated at the interim rate of $45.85 per
telephone per month, as compared with the flat fee of $6.00 per telephone per
month in place prior to November 6, 1996. The Payphone Order also provided that
commencing October 7, 1997, and ending October 6, 1998, the dial-around
compensation would change to a rate of $0.35 per call. Thereafter, the default
dial-around rate would be equal to the local coin call rate.
A number of parties filed petitions for judicial review of certain of
the FCC implementing regulations (including the dial-around compensation
rules). On July 1, 1997, the U.S. Court of Appeals for the District of Columbia
Circuit (the "Court") issued an order in Illinois Telecommunication Association
v. FCC et al. remanding certain issues to the FCC for reconsideration. These
issues included, among other things, the evidentiary basis for the interim and
default dial-around compensation rates adopted by the FCC and the basis on
which inter-exchange carriers (IXCs) would be required to compensate the pay
phone providers.
In particular, the FCC had mandated that the interm and default
compensation rate for 800 and access code calls should be equal to the
deregulated local coin rate. The FCC based this mandate on its conclusion that
the cost of coin calls, 800 calls and access code calls are all similar.
However, the Court found that the FCC failed to respond to any of the data on
the record showing that the costs of different types of pay phones calls are
not similar. Accordingly, the Court found that the FCC's conclusion that
compensation for 800 and access code calls should be set at the deregulated
local coin rate was unjustified and remanded this issue to the FCC for further
consideration. Additionally, the $.35 rate used to establish the interim
dial-around compensation, and which was an attempt to approximate the
deregulated rate, was also remanded. The Court found that the FCC must set a
new interim rate and decide how to adjust it when the interim period had come
to an end. Finally, the Court found that the FCC acted arbitrarily and
capriciously in requiring payments only from large IXCs, and had failed to
justify why it allocated the $45.85 based solely on total toll revenues of
IXCs. Accordingly, these issues were also remanded to the FCC.
On September 16, 1997, the Court granted a motion for rehearing and
clarification in connection with its July 1, 1997 decision.
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The Court stated that it had intended in its July 1 decision to vacate, and
not just to remand to the FCC for further consideration, those portions of the
Payphone Order setting at $.35 the interim and default per call compensation
rate and determining the composition of the carrier group which must pay the
flat rate interim compensation. Also, the Court reaffirmed the FCC's decision
to deregulate the local coin-calling rate charged at payphones, effective
October 7, 1997.
RECENT FCC ORDER
On October 9, 1997, the FCC addressed the default per-call compensation
rate for subscriber 800 and access code calls originated from pay phones (the
"1997 Order"). Effective October 7, 1997, the FCC established a rate of $0.284
per call (equivalent to $37.20 per pay phone per month, assuming 131 qualifying
calls per month as determined by the FCC's study underlying the Payphone Order;
its updated study underlying the 1997 order concluded that rates should be set
on the basis of an assumed 154 calls per phone per month) as the default
per-call compensation rate for subscriber 800 and access code calls. This rate
will be in effect for the first two years of the per-call compensation scheme
and will continue to be the default rate for dial-around calls absent a
negotiated rate. IXCs must pay this per-call amount to pay phone service
providers beginning October 7, 1999. In addition, the FCC mandated a per call
default rate of $0.284 for calls made from coinless phones and the market-based
coin rate less $0.066 for calls from other phones beginning on October 7, 1999.
While the FCC further stated that the compensation applicable during the period
from November 6, 1996, through October 6, 1997, including the method of
calculation and allocation among IXCs, will be addressed in a subsequent FCC
order in this proceeding, the FCC tentatively concluded that the $0.284
per-call rate adopted as a default rate on a going forward basis should also be
used to govern compensation obligations during the period ending October 6,
1997, and that payphone service providers are entitled to compensation for all
of their access code and subscriber 800 calls during this period.
As a result of the 1997 Order with respect to the calculation and
timing of collection of October 7, 1997 dial-around compensation, uncertainties
exist as to both the rate that will be finally adopted by the FCC for such
period and whether any changes to the rate would be retroactive. Historically,
the Company has recognized gross dial-around compensation at the $45.85 rate,
which was in effect during the period. If the FCC's tentative conclusion that
dial-around for the period November 6, 1996 through October 6, 1997, will be at
the default rate of $0.284 per-call, were applied to the assumed 131 calls per
month it would result in a reduction in gross dial-around compensation per
phone of $8.65 per phone per month. Using the forgoing assumptions would result
in a cumulative adjustment of approximately $3.5 million, net of estimated
expenses. A further reduction in the prior or default dial-around compensation
rate or the number of qualified calls made could have a material adverse effect
on the Company's results. Pending final FCC action, no assurances can be given
as to the exact amount or timing of any such adjustment.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
Statements, other than historical facts, contained in this Report on
Form 8-K, are "forward looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended,
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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) the effect of increases or decreases in the dial-around compensation rate
and the coin drop rate and the timing of receipt by the Company of any such
compensation. 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 economic 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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PhoneTel Technologies, Inc.
(Registrant)
Date: October 17, 1997 /s/ Peter G. Graf
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Peter G. Graf
Chairman of the Board and
Chief Executive Officer
