<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
COMMISSION FILE NUMBER 0-16715
PHONETEL TECHNOLOGIES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
OHIO 34-1462198
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
NORTH POINT TOWER, 7TH FLOOR, 1001 LAKESIDE AVENUE, CLEVELAND, OHIO 44114-1195
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(216) 241-2555
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
<S> <C>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE $0.01 AMERICAN STOCK EXCHANGE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $0.01 PAR VALUE
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(TITLE OF CLASS)
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 18, 1998 was $29,281,000.
The number of shares outstanding of the registrant's Common Stock, $.01 par
value, as of March 18, 1998 was 16,551,507.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for use at the 1998 Annual Meeting
of Shareholders are incorporated by reference in Part III hereof.
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PART I
ITEM 1. BUSINESS
PhoneTel Technologies, Inc. (the "Company") was incorporated under the
laws of the State of Ohio on December 24, 1984. The Company operates in the
telecommunications industry which encompasses the installation and operation, in
and on property owned by others, of public pay telephones on a revenue sharing
basis, and the resale of operator assisted and long distance services. The
Company's executive offices are located at North Point Tower, 7th Floor, 1001
Lakeside Avenue, Cleveland, Ohio 44114-1195 and its telephone number is (216)
241-2555.
The Company owns, operates, services and maintains a system of public
pay telephones. The Company derives substantially all of its revenues from coin
and non-coin calls placed from its public pay telephones. The Company enters
into contracts with location providers to operate public pay telephones at
locations where significant demand exists for public pay telephone services,
such as shopping centers, convenience stores, service stations, grocery stores,
restaurants, truck stops and bus terminals.
The Company has increased its revenue base from 2,350 installed public
pay telephones at December 31, 1993 to 43,847 installed public pay telephones at
December 31, 1997. The Company's base of installed public pay telephones at
March 13, 1998 was 43,156. This growth was principally achieved through
acquisitions and to a lesser extent through new phone installations resulting
from the Company's internal sales and marketing efforts.
The Company's objective is to grow its pay telephone base through
additional acquisitions, as well as through internal growth, thereby achieving
economies of scale while implementing cost savings. Company management believes
that there is a significant opportunity to consolidate the highly fragmented
independent segment of the public pay telephone industry. Selective acquisitions
enable the Company to expand its geographic presence and further its strategy of
clustering its public pay telephones more rapidly than with new installations.
When acquisitions are integrated, the Company typically can operate the public
pay telephones at a lower cost than the seller. Accordingly, the Company has
maintained an active acquisition program to acquire public pay telephones that
are in, or contiguous to, its existing markets or that can form the basis of a
new cluster. There can be no assurance that the Company will be able to continue
its objective of growing through additional acquisitions.
The Company actively seeks to install new public pay telephones and has
enhanced its internal sales and marketing efforts to obtain additional contracts
to own and operate public pay telephones with new and existing national,
regional and local accounts. In evaluating locations for the installation of
public pay telephones, the Company conducts a site survey to examine various
factors, including population density, traffic patterns, historical usage
information and other geographic factors. The installation of public pay
telephones in new locations is generally less expensive than acquiring public
pay telephones. As part of its strategy to continue to reduce operating costs,
the Company outsources its long distance and operator services to a number of
subcontractors that are providers of operator services ("OSPs"), principally
Intellicall Operator Services, Inc (together with Intellicall, Inc.
"Intellicall").
The Company's public pay telephones are "smart" telephones and are
operated by means of advanced microprocessor technology that enables the
telephones to perform substantially all of the necessary coin-driven and certain
non coin-driven functions independent of the Company's central office. Unlike
"dumb" telephones used by most Bell Operating Companies ("BOCs") and other Local
Exchange Carriers ("LECs"), smart telephones, in concert with the Company's
management information systems, enable the Company to continuously determine
each telephone's operability and need for service as well as its readiness for
collection of coin revenues. Rate changes and other software-dependent functions
can be performed from the central office without dispatching service technicians
to individual public pay telephones of the Company.
The Company employs both advanced telecommunications technology and
trained field technicians as part of its commitment to provide superior customer
service. The technology used by the Company enables it to maintain accurate
records of telephone activity which can be verified by customers, as well as
respond quickly to equipment malfunctions. The Company's standard of performance
is to repair malfunctions within 24 hours of their occurrence.
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The Company seeks to promote and achieve recognition of its products
and services by posting the "PhoneTel" label on all of its public pay
telephones, as well as through advertisements in trade magazines. The Company
believes that achieving market recognition will facilitate its expansion
strategy by enhancing its ability to obtain additional accounts and encouraging
the use of its public pay telephones in locations where consumers have multiple
pay telephone options.
INDUSTRY OVERVIEW
Public pay telephones are primarily owned and operated by BOCs, other
LECs and independent public pay telephone companies. Of the approximately 2.5
million public pay telephones operated in the United States in 1995, Multimedia
Telecommunications Association estimates that approximately 87% were operated by
BOCs and other LECs and approximately 13% were operated by independent public
pay telephone companies. Within the United States, Multimedia Telecommunications
Association estimates that there were approximately 342,000 public pay
telephones owned by independent public pay telephone companies in 1995. Today's
telecommunications marketplace was principally shaped by the 1984 court-directed
divestiture of the BOCs by AT&T. The AT&T divestiture and the many regulatory
changes adopted by the FCC and state regulatory authorities in response to the
AT&T divestiture, including the authorization of the connection of competitive
or independently-owned public pay telephones to the public switched network,
have resulted in the creation of new business segments in the telecommunications
industry. Prior to these developments, only BOCs or other LECs owned and
operated public pay telephones.
As part of the AT&T monopoly break-up, the United States was divided
into geographic areas known as Local Access Transport Areas ("LATAs"). BOCs and
other LECs provide telephone service that both originates and terminates within
the same LATA ("intraLATA") pursuant to tariffs filed with and approved by state
regulatory authorities. Until recently, BOCs were prohibited from offering or
deriving revenues or income from telecommunications services between LATAs
("interLATA"). Long distance companies, such as AT&T, MCI and Sprint, provide
interLATA services and, in some circumstances, may also provide long distance
service within LATAs. An interLATA long distance telephone call generally begins
with an originating LEC transmitting the call from the originating telephone to
a point of connection with a long distance carrier. The long distance carrier,
through its owned or leased switching and transmission facilities, transmits the
call across its long distance network to the LEC servicing the local area in
which the recipient of the call is located. This terminating LEC then delivers
the call to the recipient.
Under the February 8, 1996 enactment of the Telecommunications Act, the
BOCs may provide interLATA telecommunications services and may compete for the
provision of interLATA toll calls, upon receipt of all necessary regulatory
approvals and the satisfaction of applicable conditions. The Telecommunications
Act permits the BOCs to provide virtually all "out of region" long distance
telecommunications services immediately upon the receipt of any state and/or
federal regulatory approvals otherwise applicable to long distance service. For
the BOCs and other LECs to provide interLATA toll service within the same states
in which they also provide local exchange service ("in-region service"), prior
FCC approval must be obtained. The timing of such approval is unclear and may
depend on the outcome of litigation related to recent regulations promulgated by
the FCC relating to the duties of BOCs and other incumbent LECs under Section
251 of the Telecommunications Act. This FCC approval to provide "in-region"
service is conditioned upon, among other things, a showing by a BOC or other LEC
that, with certain limited exceptions, facilities-based local telephone
competition is present in its market, and that it has satisfied the 14-point
"competitive checklist" established by the Telecommunications Act which
includes, among other things, that the BOC or other LEC has entered into at
least one interconnection agreement. In addition, the Telecommunications Act is
designed to facilitate the entry of any entity (including cable television
companies and utilities) into both the competitive local exchange and long
distance telecommunications markets. As a result of the Telecommunications Act,
long distance companies (such as AT&T and MCI), cable television companies,
utilities and other new competitors will be able to provide local exchange
service in competition with the incumbent BOC or other LEC. This should
ultimately increase the number and variety of carriers that provide local access
line service to independent public pay telephone providers such as the Company.
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Prior to 1987, coin calls were the sole source of revenues for
independent public pay telephone operators. Long distance calling card and
collect calls from these public pay telephones were handled exclusively by AT&T.
Beginning in 1987, a competitive operator service system developed which allowed
OSPs, including long distance companies such as MCI and Sprint, to handle
non-coin calls and to offer independent public pay telephone companies
commissions for directing operator assisted or calling card calls to them.
Generally, public pay telephone revenues may be generated through: (i)
coin calls; (ii) operator service calls ("0+" i.e., credit card, collect and
third number billing calls, and "0-", i.e. calls transferred by the LECs to the
OSPs requested by the caller); and (iii) access code calls using carrier access
numbers (e.g., "10XXX" codes, "1-800" or "950"). Section 276 of the
Telecommunication Act and the FCC's implementing regulations (both of which were
recently enacted) will permit independent public pay telephone providers to
generate additional revenues from all of these three categories, each of which
consists of local, intraLATA toll, intrastate interLATA, interstate interLATA
and international call components.
ACQUISITIONS
The following table summarizes the Company's significant acquisitions
in 1995, 1996 and 1997.
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<CAPTION>
Number of
Date of Installed Public Primary
Company Acquired Acquisition Pay Telephones Areas Served
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<S> <C> <C> <C>
London Communications, Inc. June 10, 1997 2,519 Georgia; North Carolina; South Carolina
("London")
American Public Telecom, Inc. May 30, 1997 859 Michigan
("American")
Advance Pay Systems, Inc. May 30, 1997 800 Virginia
("Advance")
Coinlink, LLC February 14, 1997 300 Oklahoma
("Coinlink")
RSM Communications, Inc. January 31, 1997 292 Tennessee
("RSM")
Americom, Inc. January 17, 1997 99 Arizona
("Americom")
Texas Coinphone January 14, 1997 1,250 Texas
("Texas Coinphone")
Cherokee Communications, Inc. January 1, 1997 13,949 Texas; New Mexico; Colorado;
("Cherokee") Utah; Montana
Amtel Communications Services September 13, 1996 6,872 California; Washington;
("Amtel") Oregon; Colorado
Payphones of America, Inc. August 1, 1996 3,115 Missouri; Illinois;
("POA") Virginia; Florida
International Pay Phones, Inc. March 15, 1996 2,101 North Carolina,
of South Carolina and South Carolina, Tennessee
International Pay Phones, Inc.
of Tennessee
("IPP")
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Paramount Communications Systems, Inc. March 15, 1996 2,528 Florida
("Paramount")
Public Telephone Corporation October 16, 1995 1,200 Illinois; Michigan
("Public")
World Communications, Inc. September 22, 1995 3,237 Missouri; Illinois; Florida
("World")
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Total installed public pay telephones acquired 39,121
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Total installed public pay telephones at March 13, 1998 43,156
=============
</TABLE>
PRODUCTS AND SERVICES
The Company's primary business is to obtain contracts, either through
acquisitions or internal growth, from location providers to install and operate
public pay telephones on a revenue sharing basis. The Company installs public
pay telephones in properties owned or controlled by others where significant
demand exists for public pay telephone services, such as shopping centers,
convenience stores, service stations, grocery stores, restaurants, truck stops
and bus terminals, at no cost to the location provider. The Company services and
collects the revenue generated from the public pay telephones and pays the
location provider a share of the revenues generated by the telephone in
consideration for permitting the installation of the pay telephone on its
premises.
The term of a location agreement generally ranges from three to ten
years and provides for an automatic renewal ("evergreen") of the term of the
contract unless it is cancelled by the location provider under the terms of the
agreement. The Company can generally terminate a location agreement on 30-days'
prior notice to the location provider if the public pay telephone does not
generate sufficient total revenues for two consecutive months. Under certain of
the Company's location agreements, the failure of the Company to remedy a
default within a specified period after notice may give the location provider
the right to terminate such location agreement. The duration of the contract and
the commission arrangement depends on the location, number of telephones and
revenue potential of the account.
Substantially all of the Company's public pay telephones accept coins
as well as other forms of payment for local or long-distance calls. The
Company's public pay telephones generate coin revenues primarily from local
calls. Prior to October 7, 1997, state regulatory authorities typically set the
maximum rate for local coin calls that could be charged by BOCs and other LECs
and independent public pay telephone companies. The Company generally was
required to charge the same rate as the BOCs and the other LECs for local calls
in substantially all of the states in which the Company's public pay telephones
are located. In most states that charge was $0.25, although in some
jurisdictions the charge was less than $0.25 per local call, and in a limited
number of other jurisdictions which had already deregulated the price of local
calls, the charge was $0.35. On October 7, 1997, the effective date of the FCC's
mandate to deregulate the local coin rate, the Company increased the amount
charged to place a local coin call from $0.25 to $0.35 on substantially all of
its pay telephones. See "Government Regulations."
Traditionally, local coin calls have been provided for an unlimited
duration, although some jurisdictions, in which the Company's public pay
telephones are located, allow call timing, which requires the deposit of an
additional amount after a specified period of time has elapsed. The Company pays
monthly line and usage charges to LECs or competitive local exchange carriers
("CLECs") for all of its installed public pay telephones. These charges cover
basic telephone service as well as the transport of local coin calls.
The Company outsources its long distance and operator service
operations to a number of OSPs, including Intellicall, which is the Company's
primary provider of such services. The revenue the Company receives from each
OSP is determined based on the volume of calls carried by the OSP and the amount
of revenues generated by the calls. In certain regions, the Company also
utilizes a microprocessor-based automated operator system for certain pay
telephones which allows the telephones to collect and store billing information
and to complete the call, i.e. "store and forward calls". The Company also
receives revenues from long distance carriers for calls made from its public
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pay telephones, including "dial-around calls" where the caller dials a code to
obtain access to an OSP or a long distance company other than one designated by
the Company. In May 1992, the FCC ruled that independent public pay telephone
providers were entitled to compensation on an interim basis at a fixed rate of
$6.00 per telephone per month for all interstate dial-around calls placed from a
pay telephone. Section 276 of the Telecommunications Act ("Section 276")
required the FCC to establish a per-call compensation plan to ensure that public
pay telephone service providers were fairly compensated for all calls made from
their telephones commencing November 6, 1996. In an order released on September
20, 1996 (the "1996 Payphone Order"), the FCC implemented regulations that
replaced the $6.00 flat fee per telephone per month with an interim $45.85 flat
fee per telephone per month from November 6, 1996 to October 6, 1997. 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 pay phone service providers ("PSPs"). The Court
remanded the issues to the FCC for further consideration, and clarified on
September 15, 1997 that it had vacated certain portions of the 1996 Payphone
Order, including the dial-around compensation rate.
Thereafter, the FCC adopted and released a subsequent order (the "1997
Payphone Order") in which it established a rate of $0.284 per call for two years
for per-call dial-around compensation: 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 to 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.
Management believes that both the interim plan and the per-call
compensation plan will continue to generate significant additional revenues for
the Company, net of related expenses and processing fees. However, there can be
no assurance that the rules, regulations and policies adopted by the FCC on its
own or after judicial review will not have a material adverse affect on the
Company's business, results of operations or financial condition.
TELEPHONE EQUIPMENT SUPPLIERS
The Company purchases the majority of its pay telephones from two
manufacturers of public pay telephones, Intellicall and Protel, Inc. Although
each manufacturer uses similar technology, the Company seeks to install
primarily a single brand of telephone within a specific geographic area. This
maximizes the efficiency of the Company's field technicians and makes it easier
to stock appropriate spare parts. It is the Company's policy to place the
PhoneTel name on telephones that it acquires or installs.
SALES AND MARKETING
The Company utilizes its internal sales force and independent sales
representatives to market its products and services. The internal sales force
receives salaries plus incentive compensation for each public pay telephone
installed, and the independent sales representatives are paid on a
commission-only basis for each public pay telephone installed. In addition, in
certain instances, the Company pays a fee to its technicians for securing
location agreements for new installations. The Company also markets its products
and services through advertising in trade publications, booths at trade shows
and referrals from existing customers.
The Company directs a major portion of its marketing efforts for public pay
telephones to multi-station accounts, such as shopping centers, convenience
stores, service stations, grocery stores, restaurants, truck stops and bus
terminals. These multi-station accounts have the advantages of greater
efficiency in collection and maintenance. The Company also solicits single
station accounts, where there is a demonstrated high demand for public pay
telephone service. In evaluating locations for the installation of public pay
telephones, the Company generally conducts a site survey to examine various
factors, including population density, traffic patterns, historical usage
information and other
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geographical factors. The Company generally will not install a public pay
telephone unless management believes, based on the site survey, that the site
will generate an adequate level of revenues.
CUSTOMERS
The Company's public pay telephone operations are diversified on both a
geographical and customer account basis. Currently, the Company owns and
operates public pay telephones in 42 states and the District of Columbia
(approximately 94% of which public pay telephones are located in 22 states)
through agreements with both multi-station customers such as shopping centers,
convenience stores, service stations, grocery stores, restaurants, truck stops
and bus terminals, as well as with single station customers.
The Company owns and operates the public pay telephones for certain
properties owned by Simon DeBartolo Group, Inc. ("DeBartolo"). The Company
derived approximately 15%, 5% and 2% of its total revenue for the years ended
December 31, 1995, 1996 and 1997, respectively, from the operation of these
public pay telephones. As the Company expands its installed public pay telephone
base through additional acquisitions and internal growth, it expects that the
percentage of total revenues derived from DeBartolo will continue to decline.
Other than DeBartolo, no single customer generated 10% or more of the Company's
total revenue for the years ended December 31, 1995, 1996 or 1997.
GOVERNMENT REGULATIONS
The operations of the public pay telephone industry are regulated
primarily by the public service or utility commissions of the various states and
by the FCC. Generally, the Company must obtain approvals to operate public pay
telephones from the public utility or service commissions of most states in
which the Company operates. In addition, from time to time, legislation is
enacted by Congress or the various state legislatures that affects the
telecommunications industry generally and the public pay telephone industry
specifically. Court decisions interpreting laws applicable to the
telecommunications industry may also have a significant effect on the public pay
telephone industry.
STATE. Since the AT&T break-up, state regulatory authorities have
primarily been responsible for regulating intrastate public pay telephone
services. Public utility commissions, in most states, have established rules and
regulations that govern the provision of public pay telephone services,
including certification or registration, notice to end users of the identity of
the service provider in the form of postings or verbal announcements,
requirements for rate quotes upon request, call routing restrictions, and
maximum price limitations. While not necessarily uniform, these rules and
regulations generally establish minimum technical and operational
characteristics to assure that public interest considerations are met.
Historically, each state has had the right to regulate pricing and other aspects
of the operations of independently-owned public pay telephones as well as the
provision of intrastate telephone service. In some jurisdictions, in order for
the Company to operate its public pay telephones, it is necessary for it to
become certified as a pay telephone provider and to file tariffs. The procedure
and length of time for the certification process varies from state to state.
Until recently, in many states only local telephone companies were permitted to
process local and/or intraLATA operator assisted calls. The Company has obtained
the requisite regulatory approvals to provide public pay telephone service in
all states in which it provides such services and complies with applicable state
regulations governing such services.
Section 276 of the Telecommunications Act, which was enacted in 1996,
gave the FCC authority to adopt rules affecting intrastate telephone services
and to preempt state rules and regulations inconsistent with those adopted by
the FCC. As discussed in more detail below, the FCC adopted rules on September
20, 1996 that preempt certain existing state regulations and limit the scope of
future state regulation of pricing and other aspects of public pay telephone
operation. In particular, states were required to: (a) effective October 7,
1997, deregulate the price of a local phone call; (b) eliminate all intrastate
subsidies for BOC and LEC pay phone services; (c) enact rules governing the
provision of "public interest pay phones"; and (d) conduct a thorough review of
all existing state pay phone rules to ensure that those rules do not conflict
with the intent of Section 276 and the FCC implementing rules.
FEDERAL. Until recently, the FCC has not actively regulated the
provision of intrastate public pay telephone services by independent public pay
telephone companies. However, the Company believes that the enactment of
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Section 276 will have a significant impact on the FCC's role in governing and
regulating the provision of intrastate public pay telephone services. In
addition, the FCC actively regulates the interstate and foreign
telecommunications market, which affects the Company's operations in numerous
ways.
Until the enactment of Section 276, the FCC had regulated public pay
telephones primarily in the context of its regulation of OSPs, and in
particular, through its implementation of the Telephone Operator Consumer
Services Improvement Act (the "Operator Services Act"). The Operator Services
Act was enacted in October 1990 and established various requirements for
companies that provide operator services and call aggregators (which send calls
to these OSPs). The requirements of the Operators Services Act include call
branding, information posting, rate quoting and the filing of informational
tariffs. The Company must comply or ensure compliance with certain billing and
consumer information requirements. For example, the Company is not permitted to
or to allow its OSP to bill consumers for unanswered calls, bill for calls that
do not reflect the location or the origination of the call, or bill the call
from any location other than from where the call is made, unless the consumer's
consent is explicitly obtained. Furthermore, the Company and its OSP must
identify the OSP presubscribed to the public pay telephone to end users in the
form of postings at or near the telephone or verbal announcements in accordance
with the FCC's requirements. The Company also must allow consumers to access the
interexchange carrier of their choice by entering a specific code number, i.e.,
a "10XXX," "800" or a "950" number. The Company believes that it complies with
the provisions of the Operator Services Act as a call aggregator (i.e., one who
makes telephones available to the public for long distance calls using an OSP).
The Operator Services Act also requires the FCC to take action to limit the
exposure of public pay telephone companies to undue risk of fraud.
The Operator Services Act also directed the FCC to consider the need to
prescribe compensation to owners of independent public pay telephones for
dial-around calls. In May 1992, the FCC ruled that independent public pay
telephone companies were entitled to dial-around compensation. Due to the
complexity of establishing an accounting system for determining compensation for
these calls, the FCC temporarily set compensation at $6.00 per public pay
telephone per month, to be allocated among long distance companies earning
annual toll revenues for interstate calls in excess of $100 million per year in
accordance with their market share. In 1996, Section 276 was enacted, which
required the FCC to establish a per-call compensation plan to ensure that all
public pay telephone service providers are fairly compensated for all calls,
both intrastate and interstate.
In 1992, the FCC initiated a rulemaking in which it proposed to
implement the "billed party preference" system ("BPP") for 0+ interLATA traffic
from public pay telephones and other aggregator locations such as hotels and
motels. Under BPP, operator-assisted long distance traffic would be carried
automatically by the OSP preselected by the party being billed for the call.
Under the current presubscription system, unless an access code is dialed, 0 +
calls from public pay telephones are routed to the OSP presubscribed to the
public pay telephones. Under BPP as proposed, 0 + calls would be completed by an
OSP with no relationship to the public pay telephone provider, and thus would
eliminate commissions paid by the presubscribed OSP to the public pay telephone
provider on 0 + calls.
In June 1996, the FCC issued a Second Further Notice of Proposed
Rulemaking in CC Docket No. 92-77 in which it tentatively concluded that the
costs of BPP outweigh the benefits, and proposed to not implement BPP. Instead,
the FCC proposed to (i) establish benchmarks for OSP rates based upon a
composite of the rates charged by the three largest interexchange carriers
(AT&T, MCI, and Sprint), which composite is intended to reflect rates in line
with what consumers expect to pay, and (ii) require OSPs that charge rates
and/or fees imposed by location providers whose total is greater than a given
percentage above the benchmarks, to disclose the applicable charges for the call
to consumers orally before connecting a call. Alternatively, the FCC proposed to
require all OSPs to disclose their rates on all operator assisted calls. The
effect of the rules, if any, ultimately adopted by the FCC, on the Company's
business, results of operations or financial condition cannot be determined at
this time.
On September 20, 1996, the 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 public pay telephone provisions of
Section 276. Key elements of the rulemaking include:
(a) 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
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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 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 IXCs would be required to compensate
pay phone service providers. The Court remanded the issue to the FCC for further
consideration, and clarified on September 15, 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 amount 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. This rate is based on the market-based local
coin rate, adjusted for certain costs defined by the FCC as $0.066 per call and
is the default per-call rate for subscriber 800 and access code calls. The new
rate was 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 to 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.
A number of parties filed a Motion to Stay the 1997 Payphone Order pending
judicial review and requested expedited consideration and briefing schedule with
the United States Court of Appeals for the District of Columbia (the "Court").
The Court denied the Motion to Stay and granted the Motion for Expedited
Consideration and Briefing Schedule. The Court is expected to hear arguments in
May 1998.
On March 9, 1998, the Common Carrier Bureau of the FCC issued a Memorandum
Opinion and Order (the "Memorandum") which, among other things, granted a waiver
and extended the time frame for the LECs to implement the system for identifying
dial-around calls placed from pay telephones ("ANI Identification"). The
Memorandum reiterated the obligation of the IXCs to pay dial-around compensation
by April 1, 1998, for the period commencing October 7, 1997 and ending December
31, 1998, at the rate of $0.284 per call based on the actual number of
dial-around calls per pay telephone, if such call data is available. In the
Memorandum the FCC recognized, given the waiver and extension of the time frame
granted to certain IXCs to implement ANI Identification, that certain disputes
between carriers and pay telephone providers were likely to arise regarding the
true number of compensable calls. Therefore, the FCC identified the potential
need for it to address true-up requirements for dial-around compensation in a
subsequent order and clarified that the timing of said subsequent order in no
way would relieve or delay the obligation of the IXCs to pay compensation on
April 1, 1998.
(b) LEC subsidization. BOCs and other LECs have traditionally included a
public pay telephone cost element in determining the access charges imposed upon
carriers to terminate long distance calls. Section 276 and the new FCC rules
require LECs to eliminate these and other subsidies, to reduce their interstate
access charges, to operate their public pay telephones as detariffed customer
premises equipment and to provide independent public pay telephone providers all
functionalities used by the LEC in its own delivery of public pay telephone
service. In contrast to the past, when the LEC imposed a subscriber line charge
on public pay telephone providers but not on its own public pay
- 9 -
<PAGE> 10
telephones, the FCC now requires that any subscriber line charge and tariffed
network services charges apply equally to both LEC and independent public pay
telephones.
(c) Non-structural safeguards. The FCC adopted certain non-structural
safeguards in its Computer III inquiry which were designed to prevent BOCs from
using their incumbent market power in an anti-competitive manner. These
safeguards generally allow the BOCs to provide certain services on an integrated
basis (i.e., directly rather than through a separate subsidiary) provided that
BOCs (i) allow nondiscriminatory access to their network features and
functionalities; (ii) restrict use of customer proprietary network information;
(iii) subscribe to certain network information disclosure rules; (iv) do not
discriminate in the provision, installation, and maintenance of services and
reporting and (v) adopt certain cost accounting safeguards. In its rulemaking,
the FCC applied these safeguards to the provision of public pay telephone
services by the BOCs, and found that further non-structural safeguards were
unnecessary. The FCC also decided to reclassify BOC public pay telephone service
as a "nonregulated activity" so that costs from public pay telephone activities
would be separated from regulated non-public pay telephone accounts. Consistent
with this approach, the FCC has implemented certain accounting safeguards under
the Telecommunications Act to prevent the subsidization of BOC public pay
telephone services by non-public pay telephone revenues.
(d) InterLATA presubscription. In the past BOCs were not permitted to
compete in the interLATA marketplace. Section 276 permits BOCs to negotiate with
location providers and select interLATA long distance service providers for
their public pay telephones, unless the FCC determines that it is not in the
public's interest. In its rulemaking, the FCC concluded that a BOC should be
permitted to negotiate for the right to select the interLATA carrier serving its
public pay telephones, but not until its plan to comply with the Computer III
non-structural safeguards has been approved by the FCC.
(e) IntraLATA presubscription. Until recently, in almost every state, only
the LEC has been able to be "presubscribed" to a telephone for local and
intraLATA toll calls, including at a public pay telephone. "Presubscription"
refers to an arrangement whereby a call is automatically connected to a
pre-selected carrier, unless another carrier's access code is dialed. Section
276 provides that all public pay telephone service providers have the right to
"negotiate with the location provider on the location provider's selecting and
contracting with, and subject to the terms of any agreement with the location
provider, to select and contract with, the carriers that carry intraLATA calls
from their payphones." The FCC's new rules give all public pay telephone service
providers (including BOCs and independent providers such as the Company) the
right to negotiate with location providers concerning the intraLATA carrier.
(f) Public interest public pay telephones. Section 276 requires the FCC to
ensure that public pay telephones provided in the interest of public health,
safety, and welfare are maintained and supported equitably. The new FCC rules
adopt a narrow definition of "public interest payphone," and leave to the
discretion of the states how to fund their respective public interest public pay
telephone programs, so long as the funding mechanism: (i) "fairly and equitably"
distributes the costs of such program; and (ii) does not involve the use of
subsidies prohibited by Section 276(b)(1)(B) of the Telecommunications Act. Each
state's funding review must be completed by October 1998.
The Company believes that Section 276 and the implementing regulations
adopted by the FCC will likely have an overall positive effect on the public pay
telephone industry in general and the Company in particular. A number of parties
have filed petitions for judicial review of these regulations in federal courts
of appeals. To date, the regulations, as described hereinabove, remain in
effect.
SERVICEMARK
The Company uses the servicemark "PhoneTel" on its telephones,
letterhead and in various other manners. On November 22, 1988, the United States
Patent and Trademark Office granted the Company a Certificate of Registration
for the servicemark "PhoneTel" for providing telecommunications services for a
period of twenty years.
COMPETITION
The public pay telephone industry is, and can be expected to remain,
highly competitive. While the Company's principal competition comes from BOCs
and other LECs, the Company also competes with other
- 10 -
<PAGE> 11
independent providers of public pay telephone services, major OSPs and
interexchange carriers. In addition, the Company competes with providers of
cellular communications services and personal communications services
(wireless), which provide an alternative to the use of public pay telephones.
Furthermore, pursuant to Section 276 and the FCC's implementing regulations,
BOCs are permitted to negotiate with location providers and select interLATA
long distance service providers for their public pay telephones. See
"Business--Governmental Regulations." This will enable BOCs to generate
revenues from a new service, as well as to compete with independent public pay
telephone providers for locations to install their public pay telephones by
offering location providers higher commissions for long distance calls than
those currently offered by independent public pay telephone providers.
Some of the other public pay telephone companies have pursued an
acquisition strategy similar to the Company's and frequently compete with the
Company for the most favorable public pay telephone contracts and sites.
Although the Company is one of the largest independent public pay telephone
service providers, most BOCs and other LECs and interexchange carriers have, and
some independent public pay telephone companies with which the Company competes
may have, substantially greater financial, marketing and other resources than
the Company. In addition, in response to competition from public pay telephone
companies, many BOCs and other LECs have increased their compensation
arrangement with location providers by offering higher commissions.
The Company believes the principal competitive factors in the public
pay telephone industry are: (i) the amount of commission payments to location
providers; (ii) the ability to serve accounts with locations in several LATAs or
states; and (iii) the quality of service provided to location owners and public
pay telephone users. The Company believes that it is well-positioned to compete
effectively in the public pay telephone industry.
EMPLOYEES
The Company had 513 employees on February 28, 1998. The Company
considers its relations with its employees to be satisfactory. None of the
employees of the Company are a party to agreements with any unions.
IMPACT OF SEASONALITY
The Company completed two acquisitions which added approximately 4,400
public pay telephones in 1995, four acquisitions which added approximately
14,600 telephones during the first nine months of 1996 and additional
acquisitions which added approximately 20,000 telephones in the first six months
of 1997. The seasonality of the Company's historical operating results has been
affected by shifts in the geographic concentrations of its telephones resulting
from such acquisitions.
ITEM 2. PROPERTIES
The Company's principal office is located at North Point Tower, 7th Floor,
1001 Lakeside Avenue, Cleveland, Ohio 44114-1195, where the Company leases
approximately 20,000 square feet of space at a monthly rental of $24,167 subject
to certain adjustments. The leased area increases to 39,919 square feet on
November 1, 1998 with corresponding increases in monthly rent to $39,777 per
month on November 1, 1998 and to $41,148 per month on November 1, 2000. The
lease expires on October 31, 2003. The Company also maintains approximately 40
district operations facilities. The Company considers its facilities adequate
for its purposes.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings which, individually or
in the aggregate, would have a material adverse effect on the Company's
business, results of operations, financial condition, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1997, no
matters were submitted to a vote of the Company's shareholders.
- 11 -
<PAGE> 12
PART II
ITEM 5.MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Effective November 14, 1996, the Company's Common Stock, $0.01 par
value ("Common Stock"), was listed on the American Stock Exchange ("AMEX") under
the symbol "PHN". The Common Stock was formerly quoted on the Nasdaq SmallCap
Market ("Nasdaq") under the symbol "PNTL". The following table sets forth on a
per share basis, for the periods indicated, the high and low sales prices of the
Common Stock as reported by Nasdaq or the AMEX, as applicable. The high and low
bid sales prices have been adjusted to reflect the one for six reverse stock
split which became effective on December 26, 1995.
<TABLE>
<CAPTION>
Price Range
High Low
---- ---
1995:
<S> <C> <C>
First Quarter................................................................. $ 7 1/8 $ 4 7/8
Second Quarter................................................................ 8 1/4 4 7/8
Third Quarter................................................................. 8 1/4 5 7/16
Fourth Quarter................................................................ 8 5/8 5 1/4
1996:
First Quarter................................................................. 7 7/8 5
Second Quarter................................................................ 6 1/2 2 3/4
Third Quarter................................................................. 5 2
Fourth Quarter................................................................ 5 2 1/4
1997:
First Quarter................................................................. 4 5/8 3
Second Quarter................................................................ 3 7/16 1 7/8
Third Quarter................................................................. 2 7/8 1 13/16
Fourth Quarter................................................................ 3 3/8 2 3/8
1998:
Through March 19, 1998........................................................ 2 7/8 2
</TABLE>
As of February 27, 1998, there were 2,096 shareholders of record.
DIVIDEND POLICY ON COMMON STOCK
The Company has never declared or paid any dividends on its Common
Stock. The Company currently intends to retain its earnings to finance the
growth and development of its business and does not anticipate paying cash
dividends in the foreseeable future. The payment of dividends by the Company is
restricted by the notes issued pursuant to the Company Debt Offering (as defined
herein) completed on December 18, 1996. In addition, the Company cannot pay any
dividends on its Common Stock unless dividends are paid to the holders of the
Series A Preferred (as defined herein) in an amount equal to that which such
holders would have been entitled to receive if such holders had converted their
shares of Series A Preferred (as defined herein) into Common Stock prior to the
record date used by the Board of Directors for determining the holders of Common
Stock entitled to receive such dividends. Any future declaration of dividends
will be subject to the discretion of the Board of Directors of the Company. The
timing, amount and form of dividends (other than with respect to the holders of
the 14% Preferred (as defined herein) which are only entitled to receive
dividends payable in kind), if any, will depend, among other things, on the
Company's financial condition, capital requirements, cash flow, profitability,
plans for expansion, business outlook and other factors deemed relevant by the
Board of Directors of the Company.
- 12 -
<PAGE> 13
SALES AND ISSUANCES OF COMMON STOCK
Sales and issuances of the Company's Common Stock during 1995, 1996 and
1997 were as follows:
<TABLE>
<CAPTION>
Number of Average
Common Price Per
Shares Share
------ -----
<S> <C> <C> <C> <C>
1995: Private sales to officers and directors 286,643 4.77
Private sales to creditors of the Company 133,332 4.50
Private sales to affiliates of the Company 38,888 4.63
Issued in connection with acquisitions 731,189 6.74
Issued to third parties for services 69,895 6.01
Issued to directors for services 21,488 5.09
Issued to directors upon conversion of debt and interest 26,065 4.51
Issued to third party creditors upon conversion of debt
and accrued interest 4,166 4.80
Exercise of stock options 8,333 4.20
Other issuances 13,193 5.20
--------------
Total issuances of Common Stock in 1995 1,333,192
==============
1996: Issued in connection with acquisitions 2,860,608 2.81
Exercise of nominal value warrants 1,035,137 0.01
Conversion of 10% Non-voting Preferred 884,214 6.00
Company Equity Offering (registered) 6,750,000 2.71
Issued to an executive upon conversion of
debt and accrued interest 99,119 2.50
Other issuances 4,400 4.69
--------------
Total issuances of Common Stock in 1996 11,633,478
==============
1997: Company Equity Offering (registered) 1,012,500 2.79
Exercise of nominal value
warrants by Directors 221,125 .01
Other exercises of nominal value warrants 88,629 .01
Exercise of stock options 100,000 1.02
Issued to Directors for services 75,000 2.78
Conversion of Series A Preferred 250,000 .01
Issued to executive upon conversion of
debt and accrued interest 124,747 3.00
--------------
Total issuances of Common Stock in 1997 1,872,001
==============
</TABLE>
PREFERRED STOCK
On February 23, 1996, the Company created three new classes of preferred
stock: (i) Series A Special Convertible Preferred Stock, $0.20 par value, $0.20
Stated Value, 250,000 authorized shares, with each share immediately convertible
into 20 shares of Common Stock, and non-voting ("Series A Preferred"); (ii)
Series B Special Convertible Preferred Stock, $0.20 par value, $120 Stated
Value, 250,000 authorized shares, with each share immediately convertible into
20 shares of Common Stock, and non-voting ("Series B Preferred"); and (iii) 14%
Convertible Cumulative Redeemable Preferred Stock, without par value, $60 Stated
Value, non-voting, 200,000 authorized shares, and with each share immediately
convertible into 10 shares of Common Stock ("14% Preferred"). Each share of the
14% Preferred is entitled to receive a quarterly dividend of 0.035 shares of 14%
Preferred. On February 7, 1997, a former lender to the Company exercised options
for 12,500 shares of Series A Preferred which were immediately converted into
250,000 shares of Common Stock
- 13 -
<PAGE> 14
The Company's 10% Cumulative Non-Voting Redeemable Preferred Stock
("10% Non-Voting Preferred") was issued in connection with the acquisition of
World. On June 27, 1996, the shareholders of the Company approved conversion
rights to the 10% Non-Voting Preferred. On June 28, 1996, the Company converted
the outstanding shares of 10% Non-Voting Preferred into 884,214 shares of Common
Stock. No dividends were ever declared on the 10% Non-Voting Preferred.
The Company's 10% Cumulative Redeemable Preferred Stock ("10% Cumulative
Preferred") was issued to a significant customer in 1992. No dividends were paid
on the 10% Cumulative Preferred in 1995 or 1996 and all outstanding shares of
the 10% Cumulative Preferred were redeemed on March 15, 1996.
All outstanding shares of the Company's 8% Cumulative Redeemable Preferred
Stock ("8% Preferred") were redeemed on March 15, 1996. Dividends paid on the 8%
Preferred of $36,000 in 1995 are reflected in the accumulated deficit.
All outstanding shares of the Company's 7% Cumulative Convertible
Redeemable Preferred Stock ("7% Preferred") were redeemed on March 15, 1996.
Dividends paid on the 7% Preferred of $4,375 in 1995 are reflected in the
accumulated deficit.
- 14 -
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from the consolidated
financial statements of the Company. The data should be read in conjunction with
the consolidated financial statements, related notes and other financial
information included herein.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
(in thousands except share and per share amounts) YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Coin calls $4,238 $8,421 $12,130 $26,212 $58,520
Non-coin telecommunication services (1) 6,742 7,176 6,458 17,649 50,624
Other 89 269 130 943 500
------------ ------------ ------------ ------------ ------------
11,069 15,866 18,718 44,804 109,644
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Line and transmission charges (1) 2,376 4,135 5,149 11,153 24,518
Telecommunication and validation fees (1) 1,517 1,390 1,258 5,608 11,599
Location commissions 2,599 3,391 3,468 6,072 16,628
Field operations (1) 1,895 3,565 4,934 8,733 21,330
Selling, general and administrative (1) 2,399 2,463 2,645 4,381 10,483
Depreciation and amortization 896 2,236 4,383 12,800 22,798
Other unusual charges and contractual settlements - - 2,170 6,072 9,490
------------ ------------ ------------ ------------ ------------
11,682 17,180 24,007 54,819 116,846
------------ ------------ ------------ ------------ ------------
Loss from operations (613) (1,314) (5,289) (10,015) (7,202)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense - related parties - - - (5,235) (1,431)
Interest expense - others (175) (388) (837) (1,504) (15,181)
Interest income 9 7 16 182 560
------------ ------------ ------------ ------------ ------------
(166) (381) (821) (6,557) (16,052)
------------ ------------ ------------ ------------ ------------
Loss before extraordinary item (779) (1,695) (6,110) (16,572) (23,254)
Extraordinary item:
Loss on early extinguishment of debt - - - (10,077) -
------------ ------------ ------------ ------------ ------------
NET LOSS ($779) ($1,695) ($6,110) ($26,649) ($23,254)
============ ============ ============ ============ ============
Net loss applicable to common shareholders ($986) ($1,987) ($6,420) ($29,090) ($24,262)
Net loss per common share (2) ($0.96) ($1.35) ($3.29) ($5.29) ($1.51)
Weighted average number of shares (2) 1,031,384 1,470,188 1,950,561 5,494,011 16,040,035
EBITDA (3) $283 $922 $1,264 $8,857 $25,086
BALANCE SHEET DATA:
Total assets $4,697 $10,158 $28,917 $159,770 $169,826
Long-term debt and mandatorily redeemable preferred
stock, less current portion of debt 613 2,272 12,563 132,086 157,938
Stockholders' equity (deficit) 2,190 2,648 9,711 16,705 (4,042)
Cash dividends per common share - - - - -
</TABLE>
- 15 -
<PAGE> 16
(1) Certain costs and expenses for prior years have been reclassified to
conform to the current year presentation. The reclassifications have had no
impact on net loss as previously reported.
(2) Net loss per common share and weighted average number of common shares
outstanding in all periods have been adjusted to reflect the one for six
(1:6) reverse stock split which was effective December 26, 1995.
(3) EBITDA represents earnings before interest income and expense,
depreciation, amortization, other unusual charges and contractual
settlements, and the extraordinary loss. 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 defined 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 telephone industry to analyze comparable public pay telephone
companies on the basis of operating performance, leverage and liquidity.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995
Statements, other than historical facts, contained in this Form 10-K 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.
OVERVIEW
The Company derives substantially all of its revenues from coin calls
and non-coin calls placed from its public pay telephones. Coin revenue is
generated from local and direct-dial long-distance calls that are placed from
the Company's public pay telephones. Non-coin revenue is generated from calling
card, credit card, collect and third party billed calls. Typically, each public
pay telephone has a presubscribed (dedicated) provider of long distance and
operator services. The Company receives revenues for non-coin calls placed from
its public pay telephones in the form of commissions from its presubscribed long
distance provider and OSPs based on the volume of calls carried by the OSP and
the amount of revenue generated by the calls.
Effective November 6, 1996, pursuant to FCC regulations, the Company
derived additional revenues from dial-around calls placed from its public pay
telephones. From November 6, 1996 to December 31, 1996, the Company recorded
gross dial-around revenues at the then mandated 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. Pursuant to the FCC's Second Report and Order, in
1997, the Company recorded gross dial-around revenue at a rate of $37.20 per
installed pay telephone per month and recorded a charge of $395,000 in 1997 for
the retroactive reduction in the dial-around
- 16 -
<PAGE> 17
compensation rate from $45.85 to $37.20 per telephone per month, applicable to
the November 6, 1996 to December 31, 1996 period. From October 7, 1997 to
October 6, 1998, the Company will receive dial-around compensation at a
per-call rate of $0.284 (or such other rate as may be determined by the FCC or
the courts) based on the actual number of dial-around calls placed from each of
its public pay telephones (or such other number of calls as may be permitted by
the FCC or the courts). Thereafter, the dial-around rate will be at a per-call
rate equal to the local coin call rate less $0.066. Additionally, the states
were required to deregulate the price of a local phone call, which has allowed
the Company to increase its local coin call rate thereby generating additional
revenues. Effective October 7, 1997, the Company increased the local coin call
rate at a majority of its pay telephones to $0.35 in states in which the local
call rate was previously limited to $0.25. Substantially all of the Company's
pay telephones currently have a local coin rate of $0.35. However, there can be
no assurance as to the ultimate effect that the rules and policies adopted by
the FCC on its own or after any judicial review will have on the Company's
business, results of operations or financial condition. See "Business --
Governmental Regulations."
The Company's principal operating expenses consist of: (i) telephone
line and transmission charges; (ii) commissions paid to location providers which
are typically expressed as a percentage of revenues and are fixed for the term
of the agreements with the respective location providers; (iii)
telecommunication and validation fees; and (iv) field service and collection
costs which are principally comprised of personnel costs for collecting coins
from and maintaining the Company's public pay telephones. The Company pays
monthly line and usage charges to BOCs and other LECs for interconnection to the
local network for local calls, which are computed on a flat monthly charge plus
either a per message or per minute usage rate based on the time and duration of
the call. The Company also pays fees to BOCs and other LECs and long distance
carriers based on usage for local or long distance coin calls.
Notwithstanding the aforementioned anticipated benefits of Section 276 and
the implementing regulations, as a result of the provisions permitting BOCs and
other LECs to negotiate with location providers and select interLATA long
distance carriers for their public pay telephones, it is anticipated that
Section 276 and the implementing regulations may also result in increased
competition for public pay telephone locations and an accompanying increase in
the commissions payable to location providers. Moreover, revenues may be
diminished if the FCC prescribes lower benchmark rates for interstate operator
long distance calls. See "Business -- Governmental Regulations."
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
information from the Company's Consolidated Statements of Operations, included
elsewhere in this Form 10-K, expressed as a percentage of total revenues.
Certain of the following information for the year ended December 31, 1995 has
been reclassified to conform to the presentation for the year ended December 31,
1997 based on management's belief that the revised presentation more accurately
reflects the Company's strategy of owning and managing public pay telephones
versus providing operator services. The reclassifications had no impact on total
revenues or total expenses as previously reported.
- 17 -
<PAGE> 18
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Revenues:
Coin calls .......................... 64.8% 58.5% 53.4%
Non-coin telecommunication services . 34.5 39.4 46.1
Other ............................... 0.7 2.1 0.5
------ ------ ------
Total revenues ...................... 100.0 100.0 100.0
------ ------ ------
Operating expenses:
Line and transmission charges ....... 27.5 24.9 22.3
Telecommunication and validation fees 6.7 12.5 10.6
Location commissions ................ 18.5 13.6 15.2
Field operations .................... 26.4 19.5 19.5
Selling, general and administrative
expenses .......................... 14.2 9.7 9.6
Depreciation and amortization ....... 23.4 28.6 20.8
Other unusual charges and
contractual settlements .......... 11.6 13.6 8.6
------ ------ ------
Total operating expenses ............ 128.3 122.4 106.6
------ ------ ------
Loss from operations ..................... (28.3) (22.4) (6.6)
------ ------ ------
Other income (expense):
Interest expense - related parties .. - (11.7) (1.3)
Interest expense - others ........... (4.5) (3.3) (13.8)
Interest income ..................... 0.2 0.4 0.5
------ ------ ------
Total other income (expense) ........ (4.3) (14.6) (14.6)
------ ------ ------
Loss before extraordinary item ........... (32.6) (37.0) (21.2)
Extraordinary item ....................... - (22.5) -
------ ------ ------
Net loss ................................. (32.6)% (59.5)% (21.2)%
====== ====== ======
EBITDA ................................... 6.8% 19.8% 22.9%
====== ====== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Total revenues increased $64,840,000, or 144.7%, from
$44,804,000 for the year ended December 31, 1996 to $109,644,000 for the year
ended December 31, 1997. This increase is attributable primarily to an increase
in the number of installed public pay telephones, which increased by 18,818, or
75.2%, from 25,029 at December 31, 1996 to 43,847 at December 31, 1997, with the
majority of the increase occurring in the first quarter of 1997 due to
acquisitions completed in that quarter.
Revenues from coin calls increased $32,308,000, or 123.3%, from
$26,212,000 for the year ended December 31, 1996 to $58,520,000 for the year
ended December 31, 1997. This increase was primarily due to the acquisition and
installation of public pay telephones which produced additional revenues and the
increase in the local coin rate from $0.25 to $0.35 in a majority of the
Company's pay telephones effective October 7, 1997. Such increases were offset
in part by a reduction in average coin revenue per installed pay telephone due
to a decrease in call volume.
Revenues from non-coin telecommunication services increased by
$32,975,000 or 186.8%, from $17,649,000 in 1996 to $50,624,000 in 1997. The
increase was due to the increase in the number of installed pay telephones
relating to the acquisition and installation of public pay telephones, and the
increase in gross revenue from dial-around compensation. Dial-around revenues
increased $15,881,000, from $3,219,000 in 1996 to $19,100,000 in 1997 due to
regulatory changes that increased the dial-around compensation rate for both
existing and acquired public pay telephones. The increase in non-coin revenue
was offset in part by a reduction in operator assisted calls as a result of
aggressive dial-around advertising by long distance carriers such as AT&T and
MCI Communications Corporation ("MCI"). At December 31, 1996 and 1997, accounts
receivable included $2,554,000 and $12,938,000, respectively, arising from
dial-around compensation. Such receivables are received quarterly in arrears.
- 18 -
<PAGE> 19
Effective November 6, 1996, pursuant to the rules and regulations
promulgated by the FCC under Section 276 of the Telecommunications Act (the
"1996 Payphone Order"), the Company was to receive dial-around compensation of
$45.85 per installed pay telephone per month from November 6, 1996 through
October 6, 1997 (as compared with the flat fee of $6.00 per installed pay
telephone per month in periods prior to November 6, 1996), and per-call
compensation thereafter, at $0.35 per call from October 7, 1997 to October 6,
1998 (as compared with the flat fee of $45.85 per installed pay telephone per
month) and thereafter, at a per-call rate equal to the local coin rate for each
dial-around call.
Several parties, including interexchange carriers ("IXCs"), filed
petitions with the U. S. Court of Appeals for the District of Columbia Circuit
(the "Court") for review of certain of the FCC regulations, including the
dial-around compensation rate. On July 1, 1997, the Court vacated certain
portions of the 1996 Payphone Order, including the dial-around compensation
rate, and remanded the issue to the FCC for further consideration.
On October 9, 1997, the FCC issued its Second Report and Order (the
"1997 Payphone Order") which established a new dial-around compensation rate,
effective October 7, 1997, of $0.284 per call (the market based local coin rate
estimated at $0.35 less certain costs defined by the FCC as $0.066 per call)
multiplied by the actual number of dial-around calls placed from a pay
telephone. Furthermore, the 1997 Payphone Order tentatively concluded that the
dial-around compensation rate of $0.284 per call would be used to calculate
dial-around compensation for the period November 6, 1996 to October 7, 1997.
Evidence initially presented by a pay telephone industry trade association as
part of the Court of Appeals proceeding indicated that the average number of
dial-around calls placed from independent pay telephones equaled 131 calls per
month.
Based on the FCC's tentative conclusions in the 1997 Payphone Order, in
the third quarter of 1997, the Company adjusted the amount of dial-around
compensation recorded in prior quarters from the initial $45.85 rate to $37.20
(131 calls per installed pay telephone per month). Included in this adjustment
was a net charge of $395,000 for dial-around compensation relating to the period
November 6, 1996 to December 31, 1996. This adjustment amount is included in
other unusual charges and contractual settlements in 1997.
On March 9, 1998, the Common Carrier Bureau of the FCC issued a
Memorandum Opinion and Order (the "Memorandum") which, among other things,
granted a waiver of the time frame previously scheduled and established a
timetable for local exchange carriers to implement a system for identifying
dial-around calls placed from pay telephones ("ANI Identification"). This
Memorandum reiterated the obligation of the IXCs to pay, by April 1, 1998,
$0.284 per call based on the actual number of dial-around calls per pay
telephone if such call data is available. In its Memorandum, the FCC recognized,
given its waiver and extension of the time frame set for certain IXCs for the
implementation of ANI Identification, that certain disputes between carriers and
pay telephone providers were likely to arise about the true number of
compensable calls. Therefore, the FCC identified the potential need for it to
address true-up requirements for dial-around compensation in a subsequent order
and clarified that the timing of the subsequent order in no way relieves or
delays the obligations of IXCs to pay compensation on April 1, 1998. In the
fourth quarter of 1997, the Company recorded revenues of $4,734,000 for
dial-around compensation at a rate of $37.20 per installed pay telephone per
month, based on 131 calls per month.
Based on the information available, the Company believes that the
minimum amount it is entitled to as fair compensation under the
Telecommunications Act for the period from November 7, 1996 through March 31,
1998 is $37.20 per pay telephone per month. Further, the Company does not
believe that it is reasonably possible that the amount will be materially less
than $37.20 per pay telephone per month. While the amount of $0.284 per call
constitutes the Company's position as to 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. A number of parties filed a Motion to
Stay the 1997 Payphone Order pending judicial review and requested expedited
consideration and briefing schedule with the Court. The Court denied the Motion
to Stay and granted the Motion for Expedited Consideration and Briefing
Schedule. The Court is expected to hear arguments in May 1998.
Other revenues decreased $443,000 or 47.0% from $943,000 in 1996 to
$500,000 in 1997. This decrease was primarily due to the reduction in revenue
relating to the $1,200,000 signing bonus received in 1996 upon execution of a
new operator service agreement, which was being recognized as income on a pro
rata basis over the twelve month period ended March 1997.
- 19 -
<PAGE> 20
OPERATING EXPENSES. Total operating expenses increased $62,027,000 or
113.1%, from $54,819,000 for the year ended December 31, 1996 to $116,846,000
for the year ended December 31, 1997. Operating expenses represent 122.4% of
total revenues in 1996 and 106.6% of total revenues in 1997, a decrease of
15.8%. The percentage decrease was due in part to the reductions in depreciation
and amortization expense and in other unusual charges and contractual
settlements as a percentage of total revenues, as well as the increase in total
revenues attributable to the increase in dial-around compensation.
Line and transmission charges increased $13,365,000 or 119.8%, from
$11,153,000 in 1996 to $24,518,000 in 1997. Line and transmission charges
represent 24.9% and 22.3% of total revenues for the years ended December 31,
1996 and 1997, respectively, a decrease of 2.6%. The increase in amount is
primarily due to the increase in the number of pay telephones due to
acquisitions. The decrease in expense as a percentage of total revenue is
primarily due to the increase in dial-around compensation.
Telecommunication and validation fees (consisting primarily of
processing costs relating to operator services) increased from $5,608,000 in
1996 to $11,599,000 or 106.8%. Telecommunication and validation fees represented
12.5% of total revenue in 1996 and 10.6% of total revenue in 1997. The increase
in amount was primarily due to the increase in the number of installed pay
telephones. The decrease, as a percentage of total revenue, is primarily due to
the increase in dial-around compensation.
Location commissions increased $10,556,000, or 173.8%, from $6,072,000
for the year ended December 31, 1996 to $16,628,000 for the year ended December
31, 1997. As a percentage of total revenues, location commissions increased from
13.6% in 1996 to 15.2% in 1997, an increase of 1.6%. The dollar and percentage
increases are due to the increase in the number of pay telephones resulting from
acquisitions and installations and the increase in commission rates on new
location contracts. The commission rate increase also reflects the increased
competition in certain geographic areas from local exchange carriers and other
independent public pay telephone service providers in renewing existing
contracts and obtaining new contracts with location providers.
Field operations consists principally of personnel costs, rents and
utilities of the district service facilities, repairs and maintenance of the
public pay telephones, and sales and property taxes. Field operations expense
increased from $8,733,000 in 1996 to $21,330,000 in 1997, an increase of
$12,597,000 or 144.2%. The dollar increase is primarily due to the increase in
personnel costs, rent and service related expenses relating to the acquisition
of Cherokee, Amtel, POA and London. Field operations expenses as a percentage of
total revenues remained unchanged at 19.5% in 1996 and 1997.
Sales, general and administrative expenses ("SG&A") increased $6,102,000
or 139.3%, from $4,381,000 for the year ended December 31, 1996 to $10,483,000
for the year ended December 31, 1997. The dollar increase is primarily due to
the increase in personnel cost, travel, telephone and insurance resulting from
acquisitions and other business expansion. As a percentage of total revenue,
SG&A expenses are comparable in 1996 and 1997.
Depreciation and amortization increased $9,998,000 or 78.1% from
$12,800,000 for the year ended December 31, 1996 to $22,798,000 for the year
ended December 31, 1997. Depreciation and amortization represented 28.6% of
total revenues in 1996 and 20.8% of total revenues in 1997, a decrease of 7.8%.
The dollar increase is primarily due to the increase in depreciation and
amortization relating to 1997 business acquisitions and to a lesser extent 1996
acquisitions. The decrease as a percentage of total revenue is due to the longer
useful lives used for amortizing location contracts relating to acquisitions
based on a study performed by the Company and the effect of the revenue increase
relating to dial-around compensation.
Other unusual charges and contractual settlements increased $3,418,000
or 56.3% from $6,072,000 in 1996 to $9,490,000 in 1997. For the year ended
December 31, 1997, the unusual charges and contractual settlements consisted of:
(i) a forfeited deposit, professional fees and related expenses applicable to
the termination of the proposed acquisition of Communications Central Inc.,
$7,771,000; (ii) legal and note holder consent solicitation fees relating to the
amendment to the indenture for the 12% Senior Notes, $761,000; (iii) a
retroactive adjustment to dial-around compensation resulting from regulatory
changes, $395,000; and (iv) other non-recurring items totaling $563,000. Other
unusual charges and contractual settlements represented 13.6% of total revenue
in 1996 and 8.6% of total revenue in 1997, a decrease of 5.0%.
- 20 -
<PAGE> 21
OTHER INCOME (EXPENSE) Other income (expense) consists of interest
incurred on debt with related parties, the 12% Senior Notes and others, and
interest income (earned primarily from the proceeds of the 12% Senior Notes
before such proceeds were used for acquisitions). Total other income (expense)
increased $9,495,000, or 144.8%, from $6,557,000 in 1996 to $16,052,000 in 1997.
Other income (expense) represented 14.6% of total revenue in 1996 and 1997. The
dollar increase is due to the increase in long-term debt relating to the
issuance of the 12% Senior Notes in December 1996 and borrowings under the
related party debt agreement entered into in May 1997. Proceeds from the 12%
Senior Notes, among other things, were used to repay the outstanding balance
under the former debt agreement with the related party at the end of 1996.
EXTRAORDINARY ITEM The Company recorded extraordinary losses of
$10,077,000, representing 22.5% of total revenues for the year ended December
31, 1996. The extraordinary loss related to non-recurring costs that were
incurred in connection with the restructuring of the Company's long-term debt on
March 15, 1996 and December 18, 1996.
EBITDA EBITDA (income before interest income, interest expense,
depreciation, amortization, other unusual charges and contractual settlements,
and the extraordinary losses on debt restructuring) increased $16,229,000 from
$8,857,000 for the year ended December 31, 1996 to $25,086,000 for the year
ended December 31, 1997. EBITDA represented 19.8% of total revenues for the year
ended December 31, 1996 and 22.9% for the year ended December 31, 1997, an
increase of 3.1%. EBITDA is not intended to represent an alternative to
operating income (as defined in accordance with generally accepted accounting
principles) as an indicator of the Company's operating performance, or as an
alternative to cash flows from operating activities (as defined 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 telephone industry to analyze comparable
public pay telephone companies on the basis of operating performance, leverage
and liquidity.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES Total revenues increased $26,086,000, or 139.4%, from
$18,718,000 for the year ended December 31, 1995 to $44,804,000 for the year
ended December 31, 1996. This increase is attributable primarily to an increase
in the number of installed public pay telephones, which increased by 15,571, or
164.6%, from 9,458 at December 31, 1995 to 25,029 at December 31, 1996, with the
majority of the increase occurring in the third and fourth quarters of 1995 and
the first and third quarters of 1996 due to the Company's acquisitions. As of
March 7, 1997 the number of installed public pay telephones was 41,313.
Revenues from coin calls increased $14,082,000, or 116.1%, from
$12,130,000 for the year ended December 31, 1995 to $26,212,000 for the year
ended December 31, 1996. Non-coin telecommunication services increased
$11,191,000, or 173.3%, from $6,458,000 for the year ended December 31, 1995 to
$17,649,000 for the year ended December 31, 1996. The increases were primarily
due to the acquisition and installation of public pay telephones producing
additional revenues, the increase in the dial-around compensation rate and, to a
lesser extent, to the increases in coin calls resulting from the continuation of
the 1994 program which offered customers a three minute long distance call
anywhere in the continental United States for $0.75 (the "$0.75 Long Distance
Call Program" subsequently changed to $1.00 for the first three minutes in some
locations). However, the increase in non-coin revenue was offset in part by a
reduction in operator assisted calls as a result of aggressive dial-around
advertising by long distance carriers such as AT&T and MCI.
Other revenues increased $813,000, or 625.4%, from $130,000 for the
year ended December 31, 1995 to $943,000 for the year ended December 31, 1996.
This increase was primarily due to the pro rata recognition of the $1,200,000
signing bonus received from Intellicall upon execution of the Company's new
operator services agreement on March 15, 1996. The Company is recognizing the
signing bonus over a 12 month period.
OPERATING EXPENSES Total operating expenses increased $30,812,000, or
128.3%, from $24,007,000 for the year ended December 31, 1995 to $54,819,000 for
the year ended December 31, 1996. Operating expenses represented 128.3% of total
revenues for the year ended December 31, 1995 and 122.4% of total revenues for
the year ended December 31, 1996, a decrease of 5.9%. The percentage decrease
was due to a reduction in other unusual
- 21 -
<PAGE> 22
charges and contractual settlements and selling, general and administrative
expenses offset in part by higher depreciation and amortization as a result of
acquisitions and higher unusual charges and contractual settlements.
Line and transmission charges increased $6,004,000, or 116.6%, from
$5,149,000 for the year ended December 31, 1995 to $11,153,000 for the year
ended December 31, 1996. Line and transmission charges represented 27.5% of
total revenues for the year ended December 31, 1995 and 24.9% of total revenues
for the year ended December 31, 1996, a decrease of 2.6%. The dollar increase in
line and transmission charges was, in part, due to additional public pay
telephones acquired from IPP and Paramount, the increases in coin calls
resulting from the $0.75 Long Distance Call Program, and to a lesser extent, the
acquisitions of POA (completed September 16, 1996 with an effective purchase
date of August 1, 1996) and Amtel (completed September 13, 1996), as well as
increases in certain local telephone company line charges. The percentage
decrease was due to lower line charges for the acquired companies as compared to
those in 1995.
Telecommunication and validation fees, increased $4,350,000, or 345.8%,
from $1,258,000 for the year ended December 31, 1995 to $5,608,000 for the year
ended December 31, 1996. Telecommunication and validation fees represented 6.7%
of total revenues for the year ended December 31, 1995 and 12.5% of total
revenues for the year ended December 31, 1996, an increase of 5.8%. The increase
was primarily the result of the increase in the number of installed public pay
telephones and the outsourcing of operator services in 1996.
Location commissions increased $2,604,000, or 75.1%, from $3,468,000
for the year ended December 31, 1995 to $6,072,000 for the year ended December
31, 1996. Location commissions represented 18.5% of total revenues for the year
ended December 31, 1995 and 13.6% of total revenues for the year ended December
31, 1996, a decrease of 4.9%. The dollar increase is due to location agreements
from public pay telephones acquired in the acquisitions of World, Public
Telephone, IPP and Paramount, and to a lesser extent the location agreements
acquired in the acquisitions of POA and Amtel, while the percentage decrease is
due to such location agreements having lower commission rates than those from
the Company's existing public pay telephones.
Field operations (consisting of principally of personnel costs, rents
and utilities of the regional service facilities, and repair and maintenance of
the public pay telephones), increased $3,799,000, or 77.0%, from $4,934,000 for
the year ended December 31, 1995 to $8,733,000 for the year ended December 31,
1996. Field operations represented 26.4% of total revenues for the year ended
December 31, 1995 and 19.5% of total revenues for the year ended December 31,
1996, a decrease of 6.9%. The dollar increase was primarily the result of higher
personnel costs, rent, utilities and service related expenses attributable to
the acquisitions of World, Public Telephone, IPP and Paramount and, to a lesser
extent, the acquisitions of Amtel and POA, the increase in the Company's public
pay telephone base, and the additional field personnel to accommodate the
increased business. The percentage decrease reflects the economies of scale
resulting from those acquisitions that the Company has already realized. Such
economies of scale come primarily from the elimination of costs associated with
the closing of certain offices, the elimination of redundant executive and
administrative personnel and other operations areas and leveraging the Company's
existing field technicians.
SG&A expenses increased $1,736,000, or 65.6%, from $2,645,000 for the
year ended December 31, 1995 to $4,381,000 for the year ended December 31, 1996.
SG&A represented 14.2% of total revenues for the year ended December 31, 1995
and 9.7% of total revenues for the year ended December 31, 1996, a decrease of
4.5%. The dollar increase was primarily the result of the acquisitions of World,
Public Telephone, IPP and Paramount, and to a lesser extent, the acquisitions of
Amtel and POA. The percentage decrease reflects the economies of scale resulting
from those acquisitions that the Company has already realized.
Depreciation and amortization increased $8,417,000 or 192.0%, from
$4,383,000 for the year ended December 31, 1995 to $12,800,000 for the year
ended December 31, 1996. Depreciation and amortization represented 23.4% of
total revenues for the year ended December 31, 1995 and 28.6% of total revenues
for the year ended December 31, 1996, an increase of 5.2%. The dollar and
percentage increases were primarily due to the Company's acquisitions and
expansion of its public pay telephone base and purchases of additional computer
equipment, service vehicles and software to accommodate the Company's growth.
- 22 -
<PAGE> 23
Other unusual charges and contractual settlements increased $3,902,000,
or 179.8% from $2,170,000 for the year ended December 31, 1995 to $6,072,000 for
the year ended December 31, 1996. For the year ended December 31, 1996, other
unusual charges and contractual settlements consists primarily of: (i) the
settlement of contractual obligations under certain employment contracts,
$342,000; (ii) the settlement of other contractual obligations, $211,000; (iii)
the write-off of certain 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, $1,002,000; (iv) losses recognized on the early
pay-off of obligations under capital leases and other debt concurrent with the
debt restructurings completed on March 15 and December 18, 1996, $631,000; and
(v) the estimated fair market value of the Nominal Value Warrants issued
pursuant to the debt restructuring completed on March 15, 1996, $3,886,000.
Other unusual charges and contractual settlements represented 11.6% of total
revenues for the year ended December 31, 1995, and 13.6% of total revenues for
the year ended December 31, 1996, an increase of 2.0%.
OTHER INCOME (EXPENSE) Other income (expense) is comprised of interest
incurred on debt with related parties and others, and interest income. Total
other (expense) income increased $5,736,000, from a net expense of $821,000 for
the year ended December 31, 1995 to a net expense of $6,557,000 for the year
ended December 31, 1996. Other (expense) income represented 4.4% of total
revenues for the year ended December 31, 1995 and 14.6% of total revenues for
the year ended December 31, 1996, an increase of 10.2%. The dollar and
percentage increases were due to the financing obtained for the acquisitions
completed in 1996, and to a lesser extent the refinancing obtained in December
1996. Related party interest expense was $5,235,000 for the year ended December
31, 1996, representing 11.7% of total revenues. Included in related party
interest expense was non-cash interest expense of $1,605,000, or 3.6% of total
revenues for the year ended December 31, 1996, representing the accretion of the
debt under the Credit Agreement to its maturity amount.
EXTRAORDINARY ITEM The Company recorded extraordinary losses of
$10,077,000, representing 22.5% of total revenues for the year ended December
31, 1996. The extraordinary loss related to non-recurring costs that were
incurred in connection with the restructuring of the Company's long-term debt on
March 15, 1996 and December 18, 1996.
EBITDA EBITDA increased $7,593,000, from $1,264,000 for the year ended
December 31, 1995 to $8,857,000 for the year ended December 31, 1996. EBITDA
represented 6.8% of total revenues for the year ended December 31, 1995 and
19.8% for the year ended December 31, 1996, an increase of 13.0%.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS Net cash used in operating activities during the fiscal
years ended December 31, 1995, 1996 and 1997 were $580,000, $269,000 and
$4,720,000, respectively. Net cash used in operating activities consisted
primarily of the funding of operating losses, increases in current assets (see
earlier discussion of increase in dial-around compensation accounts receivable)
and repayment of current liabilities, offset by the issuance of the Nominal
Value Warrants (as defined herein), depreciation and amortization, accretion of
debt, and the non-cash portion of the loss associated with the debt
restructuring.
Cash used in investing activities during the fiscal years ended
December 31, 1995, 1996 and 1997 were $2,354,000, $63,062,000 and $57,197,000,
respectively. Cash used in investing activities consisted primarily of payments
to acquire companies (including the Cherokee acquisition deposit of $37,110,000
at December 31, 1996) and capital expenditures primarily due to the purchase and
installation of new pay telephone equipment.
Cash provided by financing activities during the fiscal years ended
December 31, 1995, 1996 and 1997 were $3,168,000, $109,056,000 and $21,998,000,
respectively, which consisted primarily of net proceeds from the Company Debt
Offering, the Company Equity Offering and from other borrowings offset by
redemptions and repurchases of preferred stock and repayments of debt.
CREDIT FACILITY On March 15, 1996, the Company entered into a credit
agreement (the "Credit Facility"), with ING (U.S.) Capital Corporation ("ING")
and Cerberus Partners, L.P. ("Cerberus" and, together with ING, the "Lenders"),
pursuant to which the Lenders agreed to lend the Company up to $37,250,000. On
March 15, 1996, the Company borrowed $30,531,000 pursuant to the Credit
Facility. During the second quarter of 1996, the Company
- 23 -
<PAGE> 24
borrowed an additional $1,693,000 pursuant to the Credit Facility. The initial
borrowings under the Credit Facility were used to complete the Paramount and IPP
acquisitions, to repay $8,503,000 of outstanding debt and $3,174,000 of
outstanding obligations under capital leases, to redeem the 10% Preferred, 8%
Preferred and 7% Preferred, to pay related transaction fees, to fund the Amtel
acquisition deposit of $1,300,000 and for working capital.
In connection with the execution of the Credit Facility on March 15,
1996, ING and Cerberus each received 102,412 warrants (204,824 warrants in total
and referred to herein as the "Lenders' Warrants"), which would collectively
allow them to purchase up to 204,824 shares of Series A Preferred at an exercise
price of $0.20 per share. Each share of Series A Preferred is convertible into
20 shares of the Company's Common Stock. The debt under the Credit Facility was
initially recorded net of an allocation of the fair value of the Lenders'
Warrants, such fair value being determined using the Black-Scholes valuation
model. ING and Cerberus may separately exercise their warrants without any
action of the other party.
On September 13, 1996, concurrent with the acquisition of Amtel, the
Lenders amended the Credit Facility to increase the maximum borrowings available
under the Credit Facility to $41,000,000. The Company then borrowed an
additional $8,777,000 and used $5,950,000 of the proceeds to complete the Amtel
and POA acquisitions. The remainder of the proceeds were used for working
capital and payment of certain related acquisition expenses. On November 22,
1996, the Lenders amended the Credit Facility to permit the incurrence of
additional borrowings of up to $2,000,000 to fund the deposits required in
connection with the Cherokee and the Texas Coinphone acquisitions and for
working capital purposes, thereby increasing the maximum borrowings available
under the Credit Facility to $43,000,000.
On December 18, 1996, the Company repaid all of the indebtedness under
the Credit Facility with a portion of the proceeds from the Company Equity
Offering and the Company Debt Offering, and the Credit Facility was terminated.
The Company realized an extraordinary loss of $9,810,000 consisting primarily of
the write-off of the remaining value assigned to the Series A Preferred warrants
and related unamortized deferred financing costs.
THE COMPANY EQUITY OFFERING AND THE COMPANY DEBT OFFERING. On December
18, 1996, the Company closed the following public underwritten offerings: (i)
the sale of 6,750,000 shares of Common Stock (the "Company Equity Offering"), at
a price to the public of $3.00 per share, for net proceeds to the Company
therefrom of $18,295,000 and (ii) the sale of $125,000,000 aggregate principal
amount of its 12% Senior Notes due 2006 (the "Notes" or the "Company Debt
Offering"), for net proceeds to the Company therefrom of $119,149,000. In
connection with the Company Equity Offering, the Company also granted the
underwriters a 45-day option to purchase up to 1,012,500 additional shares of
Common Stock, at $3.00 per share (less an underwriting discount of $0.21 per
share), solely to cover over-allotments (the "Over-Allotment Option"). The
Company received $2,825,000 at the time the underwriters exercised their
Over-Allotment Option on January 29, 1997.
The Notes are general unsecured obligations of the Company limited in
aggregate principal amount to $125,000,000 and will mature on December 15, 2006.
Interest on the Notes accrues at the rate of 12% per annum and is payable
semi-annually in arrears on June 15 and December 15 in each year commencing June
15, 1997. The Notes rank senior in right of payment to all indebtedness of the
Company that is expressly subordinated and are pari passu in right of payment
with all other senior indebtedness of the Company. The Notes are guaranteed
jointly and severally and fully and unconditionally on a senior unsecured basis
by the Subsidiary Guarantors, including any and all future subsidiaries of the
Company.
The Notes are redeemable, in whole or in part, at the option of the
Company at any time on or after December 15, 2001, at the redemption prices set
forth in the indenture, plus accrued and unpaid interest to the date of
redemption. In addition, at any time or from time to time prior to December 15,
1999, the Company may redeem up to 40% of the aggregate principal amount of the
Notes originally issued with the net cash proceeds to the Company of one or more
public equity offerings or equity private placements (other than the Company
Equity Offering) at a redemption price equal to 112% of the principal amount
thereof, plus accrued and unpaid interest to the date of redemption provided
that at least $75,000,000 principal amount of the Notes remains outstanding
immediately after any such redemption.
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<PAGE> 25
The indenture imposes certain limitations on the ability of the Company
and the Subsidiary Guarantors to, among other things, incur additional
indebtedness, pay dividends or make certain other restricted payments,
consummate certain asset sales, enter into certain transactions with interested
persons, incur liens, impose restrictions on the ability of a Subsidiary
Guarantor to pay dividends or make certain payments to the Company, conduct
business other than the pay telephone and ancillary businesses, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of the Company.
The indenture contains customary events of default, including, without
limitation, the following: (i) the failure to pay principal or interest when due
on the Notes; (ii) certain defaults under agreements relating to other
indebtedness; (iii) the breach of any covenant in the indenture; (iv) the levy
of certain judgments; and (v) certain bankruptcy, reorganization and insolvency
events. The occurrence of an event of default under the indenture permits the
holders of the Notes to accelerate the Notes and to pursue other remedies.
In addition, upon a "change of control" (as defined in the indenture),
the Company has the obligation to offer to repurchase all outstanding Notes from
the holders thereof at a price equal to 101% of the outstanding principal
balance, plus accrued and unpaid interest to the date of repurchase. On December
30, 1997, the Company solicited and received the consent from its Note Holders
to amend the indenture to increase the limit of permitted indebtedness and to
modify the definition of consolidated net income to exclude certain
non-recurring expenses and non-operating charges when calculating certain
restrictive covenants. The Company incurred $625,000 in deferred financing
costs to the Note Holders and $761,000 in fees relating to the solicitation of
the Note Holders' consent to amend the indenture.
The Company used the net proceeds from the Company Equity Offering to
repay approximately $8.0 million of debt outstanding under the Credit Facility
and the balance for working capital and other general corporate purposes. The
Company used a portion of the net proceeds from the Company Debt Offering to
repay all of the remaining outstanding debt under the Credit Facility, to repay
certain capital lease obligations and other indebtedness and to finance the
Cherokee and Texas Coinphone acquisitions.
NEW CREDIT AGREEMENT. On May 30, 1997, the Company entered into an
agreement ( the "Credit Agreement") with various lenders (collectively referred
to as the "Lenders"). ING is Agent for the Lenders and Transamerica Business
Credit Corporation and Finova Capital Corporation are Co-Agents for the Lenders.
ING is a significant shareholder of the Company's common equity. The Credit
Agreement provided a $75,000,000 commitment of which $60,000,000 was to be
utilized for future acquisitions ("Expansion Loan Commitment"), and $15,000,000
was to be utilized for general working capital requirements. Borrowings accrue
interest at the ING Alternate Base Rate (as defined in the Credit Agreement)
plus 1.50%. The Credit Agreement matures on May 20, 2000 and all the Company's
installed public pay telephones are pledged as collateral. The Company borrowed
$17,700,000 under the Expansion Loan Commitment to complete the acquisitions of
Advance, American, and London and to pay related acquisition and credit facility
fees. The Company also borrowed $7,300,000 of the Revolving Credit Commitment
for interest payments due under the $125,000,000 12% Senior Notes and for
general working capital purposes. Subsequent to the September 16, 1997 Court
ruling which vacated dial-around compensation, and pursuant to certain terms of
the Credit Agreement, the Agent gave notice to the Company that it was
prohibited from making additional borrowings under the Credit Agreement, without
prior approval from the Lenders.
The Credit Agreement includes covenants which, among other things,
require the Company to maintain ratios as to fixed charges, debt to earnings,
current ratio and interest coverage (all as defined in the Credit Agreement).
Other covenants limit incurrence of additional long-term debt, the level of
capital expenditures, the incurrence of lease obligations and permitted
investments.
On February 24, 1998, the Credit Agreement was amended to increase the
Revolving Credit Commitment to $20,000,000 and to decrease the Expansion Loan
Commitment to $55,000,000. The amount available for letters of credit under the
working capital commitment was reduced from $5,000,000 to $3,000,000 and certain
of the covenants were amended. On March 31, 1998, the Credit Agreement was
further amended with respect to certain financial covenants.
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<PAGE> 26
OTHER. The redemption price for the 10% Preferred, 8% Preferred and 7%
Preferred consisted of cash payments aggregating $1,117,000 and 34,436 shares of
14% Preferred. In the aggregate, $6,475,000 of the Company's outstanding
obligations, including portions of the purchase price for the IPP and Paramount
acquisitions, was liquidated by issuing 107,918 shares of 14% Preferred. The
$2,002,000 excess of the redemption price of the preferred issues redeemed over
their aggregate carrying value was recorded as a reduction of earnings available
to common shareholders on March 15, 1996.
On March 15, 1996, warrants to purchase 2,018,942 shares of Common
Stock at an exercise price of $.01 per share ("Nominal Value Warrants") were
issued in conjunction with the acquisitions of IPP and Paramount, redemption of
the 10% Preferred, 8% Preferred and 7% Preferred, and conversion of certain
related party debt of the Company to the 14% Preferred. Certain holders of the
14% Preferred are deemed related parties. See "Item 13 Certain Relationships and
Related Transactions." The warrants expire on March 13, 2001. An independent
valuation company has estimated the fair market value of the Nominal Value
Warrants to be $4,975,000, using the Black-Scholes valuation model, of which
$3,886,000 (the amount attributable to the warrants provided to related parties
in connection with the redemption of the preferred shares and the conversion of
certain debt) was recorded in the caption "other unusual charges and contractual
settlements" in the Company's consolidated statement of operations.
On September 12, 1995, the Company borrowed $1,200,000 (which was
recorded net of the value of warrants issued of $349,000) from third party
investors pursuant to a 19 month credit agreement, bearing interest at 12.5%.
The proceeds were used for operating expenses and to make certain employee
severance payments. This debt was repaid on March 15, 1996 with borrowings under
the Credit Facility.
The Company's working capital declined from $39,491,000 at December 31,
1996 to $7,839,000 at December 31, 1997, a decrease of $31,652,000. Cash flows
used in operating activities increased from $269,000 in 1996 to $4,720,000 in
1997, an increase of $4,451,000 predominantly due to the increase in accounts
receivable relating to dial-around compensation. At December 31, 1997, the
Company had a deficit of $4,042,000 in stockholders' equity (excluding
mandatorily redeemable preferred stock) as a result of the current year loss of
$23,254,000 and a loss of $26,649,000 in 1996.
The Company's working capital, liquidity and capital resources may be
limited by its ability to generate sufficient cash flow from its operations or
its investment or financing activities. Cash flow from operations depends on
revenues from coin and non-coin sources, including dial-around compensation, and
Management's ability to control expenses. There can be no assurance that coin
revenues will increase, that revenues from dial-around compensation will
continue at the rates anticipated or that they will be received by the Company
in the amounts the Company has recorded as receivable as they become due, or
that operating expenses can be maintained at present or reduced to lower levels.
To the extent that cash flow from operating activities is insufficient to meet
the Company's cash requirements, there can be no assurance that the Company's
Lenders will grant additional advances under the Credit Agreement for working
capital or business expansion purposes or that the Company can obtain additional
financing to meet its debt service and other cash requirements. In the event the
Company fails to meet its debt service requirements, such debt could become
immediately due and payable.
The Company has negotiated with its Lenders who have given notice to
the Company that it is prohibited from making additional borrowings under its
existing credit agreement without the prior approval of the Lenders. On
February 24, 1998, the Credit Agreement was amended to increase the working
capital commitment and to amend certain restrictive covenants. Subsequently,
the Company was permitted to borrow an additional $3,000,000 for general
working capital purposes. On March 31, 1998, the Credit Agreement was further
amended with respect to certain financial covenants.
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<PAGE> 27
The Company continues to negotiate with its current lenders and to
evaluate the necessity of alternative financing arrangements. Management
believes, but cannot assure, that cash flow from operations (including
substantial collections of accounts receivable from dial-around compensation),
additional liquidity which its current lenders may provide or other alternative
financing arrangements as may be required, will allow the Company to sustain
its operations and meet its obligations through the remainder of 1998.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company is currently in the process of completing a detailed
assessment of the full impact of the Year 2000 Issue. In the absence of the
completion of this detailed assessment, the Company does not have a reasonable
basis to conclude whether the Year 2000 Issue will have a material effect on
future financial results, or cause reported financial information not to be
necessarily indicative of future operating results or future financial
condition. The Company also does not have a reasonable basis to conclude whether
the impacts of the Year 2000 Issue will come to fruition. However, it is
Management's belief that the Company will be able to meet the compliance
requirements for the Year 2000 Issue.
ITEM 8. FINANCIAL STATEMENTS
The consolidated financial statements of the Company are set forth in Item
14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no resignation or dismissal of the Registrant's accountants
during the two most recent fiscal years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The description of the directors and executive officers of the Registrant
is incorporated herein by reference to the section of the definitive Proxy
Statement for the 1998 Annual Meeting of Shareholders (the "Proxy Statement"),
entitled "Election of Directors", which Proxy Statement is expected to be filed
in April 1998. In addition, the information set forth in the section of the
Proxy Statement entitled "Section 16(a), Beneficial Ownership Reporting
Compliance" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the section of the definitive Proxy
Statement for the 1998 Annual Meeting of Shareholders entitled "Executive
Compensation", which Proxy Statement is expected to be filed in April 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the section of the definitive Proxy
Statement for the 1998 Annual Meeting of Shareholders entitled "Security
Ownership of Certain Beneficial Owners and Management", which Proxy Statement is
expected to be filed in April 1998.
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<PAGE> 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the section of the definitive Proxy
Statement for the 1998 Annual Meeting of Shareholders entitled "Executive
Compensation-Certain Transactions", which Proxy Statement is expected to be
filed in April 1998.
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PART IV
ITEM 14. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
<TABLE>
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1. FINANCIAL STATEMENTS
--------------------
<S> <C>
Report of Independent Accountants......................................................................F-1
Consolidated Balance Sheets as of December 31, 1996 and 1997...........................................F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997..................................................................F-3
Statements of Changes in Mandatorily Redeemable Preferred Stock for the Years Ended
December 31, 1995, 1996 and 1997..................................................................F-4
Statements of Changes in Non-mandatorily Redeemable Preferred Stock,
Common Stock and Other Shareholders' Equity (Deficit) for the Years Ended
December 31, 1995, 1996 and 1997...................................................................F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995,
1996 and 1997......................................................................................F-7
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1995, 1996 and 1997..................................................................F-9
2. FINANCIAL STATEMENT SCHEDULES
-----------------------------
The financial statement schedules required to be filed herewith are set
forth in Exhibits 27 and 99.
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3. EXHIBITS
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EXHIBIT NO. DESCRIPTION
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3.1 Articles of Incorporation. (1)*
3.2 Amendment to Articles of Incorporation dated August 30, 1989. (2)*
3.3 Amended and Restated Code of Regulations. (5)*
3.5 Amendment to Articles of Incorporation dated January 3, 1992. (5)*
3.6 Amendment to Articles of Incorporation dated January 20, 1992. (5)*
3.7 Amendment to Articles of Incorporation dated April 9, 1992. (8)*
3.8 Amendment to Articles of Incorporation dated June 18, 1993. (8)*
3.9 Amendment to Articles of Incorporation dated June 30, 1993. (8)*
3.10 Amendment to Articles of Incorporation dated September 22, 1995. (13)*
3.11 Amendment to Articles of Incorporation dated December 15, 1995. (13)*
3.12 Amendment to Articles of Incorporation dated February 28, 1996. (13)*
</TABLE>
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4.1 Specimen of Common Stock Certificate. (3)*
4.2 Form of 14% Convertible Preferred Stock. (13)*
4.3 Indenture relating to the Notes offered in the Company Debt Offering (including the form of Note). (18)*
5.1 Opinion of Tammy L. Martin, Esq. regarding validity of the Notes registered. (18)*
10.2 Stock Incentive Plan for Key Employees, dated May 5, 1987. (1)*
10.3 Amended and Restated Stock Option Agreement between PhoneTel Technologies, Inc. and Jerry H. Burger dated July 1, 1993. (8)*
10.4 Stock Option Agreement dated July 1, 1993 between PhoneTel Technologies, Inc. and Bernard Mandel. (8)*
10.7 Separation Agreement dated September 15, 1995 between PhoneTel Technologies, Inc. and Jerry Burger, together with amendments
thereto. (13)*
10.8 Separation Agreement dated September 15, 1995 between PhoneTel Technologies, Inc. and Bernard Mandel, together with
amendments thereto. (13)*
10.10 Registration Rights Agreement dated April 10, 1992 among PhoneTel Technologies, Inc., George H. Henry, Carl Kirchhoff and
Charles Stuart. (5)*
10.11 Registration Rights Agreement among PhoneTel Technologies, Inc. J & C Resources, Inc. and Allen Moskowitz. (5)*
10.13 Stock Option Agreement and Registration Rights Agreement between PhoneTel Technologies, Inc. and William D. Moses, Jr. dated
May 11, 1992. (5)*
10.14 Assignment Agreement between William D. Moses, Jr. and Edward A. Moulton transferring the right to receive options to acquire
5,000 shares of Common Stock of PhoneTel Technologies, Inc. (9)*
10.15 Stock Option Agreement and Registration Rights Agreement between PhoneTel Technologies, Inc. and George H. Henry dated March
24, 1992. (5)*
10.16 Amendment No. 1 to Amended and Restated Loan Agreement and Registration Rights Agreement dated October 23, 1992 by and among
PhoneTel Technologies, Inc., J & C Resources, Inc. and Allen Moskowitz. (6)*
10.18 Master Agreement between The Cafaro Company and PhoneTel Technologies, Inc. dated December 23, 1992. (6)*
10.19 Operator Subscriber Service Agreement dated March 25, 1994 between U.S. Long Distance, Inc. and Alpha Pay Phones-IV, L.P.
(7)*
10.22 Stock Option Agreement with Allenstown Investments Limited dated on or about January 10, 1994 relative to grant of an option
to purchase 126,000 shares of PhoneTel Technologies, Inc. Common Stock. (8)*
10.23 Stock Option Agreement with Douglas Abrams with respect to 45,000 shares of Common Stock of PhoneTel Technologies, Inc. dated
on or about January 10, 1994. (8)*
10.24 Amendment to Stock Option Agreement dated January 10, 1994 with Douglas Abrams with respect to 45,000 shares of Common Stock
of PhoneTel Technologies, Inc. (9)*
</TABLE>
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10.25 Stock Option Agreement with William Moses, Jr. relative to 75,000 shares of Common Stock of PhoneTel Technologies, Inc. dated
on or about January 29, 1993. (8)*
10.26 Agreement dated January 5, 1994 between PhoneTel Technologies, Inc. and the Estate of William Moses relative to loan in the
amount of one million dollars and providing for warrants to purchase 100,000 shares and contingent right to acquire warrants
to purchase 400,000 shares of PhoneTel Technologies, Inc. Common Stock. (8)*
10.27 Agreement dated September 13, 1994 between PhoneTel Technologies, Inc. and the Estate of William Moses relative to
restructuring the repayment schedule of certain monies owed by PhoneTel Technologies, Inc. and providing for warrants to
purchase 45,000 shares of PhoneTel Technologies, Inc. Common Stock. (9)*
10.28 Loan Agreement dated December 29, 1993 between PhoneTel Technologies, Inc. and certain lenders identified therein with
respect to borrowing by PhoneTel Technologies, Inc. of $400,000 and the granting of warrants to purchase, in the aggregate, a
total of 62,745 shares of Common Stock by PhoneTel Technologies, Inc. (8)*
10.29 Letter Agreement dated February 23, 1995 between PhoneTel Technologies, Inc. and certain lenders identified therein with
respect to the extension of the maturity dates of certain promissory notes and the granting of additional warrants to
purchase Common Stock of PhoneTel Technologies, Inc. (9)*
10.30 Stock Option Agreement dated March 3, 1994 between PhoneTel Technologies, Inc. and George H. Henry relative to a grant of an
option to purchase 39,000 shares of PhoneTel Technologies, Inc. Common Stock. (9)*
10.31 Stock Option Agreements dated in January 1994 between PhoneTel Technologies, Inc. and George H. Henry granting options to
purchase, in the aggregate, a total of 106,551 shares of PhoneTel Technologies, Inc. Common Stock. (9)*
10.32 Stock Option Agreement with George H. Henry dated in August 1993 relative to a grant of an option to purchase 150,000 shares
of PhoneTel Technologies, Inc. Common Stock. (9)*
10.35 Amendments to Warrant Agreements between PhoneTel Technologies, Inc. and Richard Thatcher dated March 1995, and related
Warrant Agreements thereto, issued pursuant to a Letter Agreement dated February 23, 1995, relative to the grant of warrants,
in the aggregate, to purchase a total of 49,412 shares of PhoneTel Technologies, Inc. Common Stock. (9)*
10.36 Warrant Agreements with Richard Thatcher dated February, March and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the aggregate, to purchase a total of 7,500 shares of PhoneTel
Technologies, Inc. Common Stock. (9)*
10.37 Amendments to Warrant Agreements between PhoneTel Technologies, Inc. and Gerald Waldschutz dated March 1995, and related
Warrant Agreements thereto, issued pursuant to a Letter Agreement dated February 23, 1995, relative to the grant of warrants,
in the aggregate, to purchase a total of 41,177 shares of PhoneTel Technologies, Inc. Common Stock. (9)*
10.38 Warrant Agreements with Gerald Waldschutz dated February, March and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the aggregate, to purchase a total of 6,250 shares of PhoneTel
Technologies, Inc. Common Stock. (9)*
10.39 Amendments to Warrant Agreements between PhoneTel Technologies, Inc. and Steven Richman dated March 1995, and related Warrant
Agreements thereto, issued pursuant to a Letter Agreement dated February 23, 1995, relative to the grant of warrants, in the
aggregate, to purchase a total of 41,177 shares of PhoneTel Technologies, Inc. Common Stock. (9)*
</TABLE>
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10.40 Warrant Agreements with Steven Richman dated February, March and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the aggregate, to purchase a total of 6,250 shares of PhoneTel
Technologies, Inc. Common Stock. (9)*
10.41 Amendments to Warrant Agreements between PhoneTel Technologies, Inc. and Janice Fuelhart dated March 1995, and related
Warrant Agreements thereto, issued pursuant to a Letter Agreement dated February 23, 1995, relative to the grant of
warrants, in the aggregate, to purchase a total of 49,412 shares of PhoneTel Technologies, Inc. Common Stock. (9)*
10.42 Warrant Agreements with Janice Fuelhart dated February, March and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the aggregate, to purchase a total of 1,250 shares of PhoneTel
Technologies, Inc. Common Stock. (9)*
10.43 Amendments to Warrant Agreements between PhoneTel Technologies, Inc. and Peter Graf dated in March 1995, and related
Warrant Agreements thereto, issued pursuant to a Letter Agreement dated February 23, 1995, relative to the grant of
warrants, in the aggregate, to purchase a total of 148,235 shares of PhoneTel Technologies, Inc. Common Stock. (9)*
10.44 Warrant Agreements with Peter Graf dated February, March and April 1995, issued pursuant to a Letter Agreement dated
February 23, 1995, relative to the grant of warrants, in the aggregate, to purchase a total of 28,750 shares of PhoneTel
Technologies, Inc. Common Stock. (9)*
10.45 Stock Option Agreement dated May 24, 1994 between PhoneTel Technologies, Inc. and the Estate of William D. Moses, and
subsequent assignment thereof dated February 2, 1995, relative to the grant of an option to purchase 50,000 shares of
PhoneTel Technologies, Inc. Common Stock. (9)*
10.46 Stock Option Agreement dated September 13, 1994 between PhoneTel Technologies, Inc. and the Estate of William D. Moses, and
subsequent assignment thereof dated February 2, 1995, relative to the grant of an option to purchase 45,000 shares of
PhoneTel Technologies, Inc. Common Stock. (9)*
10.47 Warrant Agreement dated March 31, 1994 between PhoneTel Technologies, Inc. and the Estate of William D. Moses, and
subsequent assignment thereof dated February 2, 1995, relative to the grant of warrants to purchase 200,000 shares of
PhoneTel Technologies, Inc. Common Stock. (9)*
10.48 Agreement and Plan of Merger dated September 22, 1995, together with Exhibits attached thereto, by and among PhoneTel
Technologies, Inc. Phone Tel II, Inc., and World Communications, Inc. (10)*
10.49 Amendment to Agreement and Plan of Merger dated September 22, 1995 by and among PhoneTel Technologies, Inc., PhoneTel II,
Inc., and World Communications, Inc. (10)*
10.50 Agreement and Plan of Merger dated October 16, 1995, together with Exhibits attached thereto, by and among PhoneTel
Technologies, Inc., PhoneTel II, Inc., and Public Telephone Corporation. (11)*
10.51 Agreement and Plan of Merger dated November 22, 1995, between PhoneTel Technologies, Inc. and International Pay Phones,
Inc., South Carolina corporation, and all amendments thereto. (12)*
10.52 Agreement and Plan of Merger dated November 22, 1995, between PhoneTel Technologies, Inc. and International Pay Phones,
Inc., Tennessee corporation, and all amendments thereto. (12)*
10.53 Share Purchase Agreement dated as of November 16, 1995, between PhoneTel Technologies, Inc. and Paramount Communications
Systems, Inc., and all amendments thereto. (12)*
10.54 Credit Agreement dated as of March 15, 1996 among PhoneTel Technologies, Inc., Various Lenders and Internationale
Nederlanden (U.S.) Capital Corporation (the "Credit Agreement"). (12)*
</TABLE>
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10.55 Security Agreement dated as of March 15, 1996 among PhoneTel Technologies, Inc. Public Telephone Corporation, World
Communications, Inc., Northern Florida Telephone Corporation and Paramount Communications Systems, Inc. and Internationale
Nederlanden (U.S.) Capital Corporation as Agent for itself and certain other lenders. (12)*
10.56 Warrant Purchase Agreement dated as of March 15, 1996 between PhoneTel Technologies, Inc. and Internationale Nederlanden
(U.S.) Capital Corporation and Cerberus Partners, L.P. (12)*
10.57 Registration Rights Agreement dated as of March 15, 1996 between PhoneTel Technologies, Inc. and Internationale Nederlanden
(U.S.) Capital Corporation and Cerberus Partners, L.P. (12)*
10.58 Warrant Certificate dated as of March 15, 1996 granting Internationale Nederlanden (U.S.) Capital Corporation the right to
purchase 102,412 shares of Series A Special Convertible Preferred Stock of PhoneTel Technologies, Inc. (13)*
10.59 Warrant Certificate dated as of March 15, 1996 granting Cerberus Partners, L.P. the right to purchase 102,412 shares of
Series A Special Convertible Preferred Stock of PhoneTel Technologies, Inc. (13)*
10.60 Form of Warrant issued on March 15, 1996 to persons listed on Schedule A to this exhibit. (13)*
10.61 Operator Service Subscriber Agreement dated as of February 29, 1996 by and between Intellicall Operator Services, Inc. and
PhoneTel Technologies, Inc. (13)*
10.62 Intellistar License Agreement dated as of February 29, 1996 by and between Intellicall, Inc. and PhoneTel Technologies,
Inc. (13)*
10.63 Relay Services Agreement dated as of February 29, 1996 by and between Intellicall, Inc. and PhoneTel Technologies, Inc.
(13)*
10.64 Stock Option Agreement dated April 1, 1995 between PhoneTel Technologies, Inc. and Daniel J. Moos. (13)*
10.65 Separation Agreement dated July 29, 1996 between PhoneTel Technologies, Inc. and Daniel J. Moos. (15)*
10.66 Employment Agreement dated September 1, 1996 between PhoneTel Technologies, Inc. and Richard Kebert. (15)*
10.67 First Amendment to Credit Agreement dated as of April 11, 1996. (15)*
10.68 Second Amendment to Credit Agreement dated as of June 1996. (14)*
10.69 Third Amendment to Credit Agreement dated as of August 1, 1996. (14)*
10.70 Fourth Amendment to Credit Agreement dated as of September 13, 1996. (14)*
10.71 Fifth Amendment to Credit Agreement dated as of September 13, 1996. (14)*
10.72 Sixth Amendment to Credit Agreement dated as of October 8, 1996. (15)*
10.73 Asset Purchase Agreement among PhoneTel Technologies, Inc., an Ohio Corporation As Buyer and ACI-HDT Supply Company, a
California corporation, Amtel Communications Services, a California corporation, Amtel Communications Correctional
Facilities, a California corporation, Amtel Communication, Inc., a California corporation, Amtel Communications, Inc., a
California corporation, and Amtel Communications Payphones, Inc., a California corporation, as Seller, dated June 26, 1996,
and all amendments thereto. (14)*
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<TABLE>
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10.74 Amended and Restated Share Purchase Agreement among PhoneTel III, Inc., Payphones of America, Inc. and All of the
Shareholders of Payphones of America, Inc., dated as of August 1, 1996, and all amendments thereto. (14)*
10.75 Seventh Amendment to Credit Agreement dated as of November 22, 1996. (16)*
10.76 Agreement and Plan of Merger dated as of November 21, 1996 among PhoneTel Technologies, Inc., PhoneTel CCI, Inc., Cherokee
Communication, Inc. and all of the shareholders of Cherokee Communications, Inc. (the "Cherokee Merger Agreement") (16)*
10.77 Escrow Agreement dated as of November 21, 1996 among Comerica Bank-Texas, as escrow agent, Cherokee Communications, Inc.,
Bill H. Bailey, Jr. and J. Bruce Duty, as duly authorized agents for all of the shareholders of Cherokee Communications,
Inc., PhoneTel Technologies, Inc. and Bill H. Bailey, Jr., Jerry T. Beddow and Edward L. Marshall, individually. (16)*
10.78 Amendment dated as of December 31, 1996 to the Cherokee Merger Agreement. (17)*
10.79 Asset Purchase Agreement dated January 13, 1997, among PhoneTel Technologies, Inc., an Ohio Corporation, Texas Coinphone, a
Texas general partnership, Pete W. Catalena and Dennis H. Goehring. (17)*
10.80 Agreement and Plan of Merger by and among PhoneTel Technologies, Inc., PhoneTel Acquisition Corp. and Communications
Central Inc. dated as of March 14, 1997. (19)*
10.81 First Supplemental Indenture, dated as of January 3, 1997, supplementing the Indenture, Dated as of December 18, 1996,
among PhoneTel Technologies, Inc., the Subsidiary Guarantors named on Schedule I thereto and Marine Midland Bank, as
Trustee, $125,000,000 12% Senior Notes Due 2006. (20)*
10.82 Second Supplemental Indenture, dated as of May 29, 1997, supplementing the Indenture, Dated as of December 18, 1996, as
supplemented by the First Supplemental Indenture dated as of January 3, 1997, among PhoneTel Technologies, Inc., the
Subsidiary Guarantors named on Schedule I thereto and Marine Midland Bank, as Trustee, $125,000,000 12% Senior Notes Due
2006. (20)*
10.83 First Amendment to Agreement and Plan of Merger by and among PhoneTel Technologies, Inc., PhoneTel Acquisition Corp. and
Communications Central Inc. dated as of May 15, 1997. (20)*
10.84 $75,000,000 Credit Agreement dated as of May 30, 1997 among PhoneTel Technologies, Inc., as the Borrower, Various Lenders
and ING (U.S.) Capital Corporation, as the Agent for the Lenders and Transamerica Business Credit Corporation and Finova
Capital Corporation, as Co-Agents for the Lenders. (20)*
10.85 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. (21)*
10.86 Third Supplemental Indenture, dated as of December 30, 1997, supplementing the Indenture, dated as of December 18, 1996, as
supplemented by the First Supplemental Indenture, dated as of January 3, 1997, and the Second Supplemental Indenture, dated
as of May 29, 1997, among PhoneTel Technologies, Inc., the Subsidiary Guarantors named on Schedule I thereto and Marine
Midland Bank, as Trustee, $125,000,000 12% Senior Notes due 2006.
</TABLE>
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<TABLE>
<S> <C>
10.87 First Amendment to Credit Agreement, dated as of February 24, 1998, amending the $75,000,000 Credit Agreement dated as of
May 30, 1997 among PhoneTel Technologies, Inc. as the Borrower, Various Lenders and ING (U.S.) Capital Corporation, as
Agent for the Lenders and Transamerica Business Credit Corporation and Finova Capital Corporation, as Co-Agents for the
Lenders.
10.88 PhoneTel Technologies, Inc. 1997 Stock Incentive Plan (22) *
21.1 Subsidiaries of PhoneTel Technologies, Inc.
27.1 Financial Data Schedule for the Year Ended December 31, 1997
27.2 Financial Data Schedule for the Year Ended December 31, 1996
27.3 Financial Data Schedule for the Year Ended December 31, 1995
99 Financial Statement Schedule - Valuation and Qualifying Accounts
-----------------
<FN>
* Previously filed.
(1) Incorporated by reference from the Registration Statement on Form S-18 (Registration No. 33-16962C) of PhoneTel
Technologies, Inc. (the "Company"), filed with the Securities and Exchange Commission on September 1, 1987.
(2) Incorporated by reference from Amendment No. 1 to the Company's Registration Statement on Form S-1, Registration No.
33-30428, filed September 27, 1989.
(3) Incorporated by reference from Amendment No. 1 to the Company's Registration Statement on Form S-18 (Registration No.
33-16962C), filed with the Securities and Exchange Commission on October 30, 1987.
(4) Incorporated by reference from the Company's Form 10-K for the year ended December 31, 1989.
(5) Incorporated by reference from the Company's Form 10-K for the year ended December 31, 1991.
(6) Incorporated by reference from the Company's Form 10-KSB for the year ended December 31, 1992.
(7) Incorporated by reference from the Company's Form 8-K dated March 25, 1994.
(8) Incorporated by reference from the Company's Form 10-KSB for the year ended December 31, 1993.
(9) Incorporated by reference from the Company's Form 10-KSB for the year ended December 31, 1994.
(10) Incorporated by reference from the Company's Form 8-K dated September 22, 1995.
(11) Incorporated by reference from the Company's Form 8-K dated October 16, 1995.
(12) Incorporated by reference from the Company's Form 8-K dated March 15, 1996.
(13) Incorporated by reference from the Company's Form 10-KSB for the year ended December 31, 1995.
(14) Incorporated by reference from the Company's Form 8-K dated September 13, 1996.
(15) Incorporated by reference from the Company's Form 10-QSB for the quarter ended September 30, 1996.
(16) Incorporated by reference from Amendment No. 2 to the Company's Registration Statement on Form SB-2 (Registration No.
333-13767), filed with the Securities and Exchange Commission on December 12, 1996.
(17) Incorporated by reference from the Company's Form 8-K dated January 3, 1997.
(18) Incorporated by reference from Amendment No. 2 to the Company's Registration Statement on Form SB-2 (Registration No.
333-15611), filed with the Securities and Exchange Commission on December 13, 1996.
</FN>
</TABLE>
- 35 -
<PAGE> 36
(19) Incorporated by reference from the Company's Form 10-KSB for the year
ended December 31, 1996.
(20) Incorporated by reference from the Company's Form 10-QSB for the quarter
ended June 30, 1997.
(21) Incorporated by reference from the Company's Form 10-QSB for the quarter
ended September 30, 1997.
(22) Incorporated by reference from the Company's Proxy Statement for the
1997 Annual Meeting of Shareholders.
(B) REPORT ON FORM 8-K
The Company filed a report on Form 8-K on October 21, 1997, reporting
under Item 5 of Form 8-k.
(C) EXHIBITS
The response to this portion of Item 14 is submitted as a separate
section of this report. See Item 14(a)3. for a list of Exhibits hereto.
(D) FINANCIAL STATEMENT SCHEDULES
The financial statement schedules to this Form 10-K are set forth as
exhibits 27.1, 27.2, 27.3 and 99.
- 36 -
<PAGE> 37
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
PhoneTel Technologies, Inc.
In our opinion, the accompanying consolidated balance sheets and
related consolidated statements of operations, changes in mandatorily redeemable
preferred stock, changes in non-mandatorily redeemable preferred stock, common
stock and other shareholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of PhoneTel Technologies, Inc.
and its subsidiaries at December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Cleveland, Ohio
March 31, 1998
F-1
<PAGE> 38
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash $46,438 $6,519
Accounts receivable, net of allowance for doubtful accounts
of $92 and $507, respectively 3,749 16,278
Other current assets 283 972
--------- ---------
Total current assets 50,470 23,769
Property and equipment, net 19,243 30,109
Intangible assets, net 52,144 115,607
Other assets 803 341
Restricted cash equivalents 37,110 -
--------- ---------
$159,770 $169,826
========= =========
LIABILITIES AND EQUITY
Current liabilities:
Current portion:
Long-term debt $1,009 $544
Obligations under capital leases 138 92
Accounts payable 5,003 8,768
Accrued expenses:
Location commissions 1,767 3,142
Personal property and sales tax 1,071 1,927
Interest 774 991
Salaries, wages and benefits 574 466
Other 643 -
--------- ---------
Total current liabilities 10,979 15,930
Long-term debt 125,274 150,203
Obligations under capital leases 104 19
Commitments and contingencies - -
14% Cumulative Preferred Stock Mandatorily Redeemable
(redemption amount $8,289 due June 30, 2000) 6,708 7,716
Non-mandatorily Redeemable Preferred Stock, Common Stock
and Other Shareholders' Equity (Deficit) 16,705 (4,042)
--------- ---------
$159,770 $169,826
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 39
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Coin calls $12,130 $26,212 $58,520
Non-coin telecommunication services 6,458 17,649 50,624
Other 130 943 500
------------ ------------ ------------
18,718 44,804 109,644
------------ ------------ ------------
COSTS AND EXPENSES:
Line and transmission charges 5,149 11,153 24,518
Telecommunication and validation fees 1,258 5,608 11,599
Location commissions 3,468 6,072 16,628
Field operations 4,934 8,733 21,330
Selling, general and administrative 2,645 4,381 10,483
Depreciation and amortization 4,383 12,800 22,798
Other unusual charges and contractual settlements 2,170 6,072 9,490
------------ ------------ ------------
24,007 54,819 116,846
------------ ------------ ------------
Loss from operations (5,289) (10,015) (7,202)
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense - related parties - (5,235) (1,431)
Interest expense - others (837) (1,504) (15,181)
Interest income 16 182 560
------------ ------------ ------------
(821) (6,557) (16,052)
------------ ------------ ------------
Loss before extraordinary item (6,110) (16,572) (23,254)
Extraordinary item:
Loss on early extinguishment of debt - (10,077) -
------------ ------------ ------------
NET LOSS ($6,110) ($26,649) ($23,254)
============ ============ ============
Earnings per share calculation:
Loss before extraordinary item ($6,110) ($16,572) ($23,254)
Preferred dividend payable in kind - (337) (514)
Preferred dividend payable in cash (310) - -
Accretion of 14% Preferred to its redemption value - (102) (494)
Premium on redemption of 10%, 8% and 7% Preferred - (2,002) -
------------ ------------ ------------
Loss before extraordinary item applicable to
common shareholders (6,420) (19,013) (24,262)
Extraordinary item:
Loss on early extinguishment of debt - (10,077) -
------------ ------------ ------------
Net loss applicable to common shareholders ($6,420) ($29,090) ($24,262)
============ ============ ============
Loss per common share before extraordinary item ($3.29) ($3.46) ($1.51)
============ ============ ============
Net loss per common share ($3.29) ($5.29) ($1.51)
============ ============ ============
Weighted average number of shares 1,950,561 5,494,011 16,040,035
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 40
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN MANDATORILY REDEEMABLE PREFERRED STOCK
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------------
1995 1996 1997
------------------ ------------------ ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
14% CUMULATIVE
REDEEMABLE CONVERTIBLE
PREFERRED STOCK
Balance, 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 17,760 514
Accretion of carrying value
to amount payable at
redemption on June 30, 2000 - - - 102 - 494
------- ------- ------- ------- ------- -------
Balance, end of year - - 120,387 $6,708 138,147 $7,716
======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 41
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN NON-MANDATORILY REDEEMABLE PREFERRED STOCK,
COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------------------------
1995 1996 1997
-------------------------- --------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
7 % Cumulative
Convertible Redeemable
Preferred Stock
Balance, beginning of year 2,500 $200 2,500 $200 - -
Redemption - - (2,500) (200) - -
----------- ----------- ----------- ----------- ----------- -----------
Balance, end of year 2,500 200 - - - -
=========== ----------- =========== ----------- =========== -----------
8 % Cumulative Redeemable
Preferred Stock
Balance, beginning of year 12,200 981 12,200 981 - -
Redemption - - (12,200) (981) - -
----------- ----------- ----------- ----------- ----------- -----------
Balance, end of year 12,200 981 - - - -
=========== ----------- =========== ----------- =========== -----------
10 % Cumulative Redeemable
Preferred Stock
Balance, beginning of year 1,496 - 1,496 - - -
Redemption - - (1,496) - - -
----------- ----------- ----------- ----------- ----------- -----------
Balance, end of year 1,496 - - - - -
=========== ----------- =========== ----------- =========== -----------
10 % Cumulative Non-voting
Redeemable Preferred Stock
Balance, beginning of year - - 530,534 5,305 - -
Acquisitions 530,534 5,305 - - - -
Conversion - - (530,534) (5,305) - -
----------- ----------- ----------- ----------- ----------- -----------
Balance, end of year 530,534 5,305 - - - -
=========== ----------- =========== ----------- =========== -----------
Series A Special Convertible
Preferred Stock
Balance, beginning of year - - - - - -
Exercise of Warrants - - - - 12,500 $3
Conversion to Common Stock - - - - (12,500) (3)
----------- ----------- ----------- ----------- ----------- -----------
Balance, end of year - - - - - -
=========== ----------- =========== ----------- =========== -----------
Common Stock
Balance, beginning of year 1,522,158 15 2,855,350 29 14,488,828 145
Private sales of stock 472,056 5 - - - -
Company Equity Offering - - 6,750,000 68 1,012,500 10
Exercise of warrants and option 8,333 - 1,035,137 10 409,754 4
Acquisitions 731,189 8 2,860,608 28 - -
Conversion of Series A Preferred - - - - 250,000 3
Conversion of 10% Non-voting
Preferred - - 884,214 9 - -
Other issuances of stock 121,614 1 103,519 1 199,747 2
----------- ----------- ----------- ----------- ----------- -----------
Balance, end of year 2,855,350 29 14,488,828 145 16,360,829 164
=========== ----------- =========== ----------- =========== -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 42
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN NON-MANDATORILY REDEEMABLE PREFERRED STOCK,
COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------------
1995 1996 1997
------------------ -------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- -------- -------- -------- -------- --------
<S> <C> <C> <C>
Additional Paid-in Capital
Balance, beginning of year $8,755 $16,650 $59,104
Company Equity Offering, net - 18,228 2,815
Private sales of stock 2,010 - -
Exercise of warrants and options 35 - 101
Acquisitions 4,918 8,010 -
Warrants issued with debt 349 6,412 -
Conversion of 10% Non-voting
Preferred - 5,296 -
Issuance of Nominal
Value Warrants - 4,241 -
Other issuances of stock 583 267 580
-------- -------- --------
Balance, end of year 16,650 59,104 62,600
-------- -------- --------
Accumulated Deficit
Balance, beginning of year (7,304) (13,454) (42,544)
Net loss (6,110) (26,649) (23,254)
Dividends:
Paid on 7% and 8% Preferred (40) - -
Payable in-kind on 14%
Preferred and accretion - (439) (1,008)
Redemption of stock:
7% , 8% and 10% Preferred - (2,002) -
-------- -------- --------
Balance, end of year (13,454) (42,544) (66,806)
-------- -------- --------
Total Non-mandatorily
Redeemable Preferred Stock,
Common Stock and
Other Shareholders' Equity (Deficit) $9,711 $16,705 ($4,042)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 43
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss ($6,110) ($26,649) ($23,254)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization 4,383 12,800 22,798
Amortization of deferred revenues - (900) (300)
Increase in allowance for doubtful accounts - 92 267
Issuance of Nominal Value Warrants - 3,886 -
Stock in lieu of cash payments 529 21 -
Accretion of related party debt - 1,605 -
Loss on debt restructuring - 9,628 -
Other non-cash charges 354 156 2
Changes in current assets and current liabilities,
net of assets acquired 264 (908) (4,233)
-------- -------- --------
(580) (269) (4,720)
-------- -------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisitions (672) (22,576) (48,687)
Restricted funds - (37,110) -
Acquisition deposits (950) (520) -
Purchases of property and equipment (237) (2,851) (7,937)
Proceeds from sale of assets - - 789
Deferred revenues - signing bonus - 1,200 -
Purchases of intangible assets (427) (907) (1,265)
Other deferred charges (68) (298) (97)
-------- -------- --------
(2,354) (63,062) (57,197)
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 44
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from debt issuances $3,133 $43,000 $110
Net proceeds from Company Debt Offering - 119,149 -
Net proceeds from issuances of preferred and Common Stock 1,932 - -
Net proceeds from Company Equity Offering - 18,295 2,825
Proceeds from shareholder debt - 835 25,000
Principal payments on borrowings (1,891) (66,205) (1,642)
Dividends paid (40) - -
Debt financing costs - (4,911) (4,402)
Redemption of 10% and 8% Preferred - (1,117) -
Proceeds from warrant and option exercises 34 10 107
--------- --------- ---------
3,168 109,056 21,998
--------- --------- ---------
Increase (decrease) in cash 234 45,725 (39,919)
Cash, beginning of period 479 713 46,438
--------- --------- ---------
Cash, end of period $713 $46,438 $6,519
========= ========= =========
SUPPLEMENTAL DISCLOSURE:
Interest paid during the year $674 $4,465 $16,395
========= ========= =========
NON-CASH TRANSACTIONS:
Acquisitions:
Amtel Communications - $5,421 -
Payphones of America - 13,918 -
International Pay Phones $150 3,536 -
Paramount Communications - 1,064 -
World Communications 14,935 - -
Public Telephone 4,853 - -
Common Stock issued for services 529 21 $208
Common Stock issued in payment of debt and interest 138 248 374
--------- --------- ---------
$20,605 $24,208 $582
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 45
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND
1997 (IN THOUSANDS EXCEPT FOR INSTALLED PUBLIC PAY
TELEPHONES,
PER CALL, SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
PhoneTel Technologies, Inc. and Subsidiaries (the "Company") operate in
the telecommunications industry, specializing in the business segment that
includes the installation and operation of public pay telephones on a revenue
sharing basis and offering operator assisted long distance services. At December
31, 1995, 1996 and 1997, the Company operated 9,458, 25,029 and 43,847 installed
public pay telephones, respectively. The Company's operations are regulated by
the Public Service or Utility Commissions of the various States and the Federal
Communications Commission.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. Intercompany transactions and
balances have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all investments with original maturities of three
months or less to be cash equivalents.
RESTRICTED CASH EQUIVALENTS
Restricted cash equivalents represent a portion of the net proceeds
realized from the Company's Debt Offering completed on December 18, 1996, which,
pursuant to the terms of the Company's Debt Offering, were restricted to certain
transactions. The funds were used to complete the acquisition of Cherokee
Communications, Inc. on January 1, 1997.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost or, if acquired through a
business combination, at the amount established by purchase price allocation.
The Company also capitalizes certain costs related to installing telephones and
depreciates those costs over the estimated useful life of the telephone or the
term of the location contract, whichever is shorter. Depreciation for financial
reporting and tax purposes is computed using the straight-line method and
accelerated methods, respectively, over the estimated useful lives of the assets
commencing when the equipment is placed in service.
F-9
<PAGE> 46
INTANGIBLE ASSETS
Intangible assets include costs incurred in the installation of public
pay telephones or in the acquisition of installed public pay telephones through
a business combination ("location contract"), non-compete agreements, costs
associated with obtaining operating certification in various states and deferred
financing costs. Intangible assets are amortized over the estimated economic
life of the respective location contracts, the term of the respective
non-compete or financing agreement, and five years for state operating
certifications.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates potential impairment of long-lived
assets. A loss relating to an impairment of assets occurs when the aggregate of
the estimated undiscounted future cash inflows to be generated by the Company's
assets, grouped by Company operating district (including any salvage values) is
less than the related assets' carrying value. Impairment is measured based on
the difference between the present value of the discounted expected future cash
flows and the assets' carrying value. No impairment was recorded in 1996 or
1997.
REVENUE RECOGNITION
Revenues from coin calls, reselling operator assisted and long distance
services, and compensation for dial-around calls are recognized in the period in
which the customer places the related call.
EARNINGS PER SHARE
In March 1997, the 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.
In the fourth quarter of 1997, the Company adopted FASB Statement No.
128 and has applied the provisions of the statement to prior periods. No
restatement of amounts previously reported as loss per share by the Company was
required.
Basic earnings per share amounts are computed by dividing income or
loss applicable to common shareholders by the weighted average number of shares
outstanding during the period.
Diluted earnings per share amounts are determined in the same manner as
basic earnings per share except the number of shares is increased assuming
exercise of stock options and warrants using the treasury stock method and
conversion of the 7% Cumulative Convertible Redeemable Preferred ("7%
Preferred") in 1995 and the 14% Cumulative Redeemable Preferred ("14%
Preferred") in 1996 and 1997. In addition, income or loss applicable to common
shareholders is not adjusted for dividends and other transactions relating to
preferred shares for which conversion is assumed. Diluted earnings per share
amounts have not been reported because the Company has a net loss and the impact
of the assumed exercise of the stock options and warrants and the assumed
conversion of the 7% Preferred and 14% Preferred is not dilutive.
The weighted average number of common shares outstanding in all periods
has been adjusted to reflect the one for six (1:6) reverse stock split which was
effective December 26, 1995.
INCOME TAXES
The Company utilizes the asset and liability method to account for
income taxes whereby deferred tax assets and liabilities are recognized to
reflect the future tax consequences attributable to temporary differences
between the financial reporting basis of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to be recovered and settled. The effect of a
change in tax rates on deferred tax assets and liabilities is recognized in the
period in which the change is enacted.
F-10
<PAGE> 47
RECLASSIFICATIONS
Certain amounts relating to 1995 and 1996 have been reclassified to
conform to the current year presentation. The reclassifications have had no
impact on total assets, shareholders' equity or net loss as previously reported.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of financial instruments are based on a variety of
factors. Where available, fair values represent quoted market prices for
identical or comparable instruments. In other cases, fair values have been
estimated based on assumptions concerning the amount and timing of estimated
future cash flows and assumed discount rates reflecting varying degrees of risk.
Accordingly, the fair values may not represent actual values of the financial
instruments that could have been realized as of December 31, 1996 and 1997, or
that will be realized in the future. At December 31, 1996 and 1997, the
difference between the estimated fair values of financial instruments and their
carrying values was not material.
NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", ("SFAS No. 130"). 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
utilizing internal reporting methodologies. This Statement is effective for
financial statements for the period beginning after December 15, 1997.
Management has not evaluated the impact of this Statement.
2. FINANCIAL CONDITION
The Company's working capital declined from $39,491 at December 31,
1996 to $7,839 at December 31, 1997, a decrease of $31,652. Cash flows used in
operating activities increased from $269 in 1996 to $4,720 in 1997, an increase
of $4,451, predominantly due to the increase in accounts receivable relating to
dial-around compensation. At December 31, 1997, the Company had a deficit of
$4,042 in stockholders equity (excluding mandatorily redeemable preferred stock)
as a result of the current year loss of $23,254 and a loss of $26,649 in 1996.
The Company was not in compliance with certain financial covenants under the
Credit Agreement at December 31, 1997, principally due to the reduction in the
per phone per month dial-around compensation from $45.85 to $37.20 and to the
costs related to the termination of the Communications Central Inc. merger
agreement. The Credit Agreement was subsequently amended to eliminate the
financial covenants as of December 31, 1997.
The Company's working capital, liquidity and capital resources may be
limited by its ability to generate sufficient cash flow from its operations or
its investment or financing activities. Cash flow from operations depends on
revenues from coin and non-coin sources, including dial-around compensation, and
Management's ability to control expenses. There can be no assurance that coin
revenues will increase, that revenues from dial-around compensation will
continue at the rates anticipated or that they will be received by the Company
in the amounts the Company has recorded as receivable as they become due, or
that operating expenses can be maintained at present or reduced to lower levels.
To the extent that cash flow from operating activities is insufficient to meet
the Company's cash requirements, there can be no assurance that the Company's
Lenders will grant additional advances under the Credit Agreement for working
capital or business expansion purposes or that the Company can obtain additional
financing to meet its debt service and other cash requirements. In the event the
Company fails to meet its debt service requirements, such debt could become
immediately due and payable.
The Company has negotiated with its Lenders who have given notice to
the Company that it is prohibited from making additional borrowings under its
existing credit agreement without the prior approval of the Lenders. On
February 24, 1998, the Credit Agreement was amended to increase the working
capital commitment and to amend certain restrictive covenants. Subsequently,
the Company was permitted to borrow an additional $3,000 for general working
capital purposes. On March 31, 1998, the Credit Agreement was further amended
with respect to certain financial covenants.
F-11
<PAGE> 48
The Company continues to negotiate with its current lenders and to
evaluate the necessity of alternative financing arrangements. Management
believes, but cannot assure, that cash flow from operations (including
substantial collections of accounts receivable from dial-around compensation),
additional liquidity which its current lenders may provide or other alternative
financing arrangements as may be required, will allow the Company to sustain
its operations and meet its obligations through the remainder of 1998.
3. ACQUISITIONS AND MERGERS
TERMINATION OF PROPOSED ACQUISITION
On March 14, 1997, PhoneTel entered into an Agreement and Plan of
Merger (the "Merger Agreement") to acquire Communications Central Inc. ("CCI"),
pursuant to which on March 20, 1997 a wholly-owned subsidiary of PhoneTel
commenced a tender offer (the "Offer") for all of the outstanding shares of
common stock of CCI ("CCI Shares") at $12.85 per share in cash. The Offer
expired on August 20, 1997. No CCI Shares were purchased and all CCI Shares
tendered and not properly withdrawn at the time of expiration were returned by
the depository. On August 21, 1997, PhoneTel announced that the Merger Agreement
had been terminated and in connection therewith forfeited a $6,000 deposit that
had been paid to CCI. The Company recorded a charge of $7,818 relating to the
transaction, including the forfeited deposit and $1,818 in professional fees and
related expenses in the third quarter of 1997.
LONDON COMMUNICATIONS, INC. - JUNE 10, 1997 ("LONDON")
The Company acquired 2,519 installed public pay telephones for $9,514
and incurred related acquisition expenses of $204.
ADVANCE PAY SYSTEMS, INC. - MAY 30, 1997 ("ADVANCE")
The Company acquired 800 installed public pay telephones for $2,709 and
incurred related acquisition expenses of $62.
AMERICAN PUBLIC TELECOM, INC. - MAY 30, 1997 ("AMERICAN")
The Company acquired 859 installed public pay telephones for $3,312 and
incurred related acquisition expenses of $69.
TEXAS COINPHONE - JANUARY 14, 1997 ("TEXAS COINPHONE")
The Company acquired 1,250 installed public pay telephones, parts and
supplies inventories, and certain other assets for $3,660 and incurred related
acquisition expenses of approximately $50.
CHEROKEE COMMUNICATIONS, INC. - JANUARY 1, 1997 ("CHEROKEE")
The Company acquired 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.
F-12
<PAGE> 49
AMTEL COMMUNICATIONS SERVICES - SEPTEMBER 13, 1996 ("AMTEL")
The Company acquired 6,872 installed public pay telephones and
inventory consisting of approximately 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")
The Company acquired 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 non-competition
and consulting agreements for an aggregate value of $360. Additionally, the
Company incurred approximately $50 in related acquisition expenses.
INTERNATIONAL PAY PHONES, INC. OF SOUTH CAROLINA ("IPP SC") AND
INTERNATIONAL PAYPHONES, INC. OF TENNESSEE ("IPP TN") - MARCH 15, 1996
(REFERRED TO AS "IPP")
The Company acquired 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;
117,785 warrants to purchase shares of Common Stock at a nominal exercise price
("Nominal Value Warrants"), valued at $139; $57 for three five year non-compete
agreements; and the assumption of approximately $588 in liabilities.
PARAMOUNT COMMUNICATIONS, INC. - MARCH 15, 1996 ("PARAMOUNT")
The Company acquired 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-compete agreement,
valued at $50.
PUBLIC TELEPHONE CORPORATION - OCTOBER 16, 1995 ("PUBLIC TELEPHONE")
The Company acquired 1,200 installed public pay telephones for a
purchase price consisting of 304,879 shares of Common Stock (valued at $6.75 per
share, or $2,058) and the assumption of $2,795 in liabilities. In connection
with the acquisition, the Company entered into two five year non-compete
agreements valued at $798.
WORLD COMMUNICATIONS, INC. - SEPTEMBER 22, 1995 ("WORLD")
The Company acquired 3,237 installed public pay telephones for a
purchase price consisting of: 402,500 shares of Common Stock (valued at $6.75
per share, or $2,717); 530,534 shares of 10% Non-voting Redeemable Preferred
Stock ("10% Non-voting Preferred"), valued at $5,305, which were converted to
884,214 shares of Common Stock on June 28, 1996; and the assumption of $6,913 in
liabilities.
PURCHASE PRICE ACCOUNTING
The Company recorded each of the above acquisitions as purchases and
has included the results of the acquired entities in the statements 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
are determined using discounted cash flows over the remaining estimated economic
lives of the acquired location contracts. The amount of location contracts
recorded for each acquisition and the estimated economic life of the acquired
location contracts are as follows: London $8,608, 102 months; Advance $2,313,
120 months; American $2,763, 103 months; Texas Coinphone $ 3,097, 101 months;
Cherokee $53,103, 113 months; Amtel $10,136, 99 months; POA $12,054, 103 months;
IPP $6,959, 97 months; Paramount $10,116, 109 months; Public Telephone $1,404,
103 months; World $7,156, 103 months.
F-13
<PAGE> 50
PRO FORMA FINANCIAL DATA (UNAUDITED)
Set forth below is the Company's unaudited pro forma condensed
statement of operations data for the years ended December 31, 1995, 1996 and
1997, as though the World and Public Telephone acquisitions had occurred at the
beginning of 1995; the IPP, Paramount, POA and Amtel acquisitions had occurred
at the beginning of 1995 and 1996; and the Cherokee, Texas Coinphone, Advance,
American and London acquisitions had occurred at the beginning of 1996 and 1997.
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Total revenues $ 59,515 $ 109,980 $ 114,638
Loss before extraordinary item (15,364) (26,060) (24,093)
Net loss (15,364) (36,137) (24,093)
Net loss applicable to common
Shareholders (16,018) (38,578) (25,101)
Net loss per common share ( 2.99) ( 2.63) ( 1.56)
</TABLE>
The unaudited pro forma results above are not necessarily indicative of
either actual results of operations that would have occurred had the
acquisitions been made at the beginning of 1995, 1996 or 1997, or of future
results. The pro forma statement of operations data includes adjustments related
to depreciation of property and equipment, amortization of 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.
4. ACCOUNTS RECEIVABLE AND DIAL-AROUND COMPENSATION
At December 31, 1996 and 1997, accounts receivable included $2,554 and
$12,938, respectively, arising from dial-around compensation. A dial-around call
occurs when a non-coin call is placed from the Company's public pay telephone
which utilizes any carrier other than the presubscribed carrier (the Company's
dedicated provider of long distance and operator assisted calls). Such
receivables are received quarterly in arrears. For the years ended December 31,
1995, 1996 and 1997, revenues from non-coin telecommunication services included
$685, $3,219 and $19,100, respectively, for dial-around compensation.
Effective November 6, 1996, pursuant to the rules and regulations
promulgated by the FCC under Section 276 of the Telecommunications Act (the
"1996 Payphone Order"), the Company was to receive dial-around compensation of
$45.85 per installed pay telephone per month from November 6, 1996 through
October 6, 1997 (as compared with the flat fee of $6.00 per installed pay
telephone per month in periods prior to November 6, 1996), and per-call
compensation thereafter, at $0.35 per call from October 7, 1997 to October 6,
1998 (as compared with the flat fee of $45.85 per installed pay telephone per
month) and thereafter, at a per-call rate equal to the local coin rate for each
dial-around call.
Several parties, including interexchange carriers ("IXCs"), filed
petitions with the U. S. Court of Appeals for the District of Columbia Circuit
(the "Court") for review of certain of the FCC regulations, including the
dial-around compensation rate. In 1997, the Court vacated certain portions of
the 1996 Payphone Order, including the dial-around compensation rate, and
remanded the issue to the FCC for further consideration.
On October 9, 1997, the FCC issued its Second Report and Order (the
"1997 Payphone Order") which established a new dial-around compensation rate,
effective October 7, 1997, of $0.284 per call (the market based local coin rate
estimated at $0.35 less certain costs defined by the FCC as $0.066 per call)
multiplied by the actual number of dial-around calls placed from a pay
telephone. Furthermore, the 1997 Payphone Order tentatively concluded that the
dial-around compensation rate of $0.284 per call would be used to calculate
dial-around compensation for the period November 6, 1996 to October 7, 1997.
Evidence initially presented by a pay telephone industry trade association as
part of the Court of Appeals proceeding indicated that the average number of
dial-around calls placed from independent pay telephones equaled 131 calls per
month.
Based on the FCC's tentative conclusions in the 1997 Payphone Order, in
the third quarter of 1997, the Company adjusted the amount of dial-around
compensation recorded in prior quarters from the initial $45.85 rate to
F-14
<PAGE> 51
$37.20 (131 calls per installed pay telephone per month). Included in this
adjustment was a net charge of $395 for dial-around compensation relating to the
period November 6, 1996 to December 31, 1996. This adjustment amount is included
in other unusual charges and contractual settlements in 1997.
On March 9, 1998, the Common Carrier Bureau of the FCC issued a
Memorandum Opinion and Order (the "Memorandum") which, among other things,
granted a waiver of the time frame previously scheduled and established a
timetable for local exchange carriers to implement a system for identifying
dial-around calls placed from pay telephones ("ANI Identification"). This
Memorandum reiterated the obligation of the IXCs to pay, by April 1, 1998,
$0.284 per call based on the actual number of dial-around calls per pay
telephone if such call data is available. In its Memorandum, the FCC recognized,
given its waiver and extension of the time frame set for certain IXCs for the
implementation of ANI Identification, that certain disputes between carriers and
pay telephone providers were likely to arise about the true number of
compensable calls. Therefore, the FCC identified the potential need for it to
address true-up requirements for dial-around compensation in a subsequent order
and clarified that the timing of the subsequent order in no way relieves or
delays the obligations of IXCs to pay compensation on April 1, 1998. In the
fourth quarter of 1997, the Company has recorded revenues of $4,734 for
dial-around compensation at a rate of $37.20 per installed pay telephone per
month, based on 131 calls per month.
Based on the information available, the Company believes that the
minimum amount it is entitled to as fair compensation under the
Telecommunications Act for the period from November 7, 1996 through March 31,
1998 is $37.20 per pay telephone per month. Further, the Company does not
believe that it is reasonably possible that the amount will be materially less
than $37.20 per pay telephone per month. While the amount of $0.284 per call
constitutes the Company's position as to 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. A number of parties filed a Motion to
Stay the 1997 Payphone Order pending judicial review and requested expedited
consideration and briefing schedule with the Court. The Court denied the Motion
to Stay and granted the Motion for Expedited Consideration and Briefing
Schedule. The Court is expected to hear arguments in May 1998.
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
Estimated December 31
Useful Lives -----------------------
(in years) 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Telephone boards, enclosures and cases 3-10 $25,784 $41,653
Furniture, fixtures and other equipment 3-5 1,751 3,063
Leasehold improvements 2-5 249 424
---------- ----------
27,784 45,140
Less - accumulated depreciation (8,541) (15,031)
---------- ----------
$19,243 $30,109
========== ==========
</TABLE>
Depreciation expense, including amortization of assets under capital
leases, was $1,846, $5,032 and $7,270 for the years ended December 31, 1995,
1996 and 1997, respectively.
Effective January 1, 1997, the Company changed the estimated useful life
of new telephones to ten years. The impact on depreciation for 1997 was not
material.
F-15
<PAGE> 52
6. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
December 31
Amortization ---------------------
Period 1996 1997
----------- -------- ---------
<S> <C> <C> <C>
Location contracts 60-113 months $ 53,862 $126,775
Deferred financing costs 120 months 5,851 10,254
Non-compete agreements 24-60 months 2,099 3,731
State operating certifications 60 months 524 567
-------- --------
62,336 141,327
Less: accumulated amortization (10,192) (25,720)
-------- --------
$ 52,144 $115,607
======== ========
</TABLE>
Amortization of intangible assets amounted to $2,537, $7,768 and $15,528
for the years ended December 31, 1995, 1996 and 1997, respectively.
During the fourth quarter of 1996, the Company performed a study of its
location contracts acquired in business combinations. The Company determined
that the economic life (economic life includes the estimated effect of the
operation of the evergreen contract provisions, net of non-renewals) of a
contract is greater than the remaining life based on contractual terms at the
time of acquisition. Generally, location contracts are written such that they
contain an "evergreen" clause which causes the contract to automatically renew
for a like term unless the contract is canceled, in writing, by the location
provider. The Company determined that the average remaining contractually
determined life for a location contract ranged from 30 months to 36 months for
its acquisitions. Based on the study performed, which analyzed historical
renewal rates and contract terms, the economic life of acquired location
contracts were determined to range from 60 months to 113 months. The Company
adjusted its amortization periods for the acquired location contracts as of
October 1, 1996. This adjustment had the effect of decreasing amortization and
the net loss by approximately $663 or $0.12 per share in 1996 and $2,645 or
$0.16 per share in 1997. In addition, the results of operations in 1998 will be
improved by approximately $2,645 as a result of utilizing the longer location
contract life.
7. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31
------------------------
1996 1997
--------- ---------
<S> <C> <C>
Senior Notes due December 15, 2006 with interest at 12%
payable semiannually $ 125,000 $ 125,000
Related Party Debt due May 30, 2000, with interest payable
monthly at 1-1/2% above the Lenders' alternate base
rate (10% at December 31, 1997) - 25,000
Notes payable to directors and shareholders at interest
rates ranging from 9% to 13.25%, $171 repaid in
1997 and $337 plus accrued interest converted into
124,747 shares of Common Stock on January 2, 1997 508 -
Term notes payable to vendor in monthly installments
including interest at 15% (paid in February 1997) 190 -
Other notes payable due in monthly installments of
$79 including interest at rates ranging from 3% to 12%. 585 747
--------- ---------
126,283 150,747
Less current maturities (1,009) (544)
--------- ---------
$ 125,274 $ 150,203
========= =========
</TABLE>
F-16
<PAGE> 53
Following are maturities of long-term debt for each of the next five
years:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
1998 $ 544
1999 198
2000 25,005
2001 -
2002 -
--------
$ 25,747
</TABLE>
SENIOR 12% NOTES
On December 18, 1996, the Company completed a public debt offering of
$125,000 aggregate principal amount 12% Senior Notes, due 2006, with interest
payable semiannually on June 15 and December 15. The net proceeds of $119,149
were used to complete the Cherokee and Texas Coinphone acquisitions in January
1997, and to repay the outstanding indebtedness under the prior Credit Facility,
certain capitalized lease obligations and the Sellers' notes incurred in the
acquisition of POA. The remaining proceeds are available for general corporate
purposes and working capital. The Senior 12% Notes contain covenants which,
among other things, limit the Company's ability to incur additional indebtedness
or pay dividends and which require the Company, in the event of a change in
control of the Company, to offer to purchase the Senior 12% Notes for 101% of
their aggregate outstanding principal value plus accrued and unpaid interest. On
December 30, 1997, the Company solicited and received the consent from its Note
Holders to amend the indenture to increase the limit of permitted indebtedness
and to modify the definition of consolidated net income to exclude certain
non-recurring expenses and non-operating charges when calculating certain
restrictive covenants. The Company incurred $625 in deferred financing costs to
the Note Holders and $761 in fees relating to the solicitation of the Note
Holders' consent to amend the indenture.
RELATED PARTY DEBT
On May 30, 1997, the Company entered into an agreement (the "Credit
Agreement") with various lenders which were or may, thereafter, become 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. ING is
a significant shareholder of the Company's common equity. The Credit Agreement
provided a $75,000 commitment of which $60,000 was to be utilized for future
acquisitions ("Expansion Loan Commitment"), and $15,000 was to be utilized for
general working capital requirements. Borrowings accrue interest at the ING
Alternate Base Rate (as defined in the Credit Agreement) plus 1.50%. The Credit
Agreement matures on May 20, 2000 and all the Company's installed public pay
telephones are pledged as collateral. The Company borrowed $17,700 under the
Expansion Loan Commitment to complete the acquisitions of Advance, American, and
London and to pay related acquisition and credit facility fees. The Company also
borrowed $7,300 of the Revolving Credit Commitment for interest payments due
under the $125,000 12% Senior Notes and for general working capital purposes.
Subsequent to the September 16, 1997 Court ruling which vacated dial-around
compensation (see Note 3), and pursuant to certain terms of the Credit
Agreement, the agent gave notice to the Company that it was prohibited from
making additional borrowings under the Credit Agreement, without prior approval
from the Lenders.
The Credit Agreement includes covenants which, among other things,
require the Company to maintain ratios as to fixed charges, debt to earnings,
current ratio and interest coverage (all as defined in the Credit Agreement).
Other covenants limit incurrence of additional long-term debt, the level of
capital expenditures, the incurrence of lease obligations and permitted
investments.
On February 24, 1998, the Credit Agreement was amended to increase the
Revolving Credit Commitment to $20,000 and to decrease the Expansion Loan
Commitment to $55,000. The amount available for letters of credit under the
working capital commitment was reduced from $5,000 to $3,000 and certain of the
covenants were amended. On March 31, 1998, the Credit Agreement was further
amended with respect to certain financial covenants.
F-17
<PAGE> 54
CREDIT FACILITY REPAID ON DECEMBER 18, 1996
In a transaction consummated on March 15, 1996, the Company borrowed
$30,531 (out of a total credit facility ("Credit Facility") commitment of
$37,250) from ING (U.S.) Capital Corporation and one other lender (collectively
known as the "Lenders"). The Company used the funds to complete the Paramount
and IPP acquisitions, to repay all outstanding long-term debt and capital lease
obligations which had a secured interest in the Company's installed phones at
March 15, 1996, redeem the 10% Preferred, 7% Preferred and 8% Preferred and to
pay related transaction fees. In connection with the repayments, the Company
recorded an extraordinary loss of $267, or $0.05 per share. All of the Company's
installed phones were pledged as collateral to the Credit Facility. On September
13, 1996, concurrent with the acquisitions of Amtel and POA, the Lenders amended
the Credit Facility, increasing the maximum borrowings available under the
Credit Facility to $41,000. The Company then borrowed an additional $8,777 and
used $5,950 of the proceeds to complete the Amtel and POA acquisitions and the
remaining proceeds for working capital and payment of certain related
acquisition expenses. Subsequently, the Credit Facility was further amended to
$43,000. The Company repaid the Credit Facility on December 18, 1996 and
recognized an extraordinary loss of $9,810, or $1.79 per share, consisting
primarily of the write-off of the remaining unamortized value assigned to the
Nominal Value Warrants and related unamortized deferred financing costs.
A portion of the Credit Facility ($29,000) was convertible into Series B
Preferred at the ratio of 833 shares for each $100 in outstanding debt and
interest. Concurrent with the repayment of the Credit facility on December 18,
1996, the Series B Preferred was canceled. Additionally, the Lenders received
warrants to purchase 204,824 shares of Series A Preferred at an exercise price
of $0.20 per share. The debt under the Credit Agreement was initially recorded
net of an allocation of the fair value of the Lender's Warrants, such fair value
being determined using the Black-Scholes valuation model.
On March 15, 1996, concurrent with the consummation of the Credit
Facility, the Company redeemed the 10%, 8% and 7% Preferred through cash
payments of $1,117 and the issuance of 34,436 shares of 14% Preferred. In the
aggregate, $6,475 of the Company's outstanding obligations, including portions
of the purchase price for the pending acquisitions, was liquidated by issuing
107,918 shares of 14% Preferred. The $2,002 excess of the redemption price of
the preferred issues redeemed over their aggregate carrying value was recorded
as a reduction of earnings available to common shareholders.
8. LEASES
OPERATING LEASES
The Company leases its corporate offices and other locations, office
equipment and field operations service vehicles under noncancellable operating
leases expiring at various times through 2003.
Future minimum noncancellable payments under operating leases are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 1,573
1999 1,576
2000 1,457
2001 1,084
2002 574
After 2002 411
-------
$ 6,675
=======
</TABLE>
Rent expense under all operating leases was $364, $474 and $1,868 for
the years ended December 31, 1995, 1996 and 1997, respectively.
CAPITAL LEASES
During 1995 and 1996, as part of the acquisitions of World, Public
Telephone, IPP and POA, the Company assumed capital lease obligations. Leased
assets include installed public pay telephones, office equipment and vehicles.
As of December 31, 1996, the Company had paid off all capital leases secured by
installed public pay telephones.
F-18
<PAGE> 55
Assets recorded under capital leases are as follows:
<TABLE>
<CAPTION>
December 31
-----------
1996 1997
----- -----
<S> <C> <C>
Office Equipment $ 721 $ 779
Less accumulated amortization (272) (466)
----- -----
$ 449 $ 313
===== =====
</TABLE>
The Company repaid $11,149 and $130 of the outstanding obligations under
capital leases during 1996 and 1997, respectively. Following are maturities of
capital lease obligations for each of the next five years:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 92
1999 17
2000 2
2001 -
2002 -
-----
$ 111
=====
</TABLE>
9. INCOME TAXES
No provisions for income tax were required and no income taxes were paid
for the years ended December 31, 1995, 1996 or 1997 because of operating losses
generated by the Company. Deferred tax assets and (liabilities) are as follows:
<TABLE>
<CAPTION>
December 31
-----------
1996 1997
------ -------
<S> <C> <C>
Federal net operating loss carryforward $9,330 $12,073
Depreciation and amortization 342 512
Bad debts 31 172
------ -------
Gross deferred tax assets 9,703 12,757
Valuation allowance on deferred tax assets (9,703) (12,757)
------ -------
Net deferred tax assets $ - $ -
====== =======
</TABLE>
A valuation allowance has been provided against the net deferred tax
assets since management cannot predict, based on the weight of available
evidence, that it is more likely than not that such assets will be ultimately
realized. The net operating loss carryforwards, if not utilized, will expire
between the years 2002 to 2012. Internal Revenue Code Section 382 provides for
the limitation on the use of net operating loss carryforwards in years
subsequent to significant changes in ownership. As a result of the Company's
Initial Public Offering in 1988 and certain other transactions, including
acquisitions utilizing proceeds from the Company's Common Stock and the Company
Equity Offering, changes in ownership have occurred resulting in significant
limitations on the use of net operating loss carryforwards. The extent of
limitations as a result of significant changes in ownership has not been
determined by the Company.
10. PREFERRED STOCK MANDATORILY REDEEMABLE
Preferred stock mandatorily redeemable consisted of the following:
<TABLE>
<CAPTION>
December 31
-----------
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 30,229 shares at December 31, 1997 (valued at
$851); mandatory redemption amount of $7,223 and $8,289,
respectively; due June 30, 2000) $6,708 $7,716
------ ------
</TABLE>
F-19
<PAGE> 56
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. The carrying value of the 14% Preferred was increased by
$102 in 1996 and $494 in 1997 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.
11. NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY (DEFICIT)
Non-mandatorily Redeemable Preferred Stock, Common Stock and Other
Shareholders' Equity (Deficit) consisted of the following:
<TABLE>
<CAPTION>
December 31
-----------
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 16,360,829 shares issued and
outstanding at December 31, 1996 and 1997, respectively) $ 145 $ 164
Additional paid-in capital 59,104 62,600
Accumulated deficit (42,544) (66,806)
-------- --------
$ 16,705 ($4,042)
======== ========
</TABLE>
On February 23, 1996, the Company created three new classes of
preferred stock: (i) Series A Preferred; (ii) Series B Preferred; and (iii) 14%
Preferred.
On March 15, 1996, concurrent with entering into the Company's former
Credit Facility, the Company redeemed its 10%, 8% and 7% Preferred for cash
payments aggregating $1,117 and 34,436 shares of 14% Preferred. In the
aggregate, $6,475 of the Company's outstanding obligations, including portions
of the purchase price for the IPP and Paramount acquisitions, was liquidated by
issuing 107,918 shares of 14% Preferred. The $2,002 excess of the redemption
price of the preferred issues redeemed over their aggregate carrying value was
recorded as a reduction of earnings available to common shareholders.
On March 15, 1996, Nominal Value Warrants to purchase 2,018,942 shares
of Common Stock were issued in conjunction with the IPP and Paramount
acquisitions, redemption of the 10%, 8% and 7% Preferred, and conversion of
certain related party debt of the Company to the 14% Preferred. The Nominal
Value Warrants expire on March 13, 2001. An independent actuary estimated the
fair market value of the Nominal Value Warrants to be $4,975, using the
Black-Scholes valuation method, of which $3,886 (the amount attributable to the
Nominal Value Warrants provided to related parties in connection with the
redemption of the 10%, 8% and 7% Preferred shares and conversion of certain
debt) was recorded as an other expense in the Company's statement of operations.
On June 27, 1996, the shareholders of the Company approved an amendment
to the Articles of Incorporation which authorizes the Company to have
outstanding 60,000,000 shares; of which 50,000,000 shares are to be classified
as Common Stock and 10,000,000 shares as Preferred Stock.
COMPANY EQUITY OFFERING
On December 18, 1996, the Company sold 6,750,000 shares of Common Stock
at the price of $3.00 per share and received proceeds, net of offering expenses,
of $18,295. On January 29, 1997, the Company issued an additional 1,012,500
shares of Common Stock at the price of $3.00 per share and received net proceeds
of $2,825.
COMMON STOCK SHARES RESERVED FOR POSSIBLE ISSUANCE
As of December 31, 1997, the Company had reserved 8,940,930 shares of
Common Stock for issuance under the following scenarios: (i) exercise of
warrants to purchase 192,324 shares of Series A Preferred Stock, immediately
convertible into 3,846,480 shares of Common Stock; (ii) conversion of 138,147
shares of 14% Preferred into
F-20
<PAGE> 57
1,381,470 shares of Common Stock; (iii) exercise of 674,051 Nominal Value
Warrants; (iv) exercise of 955,116 warrants; (v) the exercise of 726,813 stock
options; and (vi) the exercise of 1,357,000 options under the 1997 Stock
Incentive Plan. Substantially all of the shares reserved for future issuance,
other than the shares issued under the 1997 Stock Incentive Plan, were
registered on January 24, 1997.
PREFERRED STOCK DIVIDENDS
On December 31, 1995, the Company had dividends in arrears payable to
preferred shareholders in the aggregate amount of $827. On March 15, 1996, the
10%, 8% and 7% Preferred, including dividends in arrears, were either paid or
converted to 14% Preferred.
SALES AND ISSUANCES OF COMMON STOCK
Sales to directors, creditors and affiliates of the Company during 1995
were made at prices per share below the quoted market values (based on prices
calculated by the Company's investment advisor) of the Company's Common Stock on
the dates of the transactions. No expense was recognized by the Company as the
Company believes that the discount associated with these sales reflected the
impact on quoted market value of issuing unregistered shares.
On December 31, 1996, the Company converted $248 of debt owed to a
related party into 99,119 shares of Common Stock or $2.50 per share,
representing the market price of the Common Stock on the day the Company's Board
of Directors approved the conversion.
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.
On October 23, 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.
STOCK WARRANT ACTIVITY
Activity for warrants exercisable into common stock during 1995, 1996
and 1997 was as follows:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
<S> <C> <C>
BALANCE, DECEMBER 31, 1994 112,278 $9.73
Granted:
To the Company's investment advisor 166,666 6.00
To officers of the Company 47,582 5.74
To lenders 277,876 5.71
-----------
Total Granted 492,124 5.81
Exercised - -
Canceled (24,051) 9.90
------------
BALANCE, DECEMBER 31, 1995 580,351 6.40
Granted:
Nominal Value Warrants 2,018,942 0.01
Pursuant to anti-dilution provisions 322,958 2.37
To vendors 400,000 6.00
-----------
Total Granted 2,741,900 1.16
Exercised (1,035,137) 0.01
Canceled (175,000) 6.00
-----------
BALANCE, DECEMBER 31, 1996 2,112,114 2.40
Granted pursuant to:
Anti-dilution provisions 16,798 2.33
Exercised (309,754) .01
Canceled (189,991) 7.71
-----------
BALANCE, DECEMBER 31, 1997 1,629,167 2.22
===========
</TABLE>
F-21
<PAGE> 58
The estimated fair value of the warrants on the date of grant for the
warrants issued to the investment advisor has been included in the determination
of World's purchase price. The fair value of warrants issued to lenders has been
recorded based on the relative fair values of the warrants and the related debt
on the grant date. The difference between the recorded value and the face value
of the debt has been recorded as an adjustment to interest expense using the
interest method. The difference between the intrinsic value and the exercise
price of the warrants issued to officers of the Company was not material. All
warrants outstanding at each period end are exercisable.
On March 15, 1996, the Company issued warrants to purchase 204,824
shares of Series A Preferred to two former lenders at an exercise price of $0.20
per share. Each share of Series A Preferred is convertible into 20 shares of
Common Stock.
On February 7, 1997, one of the Company's former lenders exercised
warrants for 12,500 shares of Series A Preferred (with net proceeds to the
Company of $3) which were immediately converted into 250,000 shares of common
stock. At December 31, 1996 and 1997, there were 204,824 and 192,324 warrants
which were exercisable into Series A Preferred. The warrants expire on April 1,
2006.
STOCK OPTION ACTIVITY
On February 4, 1997, the Company's Board of Directors adopted and its
shareholders ratified the Company's 1997 Stock Incentive Plan (the "Plan"). The
Plan provides for the issuance of incentive and non-qualified stock options to
purchase up to 2,000,000 shares of Common Stock by officers, directors,
employees and independent contractors of the Company. In 1997, the Company
granted 1,592,400 incentive stock options at exercise prices equal to the market
value of the Company's Common Stock on the dates of grant to substantially all
officers and employees. The options granted provide for graduated vesting,
one-third each year on the anniversary of the date of grant, and have a term of
ten years.
Other options to purchase Common Stock are granted by the Company at
the discretion of the Board of Directors to employees, officers, directors and
others, and generally are exercisable immediately upon issuance, have terms of
three to five years and are issued with exercise prices at or slightly below
quoted market value of the Company's Common Stock on the date of grant. At
December 31, 1996 and 1997, 1,021,330 options and 726,813 options, respectively,
were exercisable.
F-22
<PAGE> 59
Stock option activity during 1995, 1996 and 1997 was as follows:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
<S> <C> <C>
BALANCE, DECEMBER 31, 1994 436,135 $7.85
Granted:
To officers of the Company 159,165 6.00
To employees of the Company 9,208 6.00
-----------
Total Granted 168,373 6.00
Exercised (8,334) 4.20
Canceled (124,410) 10.49
-----------
BALANCE, DECEMBER 31, 1995 471,764 6.56
Granted:
Contractual settlement with former executive 5,000 6.00
Pursuant to anti-dilution provisions 556,898 2.11
-----------
Total Granted 561,898 2.14
Exercised - -
Canceled (12,332) 6.00
-----------
BALANCE, DECEMBER 31, 1996 1,021,330 2.98
Granted:
1997 Stock Incentive Plan 1,592,400 3.12
Pursuant to anti-dilution provisions 37,743 2.19
-----------
Total options granted 1,630,143 3.10
Exercised (100,000) 1.02
Canceled (467,660) 3.61
-----------
BALANCE, DECEMBER 31, 1997 2,083,813 2.99
===========
</TABLE>
STOCK BASED COMPENSATION
Under SFAS No. 123 "Accounting for Stock-Based Compensation," the
fair value of each option and warrant granted is estimated on the grant date
using the Black-Scholes option pricing model. The following assumptions were
made in estimating fair value: (i) dividend yield of 0%; (ii) risk-free interest
rates of 6.29% for 1995, 6.20% for 1996 and 6.35% for 1997; expected life equal
to the period of time remaining in which the options or warrants can be
exercised; and expected volatility of 76% in 1995, 99% in 1996 and 81% in 1997.
Compensation cost charged to operations was $42 in 1995 and $0 in 1996 and 1997.
Had compensation cost been determined on the basis of fair value pursuant to
SFAS No. 123, net loss and the loss per share would have increased as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net loss:
As reported ($6,110) ($26,649) ($23,254)
Pro forma (7,680) (29,930) (24,114)
Loss per share:
As reported (3.29) (5.29) (1.51)
Pro forma (3.94) (5.45) (1.57)
</TABLE>
Weighted average fair value of options and warrants granted during:
<TABLE>
<CAPTION>
<S> <C>
1995 $3.63
1996 1.76
1997 2.42
</TABLE>
The following is a summary of the status of options and warrants outstanding at
December 31, 1997:
F-23
<PAGE> 60
<TABLE>
<CAPTION>
Weighted Average
Exercise Price Remaining Weighted Average
Range Number Contractual Life Exercise Price
----- ------ ---------------- --------------
<S> <C> <C> <C>
$ 0.00 - $0.01 674,051 3.2 years $ 0.01
1.16 - 2.69 2,134,748 6.9 years 2.37
4.00 - 6.00 872,348 5.7 years 4.93
7.65 10,833 0.5 years 7.65
19.50 21,000 1.0 years 19.50
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
SEVERANCE AGREEMENTS
During 1996, the Company settled the amounts owed under Separation
Agreements with three of its former officers. Under the terms of the Separation
Agreements, the Company was obligated to pay the former officers the remainder
of their employment agreements and the Company agreed to accelerate the vesting
of options for 631,627 shares of the Company's Common Stock at $1.20 to $5.31
per share.
CONTINGENCIES
The Company, in the course of its normal operations, is subject to
regulatory matters, disputes, claims and lawsuits. In management's opinion all
such outstanding matters of which the Company has knowledge, have been reflected
in the financial statements and are covered by insurance or will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
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 to $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 March 13, 1998, the Company filed a motion for sanctions
including dismissal. The court has 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
condition or results of operations of the Company.
13. MAJOR CUSTOMER
One customer accounted for 15%, 5% and 2% of the Company's total
revenues for the years ended December 31, 1995, 1996 and 1997, respectively.
14. OTHER REVENUES AND OTHER UNUSUAL CHARGES AND CONTRACTUAL SETTLEMENTS
Other revenues include $900 in 1996 and $300 in 1997 of income relating
to amortization of deferred revenue received as a result of a signing bonus
received in connection with a services agreement with an operator service
provider.
F-24
<PAGE> 61
Other unusual charges and contractual settlements is compromised of:
<TABLE>
<CAPTION>
December 31
-----------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Termination of CCI acquisition - - $ 7,771
Settlement of employee contractual obligations $ 1,316 $ 342 147
Other contractual settlements 162 211 210
Ordinary loss on early repayment of debt - 631 -
Nominal Value Warrants - 3,886 -
Amendment to Indenture-12% Senior Notes - - 761
Dial-around compensation adjustment - - 395
Changes to the operations of the Company 692 1,002 206
---------- ------- ---------
$ 2,170 $ 6,072 $ 9,490
========== ======= =========
</TABLE>
15. 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 December 31, 1997, and for
the year ended December 31, 1997.
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Balance Sheet, at December 31, 1997
<TABLE>
<CAPTION>
PhoneTel Cherokee(a) Eliminations Consolidated
-------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Current assets $ 14,939 $ 8,830 - $ 23,769
Property and equipment, net 23,965 6,144 - 30,109
Intangible assets, net 72,837 42,770 - 115,607
Other non-current assets 58,870 6,700 ($65,229) 341
----------- ------------ --------- --------------
Total $170,611 $ 64,444 ($65,229) $169,826
=========== ============ ========= ==============
<CAPTION>
<S> <C> <C> <C> <C>
Current liabilities $ 6,634 $ 9,296 $15,930
Inter-company debt - 65,229 ( $65,229) -
Long-term debt and capital leases 149,408 814 - 150,222
14% Preferred stock 7,716 - - 7,716
Other equity 6,853 (10,895) - (4,042)
----------- ------------ --------- --------------
Total $170,611 $ 64,444 ($65,229) $169,826
=========== ============ ========= ==============
<CAPTION>
Income Statement, for the year ended December 31, 1997
<S> <C> <C> <C> <C>
Total revenues $ 75,335 $ 34,309 - $109,644
Operating expenses 79,539 37,307 - 116,846
----------- ------------ --------- --------------
Income (loss) from operations (4,204) (2,998) - (7,202)
-
Other income (expense), net (8,155) (7,897) - (16,052)
----------- ------------ --------- --------------
Net income (loss) ($12,359) ($10,895) - ($23,254)
=========== ============ ========= ==============
</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.
F-25
<PAGE> 62
16. QUARTERLY RESULTS (UNAUDITED)
The following is a summary of unaudited results of operations for the
years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
Quarter
Ended 1997 March 31 June 30 September 30 December 31
- ---------- -------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues $27,658 $27,721 $27,651 $26,614
Net loss (1,148) (1,304) (13,450) (7,352)
Net loss per common share (.09) (.09) (.85) (.47)
Quarter
Ended 1996
- ----------
Revenues $ 6,607 $10,200 $11,510 $16,487
Loss before
extraordinary item (6,795) (2,985) (3,200) (3,592)
Net Loss (6,972) (3,076) (3,200) (13,401)
Loss per common share before
extraordinary item (2.99) (.74) (.58) (.42)
Net Loss per common share (3.05) (.76) (.58) (1.50)
</TABLE>
Loss per share amounts for each quarter are required to be computed
independently and, therefore, may not equal amounts computed on an annual basis.
During the third quarter of 1997, the net loss increased by approximately $2,361
($0.15 per share) due to changes in prior quarter amounts reported for
dial-around compensation. Of this amount, $965 relating to the first quarter and
$1,001 relating to the second quarter of 1997 have been reclassified as
reductions in third quarter revenues to conform to the presentation used for
annual financial reporting purposes (Note 4). The Company also recorded a charge
of $7,818 ($0.48 per share) in the third quarter of 1997 for the cost of
terminating a proposed acquisition (Note 3).
F-26
<PAGE> 63
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.
March 31, 1998 By: /s/ Peter G. Graf
-----------------------
Peter G. Graf
Chairman of the Board and
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ Peter G. Graf Chairman of the Board, March 31, 1998
- ---------------------------- Chief Executive Officer,
Peter G. Graf and Director
/s/ Richard Kebert Chief Financial Officer and Match 31, 1998
- ---------------------------- Treasurer
Richard Kebert
/s/ Joseph Abrams Director March 31, 1998
- ----------------------------
Joseph Abrams
/s/ George Henry Director March 31, 1998
- ----------------------------
George Henry
/s/ Aron Katzman Director March 31, 1998
- ----------------------------
Aron Katzman
/s/ Steven Richman Director March 31, 1998
- ----------------------------
Steven Richman
</TABLE>
<PAGE> 64
EXHIBIT INDEX
-------------
10.86 Third Supplemental Indenture, dated as of December 30, 1997,
supplementing the Indenture, dated as of December 18, 1996, as
supplemented by the First Supplemental Indenture, dated as of January
3, 1997, and the Second Supplemental Indenture, dated as of May 29,
1997, among PhoneTel Technologies, Inc., the Subsidiary Guarantors
named on Schedule I thereto and Marine Midland Bank, as Trustee,
$125,000,000 12% Senior Notes due 2006.
10.87 First Amendment to Credit Agreement, dated as of February 24, 1998,
amending the $75,000,000 Credit Agreement dated as of May 30, 1997,
among PhoneTel Technologies, Inc. as the Borrower, various Lenders and
ING (U.S.) Capital Corporation, as Agent for the Lenders and
Transamerica Business Credit Corporation and Finova Capital
Corporation, as Co-Agents for the Lenders.
21.1 Subsidiaries of PhoneTel Technologies, Inc.
27.1 Financial Data Schedule for the Year Ended December 31, 1997
27.2 Financial Data Schedule for the Year Ended December 31, 1996
27.3 Financial Data Schedule for the Year Ended December 31, 1995
99 Financial Statement Schedule - Valuation and Qualifying Accounts
<PAGE> 1
EXHIBIT 10.86
PHONETEL TECHNOLOGIES, INC.,
AS ISSUER
THE SUBSIDIARY GUARANTORS
NAMED ON SCHEDULE I HERETO
AND
MARINE MIDLAND BANK,
AS TRUSTEE
----------------------------------
THIRD SUPPLEMENTAL INDENTURE
DATED AS OF DECEMBER 30, 1997
SUPPLEMENTING THE INDENTURE,
DATED AS OF DECEMBER 18, 1997,
AS SUPPLEMENTED BY THE FIRST SUPPLEMENTAL INDENTURE
DATED AS OF JANUARY 3, 1997,
AND THE SECOND SUPPLEMENTAL INDENTURE
DATED AS OF MAY 29, 1997,
AMONG PHONETEL TECHNOLOGIES, INC.,
THE SUBSIDIARY GUARANTORS NAMED ON SCHEDULE I THERETO
AND MARINE MIDLAND BANK, AS TRUSTEE
----------------------------------
$125,000,000
12% SENIOR NOTES DUE 2006
1
<PAGE> 2
THIS THIRD SUPPLEMENTAL INDENTURE, dated as of December
30, 1997, (the "Third Supplemental Indenture"), to the Indenture, dated as of
December 18, 1996, (as amended, modified or supplemented from time to time in
accordance therewith, the "Indenture"), among PhoneTel Technologies, Inc., a
corporation duly organized and existing under the laws of the State of Ohio,
(the "Company"), having its principal office at 1001 Lakeside Avenue, North
Point Tower, 7th Floor, Cleveland, Ohio 44114-1195, the Subsidiary Guarantors
named on Schedule I hereto, and Marine Midland Bank, (the "Trustee").
RECITALS
WHEREAS, the Company has heretofore executed and delivered to
the Trustee the Indenture, providing for, among other things, the creation and
issuance by the Company of its 12% Senior Notes due 2006 (the "Notes"); and
WHEREAS, Section 9.02 of the Indenture provides that the
Company, when authorized by a resolution of its Board of Directors, and the
Trustee, together with the written consent of the Holders of at least a majority
in aggregate principal amount of the then outstanding Notes, may amend the
Indenture, subject to certain exceptions specified in Section 9.02 of the
Indenture; and
WHEREAS, the parties hereto are entering into this Third
Supplemental Indenture to (i) amend certain of the definitions contained in
Article One of the Indenture and (ii) amend certain of the provisions contained
in Article Four of the Indenture (collectively, the "Proposed Amendments"); and
WHEREAS, the Holders of at least a majority in aggregate
principal amount of the then outstanding Notes have duly consented to the
Proposed Amendments; and
WHEREAS, the conditions set forth in the Indenture for the
execution and delivery of this Third Supplemental Indenture have been complied
with; and
WHEREAS, the Company has heretofore delivered or is delivering
contemporaneously herewith to the Trustee (i) a copy of resolutions of the Board
of Directors of the Company, (ii) evidence of the written consent of the Holders
of Notes described in the immediately preceding clause and (iii) an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent and covenants, if any, provided for in the Indenture relating to the
execution and delivery of the Third Supplemental Indenture have been complied
with; and
WHEREAS, all other acts and things necessary to make this
Third Supplemental Indenture a valid agreement of the Company and the Trustee,
in accordance with its terms, and a valid amendment of, and supplement to, the
Indenture have been done;
2
<PAGE> 3
NOW THEREFORE:
In consideration of the premises, the parties have executed
and delivered this Third Supplemental Indenture, and the Company hereby
covenants and agrees with the Trustee, for the equal and proportionate benefit
of all Holders of the Notes, that the Indenture is supplemented and amended, to
the extent and for the purposes expressed herein, as follows:
SECTION 1. DEFINITIONS. For all purposes of this Third
Supplemental Indenture, except as otherwise expressly provided or unless the
context otherwise requires, terms used herein shall have the meanings assigned
to them in the Indenture.
SECTION 2. AMENDMENT OF SECTION 1.01 OF THE INDENTURE. The
definition of "Consolidated Net Income" in Section 1.01 is amended to read in
its entirety as follows:
"Consolidated Net Income" means, with respect to any period,
the net income (or loss) of the Company and its Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP consistently applied,
adjusted, to the extent included in calculating such net income (or loss), by
excluding, without duplication, (i) all extraordinary gains and losses (net of
fees and expenses relating to the transaction giving rise thereto), (ii) the
portion of net income (or loss) of the Company and its Subsidiaries allocable to
interests in unconsolidated Persons, except to the extent of the amount of
dividends or distributions actually paid to the Company or its Subsidiaries by
such other Person during such period, (iii) net income (or loss) of any Person
combined with the Company or any of its Subsidiaries on a "pooling of interests"
basis attributable to any period prior to the date of combination, (iv) net gain
but not losses in respect of Asset Sales, (v) the net income of any Subsidiary
of the Company to the extent that the declaration of dividends or similar
distributions by that Subsidiary of that income to the Company is not at the
time permitted, directly or indirectly, by operation of the terms of its charter
or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Subsidiary or its stockholders, (vi)
non-recurring expenses of $6,000,000 incurred in the quarter ended September 30,
1997 in connection with the proposed acquisition of Communications Central Inc.,
(vii) non-recurring charges of $2,361,000 incurred in the quarter ended
September 30, 1997 in connection with dial-around compensation, (viii) all other
non-recurring, non-operating charges which may be incurred after January 1,
1998, other than any such charges incurred in connection with dial-around
compensation, and (ix) all expenses and fees paid in connection with the
solicitation of any consent to amend this Indenture.
SECTION 3. AMENDMENT OF SECTION 4.07(b)(i) OF THE INDENTURE.
Section 4.07(b)(i) is amended to read in its entirety as follows:
(i) Indebtedness of the Company incurred under the Credit
Facility in an aggregate principal amount at any time outstanding not to exceed
the sum of (1) 80% of the net amount of accounts receivable (as determined under
GAAP) of the Company and the Subsidiaries plus (2) an
3
<PAGE> 4
amount equal to $1,300 multiplied by the number of Eligible Pay Telephones, in
each case as determined in good faith by the Company at the time of each
incurrence of Indebtedness under the Credit Facility; provided that in no event
shall the aggregate principal amount of Indebtedness outstanding at any one time
under the Credit Facility permitted pursuant to this clause (i) exceed the sum
of (A) $20 million for business expansion, less the aggregate amount of any
other principal payments thereunder constituting permanent reductions of such
Indebtedness pursuant to and in accordance with the covenant described under
Section 4.13; plus (B) $20 million for working capital purposes.
SECTION 4. OPERATION OF PROPOSED AMENDMENTS. Upon the
execution and delivery of this Third Supplemental Indenture by the Trustee and
the Company, the Proposed Amendments contained herein will become effective but
will not become operative until Consents are accepted and paid for by PhoneTel
Technologies, Inc. pursuant to the Consent Solicitation Statement dated December
16, 1997 and subsequent Amended Consent Statement dated December 19, 1997 and
the related Consent Form (in each case, as the same may be amended, modified or
supplemented from time to time in accordance therewith).
SECTION 5. RECITALS. The recitals of fact contained herein
shall be taken as the statements of the Company, and the Trustee assumes no
responsibility for the correctness of the same. The Trustee makes no
representations as to the validity or adequacy of this Third Supplemental
Indenture or the due execution hereof by the Company.
SECTION 6. RATIFICATION AND CONFIRMATION OF INDENTURE. Except
as hereby expressly amended, the Indenture is in all respects ratified and
confirmed and all the terms, provisions and conditions thereof shall be and
remain in full force and effect.
SECTION 7. GOVERNING LAW. This Third Supplemental Indenture
shall be governed by and construed in accordance with the law of the state of
New York but without giving effect to applicable principles of conflicts of law
to the extent that the application of the laws of another jurisdiction would be
required thereby.
SECTION 8. SUCCESSORS. All agreements of the Company and the
Subsidiary Guarantors in this Third Supplemental Indenture shall bind their
respective successors. All agreements of the Trustee in this Third Supplemental
Indenture shall bind its successors.
SECTION 9. DUPLICATE ORIGINALS. The parties may sign any
number of copies of this Third Supplemental Indenture. Each signed copy shall be
an original, but all of them together represent the same agreement.
SECTION 10. SEVERABILITY. In case any provision in this Third
Supplemental Indenture shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
4
<PAGE> 5
SECTION 11. HEADINGS. The Article and Section headings of this
Third Supplemental Indenture have been inserted for convenience of reference
only, are not to be considered a part of this Third Supplemental Indenture and
shall in no way modify or restrict any of the terms or provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Third
Supplemental Indenture to be duly executed as of the day and year first above
written.
PHONETEL TECHNOLOGIES, INC.
By: /s/ Tammy L. Martin
----------------------------------------------------
Signature
Name: Tammy L. Martin
--------------------------------------------------
Title: Chief Administrative Officer & General Counsel
-------------------------------------------------
THE SUBSIDIARY GUARANTORS:
PUBLIC TELEPHONE CORPORATION
WORLD COMMUNICATIONS, INC.
PARAMOUNT COMMUNICATION SYSTEMS, INC.
NORTHERN FLORIDA TELEPHONE CORPORATION
PAYPHONES OF AMERICA, INC.
CHEROKEE COMMUNICATIONS INC.
(A TEXAS CORPORATION AND AS SUCCESSOR BY MERGER WITH
PHONETEL CCI, INC.)
CHEROKEE COMMUNICATIONS INC.
(A SOUTH DAKOTA CORPORATION)
CHEROKEE COMMUNICATIONS INC.
(A NEVADA CORPORATION)
PHONETEL ACQUISITION CORPORATION
PHONETEL V, INC.
For Each of the Above
By: /s/ Tammy L. Martin
----------------------------------------------------
Signature
Name: Tammy L. Martin
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Title: Chief Administrative Office & General Counsel
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5
<PAGE> 6
MARINE MIDLAND BANK, AS TRUSTEE
By: /s/ Marcia Markowski
----------------------------------------------------
Signature
Name: Marcia Markowski
--------------------------------------------------
Title: Assistant Vice President
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6
<PAGE> 1
EXHIBIT 10.87
FIRST AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "AMENDMENT"), dated as of
February 24, 1998, among PHONETEL TECHNOLOGIES, INC., an Ohio corporation (the
"BORROWER"), ING (U.S.) CAPITAL CORPORATION, a Delaware corporation ("ING"),
TRANSAMERICA BUSINESS CREDIT CORPORATION, a Delaware corporation
("TRANSAMERICA"), FINOVA CAPITAL CORPORATION, a Delaware corporation ("FINOVA"),
and AMERICAN NATIONAL BANK, a national banking association, constituting all of
the Lenders under the Credit Agreement referenced below, ING in its capacity as
Agent for the Lenders and Transamerica and Finova in their capacity as Co-Agents
for the Lenders.
RECITALS:
A. The Borrower, the Lenders, the Agent and the Co-Agents have entered
into a certain Credit Agreement, dated as of May 30, 1997 (the "CREDIT
AGREEMENT"). Capitalized terms used herein and not otherwise defined shall have
the meanings ascribed to such terms in the Credit Agreement.
B. The Borrower has requested that the Expansion Loan Commitment be
reduced to $55,000,000, that the Revolving Credit Commitment be increased to
$20,000,000 and that certain other covenants and provisions in the Credit
Agreement be amended as set forth herein.
C. The Lenders are agreeable to amending the Credit Agreement on the
terms and conditions set forth herein.
NOW, THEREFORE, the parties hereto agree as follows:
1. AMENDMENT TO ARTICLE I. Article I of the Credit Agreement is hereby
amended as follows:
(a) The definitions of "EBITDA", "Expansion Loan Commitment Amount",
"Percentage" and "Revolving Credit Commitment Amount" are replaced with the
following:
"EBITDA" means, for any Person or business for any period, an
amount equal to Net Income PLUS (to the extent deducted in determining
Net Income) interest expense, provisions for income taxes,
depreciation, amortization of intangible assets and other non-cash
charges (other than restructuring charges, as determined in accordance
with GAAP), expenses related to the termination of the merger agreement
with Communications Central Inc. of $7,861,743 and $35,478,
respectively, recorded during the periods ended September 30, 1997 and
December 31, 1997, adjustment for the period ending September 30, 1997
of dial-around compensation revenue previously recognized in the amount
of $2,408,059, expenses related to obtaining bondholder consents
recorded during the period ended December 31, 1997 in the amount of
$735,876 and nonrecurring general and administrative expenses at
$52,545 and $36,660, respectively, recorded
<PAGE> 2
during the periods ended September 30, 1997 and December 31, 1997,
MINUS (to the extent included in determining Net Income) non-cash
credits and revenues.
"EXPANSION LOAN COMMITMENT AMOUNT" means $55,000,000 as such
amount may be reduced from time to time pursuant to SECTION 3.3.4.
"PERCENTAGE" of any Lender means, at any time, in respect of
the Commitment and the Loans, the percentage set forth opposite such
Lender's signature to the First Amendment to Credit Agreement, adjacent
to the caption "Percentage", as the same may be adjusted pursuant to
SECTION 9.11
.
"REVOLVING CREDIT COMMITMENT AMOUNT" means $20,000,000, as
such amount may be reduced from time to time pursuant to SECTION 3.3.4.
(b) The following new definitions are added to Article I in proper
alphabetical order:
"ADDITIONAL LETTERS OF CREDIT" means letters of credit issued
for the account of the Borrower or any of its Subsidiaries after the
date of the First Amendment, excluding Letters of Credit.
"FIRST AMENDMENT TO CREDIT AGREEMENT" means the First
Amendment to Credit Agreement, dated as of February 24, 1998, among
Borrower, the Lenders, the Agent and the Co-Agents.
"MONTHLY PAYMENT DATE" means the last day of each calendar
month, or, if such day is not a Business Day, the immediately preceding
Business Day.
(c) The definition of "Quarterly Payment Date" is deleted and all
references in the Credit Agreement to "Quarterly Payment Date" are replaced with
references to "Monthly Payment Date".
2. AMENDMENT TO SECTION 2.1.3. Section 2.1.3 of the Credit Agreement is
hereby amended by replacing subsections (1), (7), (8) and (9) thereof
with the following:
(1) the then aggregate outstanding principal amount of all
Expansion Loans, PLUS the then aggregate outstanding principal amount
of all Revolving Credit Loans PLUS the then aggregate amount of
outstanding Letter of Credit Obligations PLUS the aggregate undrawn
face amount of the Existing Letters of Credit, PLUS the aggregate
undrawn face amount of Additional Letters of Credit, would exceed the
Borrowing Base;
(7) the then aggregate outstanding principal amount of all
Expansion Loans would not exceed $20,000,000 and the then aggregate
outstanding principal
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<PAGE> 3
amount of all Revolving Credit Loans, PLUS the then aggregate amount of
outstanding Letter of Credit Obligations, would not exceed $20,000,000,
and the making of such Loan or the issuance of such Letter of Credit,
as the case may be, would not be permitted under Section 4.07(b)(i) of
the Senior Notes Indenture; or
(8) the then aggregate outstanding principal amount of all
Expansion Loans would exceed $20,000,000, but the then aggregate
outstanding principal amount of all Loans, PLUS the then aggregate
amount of outstanding Letter of Credit Obligations, would not exceed
$65,000,000 and the "Consolidated Fixed Charge Coverage Ratio", as such
term is defined in the Senior Notes Indenture, of the Borrower and its
Subsidiaries would be less than (x) 2.50 to 1.0 if such Loan is made
prior to December 31, 1998 or (y) 2.75 to 1.0 if such Loan is made on
or after December 31, 1998; or
(9) the then aggregate outstanding principal amount of all
Loans, PLUS the then aggregate amount of all outstanding Letter of
Credit Obligations, would exceed $65,000,000 and the "Consolidated
Fixed Charge Coverage Ratio", as such term is defined in the Senior
Notes Indenture, of the Borrower and its Subsidiaries would be less
than 3.3 to 1.0;
3. AMENDMENT TO SECTION 3.3. Section 3.3 of the Credit Agreement is
hereby amended as follows:
(a) Section 3.3.1 is amended by replacing subsection (b)(i) of
such Section with the following:
(b) (i) shall, on any Business Day on which the
aggregate outstanding principal amount of all Expansion Loans
PLUS the aggregate outstanding principal amount of all
Revolving Credit Loans PLUS the then aggregate amount of
Letter of Credit Obligations PLUS the aggregate undrawn face
amount of Existing Letters of Credit PLUS the aggregate
undrawn face amount of Additional Letters of Credit exceeds
the Borrowing Base, make a mandatory prepayment of the
outstanding principal amount of Expansion Loans and Revolving
Credit Loans in an amount equal to such excess amount (such
prepayment to be applied first to all of the Revolving Credit
Loans until paid in full and then to Expansion Loans);
(b) Section 3.3.1 is hereby further amended by deleting the
word "and" at the end of subsection (e), replacing the "." at the end
of subsection (f) with "; and" and adding the following as a new
subsection (g):
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<PAGE> 4
(g) shall, on any Business Day on which the aggregate
cash and Cash Equivalent Investments of Borrower, PLUS all
cash collateral pledged to secure the Existing Letters of
Credit, exceeds $5,000,000, make a mandatory prepayment of the
Loans in an amount equal to such excess.
4. AMENDMENT TO SECTION 4.2.5. Section 4.2.5 of the Credit Agreement is
hereby amended by replacing such Section in its entirety with the
following:
SECTION 4.2.5 REQUIRED LENDER APPROVAL OF ACQUISITION. The
Agent shall have received the written approval of the Required Lenders
to the Acquisition to be financed with the proceeds of such Borrowing,
which approval may be granted or withheld by any Lender in its sole and
absolute discretion.
5. AMENDMENT TO SECTION 4.3.7. Section 4.3.7 of the Credit Agreement is
hereby amended by replacing subsections (a), (b) and (c) of such
Section in their entirety with the following:
(a) if the then aggregate outstanding principal amount of all
Expansion Loans would not exceed $20,000,000 and the then aggregate
outstanding principal amount of all Revolving Credit Loans, PLUS the
then aggregate amount of outstanding Letter of Credit Obligations,
would not exceed $20,000,000, such Borrowing or issuance of a Letter of
Credit is permitted under Section 4.07(b)(i) and all other applicable
provisions of the Senior Notes Indenture;
(b) if the then aggregate outstanding principal amount of all
Expansion Loans would exceed $20,000,000, but the then aggregate
outstanding principal amount of all Loans, plus the then aggregate
amount of outstanding Letter of Credit Obligations, would not exceed
$65,000,000, the "Consolidated Fixed Charge Coverage Ratio", as such
term is defined in the Senior Notes Indenture, of the Borrower and its
Subsidiaries would be greater than or equal to (x) 2.50 to 1.0 if such
Loan is made on or after December 31, 1997 and prior to December 31,
1998 or (y) 2.75 to 1.0 if such Loan is made on or after December 31,
1998, and such Borrowing is permitted by all applicable provisions of
the Senior Notes Indenture; and
(c) if the then aggregate outstanding principal amount of
Loans, PLUS the then aggregate amount of outstanding Letter of Credit
Obligations, would exceed $65,000,000, the "Consolidated Fixed Charge
Coverage Ratio", as such term is defined in the Senior Notes Indenture,
of the Borrower and its Subsidiaries would be greater than or equal to
3.3 to 1.0, and such Borrowing or issuance of a Letter of Credit is
otherwise permitted by all applicable provisions of the Senior Notes
Indenture;
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<PAGE> 5
6. AMENDMENTS TO SECTION 6.1.1. Section 6.1.1 of the Credit Agreement is
hereby amended as follows:
(a) The following is added as a new subsection (a)(iv) to such
Section:
(iv) promptly when available and in any event within
forty-five (45) days after the close of each Fiscal Year, an unaudited
consolidated balance sheet for the Borrower and its Subsidiaries at the
close of such Fiscal Year, and related unaudited consolidated
statements of operations, retained earnings, and cash flows for such
Fiscal Year, of the Borrower and its Subsidiaries (with comparable
information at the close of and for the prior Fiscal Year);
(b) The lead-in phrase of subsection (b) of such Section,
which states "promptly when available and in any event within thirty
(30) days after the close of each calendar month of each Fiscal Year",
is replaced with "promptly when available and in any event (x) within
thirty (30) days after the close of the first two calendar months of
each Fiscal Quarter and (y) within forty-five days (45) after the close
of the third calendar month of each Fiscal Quarter".
(c) The reference to "thirty (30) days" in subsection (c) of
such Section is replaced with "forty-five (45) days".
7. AMENDMENT TO SECTION 6.1. Section 6.1 of the Credit Agreement is hereby
further amended by replacing Section 6.1.12 (Interest Rate Protection)
in its entirety with "Section 6.1.12. Intentionally Deleted." and by
deleting Section 6.1.16 (Substitution of Existing Letters of Credit) in
its entirety.
8. AMENDMENT TO SECTION 6.2.2. Section 6.2.2 of the Credit Agreement is
hereby amended by replacing subsection (f) thereof with the following:
(f) Indebtedness existing on the Closing Date and set forth in
ITEM 10 ("Existing Indebtedness") of the Disclosure Schedule, and
Additional Letters of Credit to the extent that the aggregate stated
face amount of the Additional Letters of Credit and the Existing
Letters of Credit does not exceed $3,000,000;
9. AMENDMENT TO SECTION 6.2.4. Section 6.2.4 of the Credit Agreement is
hereby amended by replacing subsections (a), (b) and (d) of such
Section with the following:
(a) FIXED CHARGE COVERAGE RATIO. The Borrower will not permit
its Fixed Charge Coverage Ratio for the twelve-month period ending on
the last day of any Fiscal Quarter to be less than the ratio set forth
opposite such Fiscal Quarter (for the Fiscal Quarter ending on March
31, 1998, such ratio to be calculated as provided in clause (e) of this
SECTION 6.2.4):
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<PAGE> 6
<TABLE>
<CAPTION>
FISCAL QUARTER ENDING: RATIO
---------------------- -----
<S> <C>
March 31, 1998 0.8
June 30, 1998 0.9
September 30, 1998 1.0
December 31, 1998 1.2
March 31, 1999 1.3
June 30, 1999 1.3
September 30, 1999 1.4
December 31, 1999 1.4
March 31, 2000 1.4
June 30, 2000 1.4
</TABLE>
(b) DEBT TO EBITDA RATIO. The Borrower will not permit the
Debt to EBITDA Ratio of the Borrower and its Subsidiaries for the
twelve-month period ending on the last day of any Fiscal Quarter to be
more than the ratio set forth opposite such Fiscal Quarter (for the
Fiscal Quarter ending on March 31, 1998, such ratio shall be calculated
as provided in clause (e) of this SECTION 6.2.4):
<TABLE>
<CAPTION>
FISCAL QUARTER ENDING: RATIO
---------------------- -----
<S> <C>
March 31, 1998 10.5
June 30, 1998 7.5
September 30, 1998 6.5
December 31, 1998 5.5
March 31, 1999 5.0
June 30, 1999 5.0
September 30, 1999 5.0
December 31, 1999 4.5
March 31, 2000 4.5
June 30, 2000 4.0
</TABLE>
(d) INTEREST COVERAGE RATIO. The Borrower will not permit the
Interest Coverage Ratio of the Borrower and its Subsidiaries for the
twelve-month period ending on the last day of any Fiscal Quarter to be
less than the ratio set forth opposite such Fiscal Quarter (for the
Fiscal Quarter ending on March 31, 1998, such ratio to be calculated as
provided in clause (e) of this SECTION 6.2.4.):
<TABLE>
<CAPTION>
FISCAL QUARTER ENDING: RATIO
---------------------- -----
<S> <C>
March 31, 1998 1.1
June 30, 1998 1.2
September 30, 1998 1.3
</TABLE>
-6-
<PAGE> 7
<TABLE>
<S> <C>
December 31, 1998 1.6
March 31, 1999 1.7
June 30, 1999 1.8
September 30, 1999 1.8
December 31, 1999 1.9
March 31, 2000 1.9
June 30, 2000 1.9.
</TABLE>
10. AMENDMENT TO SECTION 6.2.5. Section 6.2.5 of the Credit Agreement is
hereby amended by replacing the proviso at the end of such Section with
the following:
PROVIDED, HOWEVER, that expenditures consisting of
Acquisitions approved by the Required Lenders in writing and
expenditures paid with insurance proceeds received upon the
occurrence of a Loss which are made to replace or repair
damage to destroyed assets will not be included in the
foregoing calculation for the Fiscal Year such Acquisition,
replacement or repair was made.
11. AMENDMENT TO SECTION 6.2.6. Section 6.2.6 of the Credit Agreement is
hereby amended by replacing clause (b) of such Section with the
following:
(b) any lease of real property or any vehicle lease entered into by the
Borrower or any Subsidiary after the Closing Date in the ordinary
course of business (including, without limitation, leasing corporate
office space),
12. AMENDMENT TO SECTION 6.2.7. Section 6.2.7 of the Credit Agreement is
hereby amended by replacing subsection (a) of such Section with the
following:
(a) Cash and Cash Equivalent Investments of Borrower,
including all cash collateral pledged to secure the Existing Letters of
Credit, PROVIDED that if any Loans are outstanding; such Cash and Cash
Equivalent Investments shall not exceed $5,000,000 in the aggregate;
13. AMENDMENT TO SECTION 6.2.10. Section 6.2.10 of the Credit Agreement is
hereby amended by replacing subsection (a) of such Section with the
following:
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<PAGE> 8
(a) The Borrower will not, and will not permit any Subsidiary to,
liquidate or dissolve, consolidate with, or merge into or with, any
other corporation, or purchase or otherwise acquire all, substantially
all or a substantial portion of the assets of any Person (or of any
division or business unit thereof) or purchase or otherwise acquire
installed Telephones from any Person, except that any such Subsidiary
may liquidate or dissolve voluntarily into, and may merge with and
into, the Borrower or any other wholly-owned Subsidiary (so long as the
Borrower or such wholly-owned Subsidiary is the surviving corporation),
PROVIDED, HOWEVER, that
(i) the Borrower shall be permitted to merge with and
into a Delaware corporation for the sole purpose of changing
its state of incorporation to the State of Delaware provided
that (A) the shareholders of the surviving corporation
immediately after such merger are the shareholders of the
Borrower immediately prior to such merger, (B) the number of
authorized and issued and authorized and unissued shares, and
the respective classes and series, of capital stock of the
surviving corporation shall be the same as the number of
authorized and issued and authorized and unissued shares, and
the respective classes and series of capital stock of the
Borrower immediately prior to such merger, (C) the voting
powers, designations, preferences and relative, participating,
optional or other special rights, and qualifications,
limitations and restrictions of all classes and series of
capital stock of the surviving corporation shall be identical
to the voting powers, designations, preferences (including,
without limitation, stated values and liquidation preferences)
and relative, participating, optional or other special rights,
and qualifications, limitations and restrictions of the
respective classes and series of the capital stock of the
Borrower as in effect immediately prior to such merger, and
(D) the Lenders shall have received (1) an assumption
agreement in form and substance satisfactory to the Required
Lenders, duly executed by the surviving corporation and
pursuant to which the surviving corporation shall expressly
assume all of the obligations of the Borrower under this
Agreement and the other Loan Documents, and (2) such
acknowledgments, certificates, instruments and legal opinions
relating to such merger and assumption agreement as the
Required Lenders shall reasonably request;
(ii) the Borrower and its Subsidiaries may consummate
the Closing Date Acquisitions; and
(iii) the Borrower and its Subsidiaries may
consummate other Acquisitions with the prior written consent
of the Required Lenders.
14. REPRESENTATIONS, WARRANTIES AND COVENANTS. In order to induce the
Lenders, the Agent and the Co-Agents to enter into this Amendment and
to consummate the transactions contemplated herein, the Borrower hereby
represents, warrants and covenants to and with the Agent, the Co-Agents
and each Lender as follows:
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<PAGE> 9
(a) as of the date hereof, all representations and warranties
set forth in Article 5 of the Credit Agreement and in all other Loan
Documents are true and correct in all material respects, except to the
extent described in Section 15 below;
(b) as of the date hereof and after giving effect to this
Amendment, no Default or Event of Default exists under the Credit
Agreement;
(c) no later than March 23, 1998, Borrower shall deliver to
the Lenders, the Agent and the Co-Agents (i) an opinion letter from
Skadden, Arps, Slate, Meagher & Flom, counsel to the Borrower and its
Subsidiaries, and Tammy L. Martin, General Counsel to Borrower and its
Subsidiaries, in form and substance satisfactory to the Required
Lenders, as to the corporate authority of the Borrower to enter into
this Amendment and the other documents required hereunder, the
enforceability of this Amendment and the other documents required
hereunder, and such other matters as the Lenders may request; and (ii)
a secretary's certificate in form and substance satisfactory to the
Required Lenders, certifying true and correct copies of the Borrower's
certificate of incorporation, by-laws and resolutions of the Board of
Directors approving this Amendment and the modifications set forth
herein; and
(d) the breach of any representation, warranty or covenant set
forth in this Section 14 shall constitute an Event of Default under the
Credit Agreement.
15. ACKNOWLEDGMENT OF MATERIAL ADVERSE CHANGE. (a) In July 1997, Borrower
informed the Agent, the Co-Agents and the Lenders that the United
States Court of Appeals for the District of Columbia Circuit, in Case
No. 96-1394 entitled ILLINOIS PUBLIC TELECOMMUNICATIONS ASSOCIATION,
PETITIONER, V. FEDERAL COMMUNICATIONS COMMISSION AND UNITED STATES OF
AMERICA, RESPONDENTS, WITH COMPETITIVE TELECOMMUNICATIONS ASSOCIATION,
ET AL, AS INTERVENORS, entered an order (the "Reversal") reversing and
remanding to the Federal Communications Commission (the "FCC") for
further consideration the dial-around compensation provisions of the
Commission's Report and Order implementing Section 276 of the
Communications Act of 1934, as amended by the Telecommunications Act of
1996 (the "FCC Order"). More recently, the United States Court of
Appeals for the District of Columbia vacated certain aspects of the FCC
Order relating to compensation of pay phone providers by Interexchange
Carrier Parties (1997 U.S. App. LEXIS 24440). On October 9, 1997, the
FCC adopted and released its Second Report and Order implementing
Section 276 of the Communications Act of 1934, as amended by the
Telecommunications Act of 1996 (the "Second FCC Order") which addressed
dial-around compensation for calls originating from pay phones in light
of the foregoing Court decisions, establishing a rate of $0.284
($0.35-$0.066) per call for the first two years of per-call
compensation, the market-base local coin rate, adjusted for certain
costs defined by the FCC as $0.066 per call. The Second FCC Order is on
appeal with the United States Court of Appeals for the District of
Columbia Circuit. The
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<PAGE> 10
Borrower hereby expressly acknowledges and agrees that the foregoing
events constitute a Material Adverse Change, that except to the extent
expressly provided in paragraph (b) below, the Lenders expressly
reserve all rights with respect to such Material Adverse Change and
that nothing contained in this Amendment waives such Material Adverse
Change. The Borrower further acknowledges and agrees that as provided
in Section 4.3.5 of the Credit Agreement, it is a condition precedent
to the obligations of the Lenders to make any Loans, and the obligation
of the Agent to issue and the obligations of the Lenders to purchase
participations in Letters of Credit, that no Material Adverse Change
shall have occurred since the Closing Date. Accordingly, the Lenders
have no obligation to make Loans, the Agent has no obligation to issue
Letters of Credit and the Lenders have no obligation to purchase
participations in said Letters of Credit, and the making of any such
Loans and the issuance of any such Letters of Credit are subject to the
sole and absolute discretion of the Lenders, subject to subsection (b)
below.
(b) Notwithstanding that the Material Adverse Change described in
subparagraph (a) above has occurred and that the Lenders have no obligation to
make Loans, the Agent has no obligation to issue Letters of Credit and the
Lenders have no obligation to purchase participations in said Letters of Credit,
the Agent agrees to issue Letters of Credit and the Lenders agree to make
Revolving Credit Loans and to purchase participations in said Letters of Credit,
subject to all other terms and conditions of the Credit Agreement, as amended by
this Amendment; PROVIDED, HOWEVER, that the aggregate outstanding principal
amount of all Revolving Credit Loans, PLUS the aggregate amount of outstanding
Letter of Credit Obligations, may not exceed $10,300,000 at any time.
16. EFFECTIVENESS. This Amendment shall become effective only upon (i)
receipt by the Agent of a copy of this Amendment, duly executed by each
of the Borrower, the Lenders, the Agent and the Co-Agents, and duly
acknowledged and consented to by the Subsidiaries of the Borrower in
the form attached to this Amendment; (ii) receipt by each Lender of a
duly executed and delivered Expansion Note in a principal amount equal
to such Lender's Percentage of the Expansion Loan Commitment Amount (as
such terms are modified by this Amendment), in replacement and
substitution of the Expansion Notes issued by Borrower on the Closing
Date, (iii) receipt by each Lender of a duly executed and delivered
Revolving Credit Note in a principal amount equal to such Lender's
Percentage of the Revolving Credit Commitment Amount (as such terms are
modified by this Amendment), in replacement and substitution of the
Revolving Credit Notes issued by Borrower on the Closing Date; (iv)
receipt by legal counsel to each Lender of payment for fees and
expenses incurred to date; and (v) receipt by the Agent of the
Amendment Fee required pursuant to Section 17 hereof.
17. AMENDMENT FEE. The Borrower agrees to pay to the Agent for the ratable
account of each Lender, an amendment fee in an amount equal to $150,000
(the "AMENDMENT FEE"). The Amendment Fee shall be payable by the
Borrower upon the execution of this Amendment, and the Borrower hereby
irrevocably authorizes the Agent to deduct from
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<PAGE> 11
the proceeds of a Borrowing of Revolving Loans to be made on the date
of this Agreement in the amount of $3,000,000, the sum of $150,000 for
the ratable account of each Lender as payment in full of the Amendment
Fee and the sum of $20,148.64 for the account of the Agent as payment
of its billed and outstanding legal expenses.
18. CONTINUING EFFECTIVENESS OF CREDIT AGREEMENT. The Credit Agreement and
each of the other Loan Documents shall remain in full force and effect
in accordance with their respective terms, except as expressly amended
or modified by this Amendment.
19. COST AND EXPENSES. The Borrower agrees to pay all reasonable
out-of-pocket expenses of the Agent and each of the Lenders party to
this Amendment for the negotiation, preparation, execution and delivery
of this Amendment (including reasonable fees and expenses of counsel to
the Agent and such Lenders).
20. HEADINGS. The various headings of this Amendment are inserted for
convenience only and shall not affect the meaning or interpretation of
this Amendment or any provision hereof.
21. COUNTERPARTS. This Amendment may be executed by the parties hereto in
several counterparts, each of which shall be executed by the Borrower,
the Lenders and the Agent and shall be deemed to be an original and all
of which shall constitute together but one and the same agreement.
22. GOVERNING LAW. THIS AMENDMENT SHALL BE DEEMED TO BE A CONTRACT MADE
UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK.
23. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and shall
inure to the benefit of the parties hereto and their respective
successors and assigns; PROVIDED, HOWEVER, that the Borrower may not
assign or transfer its rights or obligations hereunder or under the
Credit Agreement except in accordance with the terms of the Credit
Agreement.
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<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
PHONETEL TECHNOLOGIES, INC.
By: /s/ Tammy L. Martin
--------------------------
Name: Tammy L. Martin
Title: Secretary
[CORPORATE SEAL]
Percentage: 26.6666667% ING (U.S.) CAPITAL CORPORATION, in its
capacity as Agent and Lender
By: /s/ Steven G. Fleenor
--------------------------
Steven G. Fleenor
Vice President
Percentage: 26.6666667% TRANSAMERICA BUSINESS CREDIT
CORPORATION, in its capacity as Co-Agent
and Lender
By: /s/ Terrell W. Harris
--------------------------
Terrell W. Harris
Vice President
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<PAGE> 13
Percentage: 26.6666667% FINOVA CAPITAL CORPORATION, in its
capacity as Co-Agent and Lender
By: /s/ Marilyn Milam
--------------------------
Marilyn Milam
Vice President
Percentage: 20.0% AMERICAN NATIONAL BANK, in its
capacity as Lender
By: /s/ Richard Johnson
--------------------------
Name: Richard Johnson
Title: Vice President
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<PAGE> 14
ACKNOWLEDGMENT AND CONSENT
The undersigned hereby acknowledge receipt of a copy of the foregoing
Amendment, consent to the terms and provisions set forth therein, and agree that
the Subsidiary Guaranty dated as of May 30, 1997 (the "SUBSIDIARY GUARANTY")
made by each of the undersigned, jointly and severally, in favor of ING (U.S.)
Capital Corporation ("ING"), the other lenders as are, or may from time to time
become, parties to the Credit Agreement (as defined in the Subsidiary Guaranty)
and ING in its capacity as Agent for such Lenders, will continue in full force
and effect without diminution or impairment notwithstanding the execution and
delivery of the Amendment. The undersigned further acknowledge and agree that,
upon effectiveness of the Amendment and from and after the date thereof, each
reference to the Credit Agreement in the Subsidiary Guaranty and each other Loan
Document (as such term is defined in the Credit Agreement) to which any of the
undersigned is a party shall mean and be a reference to the Credit Agreement as
amended by this Amendment.
CHEROKEE COMMUNICATIONS, INC.
By: /s/ Tammy L. Martin
-----------------------------------
Name: Tammy L. Martin
Title: Secretary
[CORPORATE SEAL]
PHONETEL V, INC.
By: /s/ Tammy L. Martin
-----------------------------------
Name: Tammy L. Martin
Title: Secretary
[CORPORATE SEAL]
PHONETEL ACQUISITION CORP.
By: /s/ Tammy L. Martin
-----------------------------------
Name: Tammy L Martin
Title: Secretary
[CORPORATE SEAL]
-14-
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF PHONE TEL TECHNOLOGIES, INC.
The following are wholly-owned subsidiaries of PhoneTel Technologies, Inc.
Cherokee Communications, Inc.
PhoneTel Acquisition Corp.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PHONETEL TECHNOLOGIES, INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,519
<SECURITIES> 0
<RECEIVABLES> 16,785
<ALLOWANCES> (507)
<INVENTORY> 0
<CURRENT-ASSETS> 23,769
<PP&E> 45,140
<DEPRECIATION> (15,031)
<TOTAL-ASSETS> 169,826
<CURRENT-LIABILITIES> 15,930
<BONDS> 150,203
7,716
0
<COMMON> 164
<OTHER-SE> (4,206)
<TOTAL-LIABILITY-AND-EQUITY> 169,826
<SALES> 0
<TOTAL-REVENUES> 109,644
<CGS> 0
<TOTAL-COSTS> (116,846)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (267)
<INTEREST-EXPENSE> (16,052)
<INCOME-PRETAX> (23,254)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,254)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,254)
<EPS-PRIMARY> (1.51)
<EPS-DILUTED> (1.51)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PHONETEL TECHNOLOGIES, INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 713
<SECURITIES> 0
<RECEIVABLES> 942
<ALLOWANCES> (40)
<INVENTORY> 0
<CURRENT-ASSETS> 1,801
<PP&E> 17,608
<DEPRECIATION> (3,509)
<TOTAL-ASSETS> 28,917
<CURRENT-LIABILITIES> 6,644
<BONDS> 9,319
0
6,486
<COMMON> 29
<OTHER-SE> 3,196
<TOTAL-LIABILITY-AND-EQUITY> 28,917
<SALES> 0
<TOTAL-REVENUES> 18,718
<CGS> 0
<TOTAL-COSTS> (24,007)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4
<INTEREST-EXPENSE> (821)
<INCOME-PRETAX> (6,110)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,110)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,110)
<EPS-PRIMARY> (3.29)
<EPS-DILUTED> (3.29)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS OF PHONETEL TECHNOLOGIES, INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 46,438
<SECURITIES> 0
<RECEIVABLES> 3,841
<ALLOWANCES> (92)
<INVENTORY> 0
<CURRENT-ASSETS> 50,470
<PP&E> 27,784
<DEPRECIATION> (8,541)
<TOTAL-ASSETS> 159,770
<CURRENT-LIABILITIES> 10,979
<BONDS> 125,274
6,708
0
<COMMON> 145
<OTHER-SE> 16,560
<TOTAL-LIABILITY-AND-EQUITY> 159,770
<SALES> 0
<TOTAL-REVENUES> 44,804
<CGS> 0
<TOTAL-COSTS> (54,819)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (92)
<INTEREST-EXPENSE> (6,557)
<INCOME-PRETAX> (16,572)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,572)
<DISCONTINUED> 0
<EXTRAORDINARY> (10,077)
<CHANGES> 0
<NET-INCOME> (26,649)
<EPS-PRIMARY> (5.29)
<EPS-DILUTED> (5.29)
</TABLE>
<PAGE> 1
EXHIBIT 99
PHONETEL TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
---------- --------------------------------------- ----------
ADDITIONS
BALANCE --------------------------
AT CHARGED TO FROM DEDUCTIONS BALANCE
BEGINNING COSTS, EXPENSES ACQUIRED RELATING TO AT END
OF YEAR OR TAX BENEFIT COMPANY WRITE-OFFS OF YEAR
---------- --------------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Allowances deducted from related
balance sheet accounts:
Accounts Receivable $44 ($4) $40
Deferred Tax Assets 1,913 4,335 6,248
Intangible Assets 1,255 2,537 3,792
Year ended December 31, 1996
Allowances deducted from related
balance sheet accounts:
Accounts Receivable 40 92 ($40) 92
Deferred Tax Assets 6,248 3,455 9,703
Intangible Assets 3,792 7,768 (1,368) 10,192
Year ended December 31, 1997
Allowances deducted from related
balance sheet accounts:
Accounts Receivable 92 267 $148 507
Deferred Tax Assets 9,703 3,054 12,757
Intangible Assets 10,192 15,528 25,720
</TABLE>
