<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
--------------
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE TRANSITION PERIOD FROM_____ TO_____.
COMMISSION FILE NUMBER 0-16715
PHONETEL TECHNOLOGIES, INC.
---------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-1462198
---- ----------
(STATE OF OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
NORTH POINT TOWER, 7TH FLOOR, 1001 LAKESIDE AVENUE, 44114-1195
- ---------------------------------------------------- ----------
CLEVELAND, OHIO (ZIP CODE)
- ---------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(216) 241-2555
--------------
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 __
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: AS OF MAY 8, 1998,
16,551,507 SHARES OF THE REGISTRANT'S COMMON STOCK, $.01 PAR VALUE, WERE
OUTSTANDING.
<PAGE> 2
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
Page No.
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1997
and March 31, 1998...............................................................3
Consolidated Statements of Operations for the Three
Months Ended March 31, 1997 and 1998.............................................4
Statements of Changes in Mandatorily Redeemable Preferred
Stock as of December 31, 1997 and March 31, 1998.................................5
Statements of Changes in Non-mandatorily Redeemable Preferred Stock,
Common Stock and Other Shareholders' Equity (Deficit) as of
December 31, 1997 and March 31, 1998.............................................6
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1997 and 1998.............................................7
Notes to Consolidated Financial Statements...........................................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................19
Signatures.......................................................................................................20
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
DECEMBER 31 MARCH 31
1997 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 6,519 $ 5,023
Accounts receivable, net of allowance for doubtful
accounts of $507 and $548, respectively 16,278 18,403
Other current assets 972 1,342
--------- ---------
Total current assets 23,769 24,768
Property and equipment, net 30,109 29,021
Intangible assets, net 115,607 112,218
Other assets 341 478
--------- ---------
$ 169,826 $ 166,485
========= =========
LIABILITIES AND EQUITY
Current liabilities:
Current portion:
Long-term debt $ 544 $ 432
Obligation under capital leases 92 71
Accounts payable 8,768 7,644
Accrued expenses:
Location commissions 3,142 1,822
Personal property and sales tax 1,927 2,487
Interest 991 4,500
Salaries, wages and benefits 466 698
Other -- 160
--------- ---------
Total current liabilities 15,930 17,814
Long-term debt 150,203 153,112
Obligations under capital leases 19 10
Commitments and contingencies -- --
14% cumulative preferred stock mandatorily redeemable
(redemption amount $8,579 due June 30, 2000) 7,716 8,044
Non-mandatorily redeemable preferred stock,
common stock and other shareholders' equity (deficit) (4,042) (12,495)
--------- ---------
$ 169,826 $ 166,485
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
1997 1998
---------- ----------
<S> <C> <C>
REVENUES:
Coin calls $ 14,127 $ 13,188
Non-coin telecommunication services 13,211 10,905
Other 320 30
---------- ----------
27,658 24,123
---------- ----------
COSTS AND EXPENSES:
Line and transmission charges 6,179 6,916
Telecommunication and validation fees 2,846 2,714
Location commissions 3,169 3,150
Field operations 5,699 5,530
Selling, general and administrative 2,096 3,074
Depreciation and amortization 5,296 6,306
Other unusual charges and contractual settlements - 143
---------- ----------
25,285 27,833
---------- ----------
Income (loss) from operations 2,373 (3,710)
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (3,800) (4,479)
Interest income 279 37
---------- ----------
(3,521) (4,442)
---------- ----------
NET LOSS ($1,148) ($8,152)
========== ==========
Earnings per share calculation:
Preferred dividend payable in kind (147) (97)
Accretion of 14% Preferred to its redemption value (50) (231)
---------- ----------
Net loss applicable to common shareholders ($1,345) ($8,480)
========== ==========
Net loss per common share ($0.09) ($0.51)
========== ==========
Weighted average number of shares 15,525,902 16,535,846
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN MANDATORILY REDEEMABLE PREFERRED STOCK
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
------- ------- ------- -------
<S> <C> <C> <C> <C>
14 % CUMULATIVE REDEEMABLE
CONVERTIBLE PREFERRED STOCK
Balance at beginning of year 120,387 $ 6,708 138,147 $ 7,716
Dividends payable-in-kind 17,760 514 4,835 97
Accretion of carrying value to amount
payable at redemption on June 30, 2000 -- 494 -- 231
Total Mandatorily Redeemable
------- ------- ------- -------
Preferred Stock 138,147 $ 7,716 142,982 $ 8,044
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN NON-MANDATORILY REDEEMABLE PREFERRED STOCK,
COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
--------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
SERIES A SPECIAL CONVERTIBLE
PREFERRED STOCK
Balance at beginning of year -- -- -- --
Exercise of warrants 12,500 $ 3 -- --
Conversion to common stock (12,500) (3) -- --
------------ ------------ ------------ ------------
Balance at end of period -- -- -- --
============ ------------ ============ ------------
COMMON STOCK
Balance at beginning of year 14,488,828 145 16,360,829 $ 164
Company Equity Offering 1,012,500 10 -- --
Exercise of warrants and options 409,754 4 190,678 2
Conversion of Series A Preferred 250,000 3 -- --
Other issuances of stock 199,747 2 -- --
------------ ------------ ------------ ------------
Balance at end of period 16,360,829 164 16,551,507 166
============ ------------ ============ ------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 59,104 62,600
Company Equity Offering 2,815 --
Exercise of warrants and options 101 25
Other issuances of stock 580 --
------------ ------------
Balance at end of period 62,600 62,625
------------ ------------
ACCUMULATED DEFICIT
Balance at beginning of year (42,544) (66,806)
Net loss for the period (23,254) (8,152)
14% Preferred dividends payable-in-kind
and accretion (1,008) (328)
------------ ------------
Balance at end of period (66,806) (75,286)
------------ ------------
Total Non-mandatorily Redeemable
Preferred Stock, Common Stock and
Other Shareholders' Equity (Deficit) $ (4,042) $ (12,495)
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
1997 1998
-------- --------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $ (1,148) $ (8,152)
Adjustments to reconcile net loss to net cash flow from operating activities:
Depreciation and amortization 5,296 6,306
Increase in allowance for doubtful accounts 243 239
Amortization of deferred revenues (300) --
Changes in current assets and current liabilities,
net of assets acquired (3,948) (716)
-------- --------
143 (2,323)
-------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisitions (26,148) --
Acquisition deposits (11,000) --
Deferred charges on pending acquisitions (41) --
Deferred charges - commissions and signing bonuses (426) (146)
Proceeds from sale of assets -- 27
Change in other assets (2) (142)
Purchases of property and equipment (983) (904)
-------- --------
(38,600) (1,165)
-------- --------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from debt issuances 69 3,090
Principal payments on borrowings (600) (324)
Proceeds from issuance of common stock 2,825 --
Debt financing costs (812) (801)
Proceeds from warrant and option exercises 5 27
-------- --------
1,487 1,992
-------- --------
Decrease in cash (36,970) (1,496)
Cash at beginning of period 46,438 6,519
-------- --------
Cash at end of period $ 9,468 $ 5,023
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER ENDED MARCH 31, 1998
(IN THOUSANDS OF DOLLARS EXCEPT FOR INSTALLED PUBLIC PAY TELEPHONE, SHARE AND
PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three months ended March 31, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
Certain amounts relating to 1997 have been reclassified to conform to
the current quarter presentation. The reclassifications have had no impact on
total assets, shareholders' equity (deficit) or net loss as previously reported.
2. 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. In the first quarter of 1997, the
Company paid $5,000 of the $6,000 in acquisition deposits related to this
transaction.
Acquisitions completed during the year ended December 31, 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.
8
<PAGE> 9
COINLINK, LLC - FEBRUARY 14, 1997 ("COINLINK")
The Company acquired 300 installed public pay telephones for $938 and
approximately $4 in related acquisition expenses.
RSM COMMUNICATIONS, INC.- JANUARY 31, 1997 ("RSM")
The Company acquired 292 installed public pay telephones for $1,054 and
incurred acquisition expenses of approximately $7.
AMERICOM, INC. - JANUARY 17, 1997 ("AMERICOM")
The Company acquired 99 installed public pay telephones for $264 and
incurred acquisition costs of $10.
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. At March 31, 1997, $6,000 of contingent consideration was included in
acquisition deposits in the consolidated balance sheets.
PURCHASE PRICE ACCOUNTING
The above transactions have been accounted for as purchases and have
been included in the results of operations from the respective dates of
acquisition. The difference between the total purchase price and the current
assets and liabilities assumed has been allocated to property and equipment,
location contracts and non-compete agreements based on the relative fair values.
Fair values of location contracts are determined using discounted cash flows
over the remaining estimated economic lives of the acquired location contracts.
The amount of the location contracts and non-competition agreements recorded for
each acquisition and the estimated economic life of the acquired location
contracts are as follows: London $8,608, 102 months; Advance $2,313, 120 months;
American $2,763, 103 months; Coinlink $838, 103 months; RSM $956, 100 months;
Americom $243, 120 months; Texas Coinphone $3,097, 101 months; Cherokee $53,103,
113 months. Acquired property and equipment is depreciated over three to five
years.
PRO FORMA FINANCIAL DATA (UNAUDITED)
Set forth below is the Company's unaudited pro forma condensed
statement of operations data as though the London, Advance, and American
acquisitions had occurred at the beginning of 1997.
<TABLE>
<CAPTION>
Pro Forma Statement of Operations Data
Three Months Ended March 31, 1997
---------------------------------
<S> <C>
Total revenues $30,508
Net loss ( 1,548)
Net loss applicable to
common shareholders ( 1,746)
Net loss per common share ( 0.11)
</TABLE>
9
<PAGE> 10
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 1997 or of future results. The pro
forma statement of operations data includes adjustments related to the
depreciation and amortization of tangible and intangible assets, interest
expense on borrowings used to finance the acquisitions and the weighted average
number of common shares outstanding after giving effect to the acquisitions and
excludes the assets and results of operations not acquired.
3. ACCOUNTS RECEIVABLE AND DIAL-AROUND COMPENSATION
At December 31, 1997 and March 31, 1998, accounts receivable included
$12,938 and $16,109 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 three months ended
March 31, 1997 and 1998, revenues from non-coin telecommunication services
included $5,607 and $4,833 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 $37.20
(131 calls per installed pay telephone per month). Included in this adjustment
was a net charge of $965 for dial-around compensation relating to the first
quarter of 1997. This adjustment amount was included in other unusual charges
and contractual settlements in the third quarter of 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
10
<PAGE> 11
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 relieved or delayed the obligations of IXCs to pay
compensation on April 1, 1998. In the first quarter of 1998, the Company has
recorded revenues of $4,833 for dial-around compensation at a rate of $37.20 per
installed pay telephone per month, based on 131 calls per month. As of May 15,
1998, the Company has received $1,570 of the $4,734 receivable relating to
fourth quarter 1997 dial-around 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. On May 7, 1998, the Court heard oral arguments on the appeals
regarding the FCC's Payphone Order. On May 15, 1998 the Court of Appeals issued
an opinion which remanded the Second Report and Order to the FCC for further
consideration in order to justify that dial-around compensation should be based
on the deregulated local coin rate. The Court of Appeals elected not to vacate
the $0.284 per call rate on the understanding that if and when on remand the FCC
establishes some different rate of fair compensation for dial-around calls, the
FCC may adjust the dial-around compensation rate retroactively should the
equities so dictate. Further, the Court stated that if, within 6 months from the
date of issuance of their order, the FCC fails to adequately respond to the
Court's remand, any adversely affected party may request effective relief from
the Court.
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 based on $0.284 per call and 131 calls 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.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
Estimated
Useful Lives December 31 March 31
(in years) 1997 1998
---------- ---- ----
<S> <C> <C> <C>
Telephones, boards, enclosures and cases 3-10 $41,653 $ 42,375
Furniture, fixtures and other equipment 3-5 3,063 3,182
Leasehold improvements 2-5 424 463
------- ----------
45,140 46,020
Less - accumulated depreciation ( 15,031) ( 16,999)
-------- ---------
$30,109 $ 29,021
======= ==========
</TABLE>
5. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
Amortization Period December 31 March 31
(in months) 1997 1998
----------- ---- ----
<S> <C> <C> <C>
Location contracts 60-120 $ 126,775 $ 126,856
Deferred financing costs 120 10,254 11,055
Non-competition agreements 24-60 3,731 3,731
State operating certifications 60 567 571
------------ -------------
141,327 142,213
Less: Accumulated amortization ( 25,720) ( 29,995)
----------- ------------
$ 115,607 $ 112,218
============ =============
</TABLE>
6. AMENDMENTS TO CREDIT AGREEMENT
11
<PAGE> 12
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") was Agent for the Lenders and Transamerica Business Credit
Corporation and Finova Capital Corporation were 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 "First Amendment"). 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 February 24, 1998, the
Company was permitted to borrow an additional $3,000 for working capital
purposes under the Revolving Credit Commitment. On March 31, 1998, the Credit
Agreement was further amended with respect to certain financial covenants (the
"Second Amendment").
On May 8, 1998, the Company amended the Credit Agreement (the "Third
Amendment") and Foothill Capital Corporation, as replacement Agent and Lender,
assumed all of the rights and obligations of the former Lenders. Under the Third
Amendment the Revolving Credit Commitment is $20,000 and the Expansion Loan
Commitment is $20,000. Interest is payable monthly in arrears at 2% above the
Lender's reference rate (as defined in the Third Amendment) and the maturity
date of the Credit Agreement is extended to May 8, 2001. Certain financial
covenants under the Credit Agreement were also amended. The Company incurred
$668 in fees and expenses related to this amendment to the Credit Agreement
which provides the Company with immediate access to approximately $12,000 to
fund expansion and working capital needs.
7. PREFERRED STOCK MANDATORILY REDEEMABLE
<TABLE>
<CAPTION>
Mandatorily redeemable preferred stock consisted of the following:
December 31 March 31
1997 1998
---- ----
<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 30,229 shares at December 31, 1997
(valued at $851) and 35,064 shares at March 31, 1998, (valued at $947);
mandatory redemption amount of $8,579 due June 30, 2000 $ 7,716 $ 8,044
</TABLE>
The Company records dividends, declared and undeclared, at their fair
market value and recognizes the difference between the carrying value of the 14%
Preferred and the mandatory redemption amount, through monthly accretions, using
the interest method. For the three months ended March 31, 1998, the carrying
value of the 14% Preferred was increased by $231 through accretions. Each share
of 14% Preferred is entitled to receive a
12
<PAGE> 13
quarterly dividend of 0.035 shares of 14% Preferred. Each share of 14% Preferred
is convertible into 10 shares of Common Stock.
8. 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 March 31
1997 1998
<S> <C> <C>
Series A Special Convertible Preferred Stock ($0.20 par value, $0.20
stated value - 250,000
shares authorized; no shares issued) --
Common Stock
($0.01 par value - 50,000,000 shares authorized; 16,360,829 and
16,551,507 shares issued and outstanding at December 31, 1997 and
March 31, 1998,
respectively) $ 164 $ 166
Additional paid-in capital 62,600 62,625
Accumulated deficit (66,806) (75,286)
-------- --------
$ (4,042) $(12,495)
======== ========
</TABLE>
In January 1998, warrants for 190,678 shares of Common Stock (including
179,996 Nominal Value Warrants) were exercised by their holders. The Company
received proceeds of $27 from the exercise of these warrants.
9. 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.
10. 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 March 31, 1998, and for the
quarter ended March 31, 1998.
13
<PAGE> 14
Condensed Consolidating Financial Statements
Balance Sheet, at March 31, 1998
<TABLE>
<CAPTION>
PhoneTel Cherokee(a) Eliminations Consolidated
<S> <C> <C> <C> <C>
Current assets $ 15,938 $ 8,830 - $ 24,768
Property and equipment, net 23,268 5,753 - 29,021
Intangible assets, net 70,917 41,301 - 112,218
Other non-current assets 59,007 6,700 ($ 65,229) 478
----------- ------------ ---------- --------------
Total $ 169,130 $ 62,584 ($ 65,229) $ 166,485
=========== ============ ========= ==============
Current liabilities $ 7,922 $ 9,892 - $ 17,814
Inter-company debt - 65,229 ($65,229) -
Long-term debt and capital leases 152,308 814 - 153,122
14% Preferred stock 8,044 - - 8,044
Other equity (deficit) 856 ( 13,351) - ( 12,495)
----------- ------------ --------- --------------
Total $ 169,130 $ 62,584 ($65,229) $ 166,485
=========== ============ ========= ==============
Statement of Operations, for the quarter ended March 31, 1998
Total revenues $ 14,759 $ 9,364 - $ 24,123
Operating expenses 18,019 9,814 - 27,833
----------- ------------ --------- --------------
Loss from operations ( 3,260) ( 450) - ( 3,710)
Other income (expense), net ( 2,436) ( 2,006) - ( 4,442)
----------- ------------ --------- --------------
Net loss ($ 5,696) ($ 2,456) - ($ 8,152)
=========== ============ ========= ==============
</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.
11. FINANCIAL CONDITION
The Company's working capital, liquidity and capital sources may be
limited by its ability to generate sufficient cash flows from its operations or
its investment or financing activities. Cash flow from operations depends on
revenues from coin and non-coin sources. There can be no assurance that coin
revenues will increase, that revenues from dial-around compensation will
continue at rates anticipated and be received by the Company in the amounts
recorded as receivables, or that operating expenses can be maintained at present
or reduced levels. To the extent that cash flows from operating activities or
amounts available to be borrowed under the Credit Agreement are insufficient to
meet the Company's cash needs, there can be no assurance that the Company's debt
holders will permit 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, such debt could become immediately due and payable.
Management believes, but cannot assure, that cash flow from operations
(including substantial collections of accounts receivable from dial-around
compensation) or from additional financing will allow the Company to sustain its
operations and meet its obligations through the remainder of 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (IN THOUSANDS OF DOLLARS EXCEPT FOR PUBLIC PAY
TELEPHONES, PER CALL, SHARE AND PER SHARE AMOUNTS)
As described in Note 2 to the consolidated financial statements, the
Company completed various acquisitions during the first and second quarters of
1997. In the third quarter of 1997, the Company also terminated
14
<PAGE> 15
its merger agreement to acquire Communications Central Inc. The completed
acquisitions were accounted for as purchases and have been included in the
results of operations from their respective acquisition dates.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
REVENUES Revenues decreased by $3,535 or 12.8%, from $27,658 for the
first three months of 1997 to $24,123 for the first three months of 1998. This
decrease is primarily due to a decline in call volume, offset in part by the
increase in the local coin call rate from $0.25 to $0.35, and the decrease in
the dial-around compensation rate as discussed below. The number of installed
pay telephones increased from 40,829 at March 31, 1997 to 43,069 at March 31,
1998, an increase of 2,240 or 5.5%, principally due to acquisitions during the
second quarter of 1997.
Revenues from coin calls decreased by $939 or 6.6%, from $14,127 for
the three months ended March 31, 1997 to $13,188 for the three months ended
March 31, 1998. The decrease is due primarily to a decline in the number of
local coin calls which represents approximately 70% of total coin revenue.
During the fourth quarter of 1997, the Company increased its local coin call
rate from $0.25 to $0.35 and, as initially expected, experienced a reduction in
call volume. Historically, call volumes have returned to normal levels following
rate increases. However, there can be no assurance that coin call volumes will
return to prior levels or that coin revenue per phone will increase beyond
historical levels. To a lesser extent, coin revenues have been adversely
affected by changes in customer and geographic mix and weather conditions in the
first quarter of 1998.
Revenues from non-coin telecommunication services decreased by $2,306
or 17.5% from $13,211 for the three months ended March 31, 1997 to $10,905 for
the three months ended March 31, 1998. Of this decrease, long distance revenues
from operator service providers decreased by $1,531 principally due to
continuing aggressive dial-around advertising by long distance carriers such as
AT&T and MCI Communications Corporation. In addition, revenues from dial-around
compensation decreased by $775 compared to the first quarter of 1997, due to
regulatory changes effective in October 1997. Among other things, these changes
reduced the rate of compensation for dial-around calls from $45.85 per installed
pay telephones per month to a per call rate of $0.284. The Company recognizes
dial-around compensation at $37.20 per pay telephone per month based on an
estimated 131 calls for each phone per month. In the third quarter of 1997, the
Company recorded an adjustment of $2,361 to reduce dial-around compensation
previously recognized as a result of this regulatory change. Of this amount,
$965 related to the first quarter of 1997.
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
15
<PAGE> 16
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 $965 for dial-around compensation relating to the first
quarter of 1997. This adjustment amount was included in other unusual charges
and contractual settlements in the third quarter of 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 relieved or
delayed the obligations of IXCs to pay compensation on April 1, 1998. In the
first quarter of 1998, the Company has recorded revenues of $4,833 for
dial-around compensation at a rate of $37.20 per installed pay telephone per
month, based on 131 calls per month. As of May 14, 1998, the Company has
received $1,570 of the $4,734 receivable relating to fourth quarter 1997
dial-around 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. On May 7, 1998, the Court heard oral arguments on the appeals
regarding the FCC's Payphone Order. On May 15, 1998, the Court of Appeals issued
an opinion which remanded the Second Report and Order to the FCC for further
consideration in order to justify that dial-around compensation should be based
on the deregulated local coin rate. The Court of Appeals, elected not to vacate
the $0.284 per call rate on the understanding that if and when on remand the FCC
establishes some different rate of fair compensation for dial-around calls, the
FCC may adjust the dial-around compensation rate retroactively should the
equities so dictate. Further, the Court stated that if, within 6 months from the
date of issuance of their order, the FCC fails to adequately respond to the
Court's remand, any adversely affected party may request effective relief from
the Court.
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 based on $0.284 per call and 131 calls 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.
Other revenues decreased $290 from $320 for the three months ended
March 31, 1997 to $30 for the three months ended March 31, 1998. This decrease
was primarily the result of the amortization of a deferred operator services
bonus received in 1996.
OPERATING EXPENSES. Total operating expenses increased $2,548, or 10.1%, from
$25,285 for the three months ended March 31, 1997 to $27,833 for the three
months ended March 31, 1998. The increase was due to increases in line and
transmission charges, location commissions, selling, general and administrative
expenses ("SG&A expense"), and depreciation and amortization due in part to the
increase in the number of installed pay telephones and personnel relating to
acquisitions in the first and second quarters of 1997.
Line and transmission charges increased $737, or 11.9%, from $6,179 for
the three months ended March 31, 1997 to $6,916 for the three months ended March
31, 1998. Line and transmission charges represented 22.3% of total revenues for
the three months ended March 31, 1997 and 28.7% of total revenues for the three
months ended March 31, 1998, an increase of 6.4%. The dollar increase was due to
the increase in the number of installed pay telephones and the increase in the
average line and transmission charge per phone. The average line and
16
<PAGE> 17
transmission charge per phone increased due to the increased charges by local
exchange carriers ("LECs") for end user common line charges, Preferred
Interexchange Carrier charges ("PICC"), and to a more limited extent, state
Universal Service Fund fees ("USF") passed through to users such as independent
public pay telephone providers. The increase as a percentage of revenues also
reflects the effect of the decrease in revenues discussed above.
Telecommunication and validation fees (consisting primarily of
processing costs relating to operator services) decreased $132, or 4.6%, from
$2,846 for the three months ended March 31, 1997 to $2,714 for the three months
ended March 31, 1998. Telecommunication and validation fees represented 10.3% of
total revenues for the three months ended March 31, 1997 and 11.3% for the three
months ended March 31, 1998, an increase of 1.0%. The dollar decrease was
primarily the result of the decrease in operator service revenues compared to
the first quarter of 1997. The percentage increase was mostly due to changes
in customer usage under operator service contracts which affect the overall
cost percentage.
Location commissions decreased $19, or 0.6%, from $3,169 for the three
months ended March 31, 1997 to $3,150 for the three months ended March 31, 1998.
Location commissions represented 11.5% of total revenues for the three months
ended March 31, 1997 and 13.1% of total revenues for the three months ended
March 31, 1998, an increase of 1.6%. The dollar and percentage decreases are due
to the reduction in revenues in the first quarter of 1998 offset by increases in
commission rates necessary to meet competition for new customers and in renewing
contracts with existing customers.
Field operations (consisting principally of field operations personnel
costs, rents and utilities of the local service facilities and repair and
maintenance of the installed public pay telephones), decreased $169, or 3.0%,
from $5,699 for the three months ended March 31, 1997 to $5,530 for the three
months ended March 31, 1998. Field operations represented 20.6% of total
revenues for the three months ended March 31, 1997 and 22.9% of total revenues
for the three months ended March 31, 1998. The dollar decrease in 1998 compared
to 1997 was primarily due to the higher repair and servicing costs of installed
pay telephones from acquired companies during the first quarter of 1997 and the
reduction or transfer of technical support and other personnel at the Company's
Jacksonville, Texas (former Cherokee headquarters) local service facility to the
Company's Cleveland, Ohio headquarters, offset in part by an increase in service
vehicle costs. The percentage increase was a result of the lower revenues during
the first quarter of 1998.
Selling, general and administrative ("SG&A") expenses increased $978,
or 46.7%, from $2,096 for the three months ended March 31, 1997 to $3,074 for
the three months ended March 31, 1998. SG&A represented 7.6% of total revenues
for the three months ended March 31, 1997 and 12.7% of total revenues for the
three months ended March 31, 1998, an increase of 5.1%. The dollar and
percentage increases were primarily due to an expansion of the sales force, the
transfer of technical support and other personnel from the Company's
Jacksonville, Texas local service facility to the Company's headquarters, and
increases in telephone, insurance and other costs associated with acquisitions
in the second quarter of 1997.
Depreciation and amortization increased $1,010, or 19.1%, from $5,296
for the three months ended March 31, 1997 to $6,306 for the three months ended
March 31, 1998. Depreciation and amortization represented 19.1% of total
revenues for the three months ended March 31, 1997 and 26.1% of total revenues
for the three months ended March 31, 1998, an increase of 7.0%. The dollar and
percentage increases were primarily due to the Company's acquisitions and
expansion of its public pay telephone base and the reduction in total revenues.
Other unusual charges and contractual settlements were $143 in the
three months ended March 31, 1998 and consisted primarily of legal and
professional fees relating to non-recurring litigation and contractual matters.
OTHER INCOME (EXPENSE). Other income (expense) is comprised principally
of interest expense incurred on debt and interest income. Total interest expense
increased $679, or 17.9%, from $3,800 for the three months ended March 31, 1997
to $4,479 for the three months ended March 31, 1998. Interest expense
represented 13.7% of total revenues for the three months ended March 31, 1997
and 18.6% of total revenues for the three months ended March 31, 1998, an
increase of 4.9%. The dollars and percentage increases were a result of the
additional borrowings under the Company's Credit Agreement for acquisitions in
the second quarter of 1997 and for working capital purposes. Interest income for
the first quarter of 1998 decreased $242 due to the utilization of acquisition
deposits and excess operating cash invested in the first quarter of 1997.
EBITDA. EBITDA (income before interest income, interest expense, taxes,
depreciation and amortization, and other unusual charges and contractual
settlements) decreased $4,930, or 64.3%, from $7,669 for the three
17
<PAGE> 18
months ended March 31, 1997 to $2,739 for the three months ended March 31, 1998.
EBITDA represented 27.7% of total revenues for the three months ended March 31,
1997 and 11.4% of total revenues for the three months ended March 31, 1998, a
decrease of 16.3%. The dollar and percentage decreases are primarily due to the
decreases in coin and non-coin telecommunication revenues (including dial-around
compensation), and the increases in line and transmission charges and SG&A
expenses. EBITDA is not intended to represent an alternative to operating income
(as defined in accordance with generally accepted accounting principles) as an
indicator of the Company's operating performance, or as an alternative to cash
flows from operating activities (as determined in accordance with generally
accepted accounting principles) as a measure of liquidity. The Company believes
that EBITDA is a meaningful measure of performance because it is commonly used
in the public pay telephone industry to analyze comparable public pay telephone
companies on the basis of operating performance, leverage and liquidity.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS. The Company had working capital of $6,954 at March 31,
1998, compared to $7,839 at December 31, 1997, a decrease of $885, resulting
from an increase in accrued interest, offset in part by changes in other current
assets and liabilities. Net cash provided by (used in) operating activities
during the three months ended March 31, 1997 and 1998 were $143 and ($2,323)
respectively. Net cash used in operations resulted mainly from the increase in
the net loss for the three months ended March 31, 1998, offset in part by higher
non-cash charges for depreciation and amortization.
Cash used in investing activities during the three months ended March
31, 1997 and 1998 were $38,600 and $1,165, respectively. Cash used in investing
activities in the first quarter of 1997 consisted primarily of payments and
deposits to acquire companies and purchases of property and equipment, offset by
the release of the escrowed cash equivalents for the closing of the Cherokee
acquisition. In the first quarter of 1998, cash used in investing activities
consisted mainly of purchases of telephones and other property and equipment.
Cash flows provided by financing activities during the three months
ended March 31, 1997 and 1998 were $1,487 and $1,992, respectively, which in
1997 consisted primarily of the net proceeds from the exercise of the
underwriters' overallotment pursuant to the Company equity offering completed on
December 18, 1996, offset by additional debt offering expenses. Cash flows
provided by financing activities during the three months ended March 31, 1998
consisted primarily of borrowings under the Company's Credit Agreement for
capital expenditure and working capital purposes, offset by additional debt
financing costs.
On May 8, 1998 the Company's Credit Agreement was amended to provide,
among other changes, immediate access to $12,000 for working capital needs and
to fund expansion, an extension in the term to May 8, 2001, an increase of 0.5
percent in the interest rate, and modification of certain financial covenants.
The Company's working capital, liquidity and capital sources may be
limited by its ability to generate sufficient cash flows from its operations or
its investment or financing activities. Cash flow from operations depends on
revenues from coin and non-coin sources. There can be no assurance that coin
revenues will increase, that revenues from dial-around compensation will
continue at rates anticipated and be received by the Company in the amounts
recorded as receivables, or that operating expenses can be maintained at present
or reduced levels. To the extent that cash flows from operating activities or
amounts available to be borrowed under the Credit Agreement are insufficient to
meet the Company's cash needs, there can be no assurance that the Company's debt
holders will permit 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, such debt could become immediately due and payable.
Management believes, but cannot assure, that cash flow from operations
(including substantial collections of accounts receivable from dial-around
compensation) or from additional financing will allow the Company to sustain its
operations and meet its obligations through the remainder of 1998.
CAPITAL EXPENDITURES
For the three months ended March 31, 1998, the Company had capital
expenditures (exclusive of acquisitions) of $904, which were financed by cash
flows from operations and proceeds from the Company's Credit Agreement. Capital
expenditures are principally for replacement and expansion of the Company's
installed public
18
<PAGE> 19
pay telephone base and include purchases of telephones, related
equipment, site contracts, operating equipment and computer hardware.
SEASONALITY
The seasonality of the Company's historical operating results has been
affected by shifts in the geographic concentrations of its public pay telephones
resulting from acquisitions and other changes to the Company's customer mix.
Historically, first quarter revenues and related expenses have been lower than
other quarters due to weather conditions that affect pay telephone useage.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Statements, other than historical facts, contained in this Form 10-Q
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 1998 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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Third Amendment to Credit Agreement, dated as of May 8, 1998, between
PhoneTel Technologies, Inc., as the Borrower, and Foothill Capital
Corporation, as Replacement Agent and Lender, amending the Credit
Agreement dated as of May 30, 1997, as amended, restated, supplemented,
or otherwise modified from time to time, among PhoneTel Technologies,
Inc., as the Borrower, Various Lenders and ING (U.S.) Capital
Corporation, as the former Agent of the Lenders.
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the first
quarter of 1998.
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<PAGE> 20
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.
May 15, 1998 By: /s/ Peter G. Graf
----------------------------------
Peter G. Graf
Chairman of the Board and
Chief Executive Officer
May 15, 1998 By: /s/ Richard Kebert
--------------------------------
Richard Kebert
Chief Financial Officer and
Treasurer
(Principal Financial Officer and
Accounting Officer)
<PAGE> 1
EXHIBIT 10.1
------------
THIRD AMENDMENT TO CREDIT AGREEMENT
-----------------------------------
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amend-ment"),
dated as of May 8, 1998, is made between PHONETEL TECHNOLOGIES, INC., an Ohio
corporation ("Borrower") and FOOTHILL CAPITAL CORPORATION, a California
corporation ("Foothill"), in its representative capacity as replacement agent
for the Lenders signatory to the Credit Agreement (as hereinafter defined) and
in its individual capacity as a lender.
RECITALS
--------
A. Borrower has entered into that certain Credit Agreement,
dated as of May 30, 1997 (as amended, restated, supplemented, or otherwise
modified from time to time, collectively, the "Credit Agreement"), with ING
(U.S.) Capital Corporation, a Delaware corporation ("ING (U.S.)"), as agent for
the Lenders (in such capacity, "Agent"), Transamerica Business Credit
Corporation, a Delaware corporation ("Transamerica"), and FINOVA Capital
Corporation, a Delaware corporation ("FINOVA"), as co-agents for the Lenders (in
such capacity, collectively, "Co-Agents"), and American National Bank ("ANB";
collectively, with ING (U.S.), Transamerica, and FINOVA, "Lenders").
B. Borrower or Borrower's subsidiaries are parties to (or have
issued), among other agreements or instruments, each of the following agreements
and instruments with Lenders, Agent, or Co-Agents:
1. the Credit Agreement;
2. that certain Security Agreement, dated as of May 30, 1997;
3. that certain Borrower Pledge Agreement, dated as of May 30,
1997;
4. that certain Subsidiary Guaranty, dated as of May 30, 1997
("Subsidiary Guaranty");
5. that certain Subsidiary Pledge Agreement, dated as of May
30, 1997;
6. those certain Expansion Notes in the original aggregate
principal amount of $55,000,000; and
7. those certain Revolving Credit Notes in the original
aggregate principal amount of $20,000,000.
-1-
<PAGE> 2
Each of the above together with any other writings implementing the
lending transactions (including without limitation any other "Loan
Documents" as defined in the Credit Agreement) and any amendments or
modifications thereto are hereinafter collectively referred to as the
"LOAN DOCUMENTS."
C. Pursuant to the Loan Documents, certain loans and other
extensions of credit have been made by the Lender Parties to Borrower (the
"Loans").
D. Concurrent herewith, ING (U.S.), as withdrawing Agent, and
each Lender are entering into a Transfer Supplement (collectively, the "Transfer
Supplements") with Foothill, pursuant to which Foothill will acquire from such
Lender and such Lender will transfer to Foothill by assignment, all of such
Lender's interest in the outstanding principal amount of the Loans, all accrued
and unpaid interest and fees with respect thereto, and all of such Lender's
right, title and interest under the Credit Agreement and the other Loan
Documents, and upon the effectiveness of the Transfer Supplements, Foothill
will, without further action, succeed to each such Lender under the Credit
Agreement.
E. Capitalized terms used herein, and not otherwise defined
herein, shall have the meaning ascribed thereto in the Credit Agreement.
F. In order to induce Foothill to enter into the Transfer
Supplements and to perform its obligations thereunder, Borrower has agreed to
modify the Loan Documents in the manner set forth herein.
NOW, THEREFORE, for valuable consideration, Borrower and Foothill agree
as follows:
AGREEMENT
---------
1. INCORPORATION OF RECITALS. The foregoing Recitals are
incorporated herein by this reference, and the parties agree that each of such
Recitals is true and correct in all material respects.
2. ACKNOWLEDGMENT OF INDEBTEDNESS. As of May 8, 1998, Borrower
acknowledges that it is indebted to the Lender Parties as follows:
<TABLE>
<CAPTION>
(a) Revolving Credit Loans
<S> <C>
(including all accrued an unpaid interest thereon
and other costs, fees and expenses allocated thereto): $10,377,736.20
</TABLE>
-2-
<PAGE> 3
<TABLE>
<CAPTION>
(b) Expansion Loans
<S> <C>
(including all accrued and unpaid interest thereon and other
costs, fees and expenses allocated thereto): $17,743,477.79
-------------
Total: $28,121,213.99
</TABLE>
3. VALIDITY OF DOCUMENTS; NO BENEFIT TO THIRD PARTIES. The
Loan Documents executed by Borrower are legal, valid, and binding obligations of
Borrower in full force and effect and are enforceable in accordance with their
terms. Although Borrower hereby expressly reserves any and all claims, causes of
action or defenses of any kind whatsoever (if any), whether known or unknown,
which Borrower might have against the Lender Parties, Borrower hereby expressly
agrees not to assert against Foothill any defense, set-off, cause of action, or
counterclaim of any kind or nature Borrower may have against the Lender Parties,
whether now or in the future, whether now known or unknown, which would in any
way reduce or offset its obligations to Foothill as successor to the Lender
Parties under the Loan Documents or otherwise. The terms and provisions of this
Amendment shall be for the sole benefit of Borrower and Foothill and their
respective successors and assigns, and no other person, firm, entity, or
corporation (including the Lender Parties) shall have any right, benefit,
priority, or interest under, or because of this Amendment.
4. AMENDMENT OF CREDIT AGREEMENT. Effective upon the
consummation of the purchase and sale of the Loans pursuant to the Transfer
Supplements, the Credit Agreement is hereby amended as follows:
(a) The term "Lender" and all other references to ING
(U.S.), Transamerica, ANB, and FINOVA, in each case as Lender, shall mean and
refer to Foothill, as Lender.
(b) The term "Agent" and all other references to ING
(U.S.), as Agent, shall mean and
refer to Foothill, as Agent.
(c) All references to the term "ING Alternate Base
Rate" shall be changed to "Reference Rate," except as otherwise provided in this
Amendment.
(d) All references to the term "ING's Atlanta Office"
shall be changed to "Foothill's Los Angeles Office."
(e) All references to subsections (8) and (9) of
Section 2.1.3 of the Credit Agreement shall be deleted.
-3-
<PAGE> 4
(f) The following defined terms set forth in Section
1.1 of the Credit Agreement hereby are amended and restated in their entirety to
read, respectively, as follows:
"BORROWING BASE" means, as of any date, the
result of (i) the lesser of (a) $1,300 MULTIPLIED BY the number of
Eligible Pay Telephones as of such date, and (b) the sum of (1) 80% of
the net amount of accounts receivable (as determined under GAAP) of the
Borrower and its Subsidiaries as of such date PLUS (2) an amount equal
to $1,300 (or such greater amount as shall be specified under clause
(2) of Section 4.07(b)(i) of the Senior Notes Indenture as in effect on
such date) multiplied by the number of Eligible Pay Telephones as of
such date, MINUS (ii) reserves established from time to time pursuant
to SECTION 2.2.2 hereof.
"EXPANSION LOAN COMMITMENT AMOUNT" means
$20,000,000 as such amount may be reduced from time to time pursuant to
SECTION 3.3.4.
"LENDER PARTY EXPENSES" means all: costs or
expenses (including taxes, and insurance premiums) required to be paid
by Borrower under any of the Loan Documents that are paid or incurred
by the Lender Parties; fees or charges paid or incurred by the Lender
Parties in connection with the Lender Parties' transactions with
Borrower, including, fees or charges for photocopying, notarization,
couriers and messengers, telecommunication, public record searches
(including tax lien, litigation, and UCC (or equivalent) searches and
including searches with the patent and trademark office, the copyright
office, or the department of motor vehicles), filing, recording,
publication, appraisal (including periodic Collateral appraisals);
costs and expenses incurred by Agent in the disbursement of funds to
Borrower (by wire transfer or otherwise); charges paid or incurred by
Agent resulting from the dishonor of checks; costs and expenses paid or
incurred by the Lender Parties to correct any default or enforce any
provision of the Loan Documents, or in gaining possession of,
maintaining, handling, preserving, storing, shipping, selling,
preparing for sale, or advertising to sell the Collateral, or any
portion thereof pursuant to the Security Documents, irrespective of
whether a sale is consummated; costs and expenses paid or incurred by
Agent in examining the books and records of Borrower or its
Subsidiaries pursuant to SECTION 6.1.7 hereof; costs and expenses of
third party claims or any other suit paid or incurred by the Lender
Parties in enforcing or defending the Loan Documents or in connection
with the transactions contemplated by the Loan Documents or the Lender
Parties's relationship with Borrower (or any of its Subsidiaries party
to one or more Loan Documents); and the Lender Parties' reasonable
attorneys fees and expenses incurred in advising, structuring,
drafting, reviewing, administering, amending, terminating, enforcing
(including attorneys fees and expenses incurred in connection with a
"workout," a "restructuring," or an Insolvency Proceeding concerning
Borrower), defending, or concerning the Loan Documents, irrespective of
whether suit is brought.
-4-
<PAGE> 5
"OBLIGATIONS" means all Loans, debts,
principal, interest (including any interest that, but for the
provisions of the Bankruptcy Code, would have accrued), contingent
reimbursement obligations under any outstanding Letters of Credit,
premiums (including Early Termination Premiums), liabilities,
obligations, fees, charges, costs, or Lender Party Expenses (including
any fees or expenses that, but for the provisions of the Bankruptcy
Code, would have accrued), lease payments, guaranties, covenants, and
duties owing by Borrower to the Lender Parties of any kind and
description (whether pursuant to or evidenced by the Loan Documents or
pursuant to any other agreement between the Lender Parties and
Borrower, and irrespective of whether for the payment of money),
whether direct or indirect, absolute or contingent, due or to become
due, now existing or hereafter arising, and including any debt,
liability, or obligation owing from Borrower to others that the Lender
Parties may have obtained by assignment or otherwise, and further
including all interest not paid when due and all Lender Party Expenses
that Borrower is required to pay or reimburse by the Loan Documents, by
law, or otherwise.
"PERCENTAGE" means, at any time, in respect
of the Commitment and the Loans, the percentage set forth opposite such
Lender's signature to the Third Amendment, adjacent to the caption
"Percentage", as the same may be adjusted pursuant to SECTION 9.11.
"STATED MATURITY DATE" means May 8, 2001.
(g) The following new defined terms hereby are added
to Section 1.1 of the Credit Agreement in proper alphanumerical order:
"AMENDMENT DATE" means the later of (1) the
date of the execution and delivery of the Third Amendment, and (2) the
date on which all of the conditions contained in Section 6 of the Third
Amendment have been satisfied or waived.
"APPLICABLE TERMINATION RATE" means (a) 3%
from and after the Amendment Date up to May 8, 1999, (b) 2%, from and
after May 8, 1999 up to May 8, 2000, and (c) 1% thereafter; PROVIDED,
HOWEVER, that if this Agreement is terminated in conjunction with (i) a
sale of all or substantially all of the assets of Borrower, or all or
substantially all of the equity interests in Borrower, in each case, to
a Person who is not an Affiliate of Borrower or a Permitted Holder or
an Affiliate of a Permitted Holder, or (ii) an equity investment in
Borrower by a Person who is not an Affiliate of Borrower or a Permitted
Holder or an Affiliate of a Permitted Holder of not less than
$30,000,000, then the foregoing Applicable Termination Rate shall be
reduced to (1) 1.5% from and after the Amendment Date up to May 8,
1999, (2) 1%, from and after May 8, 1999 up to May 8, 2000, and (3)
0.5% thereafter.
-5-
<PAGE> 6
"BANKRUPTCY CODE" means the United States
Bankruptcy Code (11 U.S.C.ss. 101 ET SEQ.), as amended, and any successor
statute.
"COLLECTIONS" means all cash, checks, notes,
instruments, and other items of payment (including, insurance proceeds,
proceeds of cash sales, rental proceeds, and tax refunds).
"EARLY TERMINATION PREMIUM" shall have the
meaning ascribed thereto in SECTION 3.3.2.
"INSOLVENCY PROCEEDINGS" means any
proceeding commenced by or against any Person under any provision of
the Bankruptcy Code or under any other bankruptcy or insolvency law,
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extensions generally with creditors, or proceedings
seeking reorganization, arrangement, or other similar relief.
"TDS ACQUISITION" means the acquisition by
Borrower from TDS Telecommunications Corporation, a Delaware
corporation ("TDS"), of all or a portion of the tangible and intangible
assets of TDS that constitute the telecommunications business of TDS,
so long as (a) no Event of Default has occurred and is continuing, (b)
such assets are free and clear of all Liens other than Liens in favor
of Agent, and (c) the entire consideration paid or payable by Borrower
or its Subsidiaries in connection with such acquisition shall not be
more than $675,000 in cash.
"THIRD AMENDMENT" means that certain Third
Amendment to Credit Agreement, dated as of May 8, 1998, among PhoneTel
Technologies, Inc., an Ohio corporation, and Foothill Capital
Corporation, a California corporation, for itself and as agent, as the
same may be amended, restated, supplemented, or otherwise modified from
time to time.
"REFERENCE RATE" means the variable rate of
interest, per annum, most recently announced by Norwest Bank Minnesota,
National Association, or any successor thereto, as its "base rate,"
irrespective of whether such announced rate is the best rate available
from such financial institution.
(h) The following defined terms set forth in Section
1.1 of the Credit Agreement hereby are deleted in their entirety:
"ING Alternate Base Rate"
-------------------------
(i) Subsections (7), (8) and (9) of Section 2.1.3 of
the Credit Agreement shall be deleted in their entirety and replaced with the
following:
-6-
<PAGE> 7
(7) 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;
(8) [intentionally omitted];
(9) [intentionally omitted];"
(j) Section 2.3 of the Credit Agreement shall be
deleted in its entirety and replaced with the following:
"SECTION 2.3 FEES. Borrower shall pay to Agent for
the ratable benefit of the Lenders (except as otherwise indicated) the
following fees:
(a) Facility Fee. On the Amendment Date, a facility
fee of $600,000;
(b) Unused Line Fee. A nonrefundable unused line fee
in an amount equal to 0.50% per annum times the difference between (i)
the Expansion Loan Commitment Amount PLUS the Revolving Credit
Commitment Amount, and (ii) the average daily aggregate outstanding
principal amount of all Loans plus the average daily aggregate
outstanding amount of Letter of Credit Obligations. The unused line fee
described in this section shall be calculated on a daily basis and
shall be payable by the Borrower in arrears on the first day of each
month during the term of this Agreement.
(c) Annual Fee. On each anniversary of the Amendment
Date, an annual facility fee in an amount equal to 0.50% times the sum
of the Revolving Credit Commitment Amount PLUS the Expansion Loan
Commitment Amount;
(d) Financial Examination, Documentation, and
Appraisal Fees. For the sole and separate account of Agent: Agent's
customary fee of $650 per day per examiner, plus Agent's out-of-pocket
expenses for each financial analysis and examination (i.e., audits) of
Borrower performed by personnel employed by Agent; Agent's customary
appraisal fee of $1,500 per day per appraiser, plus Agent's
out-of-pocket expenses for each appraisal of the Collateral performed
by personnel employed by Agent; and, the actual charges paid or
incurred by Agent if it elects to employ the services of one or more
third Persons to perform such financial analyses and examinations
(i.e., audits) of Borrower or to appraise the Collateral; and
(e) Servicing Fee. For the sole and separate account
of Agent, payable on the first day of each month in arrears during the
term of this Agreement, and thereafter so long as any Obligations are
outstanding, a servicing fee in an amount equal to $5,000 per month.
-7-
<PAGE> 8
(k) Section 3.3.2 of the Credit Agreement shall be
deleted in its entirety and replaced with the following:
"SECTION 3.3.2 PREPAYMENT FEE. Notwithstanding the
provisions herein that provide for the termination of this Agreement on
the Stated Maturity Date, Borrower has the option, at any time upon 45
days prior written notice to Agent, to terminate this Agreement by
paying to Agent for the ratable benefit of the Lenders, in cash, the
Obligations (including an amount in cash (to be held as cash
collateral) equal to 105% of the undrawn Letters of Credit), in full,
together with a premium (the "Early Termination Premium") equal to the
Applicable Termination Rate times the sum of the Expansion Loan
Commitment Amount PLUS the Revolving Credit Commitment Amount.
(l) Sections 3.4.1 of the Credit Agreement shall be
deleted in its entirety and replaced with the following:
"SECTION 3.4.1 RATE. Except as provided in SECTION
3.4.2, (i) all Obligations (except for amounts undrawn under Letters of
Credit) shall bear interest at a per annum rate of 2.00 percentage
points above the Reference Rate. In no event shall the rate of interest
chargeable under this section for any day be less than 9.00% per annum.
To the extent that interest accrued hereunder at the rate set forth in
this section would be less than the foregoing minimum daily rate, the
interest rate chargeable hereunder for such day automatically shall be
deemed increased to the minimum rate.
(m) Section 3.4.3 of the Credit Agreement shall be
deleted in its entirety and replaced with the following:
"SECTION 3.4.3 PAYMENT DATES. Interest payable
hereunder shall be due and payable, in arrears, on the first day of
each month during the term hereof. Borrower hereby authorizes Agent, at
its option, without prior notice to Borrower, to make a Borrowing of
Revolving Credit Loans in the aggregate amount of all such interest,
Letter of Credit fees provided for in SECTION 3.5.5, Lender Party
Expenses (as and when incurred), the charges, commissions, fees, and
costs provided for in SECTION 3.5.5 (as and when accrued or incurred),
the charges provided for in SECTION 3.7 (as and when accrued or
incurred), the fees and charges provided for in SECTION 2.3 (as and
when accrued or incurred), and all installments or other payments due
under any Loan Document, which amounts thereafter shall accrue interest
at the rate then applicable to Revolving Credit Loans hereunder. Any
interest not paid when due shall be compounded and shall thereafter
accrue interest at the rate then applicable to Revolving Credit Loans
hereunder."
-8-
<PAGE> 9
(n) Section 3.4.4 of the Credit Agreement shall be
deleted in its entirety and replaced with the following:
"SECTION 3.4.4 RATE DETERMINATION. The Reference Rate
as of the Amendment Date is 8.5% per annum. In the event the Reference
Rate is changed from time to time hereafter, the rate of interest
provided for in SECTION 3.4.1 and SECTION 3.4.2 automatically and
immediately shall be increased or decreased by an amount equal to such
change in the Reference Rate. All interest and fees chargeable under
the Loan Documents shall be computed on the basis of a 360 day year for
the actual number of days elapsed."
(o) Section 3.5.5 of the Credit Agreement shall be
deleted in its entirety and replaced with the following:
"SECTION 3.5.5 LETTER OF CREDIT FEES. With respect to
each Letter of Credit, the Borrower shall pay (in addition to any and
all charges, commissions, fees, and costs incurred by Agent relating to
the letters of credit): (a) to the Agent, for the account of each
Lender, a fee equal to 1.75% per annum (divided by the sum of 1 minus
the Letter of Credit Reserve Requirement, if any, applicable to such
Lender) of such Lender's Percentage of the undrawn face amount of such
Letter of Credit; and (b) to the Agent, for its own account, a facing
fee of 0.25% per annum of the undrawn face amount of such Letter of
Credit. From and after the occurrence of an Event of Default and during
the continuance thereof, the fee payable under subsection (a) hereof
shall increase to 3.50% per annum (divided by the sum of 1 MINUS the
Letter of Credit Reserve Requirement, if any, applicable to such
Lender) of such Lender's percentage of the undrawn face amount of each
Letter of Credit, payable on demand. All fees payable under this
SECTION 3.5.5 shall be fully earned and nonrefundable on the date such
fees are due."
(p) Section 3.7 of the Credit Agreement hereby is
amended by adding the following after the last sentence of such section:
"From and after the Amendment Date, Agent shall be entitled to charge
Borrower for 2 Business Days of 'clearance' or 'float' at the rate set
forth in SECTION 3.4.1 or SECTION 3.4.2, as applicable, on all
Collections received by Borrower. This across-the-board 2 Business Day
clearance or float charge on all such Collections is acknowledged by
the parties to constitute an integral aspect of the pricing of the
Lender Parties' financing of Borrower, and shall whether or not there
are any outstanding Loans, the effect of such clearance or float charge
being the equivalent of charging 2 Business Days of interest on such
Collections. Anything contained herein to the contrary notwithstanding,
the economic benefit of such clearance or float charge is not for the
ratable benefit of the Lenders, but instead shall be for the sole and
separate account of Agent. On a monthly basis, Borrower shall report to
Agent such information as is reasonably required by Agent to enable
Agent to calculate such
-9-
<PAGE> 10
clearance or float charges payable under this section."
(q) Subsections (b) and (c) of Section 3.10 of the
Credit Agreement shall be deleted in their entirety and replaced with the
following:
"(b) The Borrower shall use the proceeds of Expansion
Loans made after the Closing Date to finance the purchase price for
Acquisitions, and shall use the proceeds of Revolving Credit Loans made
after the Closing Date to finance its working capital needs.
(c) No part of the proceeds of any Loans or Letters
of Credit shall be used for any purpose which violates Regulations T,
U, or X of the F.R.S. Board."
(r) Section 4.2 of the Credit Agreement shall be
deleted in its entirety and replaced with the following:
"SECTION 4.2 EXPANSION LOANS. With the exception of
the TDS 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."
(s) Section 4.3.4 of the Credit Agreement shall be
deleted in its entirety and replaced with the following:
"SECTION 4.3.4 MARGIN REGULATIONS. The making of such
Loan or the issuance of such Letter of Credit and the use of the
proceeds thereof shall not violate Regulations T, U or X of the F.R.S.
Board."
(t) Section 4.3.5 of the Credit Agreement shall be
deleted in its entirety and replaced with the following:
"SECTION 4.3.5 ADVERSE CHANGE. In the reasonable
judgment of the Required Lenders, no Material Adverse Change shall have
occurred since the Amendment Date."
(u) Section 4.3.7 of the Credit Agreement is deleted
in its entirety and replaced with the following:
"SECTION 4.3.7 CERTIFICATE REGARDING SENIOR NOTES
INDENTURE. The Agent shall have received a certificate duly executed by
the Chief Executive Officer of Chief Financial Officer of Borrower,
stating that, after giving effect to such Borrowing or issuance of a
Letter of Credit, as the case may be, such Borrowing or
-10-
<PAGE> 11
issuance of Letter of Credit is permitted under Section 4.07(b)(i) and
all other applicable provisions of the Senior Notes Indenture."
(v) Section 6.1.7 of the Credit Agreement shall be
deleted in its entirety and replaced with the following:
"SECTION 6.1.7 BOOKS AND RECORDS. The Borrower will
keep books and records reflecting all of its and its Subsidiaries'
business affairs and transactions in accordance with GAAP and permit
the Agent and each Lender or any of their respective representatives,
at reasonable times and reasonable intervals, to visit all of the
offices of the Borrower or its Subsidiaries, to discuss the financial
matters of the Borrower or its Subsidiaries with the officers or
independent public accountants of Borrower or its Subsidiaries, as the
case may be, and to examine (and, at the expense of the Borrower,
photocopy extracts from) any of the books or other corporate records of
Borrower or its Subsidiaries. The Borrower shall pay any fees and
expenses, including, without limitation, any fees of its independent
public accountants incurred in connection with the Agent's or any
Lender's exercise of its rights pursuant to this SECTION 6.1.7,
PROVIDED, HOWEVER, that unless an Event of Default has occurred and is
continuing the Borrower shall be required to pay such fees for not more
than four visits and examinations in each Fiscal Year."
(w) Subsections (a), (b), (c) and (d) of Section
6.2.4 of the Credit Agreement shall be deleted in their entirety and replaced in
the proper alphanumeric order with the following:
"(a) FIXED CHARGE COVERAGE RATIO. 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:
<TABLE>
<CAPTION>
============================================= ===========================================
Fiscal Quarter Ending Ratio
- --------------------------------------------- -------------------------------------------
<S> <C>
June 30, 1998 0.8
- --------------------------------------------- -------------------------------------------
September 30, 1998 0.8
- --------------------------------------------- -------------------------------------------
December 31, 1998 1.0
- --------------------------------------------- -------------------------------------------
March 31, 1999 1.2
- --------------------------------------------- -------------------------------------------
June 30, 1999 1.2
- --------------------------------------------- -------------------------------------------
September 30, 1999 1.3
- --------------------------------------------- -------------------------------------------
December 31, 1999 1.3
- --------------------------------------------- -------------------------------------------
March 31, 2000 1.3
</TABLE>
-11-
<PAGE> 12
<TABLE>
<CAPTION>
============================================= ===========================================
Fiscal Quarter Ending Ratio
- --------------------------------------------- -------------------------------------------
<S> <C>
- --------------------------------------------- -------------------------------------------
June 30, 2000 1.3
- --------------------------------------------- -------------------------------------------
September 30, 2000 1.3
- --------------------------------------------- -------------------------------------------
December 31, 2000 1.3
- --------------------------------------------- -------------------------------------------
March 31, 2001 1.3
============================================= ===========================================
</TABLE>
(b) DEBT TO EBITDA RATIO. Borrower will not permit its Debt to
EBITDA Ratio 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:
<TABLE>
<CAPTION>
============================================= ===========================================
Fiscal Quarter Ending Ratio
- --------------------------------------------- -------------------------------------------
<S> <C>
June 30, 1998 9.0
- --------------------------------------------- -------------------------------------------
September 30, 1998 8.5
- --------------------------------------------- -------------------------------------------
December 31, 1998 7.0
- --------------------------------------------- -------------------------------------------
March 31, 1999 6.0
- --------------------------------------------- -------------------------------------------
June 30, 1999 5.5
- --------------------------------------------- -------------------------------------------
September 30, 1999 5.5
- --------------------------------------------- -------------------------------------------
December 31, 1999 5.5
- --------------------------------------------- -------------------------------------------
March 31, 2000 5.5
- --------------------------------------------- -------------------------------------------
June 30, 2000 5.0
- --------------------------------------------- -------------------------------------------
September 30, 2000 5.0
- --------------------------------------------- -------------------------------------------
December 31, 2000 5.0
- --------------------------------------------- -------------------------------------------
March 31, 2001 5.0
============================================= ===========================================
</TABLE>
(c) CURRENT RATIO. Borrower will not permit its Current Ratio
on the last day of any Fiscal Quarter to be less than the ratio set
forth opposite such Fiscal Quarter:
<TABLE>
<CAPTION>
============================================= ===========================================
Fiscal Quarter Ending Ratio
- --------------------------------------------- -------------------------------------------
<S> <C>
June 30, 1998 1.2
- --------------------------------------------- -------------------------------------------
September 30, 1998 1.0
- --------------------------------------------- -------------------------------------------
December 31, 1998 1.2
</TABLE>
-12-
<PAGE> 13
<TABLE>
<CAPTION>
============================================= ===========================================
Fiscal Quarter Ending Ratio
- --------------------------------------------- -------------------------------------------
<S> <C>
- --------------------------------------------- -------------------------------------------
March 31, 1999 0.9
- --------------------------------------------- -------------------------------------------
June 30, 1999 1.2
- --------------------------------------------- -------------------------------------------
September 30, 1999 1.0
- --------------------------------------------- -------------------------------------------
December 31, 1999 1.2
- --------------------------------------------- -------------------------------------------
March 31, 2000 0.9
- --------------------------------------------- -------------------------------------------
June 30, 2000 1.2
- --------------------------------------------- -------------------------------------------
September 30, 2000 1.0
- --------------------------------------------- -------------------------------------------
December 31, 2000 1.2
- --------------------------------------------- -------------------------------------------
March 31, 2001 0.9
============================================= ===========================================
</TABLE>
(d) INTEREST COVERAGE RATIO. 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:
<TABLE>
<CAPTION>
============================================= ===========================================
Fiscal Quarter Ending Ratio
- --------------------------------------------- -------------------------------------------
<S> <C>
June 30, 1998 1.0
- --------------------------------------------- -------------------------------------------
September 30, 1998 1.1
- --------------------------------------------- -------------------------------------------
December 31, 1998 1.2
- --------------------------------------------- -------------------------------------------
March 31, 1999 1.4
- --------------------------------------------- -------------------------------------------
June 30, 1999 1.5
- --------------------------------------------- -------------------------------------------
September 30, 1999 1.6
- --------------------------------------------- -------------------------------------------
December 31, 1999 1.6
- --------------------------------------------- -------------------------------------------
March 31, 2000 1.6
- --------------------------------------------- -------------------------------------------
June 30, 2000 1.7
- --------------------------------------------- -------------------------------------------
September 30, 2000 1.7
- --------------------------------------------- -------------------------------------------
December 31, 2000 1.7
- --------------------------------------------- -------------------------------------------
March 31, 2001 1.7
============================================= ===========================================
</TABLE>
-13-
<PAGE> 14
(x) Clause (ii) of subsection (a) of Section 6.2.10
hereby is deleted in its entirety and replaced with the following:
"(ii) the Borrower and its Subsidiaries may
consummate the Closing Date Acquisitions and the TDS Acquisition; and"
(y) The notice information for Agent set forth in
Section 9.2 of the Credit Agreement hereby is changed to read as follows:
"FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
Telecopier No.: (310) 478-9788
with copies to:
BROBECK, PHLEGER & HARRISON LLP
550 South Hope Street
Los Angeles, California 90071
Attn: John Francis Hilson, Esq.
Telecopier No.: (213) 745-3345"
(z) The notice information for Borrower set forth in
Section 9.2 of the Credit Agreement hereby is changed to read as follows:
"PHONETEL TECHNOLOGIES, INC.
1001 Lakeside Avenue
North Point Tower
Cleveland, Ohio 44114-1195
Attn: General Counsel
Telecopier No.: (216) 875-4337"
5. AMENDMENT OF LOAN DOCUMENTS. Effective upon the
consummation of the purchase and sale of the Loans pursuant to the Transfer
Supplements, Borrower (and, by its execution and delivery of that certain
Reaffirmation and Consent to Amendment Number Three, dated as of the date hereof
("Reaffirmation and Consent"), each guarantor of Borrower's obligations) hereby
agrees that each Loan Document to which Borrower or such guarantor is a party is
hereby amended such that: (a) the terms "Agent" or "Pledgee" or words of like
import referring to ING (U.S.) CAPITAL CORPORATION, as Agent for the Lenders
contained in such Credit Document shall mean and refer, instead, to Foothill
Capital Corporation, as Agent for the Lenders; (b) any reference contained in
such Loan Document
-14-
<PAGE> 15
to the Credit Agreement or any other Loan Document shall mean the Credit
Agreement or such other Loan Document (as the case may be), as the same may be
amended, restated, supplemented, or otherwise modified from time to time; and
(c) any reference contained in such Loan Document to the Obligations or words of
like import referring to the Obligations shall mean and refer to the Obligations
after giving effect to this Amendment.
6. CONDITIONS PRECEDENT. This Amendment is subject to the satisfaction
(or waiver by Foothill) of each of the following conditions precedent:
(a) Borrower shall have executed and delivered this
Amendment to Foothill.
(b) Borrower shall have paid Foothill the Facility
Fee (as defined herein).
(c) Each Transferor Lender, Agent, and Foothill shall
have consummated the purchase and sale of the Loans in accordance with
the Transfer Supplements.
(d) Borrower shall have executed and delivered to
Foothill that certain Estoppel Letter, dated as of the date hereof, in
respect of the Transfer Supplements, and each guarantor shall have
consented to the terms thereof and reaffirmed such guarantors
obligations under the Subsidiary Guaranty.
(e) ING (U.S.), as withdrawing Agent, shall have
executed and delivered to Foothill that certain Resignation Letter,
dated as of the date hereof.
(f) Borrower shall have caused each guarantor to
execute and deliver to Foothill a Reaffirmation and Consent (which
document is a Loan Document for all purposes) regarding the Subsidiary
Guaranty and other Loan Documents to which such guarantor is a party
previously executed and delivered by such guarantor in favor of the
Lender Parties or Agent on behalf thereof.
7. EXPENSES. Upon demand, Borrower shall promptly pay to Foothill, in
immediately available funds any and all Lender Party Expenses (as defined
herein) incurred from time to time by Foothill; PROVIDED, HOWEVER that the
aggregate amount of such Lender Party Expenses incurred by Foothill prior to the
Amendment Date (as defined herein) with respect to the Transfer Supplements and
initial loan closing which Borrower must pay to Foothill shall not exceed
$100,000. The failure by Borrower to pay such costs shall constitute an event of
default under the Loan Documents.
8. INTEGRATION. This Amendment constitutes the complete agreement of
the parties with respect to the subject matters referred to herein and
supersedes all prior or contemporaneous negotiations, promises, commitments,
covenants or agreements of every
-15-
<PAGE> 16
kind or nature whatsoever with respect thereto, all of which have become merged
and finally integrated into this Amendment and, to the extent not included
herein, are hereby released, waived and relinquished.
9. NO WAIVER. The execution, delivery and performance of this Amendment
shall not, except as expressly provided herein, constitute a waiver of any
provision of, or operate as a waiver of any right, power or remedy of Foothill
under the Loan Documents.
10. CONFIRMATION OF OTHER TERMS AND CONDITIONS. Except as specifically
provided in this Amendment, all other terms, conditions and covenants of the
Loan Documents which are unaffected by this Amendment shall remain unchanged and
shall continue in full force and effect.
11. ACKNOWLEDGMENTS. EACH PARTY EXECUTING THIS AMENDMENT HEREBY
ACKNOWLEDGES THAT (A) IT HAS RECEIVED OR HAS HAD THE OPPORTUNITY TO RECEIVE
INDEPENDENT LEGAL ADVICE FROM ATTORNEYS OF HIS OR ITS CHOICE WITH RESPECT TO THE
NEGOTIATION AND EXECUTION OF THIS AMENDMENT; (B) IT FULLY UNDERSTANDS THE
SIGNIFICANCE AND CONSEQUENCE OF EACH AND EVERY TERM AND CONDITION OF THIS
AMENDMENT AND HAS MADE AN INDEPENDENT AND VOLUNTARY DECISION TO ENTER INTO THIS
AMENDMENT; (C) AND IN THE EVENT LEGAL COUNSEL HAS NOT BEEN CONSULTED, SUCH PARTY
KNOWINGLY AND VOLUNTARILY WAIVES THE RIGHT TO CONSULT WITH INDEPENDENT LEGAL
COUNSEL.
12. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AMENDMENT, THE CONSTRUCTION,
INTERPRETATION, AND ENFORCEMENT HEREOF, AND THE RIGHTS OF THE PARTIES HERETO
WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR RELATED HERETO SHALL BE
DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK. THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN
CONNECTION WITH THIS AMENDMENT SHALL BE TRIED AND LITIGATED ONLY IN THE STATE
AND FEDERAL COURTS LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK. EACH OF
BORROWER AND FOOTHILL WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY
RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT
TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS
SECTION. BORROWER AND FOOTHILL HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AMENDMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT
CLAIMS, TORT CLAIMS,
-16-
<PAGE> 17
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH OF
BORROWER AND FOOTHILL REPRESENTS THAT IT HAS REVIEWED THIS WAIVER AND EACH
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AMENDMENT MAY BE
FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
13. COUNTERPARTS; TELEFACSIMILE EXECUTION. This Amendment may be
executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one and
the same Agreement. Delivery of an executed counterpart of this Amendment by
telefacsimile shall be equally as effective as delivery of an original executed
counterpart of this Amendment. Any party delivering an executed counterpart of
this Amendment by telefacsimile also shall deliver an original executed
counterpart of this Amendment but the failure to deliver an original executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Amendment.
14. AUTHORIZATION. Borrower represents and warrants to Foothill that
the execution, delivery and performance by Borrower of this Amendment and any
instrument or agreement required under this Amendment have been authorized by
all necessary corporate action and do not violate any laws or orders by which it
is bound or require any consents of third parties.
15. MERGER OF SUBSIDIARIES. Borrower represents and warrants to
Foothill that Phonetel V, Inc., World Communications, Inc., Public Telephone
Corporation, Paramount Communications Systems, Inc., Northern Florida Telephone
Corp., Payphones of America, Inc., Advance Pay Systems, Inc., American Public
Telephone Corporation, PhoneTel III, Inc., International Payphones Inc.
(Tennessee), International Payphones Inc. (South Carolina), PhoneTel II, Inc.,
and PhoneTel CCI, Inc., each have been merged, directly or indirectly, with and
into Borrower with Borrower as the surviving corporation.
16. TERMINATION OF RESTRICTION ON BORROWINGS. Pursuant to Section 15 of
that certain First Amendment to Credit Agreement, dated as of February 24, 1998,
among Borrower, Agent, Co-Agents, and Lenders, the aggregate outstanding
principal of all Revolving Credit Loans, PLUS the aggregate amount of
outstanding Letter of Credit Obligations could not exceed $10,300,000 at any
time. Foothill hereby acknowledges to Borrower that as of the Amendment Date,
such restrictions will no longer apply to borrowings under the Credit Agreement.
[Signature page to follow.]
-17-
<PAGE> 18
IN WITNESS WHEREOF, this Amendment has been executed by the parties
hereto as of the date first hereinabove written.
PHONETEL TECHNOLOGIES, INC.,
an Ohio corporation
By: /s/ Tammy L. Martin
--------------------------------
Title: Secretary
-----------------------------
Percentage: 100% FOOTHILL CAPITAL CORPORATION,
a California corporation,
as agent and lender
By /s/ Allison Sellon
---------------------------------
Title: Vice President
------------------------------
-18-
<PAGE> 19
REAFFIRMATION AND CONSENT
TO THIRD AMENDMENT TO CREDIT AGREEMENT
The undersigned hereby acknowledges receipt of the Third Amendment to
Credit Agreement, dated as of May 8, 1998 ("Third Amendment"), among Phonetel
Technologies, Inc., an Ohio corporation, and Foothill Capital Corporation, a
California corporation, consents to the terms and provisions set forth therein,
and agrees that the Subsidiary Guaranty, dated as of May 30, 1997 (the
"Subsidiary Guaranty") made by the undersigned, in favor of ING (U.S.) Capital
Corporation and the Transferor Lenders will continue in full force and effect
relative to Foothill Capital Corporation, as the successor agent, and to
Foothill Capital Corporation, and its successors and assigns as a Lender under
the Credit Agreement, without diminution or impairment notwithstanding the
execution and delivery of the foregoing. The undersigned further acknowledges
and agrees that, upon the effectiveness of the foregoing, each reference to the
Credit Agreement in the Subsidiary Guaranty and each other Loan Document to
which the undersigned is a party shall mean and be a reference to the Credit
Agreement as modified by the Third Amendment.
CHEROKEE COMMUNICATIONS, INC.
By: /s/ Tammy L. Martin
-----------------------------
Title: Secretary
--------------------------
PHONETEL ACQUISITION CORP.
By: /s/ Tammy L. Martin
-----------------------------
Title: Secretary
--------------------------
-19-
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