<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, 1999
[ ] 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)
<TABLE>
<S> <C>
OHIO 34-1462198
---- ----------
(STATE OF OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
NORTH POINT TOWER, 7TH FLOOR, 1001 LAKESIDE AVENUE, CLEVELAND, OHIO 44114-1195
------------------------------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(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 15, 1999,
18,754,133 SHARES OF THE REGISTRANT'S COMMON STOCK, $.01 PAR VALUE, WERE
OUTSTANDING.
1
<PAGE> 2
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 1999
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998
and March 31, 1999...............................................................3
Consolidated Statements of Operations for the Three
Months Ended March 31, 1998 and 1999.............................................4
Statements of Changes in Mandatorily Redeemable Preferred Stock for the
Year Ended December 31, 1998 and the Three Months Ended March 31, 1999...........5
Statements of Changes in Non-mandatorily Redeemable Preferred Stock,
Common Stock and Other Shareholders' Equity (Deficit) for the Year Ended
December 31, 1998 and the Three Months Ended March 31, 1999......................6
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1998 and 1999.............................................7
Notes to Consolidated Financial Statements...........................................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................15
Item 3. Quantitative and Qualitative Disclosures about
Market Risk......................................................................22
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.....................................................23
Item 6. Exhibits and Reports on Form 8-K....................................................23
Signatures.......................................................................................................24
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
- ----------------------------------------------------------------------------------------------
<CAPTION>
(UNAUDITED)
DECEMBER 31 MARCH 31
1998 1999
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash $5,768 $4,979
Accounts receivable, net of allowance for doubtful
accounts of $935 and $901, respectively 14,021 12,161
Other current assets 1,389 1,514
--------- ---------
Total current assets 21,178 18,654
--------- ---------
Property and equipment, net 27,837 26,045
Intangible assets, net 101,073 97,181
Other assets 586 604
--------- ---------
$150,674 $142,484
========= =========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Current portion:
Long-term debt $165,216 $165,137
Obligation under capital leases 17 12
Accounts payable 11,254 10,595
Accrued expenses:
Location commissions 2,756 2,065
Personal property and sales tax 3,145 3,177
Interest 8,728 12,389
Salaries, wages and benefits 335 542
Other 1,703 1,739
--------- ---------
Total current liabilities 193,154 195,656
--------- ---------
Long-term debt 4 2
Obligations under capital leases 2 -
Commitments and contingencies - -
14% Cumulative Preferred Stock Mandatorily Redeemable
(redemption amount $9,845 due June 30, 2000) 9,112 9,498
Non-mandatorily Redeemable Preferred Stock,
Common Stock and Other Shareholders' Equity (Deficit) (51,598) (62,672)
--------- ---------
$150,674 $142,484
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
<TABLE>
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
- ---------------------------------------------------------------------------------------------------
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
1998 1999
------------- -------------
<S> <C> <C>
REVENUES:
Coin calls $13,188 $10,411
Non-coin telecommunication services 10,905 9,362
Other 30 10
------------- -------------
24,123 19,783
------------- -------------
COSTS AND EXPENSES:
Line and transmission charges 6,916 6,128
Telecommunication and validation fees 2,714 2,348
Location commissions 3,150 3,086
Field operations 5,530 5,162
Selling, general and administrative 3,074 2,519
Depreciation and amortization 6,306 6,433
Other unusual charges and contractual settlements 143 46
------------- -------------
27,833 25,722
------------- -------------
Loss from operations (3,710) (5,939)
------------- -------------
OTHER INCOME (EXPENSE):
Interest expense - related parties (716) -
Interest expense - others (3,763) (4,814)
Interest and other income 37 65
------------- -------------
(4,442) (4,749)
------------- -------------
NET LOSS ($8,152) ($10,688)
============= =============
Earnings per share calculation:
Net loss ($8,152) ($10,688)
Preferred dividend payable in kind (97) (4)
Accretion of 14% Preferred to its redemption value (231) (382)
------------- -------------
Net loss applicable to common shareholders ($8,480) ($11,074)
============= =============
Net loss per common share, basic and diluted ($0.51) ($0.59)
============= =============
Weighted average number of shares, basic and diluted 16,535,846 18,754,133
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
<TABLE>
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN MANDATORILY REDEEMABLE PREFERRED STOCK
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(UNAUDITED)
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1998 MARCH 31, 1999
----------------------------------- -----------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
14 % CUMULATIVE REDEEMABLE
CONVERTIBLE PREFERRED STOCK
Balance at beginning of year 138,147 $7,716 158,527 $9,112
Dividends payable-in-kind 20,380 268 5,548 4
Accretion of carrying value to amount
payable at redemption on June 30, 2000 - 1,128 - 382
---------------- ---------------- ---------------- ----------------
Balance at end of year 158,527 $9,112 164,075 $9,498
================ ================ ================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
<TABLE>
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)
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(UNAUDITED)
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1998 MARCH 31, 1999
----------------------------------- -----------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
SERIES A SPECIAL CONVERTIBLE
PREFERRED STOCK
Balance at beginning of year - - - -
Exercise of warrants 100,875 $20 - -
Conversion to common stock (100,875) (20) - -
---------------- ---------------- ---------------- ----------------
Balance at end of period - - - -
================ ---------------- ================ ----------------
COMMON STOCK
Balance at beginning of year 16,360,829 164 18,754,133 $188
Exercise of warrants and options 375,804 4 - -
Conversion of Series A Preferred 2,017,500 20 - -
---------------- ---------------- ---------------- ----------------
Balance at end of period 18,754,133 188 18,754,133 188
================ ---------------- ================ ----------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 62,600 61,233
Exercise of warrants and options 25 -
Exercise of warrants - Series A Preferred (20) -
Put under warrants issued for Series A Preferred (1,452) -
Other issuances of stock 80 -
---------------- ----------------
Balance at end of period 61,233 61,233
---------------- ----------------
ACCUMULATED DEFICIT
Balance at beginning of year (66,806) (113,019)
Net loss for the period (44,817) (10,688)
14% Preferred dividends payable-in-kind
and accretion (1,396) (386)
---------------- ----------------
Balance at end of period (113,019) (124,093)
---------------- ----------------
TOTAL NON-MANDATORILY REDEEMABLE
PREFERRED STOCK, COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY (DEFICIT) ($51,598) ($62,672)
================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
<TABLE>
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
1998 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss ($8,152) ($10,688)
Adjustments to reconcile net loss to net cash flow from operating activities:
Depreciation and amortization 6,306 6,433
Increase in allowance for doubtful accounts 239 202
Gain on disposal of assets - (36)
Changes in current assets (2,733) 1,534
Changes in current liabilities 2,017 2,586
---------------- ----------------
(2,323) 31
---------------- ----------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment (904) (372)
Deferred charges - commissions and signing bonuses (146) (77)
Proceeds from sale of assets 27 45
Change in other assets (142) (19)
---------------- ----------------
(1,165) (423)
---------------- ----------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from debt issuances 3,090 -
Principal payments on borrowings (324) (89)
Debt financing and restructuring costs (801) (308)
Proceeds from warrant and option exercises 27 -
---------------- ----------------
1,992 (397)
---------------- ----------------
Decrease in cash (1,496) (789)
Cash at beginning of period 6,519 5,768
---------------- ----------------
Cash at end of period $5,023 $4,979
================ ================
</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, 1999
(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, 1999
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. 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, 1998.
2. ACCOUNTS RECEIVABLE AND 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). The Company receives revenues from such carriers and
records those revenues from dial-around compensation based upon the per-phone or
per-call rate in effect under orders issued by the FCC. Retroactive changes in
the dial-around compensation rate pursuant to orders issued by the FCC are
accounted for as changes in accounting estimates and are recorded as adjustments
to revenues at the beginning of the most recent period prior to the announcement
of such changes by the FCC. At December 31, 1998 and March 31, 1999, accounts
receivable included $13,905 and $11,560, respectively, arising from dial-around
compensation. Such receivables are typically received on a quarterly basis at
the beginning of the second quarter following the quarter in which such
revenues are recognized.
For the three months ended March 31, 1998 and 1999, revenues from
non-coin telecommunication services included $4,833 and $3,937, respectively,
for dial-around compensation. Revenues for the three months ended March 31, 1998
have not been restated to reflect the retroactive reduction in dial-around
compensation recorded in the fourth quarter of 1998 as discussed below. If
revenues from dial-around compensation had been recorded at the revised rate in
the first quarter of 1998 ($0.238 per call or $31.18 per month based on an
estimated 131 calls per month), revenues from dial-around compensation would
have been $4,051 and $3,937, respectively, for the three months ended March 31,
1998 and 1999.
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 FCC directed a two-phase transition to achieve fair
compensation for dial-around calls through deregulation and competition. In the
first phase, November 6, 1996 to October 6, 1997, the FCC prescribed flat-rate
compensation payable to the payphone providers by the interexchange carriers
("IXCs") in the amount of $45.85 per month per payphone (as compared with a fee
of $6.00 per installed payphone per month in periods prior to November 6, 1996).
This rate was arrived at by determining that the deregulated local coin rate was
a valid market-based surrogate for dial-around calls. The FCC applied a
market-based, deregulated coin rate of $0.35 per call to a finding from the
record that there were a monthly average of 131 compensable dial-around calls
per payphone. This total included both carrier access code calls dialed for the
purpose of reaching a long distance company other than the one designated by the
payphone provider as well as 800 subscriber calls. The monthly per phone
flat-rate compensation of $45.85 was to be assessed only against IXCs with
annual toll-call revenues in excess of $100 million and allocated among such
IXCs in proportion to their gross long-distance revenues. During the second
phase of the transition to deregulation and market-based compensation (initially
from October 1997 to October 1998, but subsequently extended in a later order by
one year to October 1999), the FCC directed the IXCs to pay payphone service
providers (such as the Company), on a per-call basis for
8
<PAGE> 9
dial-around calls at the assumed deregulated coin rate of $0.35 per call. At the
conclusion of the second phase, the FCC set the market-based local coin rate,
determined on a payphone-by-payphone basis, as the default per-call compensation
rate in the absence of a negotiated agreement between the payphone provider and
the IXC. To facilitate per-call compensation, the FCC required the payphone
providers to transmit payphone specific coding digits that would identify each
call as originating from a payphone and required the local exchange carriers
("LECs") to make such coding available to the payphone providers as a transmit
item included in the local access line service.
In July 1997, the United States Court of Appeals for the District of
Columbia Circuit ("the Court") responded to an appeal of the 1996 Payphone
Order, finding that the FCC erred in (1) setting the default per call rate at
$0.35 without considering the differences in underlying costs between
dial-around calls and local coin calls, (2) assessing the flat-rate compensation
against only the carriers with annual toll-call revenues in excess of $100
million, and (3) allocating the assessment of the flat-rate compensation based
on gross revenues rather than on a factor more directly related to the number of
dial-around calls processed by the carrier. The Court also assigned error to
other aspects of the 1996 Payphone Order concerning inmate payphones and the
accounting treatment of payphones transferred by a Regional Bell Operating
Company ("RBOC") to a separate affiliate.
In response to the remand by the Court, the FCC issued a new order
implementing section 276 in October 1997 (the "1997 Payphone Order"). The FCC
determined that distinct and severable costs of $0.066 were attributable to a
coin call that did not apply to the costs incurred by the payphone providers in
providing access for a dial-around call. Accordingly, the FCC adjusted the per
call rate during the second phase of interim compensation to $0.284 (which is
$0.35 less $0.066). While the FCC tentatively concluded that the $0.284 default
rate (or $37.20 per payphone per month based on 131 calls per month) should be
utilized in determining compensation during the first phase and reiterated that
payphone providers were entitled to compensation for each and every call during
the first phase, it deferred for later decision the precise method of allocating
the initial interim period flat-rate payment obligation among the IXCs and the
number of calls to be used in determining the total amount of the payment
obligation. In the third quarter of 1997, the Company recorded an adjustment of
$2,361 to reduce dial-around compensation recorded in prior quarters for the
decrease in rate from $45.85 to $37.20 per payphone per month. Of this
adjustment amount, $395 related to the prior year.
On March 9, 1998, the FCC issued a Memorandum Opinion and Order, FCC
98-48 1, which extended and waived certain requirements concerning the provision
by the local exchange carriers of payphone-specific coding digits, which
identify a call as originating from a payphone. Without the transmission of
payphone-specific coding digits some of the interexchange carriers have claimed
they are unable to identify a call as a payphone call eligible for dial-around
compensation. With the stated purpose of ensuring the continued payment of
dial-around compensation the FCC, by Memorandum and Order issued on April 3,
1998, left in place the requirement for payment of per-call compensation for
payphones on lines that do not transmit the requisite payphone-specific coding
digits, but gave the IXCs a choice for computing the amount of compensation for
payphones on LEC lines not transmitting the payphone-specific coding digits of
either accurately computing per-call compensation from their databases or paying
per-phone, flat-rate compensation computed by multiplying the $0.284 per call
rate by the nationwide average number of 800 subscriber and access code calls
placed from RBOC payphones for corresponding payment periods. Accurate payments
made at the flat rate are not subject to subsequent adjustment for actual call
counts from the applicable payphone.
On May 15, 1998, the Court again remanded the per-call compensation
rate to the FCC for further explanation without vacating the $0.284 per call
rate. The Court stated that the FCC had failed to explain adequately its
derivation of the $0.284 default rate. The Court stated that any resulting
overpayment would be subject to refund and directed the FCC to conclude its
proceedings within a six-month period ending on November 15, 1998. On June 19,
1998, the FCC solicited comment from interested parties on the issues remanded.
In initial and reply comments, certain IXCs and members of the paging industry
had urged the FCC to abandon its efforts to derive a market-based rate from
surrogates and either require the caller to pay dial-around compensation by coin
deposit or adopt a cost-based rate at levels substantially below the $0.284
rate.
On February 4, 1999, the FCC issued its Third Report and Order, and
Order on Reconsideration of the Second Report and Order (the "1999 Payphone
Order") wherein it adjusted the default rate from $0.284 to $0.238,
9
<PAGE> 10
retroactive to October 7, 1997. In adjusting the default rate, the FCC shifted
its methodology from the market-based method utilized in the 1997 Payphone Order
to a cost-based method citing technological impediments that it viewed as
inhibiting the marketplace and the unreliability of certain assumptions
underlying the market-based method as a basis for altering its analysis. In
setting the cost-based default rate, the FCC incorporated its prior treatment of
certain payphone costs as well as reexamined new estimates of payphone costs
submitted as part of the proceeding. Pursuant to the 1999 Payphone Order, the
$0.24 amount ($0.238 plus 0.2 cents for FLEX ANI costs, which are amounts
charged by LECs for providing payphone specific coding digit technology) will
serve as the default per-call compensation rate for coinless payphone calls from
March 1999 through January 31, 2002, at which time, parties may petition the FCC
regarding the default amount, related issues pursuant to technological advances,
and the expected resultant market changes. In the fourth quarter of 1998, the
Company recorded an adjustment to reduce revenues previously recognized for the
period from November 7, 1996 to September 30, 1998 due to the further decrease
in the dial-around compensation rate from $0.284 to $0.238 per call. This
adjustment of $6,075 included $782 recorded as revenue in the first quarter of
1998 and $3,733 recorded as revenue in prior years.
The 1999 Payphone Order has been appealed by various parties, including
but not limited to, the trade association which represents the interests of
various pay telephone providers throughout the United States. 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, 1999 is $31.18 per pay telephone per
month based on $0.238 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 $31.18 per pay telephone per month.
3. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31 March 31
1998 1999
--------- ---------
<S> <C> <C>
Senior Notes, contractually due December 15, 2006 with interest
at 12% payable semiannually $ 125,000 $ 125,000
Related Party Debt and Credit Agreement, contractually due May 8, 2001,
with interest payable monthly at 2% above the Lenders' reference
rate (9.75% at March 31, 1999) 40,014 40,008
Other notes payable 206 131
--------- ---------
165,220 165,139
Less current maturities (165,216) (165,137)
--------- ---------
$ 4 $ 2
========= =========
</TABLE>
SENIOR 12% NOTES
On December 18, 1996, the Company completed a public debt offering of
$125,000 aggregate principal amount 12% Senior Notes, due 2006, with interest
payable semiannually on June 15 and December 15. The indenture to the 12% Senior
Notes, as amended, contains covenants which, among other things, limit the
Company's ability to incur additional indebtedness or pay dividends and which
require the Company, in the event of a change in control of the Company, to
offer to purchase the 12% Senior Notes for 101% of their aggregate outstanding
principal value plus accrued and unpaid interest.
The Company has not paid the semiannual interest payment which was due
December 15, 1998 on the 12% Senior Notes and, pursuant to the terms of the
indenture, the Company is in default on this debt. Under certain circumstances,
such obligations could become immediately due and payable. As of December 31,
1998 and March 31, 1999, the principal balance due has been classified as a
current liability in the accompanying consolidated balance sheets. As discussed
in Note 8, the Company has solicited the consent of the Noteholders to convert
the
10
<PAGE> 11
12% Senior Notes and accrued interest to Common Stock. There can be no assurance
that the requisite consent can be obtained or that conversion of the Notes to
Common Stock will occur.
RELATED PARTY DEBT AND CREDIT AGREEMENT
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 ("Revolving Credit
Commitment"). Borrowings accrued interest at the ING Alternate Base Rate (as
defined in the Credit Agreement) plus 1.50%. The Credit Agreement was originally
scheduled to mature on May 20, 2000 and all the Company's installed public pay
telephones are pledged as collateral.
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 Revolving Credit Commitment was reduced from $5,000 to
$3,000 and certain covenants therein were modified. On the same date, 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 (the "Second Amendment") to modify certain
financial covenants.
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 remained at $20,000 and the Expansion
Loan Commitment was reduced to $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 was extended to May 8, 2001. Certain
financial covenants under the Credit Agreement were also modified. The Company
incurred $1,174 in fees and expenses in connection with the Third Amendment, of
which $328 was included in other unusual charges and contractual settlements in
the Company's consolidated statements of operations after the first quarter of
1998.
During the second quarter of 1998, the Company borrowed $10,547 under
the Revolving Credit Commitment for interest payments due under the Company's
$125,000, 12% Senior Notes, to fund acquisition and financing costs and for
working capital. On July 3, 1998, the Company borrowed an additional $1,453, the
remaining amount available under the Credit Agreement, to finance the cost of
equipment upgrades relating to the installed pay telephones acquired from TDS
Telecommunications Corporation on May 18, 1998.
In April 1999, the Company requested and has received an additional
advance of $2,500 which increased the amount outstanding under its Revolving
Credit Commitment to $22,500. Proceeds are to be used for the payment of
professional fees and expenses, loan fees and certain accounts payable. The
Company also received a $45,900 commitment from the Lenders to provide debtor in
possession financing in the event the Company commences a Chapter 11 case as
contemplated by the restructuring described in Note 8. The Company incurred $250
in fees relating to the additional advance and a $250 fee for the debtor in
possession financing commitment.
At December 31, 1998 and March 31, 1999, the Company was not in
compliance with certain financial covenants and was in default under its Credit
Agreement. The Agent has notified the Company that, beginning April 1, 1999, the
Company is required to pay the default rate of interest which is two percent per
annum higher than the otherwise applicable rate. In addition, under certain
circumstances, such obligations could become immediately due and payable.
Accordingly, the Company has classified the amounts due under the Credit
11
<PAGE> 12
Agreement as a current liability in the accompanying consolidated balance
sheets. Further, there can be no assurance that the Agent will not take such
other action that it deems necessary to collect the balance due on the debt, if
the Company is unable to convert its 12% Senior Notes and accrued interest to
Common Stock.
4. PREFERRED STOCK MANDATORILY REDEEMABLE
Mandatorily redeemable preferred stock consisted of the following:
<TABLE>
<CAPTION>
December 31 March 31
1998 1999
---- ----
<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 50,609 shares at December 31, 1998
(valued at $1,118) and 56,157 shares at March 31, 1999 (valued at
$1,123); mandatory redemption amount of $9,845 due June 30, 2000 $ 9,112 $ 9,498
</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, 1999, the carrying
value of the 14% Preferred was increased by $382 through accretions. Each share
of 14% Preferred is entitled to receive a quarterly dividend of 0.035 shares of
14% Preferred. Each share of 14% Preferred is convertible into 10 shares of
Common Stock.
5. 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
1998 1999
---- ----
<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;
18,754,133 shares issued and outstanding at
December 31, 1998 and March 31, 1999) $ 188 $ 188
Additional paid-in capital 61,233 61,233
Accumulated deficit (113,019) (124,093)
--------- ---------
($ 51,598) ($ 62,672)
========= =========
</TABLE>
In January 1999, the Company granted options to purchase 35,000 shares
of Common Stock pursuant to an employment arrangement with a former officer at
an exercise price of $0.8125 per share. No compensation expense was recognized
as a result of this transaction.
12
<PAGE> 13
6. TERMINATION OF MERGER WITH DAVEL COMMUNICATIONS GROUP, INC.
On June 11, 1998, PhoneTel Technologies, Inc. ("PhoneTel") entered into
an Agreement and Plan of Merger and Reorganization (the "Davel Merger
Agreement") with Davel Communications Group, Inc., a publicly held, independent
pay telephone provider ("Davel"). On July 5, 1998, Peoples Telephone Company,
Inc., a publicly held, independent pay telephone provider ("Peoples"), also
entered into a merger agreement (the "Peoples Merger Agreement") with Davel.
On September 29, 1998, PhoneTel received a letter from Davel purporting
to terminate the Davel Merger Agreement. Thereafter, a complaint against
PhoneTel was filed in the Court of Chancery of New Castle County, Delaware by
Davel, which was subsequently amended, alleging, among other things, equitable
fraud and breach of contract relating to the Davel Merger Agreement. On October
27, 1998, PhoneTel filed its answer to the amended complaint denying the
substantive allegations contained therein and filed a counterclaim against Davel
for breach of contract. At the same time, PhoneTel filed a third party claim
against Peoples for tortuous interference with contract alleging that Peoples
induced Davel to not comply with the terms of the Davel Merger Agreement.
PhoneTel is seeking specific performance from Davel, which would
require Davel to comply with the terms of the Davel Merger Agreement or,
alternatively, for compensatory damages and costs of an unspecified amount.
PhoneTel is also seeking injunctive relief enjoining Peoples from further
tortuous interference with contract and for compensatory damages and costs of an
unspecified amount. Management believes the claims against PhoneTel are without
merit and is vigorously pursuing its claims against Davel and Peoples.
7. 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 or will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
8. FINANCIAL CONDITION
The Company has a working capital deficiency, excluding the
reclassification of long-term debt to current liabilities, of $6,976 at December
31, 1998 and $12,002 at March 31, 1999, an increase of $5,026. This increase was
primarily due to the increase in accrued interest on the Company's 12% Senior
Notes and decreases in cash and accounts receivable. Cash flow provided by (used
in) operating activities increased from ($2,323) for the three months ended
March 31, 1998 to $31 for the three months ended March 31, 1999 primarily due to
the increase in the working capital deficiency. At March 31, 1999, the Company
had a deficit in stockholders equity (excluding mandatorily redeemable preferred
stock) as a result of the current quarter loss of $10,688, the 1998 net loss of
$44,817 and a loss of $23,254 in 1997. The Company was not in compliance with
certain financial covenants under the Credit Agreement at March 31, 1999 and is
in default on this debt. Further, the Company has not paid its semiannual
interest payment due on December 15, 1998 under the Company's 12% Senior Notes
and is in default on this debt. Under certain circumstances, the debt that is in
default could become immediately due and payable.
The Company's working capital, liquidity and capital resources may be
limited by its ability to generate sufficient cash flow from its operations or
its investment or financing activities. Cash flow from operations depends on
revenues from coin and non-coin sources, including dial-around compensation, and
management's ability to control expenses. There can be no assurance that coin
revenues will increase, that revenues from dial-around compensation will
continue at the rates anticipated or that they will be received by the Company
in the amounts the Company has recorded as receivable as they become due, or
that operating expenses can be maintained at present or reduced to lower levels.
To the extent that cash flow from operating activities is insufficient to meet
the Company's cash requirements, there can be no assurance that the Company's
lender will grant additional advances under the Credit Agreement for working
capital or business expansion purposes or that the Company can obtain additional
financing to meet its debt service and other cash requirements.
13
<PAGE> 14
In January 1999, the Company announced that it had reached an agreement
in principle with an Unofficial Committee of Noteholders of its 12% Senior Notes
providing for the conversion of the Senior Notes into 95% of the reorganized
Company's common stock (the "Restructuring"). The Unofficial Committee is
comprised of certain holders of Senior Notes currently representing
approximately 59.3% in principal amount of all holders of Senior Notes. The
Restructuring is being implemented by a proposed plan of reorganization (the
"Prepackaged Plan") and further provides that existing preferred and common
shareholders would receive the remaining 5% of the reorganized Company's common
stock (as well as warrants to purchase approximately 11% of the reorganized
Company's common stock at an exercise price of $10.50 per share, assuming
10,000,000 common shares outstanding post-reorganization). These equity
interests would be subject to dilution by certain other equity issuances,
including issuances upon the exercise of certain warrants and awards to purchase
up to an aggregate of 5% of the common stock under a new management incentive
plan proposed as part of the Prepackaged Plan. The terms of the Prepackaged Plan
are summarized in a Disclosure Statement mailed on May 11, 1999 to holders of
record as of April 23, 1999 of the Senior Notes and the 14% Preferred.
The Company is soliciting acceptances of the Prepackaged Plan in
anticipation of the commencement of a case under Chapter 11 of the Bankruptcy
Code ("the Case"). The Company is seeking to obtain acceptances from (i) holders
of at least two-thirds in amount and more than one-half in number of the Senior
Notes actually voting, and (ii) from holders of at least two-thirds in amount of
the 14% Preferred actually voting in order to commence the Case with the
requisite acceptances to confirm the Prepackaged Plan. Unless extended by the
Company, the voting deadline with respect to the Prepackaged Plan is 5:00 P.M.
Eastern Time on June 11, 1999.
Under the Prepackaged Plan, claims of employees, trade and certain
other creditors of the Company, other than Senior Note claims, would be paid in
full, with the Company retaining its rights and defenses with respect to such
claims. In the event that the requisite acceptances are obtained, it is the
intention of the Company to promptly file the Case and seek confirmation of the
Prepackaged Plan. The Company will continue to operate its business under
Chapter 11 in the ordinary course.
The Company believes, but cannot assure, that it will be able to
implement the Restructuring with the consent of the holders of the Notes. In the
event that the Company and the holders of the Notes are unable to implement the
Restructuring and the Company is unable to obtain a revised working capital
facility, the Company will be forced to evaluate other available options.
9. CONDENSED CONSOLIDATING FINANCIAL STATEMENT DATA
The Company's wholly-owned subsidiary, Cherokee Communications, Inc.
("Cherokee") which was acquired January 1, 1997, is a guarantor of the $125,000
12% Senior Notes, due 2006. The following are the condensed consolidating
financial statements of PhoneTel and Cherokee as of March 31, 1999, and for the
quarter ended March 31, 1999.
14
<PAGE> 15
Condensed Consolidating Financial Statements
Balance Sheet, at March 31, 1999
<TABLE>
<CAPTION>
PhoneTel Cherokee(a) Eliminations Consolidated
-------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Current assets $ 13,871 $ 4,783 - $ 18,654
Property and equipment, net 22,298 3,747 - 26,045
Intangible assets, net 56,549 40,632 - 97,181
Other non-current assets 65,833 - ($ 65,229) 604
------------ ------------ ------------ ------------
Total $ 158,551 $ 49,162 ($ 65,229) $ 142,484
============ ============ ============ ============
Current liabilities $ 177,540 $ 18,116 - $ 195,656
Inter-company debt - 65,229 ($ 65,229) -
Long-term debt and capital leases 2 - - 2
14% Preferred stock 9,498 - - 9,498
Other equity (deficit) (28,489) (34,183) - (62,672)
------------ ------------ ------------ ------------
Total $ 158,551 $ 49,162 ($ 65,229) $ 142,484
============ ============ ============ ============
Statement of Operations, for the quarter ended March 31, 1999
Total revenues $ 14,282 $ 5,501 - $ 19,783
Operating expenses 19,252 6,470 - 25,722
------------ ------------ ------------ ------------
Loss from operations (4,970) (969) - (5,939)
Other income (expense), net (2,792) (1,957) - (4,749)
------------ ------------ ------------ ------------
Net loss $ (7,762) $ (2,926) - $ (10,688)
============ ============ ============ ============
</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.
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)
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 1999 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) changes 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,
15
<PAGE> 16
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Revenues
- --------
Revenues decreased by $4,340 or 18.0%, from $24,123 for the first three
months of 1998 to $19,783 for the first three months of 1999. This decrease is
primarily due to a decline in call volume, offset in part by the increase in the
long distance coin call rates, the decrease in the average number of installed
pay telephones and the decrease in the dial-around compensation rate as
discussed below. The average number of installed pay telephones decreased from
43,552 for the three months ended March 31, 1998 to 42,311 for the three months
ended March 31, 1999, a decrease of 1,241 or 2.8%, principally due to the timing
of expiring location contracts and the competition for payphone locations in the
marketplace.
Revenues from coin calls decreased by $2,777 or 21.1%, from $13,188 for
the three months ended March 31, 1998 to $10,411 for the three months ended
March 31, 1999. The decrease is due in part to the decrease in the number and
duration of long distance coin calls resulting from rate increases implemented
at the end of November 1998, including the elimination of the Company's program
which offered customers a four minute long distance call anywhere in the
continental United States for $1.00. Based on the results of that change, the
Company has reinstated its old rates, including the four minutes for a $1.00
program. In addition, long distance and local call volumes and coin revenues
have been adversely affected by the growth of wireless communication services,
which serves as an increasingly competitive alternative to payphone usage. To a
lesser extent, coin revenue has declined due to the decrease in the average
number of installed pay telephones compared to the first quarter of 1998.
Revenues from non-coin telecommunication services decreased by $1,543
or 14.1% from $10,905 for the three months ended March 31, 1998 to $9,362 for
the three months ended March 31, 1999. Of this decrease, long distance revenues
from operator service providers decreased by $648 principally due to continuing
aggressive dial-around advertising by long distance carriers such as AT&T and
MCI Communications Corporation. Long distance revenues from operator service
providers have also been adversely affected by the growth in wireless
communications. In addition, revenues from dial-around compensation decreased by
$895, from $4,833 in the first quarter of 1998 to $3,937 in the first quarter of
1999, due to regulatory changes which, among other things, retroactively reduced
the rate of compensation for dial-around calls from $0.284 to $0.238 per call.
Revenues for the three months ended March 31, 1998 have not been restated to
reflect the retroactive reduction in dial-around compensation recorded in the
fourth quarter of 1998 as discussed below. If revenues from dial-around
compensation had been recorded at the revised rate in the first quarter of 1998
($0.238 per call or $31.18 per month based on an estimated 131 calls per month),
revenues from dial-around compensation would have been $4,051 and $3,937,
respectively, for the three months ended March 31, 1998 and 1999.
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 FCC directed a two-phase transition to achieve fair
compensation for dial-around calls through deregulation and competition. In the
first phase, November 6, 1996 to October 6, 1997, the FCC prescribed flat-rate
compensation payable to the payphone providers by the interexchange carriers in
the amount of $45.85 per month per payphone (as compared with a fee of $6.00 per
installed payphone per month in periods prior to November 6, 1996). This rate
was arrived at by determining that the deregulated local coin rate was a valid
market-based surrogate for dial-around calls. The FCC applied a market-based,
deregulated coin rate of $0.35 per call to a finding from the record that there
were a monthly average of 131 compensable dial-around calls per payphone. This
total included both carrier access code calls dialed for the purpose of reaching
a long distance company other than the one designated by the payphone provider
as well as 800
16
<PAGE> 17
subscriber calls. The monthly per phone flat-rate compensation of $45.85 was to
be assessed only against IXCs with annual toll-call revenues in excess of $100
million and allocated among such IXCs in proportion to their gross long-distance
revenues. During the second phase of the transition to deregulation and
market-based compensation (initially from October 1997 to October 1998, but
subsequently extended in a later order by one year to October 1999), the FCC
directed the IXCs to pay payphone service providers (such as PhoneTel), on a
per-call basis for dial-around calls at the assumed deregulated coin rate of
$0.35 per call. At the conclusion of the second phase, the FCC set the
market-based local coin rate, determined on a payphone-by-payphone basis, as the
default per-call compensation rate in the absence of a negotiated agreement
between the payphone provider and the IXC. To facilitate per-call compensation,
the FCC required the payphone providers to transmit payphone specific coding
digits that would identify each call as originating from a payphone and required
the local exchange carriers to make such coding available to the payphone
providers as a transmit item included in the local access line service.
In July 1997, the United States Court of Appeals for the District of
Columbia Circuit ("the Court") responded to an appeal of the 1996 Payphone
Order, finding that the FCC erred in (1) setting the default per call rate at
$0.35 without considering the differences in underlying costs between
dial-around calls and local coin calls, (2) assessing the flat-rate compensation
against only the carriers with annual toll-call revenues in excess of $100
million, and (3) allocating the assessment of the flat-rate compensation based
on gross revenues rather than on a factor more directly related to the number of
dial-around calls processed by the carrier. The Court also assigned error to
other aspects of the 1996 Payphone Order concerning inmate payphones and the
accounting treatment of payphones transferred by a Regional Bell Operating
Company ("RBOC") to a separate affiliate.
In response to the remand by the Court, the FCC issued a new order
implementing section 276 in October 1997 (the "1997 Payphone Order"). The FCC
determined that distinct and severable costs of $0.066 were attributable to a
coin call that did not apply to the costs incurred by the payphone providers in
providing access for a dial-around call. Accordingly, the FCC adjusted the per
call rate during the second phase of interim compensation to $0.284 (which is
$0.35 less $0.066). While the FCC tentatively concluded that the $0.284 default
rate (or $37.20 per payphone per month based on 131 calls per month) should be
utilized in determining compensation during the first phase and reiterated that
payphone providers were entitled to compensation for each and every call during
the first phase, it deferred for later decision the precise method of allocating
the initial interim period flat-rate payment obligation among the IXCs and the
number of calls to be used in determining the total amount of the payment
obligation. In the third quarter of 1997, the Company recorded an adjustment of
$2,361 to reduce dial-around compensation recorded in prior quarters for the
decrease in rate from $45.85 to $37.20 per payphone per month. Of this
adjustment amount, $395 related to the prior year.
On March 9, 1998, the FCC issued a Memorandum Opinion and Order, FCC
98-48 1, which extended and waived certain requirements concerning the provision
by the local exchange carriers of payphone-specific coding digits, which
identify a call as originating from a payphone. Without the transmission of
payphone-specific coding digits some of the interexchange carriers have claimed
they are unable to identify a call as a payphone call eligible for dial-around
compensation. With the stated purpose of ensuring the continued payment of
dial-around compensation the FCC, by Memorandum and Order issued on April 3,
1998, left in place the requirement for payment of per-call compensation for
payphones on lines that do not transmit the requisite payphone-specific coding
digits, but gave the IXCs a choice for computing the amount of compensation for
payphones on LEC lines not transmitting the payphone-specific coding digits of
either accurately computing per-call compensation from their databases or paying
per-phone, flat-rate compensation computed by multiplying the $0.284 per call
rate by the nationwide average number of 800 subscriber and access code calls
placed from RBOC payphones for corresponding payment periods. Accurate payments
made at the flat rate are not subject to subsequent adjustment for actual call
counts from the applicable payphone.
On May 15, 1998, the Court again remanded the per-call compensation
rate to the FCC for further explanation without vacating the $0.284 per call
rate. The Court stated that the FCC had failed to explain adequately its
derivation of the $0.284 default rate. The Court stated that any resulting
overpayment would be subject to refund and directed the FCC to conclude its
proceedings within a six-month period ending on November 15, 1998. On June 19,
1998, the FCC solicited comment from interested parties on the issues remanded.
In initial and reply comments, certain IXCs and members of the paging industry
had urged the FCC to abandon its efforts to
17
<PAGE> 18
derive a market-based rate from surrogates and either require the caller to pay
dial-around compensation by coin deposit or adopt a cost-based rate at levels
substantially below the $0.284 rate.
On February 4, 1999, the FCC issued its Third Report and Order, and
Order on Reconsideration of the Second Report and Order (the "1999 Payphone
Order") wherein it adjusted the default rate from $0.284 to $0.238, retroactive
to October 7, 1997. In adjusting the default rate, the FCC shifted its
methodology from the market-based method utilized in the 1997 Payphone Order to
a cost-based method citing technological impediments that it viewed as
inhibiting the marketplace and the unreliability of certain assumptions
underlying the market-based method as a basis for altering its analysis. In
setting the cost-based default rate, the FCC incorporated its prior treatment of
certain payphone costs as well as reexamined new estimates of payphone costs
submitted as part of the proceeding. Pursuant to the 1999 Payphone Order, the
$0.24 amount ($0.238 plus 0.2 cents for FLEX ANI costs, which are amounts
charged by LECs for providing payphone specific coding digit technology) will
serve as the default per-call compensation rate for coinless payphone calls from
March 1999 through January 31, 2002, at which time, parties may petition the FCC
regarding the default amount, related issues pursuant to technological advances,
and the expected resultant market changes. In the fourth quarter of 1998, the
Company recorded an adjustment to reduce revenues previously recognized for the
period from November 7, 1996 to September 30, 1998 due to the further decrease
in the dial-around compensation rate from $0.284 to $0.238 per call. This
adjustment of $6,075 included $782 recorded as revenue in the first quarter of
1998 and $3,733 recorded as revenue in prior years.
The 1999 Payphone Order has been appealed by various parties, including
but not limited to, the trade association which represents the interests of
various pay telephone providers throughout the United States. 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, 1999 is $31.18 per pay telephone per
month based on $0.238 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 $31.18 per pay telephone per month.
Operating Expenses.
- -------------------
Total operating expenses decreased $2,111, or 7.6%, from $27,833 for
the three months ended March 31, 1998 to $25,722 for the three months ended
March 31, 1999. The decrease was due to a reduction in all expense categories
other than depreciation and amortization, due in part to the decrease in the
average number of installed pay telephones and personnel compared to the first
quarter of 1998.
Line and transmission charges decreased $788, or 11.4%, from $6,916 for
the three months ended March 31, 1998 to $6,128 for the three months ended March
31, 1999. Line and transmission charges represented 28.7% of total revenues for
the three months ended March 31, 1998 and 31.0% of total revenues for the three
months ended March 31, 1999, an increase of 2.3%. The dollar decrease was due to
the decrease in the average number of installed pay telephones, the decrease in
local and long distance line charges that are based upon call volumes and
duration and lower line charges resulting from the use of competitive local
exchange carriers. 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 $366, or 13.5%, from
$2,714 for the three months ended March 31, 1998 to $2,348 for the three months
ended March 31, 1999. Telecommunication and validation fees represented 11.3% of
total revenues for the three months ended March 31, 1998 and 11.9% for the three
months ended March 31, 1999, an increase of 0.6%. The dollar decrease was
primarily the result of the decrease in operator service revenues compared to
the first quarter of 1998. The increase as a percentage of total revenue was
primarily due to the decreases in coin and non-coin revenues.
Location commissions decreased $64, or 2.0%, from $3,150 for the three
months ended March 31, 1998 to $3,086 for the three months ended March 31, 1999.
Location commissions represented 13.1% of total revenues for the three months
ended March 31, 1998 and 15.6% of total revenues for the three months ended
March 31, 1999, an increase of 2.5%. The dollar decrease is due to the reduction
in revenues in the first quarter of 1999 compared to
18
<PAGE> 19
1998 offset by increases in commission rates necessary to meet competition for
new location providers as well as the renewal of location contracts with
existing location providers. The increase as a percentage of total revenues is
principally due to the increase in commission rates.
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 $368, or 6.7%,
from $5,530 for the three months ended March 31, 1998 to $5,162 for the three
months ended March 31, 1999. Field operations represented 22.9% of total
revenues for the three months ended March 31, 1998 and 26.1% of total revenues
for the three months ended March 31, 1999. The dollar decrease in 1999 compared
to 1998 was primarily due to the higher repair and servicing costs of installed
pay telephones from previously acquired companies during the first quarter of
1998 and general cost containment efforts including the reduction in personnel
during 1998. The increase as a percentage of total revenues was a result of the
lower revenues during the first quarter of 1999.
Selling, general and administrative ("SG&A") expenses decrease $555, or
18.1%, from $3,074 for the three months ended March 31, 1998 to $2,519 for the
three months ended March 31, 1999. SG&A expenses represented 12.7% of total
revenues for the three months ended March 31, 1998 and 1999. The dollar decrease
was primarily due to the reduction in personnel and related costs as well as
other cost reduction efforts.
Depreciation and amortization increased $127, or 2.0%, from $6,306 for
the three months ended March 31, 1998 to $6,433 for the three months ended March
31, 1999. Depreciation and amortization represented 26.1% of total revenues for
the three months ended March 31, 1998 and 32.5% of total revenues for the three
months ended March 31, 1999, an increase of 6.4%. The dollar and percentage
increases were primarily due to the Company's expansion of its public pay
telephone base and the reduction in total revenues.
Other unusual charges and contractual settlements were $46 in the three
months ended March 31, 1999 compared to $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 $335, or
7.5%, from $4,479 for the three months ended March 31, 1998 to $4,814 for the
three months ended March 31, 1999. Interest expense represented 18.6% of total
revenues for the three months ended March 31, 1998 and 24.3% of total revenues
for the three months ended March 31, 1999, an increase of 5.7%. The dollars and
percentage increases were a result of the additional borrowings under the
Company's Credit Agreement during 1998 primarily for working capital purposes
and additions to the Company's pay telephone base.
EBITDA
- ------
EBITDA (income before interest income, interest expense, taxes,
depreciation and amortization, and other unusual charges and contractual
settlements) decreased $2,199, or 80.3%, from $2,739 for the three months ended
March 31, 1998 to $540 for the three months ended March 31, 1999. EBITDA
represented 11.4% of total revenues for the three months ended March 31, 1998
and 2.7% of total revenues for the three months ended March 31, 1999, a decrease
of 8.7%. The dollar and percentage decreases are primarily due to the decreases
in coin and non-coin telecommunication revenues (including dial-around
compensation). 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,
19
<PAGE> 20
leverage and liquidity. See "Liquidity and Capital Resources" for a discussion
of cash flows from operating, investing and financing activities.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operating Activities
- ------------------------------------
The Company has a working capital deficiency, excluding the
reclassification of long-term debt to current liabilities, of $12,002 at March
31, 1999 compared to $5,026 at December 31, 1998, an increase of $6,976,
resulting from an increase in accrued interest and decreases in cash and
accounts receivable. Net cash provided by (used in) operating activities during
the three months ended March 31, 1998 and 1999 were ($2,323) and $31
respectively. Net cash provided by operations resulted mainly from the increase
in the net loss for the three months ended March 31, 1999, offset by non-cash
charges for depreciation and amortization and changes in current assets and
liabilities.
Cash Flows from Investing Activities
- ------------------------------------
Cash used in investing activities during the three months ended March
31, 1998 and 1999 were $1,165 and $423, respectively. In the first quarter of
1998 and 1999, cash used in investing activities consisted mainly of purchases
of telephones and other property and equipment.
Cash Flows from Financing Activities
- ------------------------------------
Cash flows provided by (used in) financing activities during the three
months ended March 31, 1998 and 1999 were $1,992 and ($397), respectively, which
in 1998 consisted primarily of borrowings under the Company's Credit Agreement
for capital expenditure and working capital purposes offset by principal
payments on borrowings and debt financing costs. Cash flows used in financing
activities during the three months ended March 31, 1999 consisted primarily of
expenditures for professional fees for the proposed restructuring of the
Company's 12% Senior Notes.
Credit Facility
- ---------------
In April 1999, the Company requested and has received an additional
advance of $2,500 which increased the amount outstanding under its Revolving
Credit Commitment to $22,500. Proceeds are to be used for the payment of
professional fees and expenses, loan fees and certain accounts payable. The
Company also received a $45,900 commitment from the Lenders to provide debtor in
possession financing in the event the Company commences a Chapter 11 case as
contemplated by the restructuring described below. The Company incurred $250 in
fees relating to the additional advance and a $250 fee for the debtor in
possession financing commitment.
Financial Condition
- -------------------
The Company has a working capital deficiency, excluding the
reclassification of long-term debt to current liabilities, of $6,976 at December
31, 1998 and $12,002 at March 31, 1999, an increase of $5,026. This increase was
primarily due to the increase in accrued interest on the Company's 12% Senior
Notes and decreases in cash and accounts receivable. Cash flow provided by (used
in) operating activities increased from ($2,323) for the three months ended
March 31, 1998 to $31 for the three months ended March 31, 1999 primarily due to
the increase in the working capital deficiency. At March 31, 1999, the Company
had a deficit in stockholders equity (excluding mandatorily redeemable preferred
stock) as a result of the current quarter loss of $10,688, the 1998 net loss of
$44,817 and a loss of $23,254 in 1997. The Company was not in compliance with
certain financial covenants under the Credit Agreement at March 31, 1999 and is
in default on this debt. Further, the Company has not made its semiannual
interest payment due on December 15, 1998 under the Company's 12% Senior Notes
and is in default on this debt. Under certain circumstances, the debt that is in
default could become immediately due and payable.
The Company's working capital, liquidity and capital resources may be
limited by its ability to generate sufficient cash flow from its operations or
its investment or financing activities. Cash flow from operations depends on
revenues from coin and non-coin sources, including dial-around compensation, and
Management's ability to control expenses. There can be no assurance that coin
revenues will increase, that revenues from dial-around compensation will
continue at the rates anticipated or that they will be received by the Company
in the amounts the
20
<PAGE> 21
Company has recorded as receivable as they become due, or that operating
expenses can be maintained at present or reduced to lower levels. To the extent
that cash flow from operating activities is insufficient to meet the Company's
cash requirements, there can be no assurance that the Company's lender will
grant additional advances under the Credit Agreement for working capital or
business expansion purposes or that the Company can obtain additional financing
to meet its debt service and other cash requirements.
In January 1999, the Company announced that it had reached an agreement
in principle with an Unofficial Committee of Noteholders of its 12% Senior Notes
providing for the conversion of the Senior Notes into 95% of the reorganized
Company's common stock (the "Restructuring"). The Unofficial Committee is
comprised of certain holders of Senior Notes currently representing
approximately 59.3% in principal amount of all holders of Senior Notes. The
Restructuring is being implemented by a proposed plan of reorganization (the
"Prepackaged Plan") and further provides that existing preferred and common
shareholders would receive the remaining 5% of the reorganized Company's common
stock (as well as warrants to purchase approximately 11% of the reorganized
Company's common stock at an exercise price of $10.50 per share, assuming
10,000,000 common shares outstanding post-reorganization). These equity
interests would be subject to dilution by certain other equity issuances,
including issuances upon the exercise of certain warrants and awards to purchase
up to an aggregate of 5% of the common stock under a new management incentive
plan proposed as part of the Prepackaged Plan. The terms of the Prepackaged Plan
are summarized in a Disclosure Statement mailed on May 11, 1999 to holders of
record as of April 23, 1999 of the Senior Notes and the 14% Preferred.
The Company is soliciting acceptances of the Prepackaged Plan in
anticipation of the commencement of a case under Chapter 11 of the Bankruptcy
Code ("the Case"). The Company is seeking to obtain acceptances from (i) holders
of at least two-thirds in amount and more than one-half in number of the Senior
Notes actually voting, and (ii) from holders of at least two-thirds in amount of
the 14% Preferred actually voting in order to commence the Case with the
requisite acceptances to confirm the Prepackaged Plan. Unless extended by the
Company, the voting deadline with respect to the Prepackaged Plan is 5:00 P.M.
Eastern Time on June 11, 1999.
Under the Prepackaged Plan, claims of employees, trade and certain
other creditors of the Company, other than Senior Note claims, would be paid in
full, with the Company retaining its rights and defense with respect to such
claims. In the event that the requisite acceptances are obtained, it is the
intention of the Company to promptly file the Case and seek confirmation of
the Prepackaged Plan. The Company will continue to operate its business under
Chapter 11 in the ordinary course.
The Company believes, but cannot assure, that it will be able to
implement the Restructuring with the consent of the holders of the Notes. In the
event that the Company and the holders of the Notes are unable to implement the
Restructuring and the Company is unable to obtain a revised working capital
facility, the Company will be forced to evaluate other available options.
CAPITAL EXPENDITURES
For the three months ended March 31, 1999, the Company had capital
expenditures of $372, which were financed by cash flows from operating
activities. Capital expenditures are principally for replacement and expansion
of the Company's installed public pay telephone base and include purchases of
telephones, related equipment, 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 usage.
21
<PAGE> 22
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send commissions, or engage in similar normal business activities.
The Company has completed a detailed assessment of the Year 2000 Issue
and has developed a plan for compliance. In the fourth quarter of 1998, the
Company began to implement its plan relating to its accounting, business
operations and corporate telephone systems. Complete implementation of the
Company's plan is dependent, among other things, upon receiving updated versions
of proprietary software from pay telephone manufacturers, confirmation from
other third parties that information and software supplied by them will be in
compliance and replacement of the Company's central office telephone switch.
Although the Company has not incurred any significant costs to date, the cost to
achieve full compliance is currently estimated to be approximately $500.
Management believes the Company will be able to implement its plan and
achieve full Year 2000 compliance before the end of 1999. Management does not
believe the Year 2000 issue will have a material effect on future financial
results or cause reported financial information not to be necessarily indicative
of future operating results or future financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the financial position of the Company
is subject to a variety of risks. In addition to the market risk associated with
movements in interest rates on the Company's outstanding debt, the Company is
subject to a variety of other types of risk such as the collectibility of its
accounts receivable and the recoverability of the carrying values of its
long-term assets. The Company's long-term obligations primarily consist of its
$125 million 12% Senior Notes and its $40 million borrowings under the Company's
Credit Agreement.
As discussed in Note 8 to the Company's consolidated financial
statements, the Company has solicited the consent of its Noteholders to convert
its 12 % Senior Notes to Common Stock. Accordingly, the fair value of such debt
is more dependent upon the value of the Company than it is on changes in
interest rates. The Company does not anticipate that the fair value of this debt
will be materially affected by changes in interest rates, if any.
The Company's earnings and cash flows are subject to market risk
resulting from changes in the interest rates with respect to its borrowings
under its $40 million Credit Agreement. The Company does not presently enter
into any transactions involving derivative financial instruments for risk
management or other purposes due to the stability in interest rates in recent
times and because Management does not consider the potential impact of changes
in interest rates to be material.
The Company's available cash balances are invested on a short-term
basis (generally overnight) and, accordingly, are not subject to significant
risks associated with changes in interest rates. Substantially all of the
Company's cash flows are derived from its operations within the United States
and the Company is not subject to market risk associated with changes in foreign
exchange rates.
22
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(a) The Company has not paid the semiannual interest payment in the amount
of $7,500 which was due December 15, 1998 on the Company's $125,000 12%
Senior Notes and, pursuant to the terms of the indenture, the Company
is in default on this debt. Under certain circumstances, such
obligations could become immediately due and payable. As of December
31, 1998 and March 31, 1999, the principal balance due has been
classified as a current liability in the accompanying consolidated
balance sheets. As discussed in Note 8, the Company has solicited the
consent of the Noteholders to convert the 12% Senior Notes and accrued
interest to Common Stock. There can be no assurance that the requisite
consent can be obtained or that conversion of the Notes to Common Stock
will occur.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated April 6, 1999, reporting
under Item 5, other events, the appointment of John D. Chichester as
President and Chief Executive Officer.
23
<PAGE> 24
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHONETEL TECHNOLOGIES, INC.
May 17, 1999 By: /s/ Peter G. Graf
---------------------
Peter G. Graf
Chairman of the Board
May 17, 1999 By: /s/ Richard Kebert
----------------------
Richard Kebert
Chief Financial Officer and
Treasurer
(Principal Financial Officer and
Accounting Officer)
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE QUARTER ENDED 3/31/99 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,979
<SECURITIES> 0
<RECEIVABLES> 12,161
<ALLOWANCES> 901
<INVENTORY> 0
<CURRENT-ASSETS> 18,654
<PP&E> 51,452
<DEPRECIATION> 25,407
<TOTAL-ASSETS> 142,484
<CURRENT-LIABILITIES> 195,656
<BONDS> 165,139
9,498
0
<COMMON> 188
<OTHER-SE> (62,860)
<TOTAL-LIABILITY-AND-EQUITY> 142,484
<SALES> 0
<TOTAL-REVENUES> 19,783
<CGS> 0
<TOTAL-COSTS> 25,722
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,749
<INCOME-PRETAX> (10,688)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,688)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,688)
<EPS-PRIMARY> (.59)
<EPS-DILUTED> (.59)
</TABLE>
