<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
COMMISSION FILE NUMBER 0-16715
PHONETEL TECHNOLOGIES, INC.
---------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-1462198
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
NORTH POINT TOWER, 7TH FLOOR, 1001 LAKESIDE AVENUE, CLEVELAND, OHIO 44114-1195
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(216) 241-2555
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE $0.01 NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $0.01 PAR VALUE
-----------------------------
(TITLE OF CLASS)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 24, 2000 was $7,155,000.
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 after the distribution of securities under a plan confirmed
by a court. Yes X No
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The number of shares outstanding of the registrant's Common Stock, $.01 par
value, as of March 24, 2000 was 10,188,630.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for use at the 2000 Annual Meeting
of Shareholders are incorporated by reference in Part III hereof.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
PhoneTel Technologies, Inc. (the "Company" or "PhoneTel") was incorporated
under the laws of the State of Ohio on December 24, 1984. The Company operates
in the telecommunications industry, which encompasses the installation and
operation, in and on property owned by others, of public payphones on a revenue
sharing basis and the resale of operator assisted and long distance services.
The Company considers this to be a single reportable business segment. The
Company's principal executive offices are located at North Point Tower, 7th
Floor, 1001 Lakeside Avenue, Cleveland, Ohio 44114-1195 and its telephone number
is (216) 241-2555.
The Company owns, operates, services, and maintains a system of public
payphones. The Company derives substantially all of its revenues from coin and
non-coin calls placed from its public payphones. The Company enters into
contracts with the owners of premises ("Location Owners") to operate public
payphones at locations where significant demand exists for public payphone
services, such as shopping centers, convenience stores, service stations,
grocery stores, restaurants, truck stops and bus terminals.
The Company has increased its revenue base from 2,350 installed public
payphones at December 31, 1993 to 36,964 at March 3, 2000. This growth from 1993
was principally achieved through acquisitions and to a lesser extent through new
payphone installations resulting from the Company's internal sales and marketing
efforts.
During the past several years, the Company's objective had been to expand
its payphone base through acquisitions, as well as through internal growth,
thereby achieving economies of scale while implementing cost savings. The
Company's management believes that there is a significant opportunity to
consolidate the highly fragmented independent segment of the public payphone
industry. Selective acquisitions have enabled PhoneTel to expand its geographic
presence and further its strategy of clustering its public payphones more
rapidly than would have been possible with new installations. More recently the
Company's strategy has been to improve the Company's operating results through
improved assets management, enhanced revenue sources and cost controls.
The Company has sought to install new public payphones and has focused its
internal sales and marketing efforts to obtain additional contracts to own and
operate public payphones with new and existing national, regional and local
accounts. In evaluating locations for the installation of public payphones, the
Company conducts a site survey to examine various factors, including population
density, traffic patterns, historical usage information and other geographic
factors. The installation of public payphones in new locations is generally less
expensive than acquiring public payphones. As part of its strategy to continue
to reduce operating costs, the Company outsources its long distance and operator
services to a number of subcontractors that are operator service providers
("OSPs"), and has recently selected One Call Communications, Inc., d/b/a Opticom
("Opticom") as its principal OSP.
Substantially all of the Company's public payphones are "smart" telephones
and are operated by means of advanced microprocessor technology that enables the
telephones to perform substantially all of the necessary coin-driven and certain
non coin-driven functions independent of the Company's central office. Unlike
"dumb" telephones used by most Regional Bell Operating Companies ("RBOCs") and
other Local Exchange Carriers ("LECs"), smart telephones, in concert with
PhoneTel's management information systems, enable PhoneTel to continuously
determine each telephone's operability and need for service as well as its
readiness for collection of coin revenues. Rate changes and other
software-dependent functions can be performed from the central office without
dispatching service technicians to individual public payphones of the Company.
The Company employs both advanced telecommunications technology and trained
field technicians as part of its commitment to provide superior customer
service. The technology used by PhoneTel enables it to maintain accurate records
of telephone activity which can be verified by customers, as well as respond
quickly to equipment malfunctions. The Company's standard of performance is to
repair malfunctions within 24 hours of their occurrence.
The Company seeks to promote and achieve recognition of its products and
services by posting the "PhoneTel" label on all of its public payphones. The
Company believes that achieving market recognition will facilitate its
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expansion strategy by enhancing its ability to obtain additional accounts and
encouraging the use of its public payphones in locations where consumers have
multiple payphone options.
Events Leading up to the Company's Chapter 11 Bankruptcy Reorganization
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The Company financed its growth from 1996 to 1998, which resulted
principally from acquisitions, by completing concurrent publicly underwritten
offerings of Common Stock (the "Company Equity Offering") and $125,000,000
aggregate principal amount 12% Senior Notes due 2006 (the "Senior Notes" or
"Company Debt Offering") in December 1996. Some of the Company's acquisitions,
capital expenditures and working capital requirements were also financed by the
Company's secured borrowings under its Credit Agreement. As a result of
declining revenues caused by competition from wireless communications companies
and the impact of aggressive marketing of long distance service offered by
interexchange carriers, the Company was unable to make the interest payment due
on December 15, 1998 on its Senior Notes and was therefore in default on this
debt. Further, the Company was not in compliance with certain financial
covenants under its Credit Agreement at December 31, 1998 and was also in
default on this debt.
At the end of 1998, the Company entered into discussions with an unofficial
committee of Senior Noteholders (the "Unofficial Committee") in an attempt to
restructure its debt. In January 1999, the Company announced that it had reached
an agreement in principle with the Unofficial Committee providing for the
conversion, through a prepackaged plan of reorganization (the "Prepackaged
Plan"), of the Senior Notes and accrued interest thereon into 95% of a new issue
of common stock, $0.01 par value per share ("Common Stock (Successor Company)")
of the reorganized Company (the "Restructuring").
The Company solicited acceptances of the Prepackaged Plan from the holders
of the Senior Notes and the 14% Cumulative Redeemable Convertible Preferred
Stock (the "14% Preferred") in anticipation of the commencement of a case under
chapter 11 of the Bankruptcy Code (the "Case"). Effective June 11, 1999, the
Company obtained acceptances of the Prepackaged Plan from holders of 99.9
percent of the Senior Notes and 100 percent of the 14% Preferred shares voting
in response to the solicitation. Such acceptances substantially exceeded the
levels required to confirm the Prepackaged Plan.
On July 14, 1999, the Company commenced the Case in the U.S. Bankruptcy
Court in the Southern District of New York (the "Court") and thereafter
continued to operate its business through November 17, 1999 as a
debtor-in-possession. The Company also obtained an order from the Court which
allowed the Company to pay prepetition and postpetition claims of employees,
trade and other creditors, other than the Senior Note claims, in the ordinary
course of business. As debtor-in-possession, on July 21, 1999 the Company
refinanced its Credit Agreement from the proceeds of a debtor-in-possession
financing agreement obtained from the Company's existing secured lender. The
Company also obtained a commitment from its existing lender to provide post
reorganization financing.
Confirmation and Consummation of the Prepackaged Plan
-----------------------------------------------------
On October 20, 1999, the Court confirmed the Prepackaged Plan. On November
17, 1999, the Company executed a post reorganization loan agreement ("Exit
Financing Agreement") and consummated the Prepackaged Plan. Pursuant to the
terms of the Prepackaged Plan, claims of employees, trade and other creditors of
the Company, other than holders of the Senior Notes are to be paid in full in
the ordinary course of business, unless otherwise agreed, with the Company
retaining its rights and defenses with respect to such claims. Holders of the
Senior Notes received 9,500,000 shares of the Common Stock (Successor Company)
in exchange for the Senior Notes. In addition, the Unofficial Committee
representing a majority in principal amount of the Senior Notes appointed four
of the five members of the Board of Directors of the Company (the "New Board").
Peter G. Graf, the former Chairman and Chief Executive Officer, continues to
serve as a Director on the New Board for a period of one year following the
consummation of the Prepackaged Plan.
Holders of the 14% Preferred received 325,000 shares of Common Stock
(Successor Company) and warrants to purchase up to 722,200 shares of Common
Stock (Successor Company) at an exercise price of $10.50 per share which expire
three years from the date of grant ("New Warrants"). Holders of existing Common
Stock received 175,000 shares of Common Stock (Successor Company) and New
Warrants to purchase up to 388,900 shares of Common Stock (Successor Company).
Options and warrants to purchase existing common stock were
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extinguished pursuant to the Prepackaged Plan.
The equity interests issued in connection with the Prepackaged Plan are
subject to dilution by certain other equity issuances, including the issuance of
205,000 shares of Common Stock (Successor Company) to certain financial advisors
for services rendered in connection with the reorganization, and issuances
resulting from the exercise of certain options to purchase up to 5% of Common
Stock (Successor Company) to be issued by the New Board pursuant to the terms of
a management incentive plan ("1999 Management Incentive Plan") and other awards
included as part of the Prepackaged Plan.
As of November 17, 1999 (the "Consummation Date"), the total amount of
Common Stock (Successor Company) outstanding, after giving effect to Common
Stock (Successor Company) and New Warrants forfeited in connection with a
warrant put obligation settlement, was 10,188,630 shares. In addition, 1,074,721
shares of Common Stock (Successor Company) are reserved for future issuance upon
the exercise of the New Warrants, and an amount equal to 5% of the shares of
Common Stock (Successor Company) is reserved for issuance pursuant to the terms
of the 1999 Management Incentive Plan. Under its Amended and Restated Articles
of Incorporation confirmed as part of the Prepackaged Plan, the total authorized
capital stock of the Company is 15,000,000 shares of Common Stock (Successor
Company).
INDUSTRY OVERVIEW
Public payphones are primarily owned and operated by RBOCs, other LECs and
Independent Payphone Providers ("IPPs"). Certain long distance companies
(referred to as interexchange carriers or "IXCs") also own and operate public
payphones. In 1998, there were approximately 2.1 million public payphones in the
United States that generated revenues of approximately $5.74 billion. As a
percentage of revenues, RBOCs and other LECs had 79.8% of this market while IPPs
and IXCs had market shares of 15.6% and 4.6%, respectively. Within the United
States, the Multimedia Telecommunications Association estimates that there were
approximately 342,000 public payphones owned by IPPs in 1995. Today's
telecommunications marketplace was principally shaped by the 1984 court-directed
divestiture of the RBOCs by American Telephone & Telegraph Company ("AT&T"). The
AT&T divestiture and the many regulatory changes adopted by the FCC and state
regulatory authorities in response to the AT&T divestiture, including the
authorization of the connection of competitive or independently-owned public
payphones to the public switched network, have resulted in the creation of new
business segments in the telecommunications industry. Prior to these
developments, only RBOCs or other LECs owned and operated public payphones.
As part of the AT&T monopoly break-up, the United States was divided into
geographic areas known as local access transport areas ("LATAs") designed to
differentiate between local telephone service and long-distance telephone
service. Traditionally, RBOCs and other LECs provide intraLATA telephone service
pursuant to tariffs filed with and approved by state regulatory authorities.
Until recently, RBOCs were prohibited from offering or deriving revenues or
income from interLATA telecommunications services. IXCs, such as AT&T and MCI
Worldcom ("MCI"), provide interLATA services and, in some circumstances, may
also provide long distance service within LATAs. An interLATA long distance
telephone call generally begins with an originating LEC transmitting the call
from the originating telephone to a point of connection with a long distance
carrier. The long distance carrier, through its owned or leased switching and
transmission facilities, transmits the call across its long distance network to
the LEC servicing the local area in which the recipient of the call is located.
This terminating LEC then delivers the call to the recipient.
Under the February 8, 1996 enactment of the Telecommunications Act, the
RBOCs may provide interLATA telecommunications services and may compete for the
provision of interLATA toll calls upon receipt of all necessary regulatory
approvals and the satisfaction of applicable conditions. The Telecommunications
Act permits the RBOCs to provide virtually all "out of region" long distance
telecommunications services immediately upon the receipt of any state and/or
federal regulatory approvals otherwise applicable to long distance service. For
the RBOCs and other LECs to provide interLATA toll service within the same
states in which they also provide local exchange service ("in-region service"),
prior FCC approval must be obtained. The timing of such approval is unclear and
may depend on the outcome of litigation related to recent regulations
promulgated by the FCC relating to the duties of RBOCs and other incumbent LECs
under section 251 of the Telecommunications Act. This FCC approval to provide
"in-region" service is conditioned upon, among other things, a showing by an
RBOC or other LEC that, with certain limited exceptions, facilities-based local
telephone competition is present in its market, and that it has satisfied the
14-point "competitive checklist" established by the Telecommunications Act which
includes, among other things, that the RBOC or other
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LEC has entered into at least one interconnection agreement. In addition, the
Telecommunications Act is designed to facilitate the entry of any entity
(including cable television companies and utilities) into both the competitive
local exchange and long distance telecommunications markets. As a result of the
Telecommunications Act, long distance companies (such as AT&T and MCI), cable
television companies, utilities and other new competitors will be able to
provide local exchange service in competition with the incumbent RBOC or other
LEC. This should ultimately increase the number and variety of carriers that
provide local access line service to IPPs such as PhoneTel.
Prior to 1987, coin calls were the sole source of revenues for IPPs. Long
distance calling card and collect calls from these public payphones were handled
exclusively by AT&T. Beginning in 1987, a competitive operator service system
developed which allowed OSPs, including long distance companies such as MCI, to
handle non-coin calls and to offer IPPs commissions for directing operator
assisted or calling card calls to them. See "Regulatory Matters."
Generally, public payphone revenues may be generated through: (i) coin
calls; (ii) operator service calls ("0+," i.e., credit card, collect and third
number billing calls, and "0-," i.e., calls transferred by the LECs to the OSPs
requested by the caller); and (iii) access code calls using carrier access
numbers (e.g., "1010XXX" codes, "1-800," "1-888" or "950"). Section 276 of the
Telecommunications Act and the FCC's implementing regulations permit IPPs to
generate additional revenues from all of these three categories, each of which
consists of local, intraLATA toll, intrastate interLATA, interstate interLATA
and international call components. See "Regulatory Matters."
ACQUISITIONS
In recent years the Company has sought to grow its payphone base through
acquisitions. The following table summarizes in reverse chronological order the
Company's significant acquisitions since January 1, 1997.
<TABLE>
<CAPTION>
NUMBER OF
DATE OF INSTALLED PRIMARY
COMPANY ACQUIRED ACQUISITION PAYPHONES AREAS SERVED
---------------- ----------- --------- ------------
<S> <C> <C> <C>
TDS Telecommunications Corporation ("TDS") May 18, 1998 3,407 Tennessee, Wisconsin,
Maine, Michigan,
Minnesota
London Communications, Inc. ("London") June 10, 1997 2,519 Georgia, North
Carolina, South
Carolina
American Public Telecom, Inc. ("American") May 30, 1997 859 Michigan
Advance Pay Systems, Inc. ("Advance") May 30, 1997 800 Virginia
Coinlink, LLC ("Coinlink") February 14, 1997 300 Oklahoma
RSM Communications, Inc. ("RSM") January 31, 1997 292 Tennessee
Americom, Inc. ("Americom") January 17, 1997 99 Arizona
Texas Coinphone ("Texas Coinphone") January 14, 1997 1,250 Texas
Cherokee Communications, Inc. ("Cherokee") January 1, 1997 Texas, New Mexico,
13,949 Colorado, Utah, Montana
------
Total installed public payphones acquired
in the three year period ended December 31, 1999 23,475
======
Total installed public payphones at March 3, 2000 36,964
======
</TABLE>
With the exception of Cherokee, each of the companies or businesses listed
in the foregoing chart was acquired by PhoneTel either as an asset purchase or a
stock purchase with a subsequent merger of the acquired entity into the Company,
with PhoneTel being the surviving corporation. Cherokee is the Company's sole
active subsidiary and is 100% owned by the Company.
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PRODUCTS AND SERVICES
The Company's primary business is to install and operate payphones on a
revenue sharing basis by obtaining contracts, either through acquisitions or
internal growth, from Location Owners. The Company installs public payphones in
properties owned or controlled by others where significant demand exists for
public payphone services, such as shopping centers, convenience stores, service
stations, grocery stores, restaurants, truck stops and bus terminals, at no cost
to the Location Owner. The Company services and collects the revenue generated
from the public payphones and pays the Location Owner a share of the revenues
generated by the telephone in consideration for permitting the installation of
the payphone on its premises.
The term of a location agreement generally ranges from three to ten years
and usually provides for an automatic renewal of the term of the contract unless
it is canceled by the Location Owner pursuant to the terms of the agreement. The
Company can generally terminate a location agreement on 30 days' prior notice to
the Location Owner if the public payphone does not generate sufficient total
revenues for two consecutive months. Under certain of the Company's Location
Owner agreements, the failure of PhoneTel to remedy a default within a specified
period after notice may give the Location Owner the right to terminate such
location agreement. The duration of the contract and the commission arrangement
depends on the location, number of telephones and revenue potential of the
account.
Substantially all of the Company's public payphones accept coins as well as
other forms of payment for local or long-distance calls. The Company's public
payphones generate coin revenues primarily from local calls. Prior to October 7,
1997, state regulatory authorities typically set the maximum rate for local coin
calls that could be charged by RBOCs and other LECs and IPPs. The Company
generally was required to charge the same rate as the RBOCs and the other LECs
for local calls in substantially all of the states in which the Company's public
payphones are located. In most states that charge was $0.25, although in some
jurisdictions the charge was less than $0.25 per local call, and in a limited
number of other jurisdictions that had already deregulated the price of local
calls, the charge was $0.35. On October 7, 1997, the effective date of the FCC's
mandate to deregulate the local coin rate, the Company increased the amount
charged to place a local coin call from $0.25 to $0.35 on substantially all of
its payphones. See "Regulatory Matters."
Traditionally, local coin calls have been provided for an unlimited
duration, although some jurisdictions in which the Company's public payphones
are located allow call timing, which requires the deposit of an additional
amount after a specified period of time has elapsed. The Company pays monthly
line and usage charges to LECs or competitive local exchange carriers ("CLECs")
for all of its installed public payphones. These charges cover basic telephone
service as well as the transport of local coin calls.
The Company outsources its long distance and operator service operations to
a number of OSPs, including Opticom, which is PhoneTel's primary provider of
such services. The revenue PhoneTel receives from each OSP is determined based
on the volume of calls carried by the OSP and the amount of revenues generated
by the calls. PhoneTel also receives revenues from long distance carriers for
calls made from its public payphones, including dial-around calls when the
caller dials a code to obtain access to an OSP or a long distance company other
than one designated by the Company. See "Regulatory Matters."
Management believes that the implementation of the Telecommunications Act
and the resultant FCC Rules will continue to provide significant additional
revenues for PhoneTel, net of related expenses and processing fees. There can be
no assurance, however, that the rules, regulations, and policies adopted by the
FCC on its own or after judicial review will not have a material adverse affect
on PhoneTel's business, results of operations, or financial condition. See
"Regulatory Matters."
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TELEPHONE EQUIPMENT SUPPLIERS
The Company purchases the majority of its payphones from two manufacturers
of public payphones, Intellicall, Inc. and Protel, Inc. Although each
manufacturer uses similar technology, the Company seeks to install primarily a
single brand of telephone within a specific geographic area. This maximizes the
efficiency of the Company's field technicians and makes stocking of appropriate
spare parts more effective. It is the Company's policy to place the PhoneTel
name on telephones that it acquires or installs.
SALES AND MARKETING
The Company utilizes its internal sales force and independent sales
representatives to market its products and services. The internal sales force
receives salary plus incentive compensation for each public payphone installed,
and the independent sales representatives are paid on a commission-only basis
for each public payphone installed. In addition, in certain instances, the
Company pays a fee to its technicians for securing location agreements for new
installations. The Company also markets its products and services through
advertising in trade publications, booths at trade shows and referrals from
existing customers.
The Company directs a major portion of its marketing efforts for public
payphones to multi-station accounts, such as shopping centers, convenience
stores, service stations, grocery stores, restaurants, truck stops and bus
terminals. These multi-station accounts have the advantage of greater efficiency
in collection and maintenance. PhoneTel also solicits single station accounts
where there is a demonstrated high demand for public payphone service. In
evaluating locations for the installation of public payphones, the Company
generally conducts a site survey to examine various factors, including
population density, traffic patterns, historical usage information and other
geographical factors. The Company generally will not install a public payphone
unless management believes, based on the site survey, that the site will
generate an adequate level of revenues.
CUSTOMERS
The Company's public payphone operations are diversified on both a
geographical and customer account basis. Currently, PhoneTel owns and operates
public payphones in 45 states and the District of Columbia (approximately 95% of
such public payphones are located in 26 states) through agreements both with
multi-station customers such as shopping centers, convenience stores, service
stations, grocery stores, restaurants, truck stops and bus terminals and with
single station customers. No single customer generated 10% or more of PhoneTel's
total revenue for the years ended December 31, 1997, 1998, or 1999.
GOVERNMENT REGULATIONS
The FCC and state regulatory authorities have traditionally regulated
payphone and long-distance services, with regulatory jurisdiction being
determined by the interstate or intrastate character of the service and the
degree of regulatory oversight varying among jurisdictions. On September 20 and
November 8, 1996, the FCC adopted rules and policies to implement section 276 of
the Telecommunications Act. The Telecommunications Act substantially
restructured the telecommunications industry, included specific provisions
related to the payphone industry and required the FCC to develop rules necessary
to implement and administer the provisions of the Telecommunications Act on both
an interstate and intrastate basis. Among other provisions, the
Telecommunications Act granted the FCC the power to preempt state regulations to
the extent that any state requirements are inconsistent with the FCC's
implementation of section 276 thereof.
Federal regulation of local coin and dial-around calls
------------------------------------------------------
The Telephone Operator Consumer Services Improvement Act of 1990 ("TOCSIA")
established various requirements for companies that provide operator services
and for call aggregators, including payphone providers, who send calls to those
companies. The requirements of TOCSIA as implemented by the FCC included call
branding, information posting, rate quoting, the filing of information tariffs
and the right of payphone users to obtain
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access to any OSP to make non-coin calls. TOCSIA also required the FCC to take
action to limit the exposure of payphone companies to undue risk of fraud.
TOCSIA further directed the FCC to consider the need to provide
compensation for IPPs for dial-around calls (non-coin calls placed from a
payphone that utilizes any carrier other than the IPPs presubscribed carrier for
long distance and operator assisted calls). Accordingly, the FCC ruled in May
1992 that IPPs were entitled to dial-around compensation. Because of the
complexity of establishing an accounting system for determining per call
compensation for these calls and other reasons, the FCC temporarily set this
compensation at $6.00 per payphone per month based on an assumed average of 15
interstate carrier access code dial-around calls at $0.40 per call. The failure
by the FCC to provide compensation for 800 subscriber dial-around calls was
challenged by the IPPs, and a federal court subsequently ruled that the FCC
should have provided for compensation for these calls.
In 1996, recognizing that IPPs had been at a severe competitive
disadvantage under the existing system of regulation and had experienced
substantial increases in the volume of dial-around calls without a corresponding
adjustment in compensation, Congress enacted section 276 of the
Telecommunications Act to promote both competition among payphone service
providers and the widespread deployment of payphones. Section 276 directed the
FCC to implement FCC Rules by November 1996 which would:
- create a standard regulatory scheme for all public payphone providers;
- establish a per-call compensation plan to ensure that all payphone
service providers are fairly compensated for each and every completed
intrastate and interstate call except for 911 emergency and
telecommunications relay service calls;
- terminate subsidies for LEC payphones from LEC-regulated base
operations;
- prescribe, at a minimum, nonstructural safeguards to eliminate
discrimination between LECs and IPPs and remove the LEC payphones from
the LEC's regulated asset base;
- provide for the RBOCs to have the same rights that IPPs have to
negotiate with Location Owners over the selection of interLATA carrier
services subject to the FCC's determination that the selection right
is in the public interest and subject to existing contracts between
the Location Owners and interLATA carriers;
- provide for the right of all payphone service providers to choose the
local, intraLATA and interLATA carriers subject to the requirements
of, and contractual rights negotiated with, Location Owners and other
valid state regulatory requirements;
- evaluate the requirement for payphones which would not normally be
installed under competitive conditions but which might be desirable as
a matter of public policy, and establish how to provide for and
maintain such payphones if it is determined that they are required;
and
- preempt any state requirements which are inconsistent with the FCC's
regulations implementing section 276.
In September and November 1996, the FCC issued an order implementing
section 276 (the "1996 Payphone Order"). In the 1996 Payphone Order, the FCC
determined that the best way to ensure fair compensation to independent and LEC
payphone providers for each and every call was to deregulate to the maximum
extent possible the price of all calls originating from payphones. For local
coin calls, the FCC mandated that deregulation of the local coin rate would not
occur until October 1997 in order to provide a period of orderly transition from
the previous system of state regulation. As a result of the deregulation of the
local coin rate, most of the RBOCs and other payphone providers (including
PhoneTel) have implemented an increase in the local coin rate to $0.35 per call
in most jurisdictions.
To achieve fair compensation for dial-around calls through
deregulation and competition, the FCC in the 1996 Payphone Order directed a
two-phase transition from a regulated market. Among other things, the 1996
Payphone Order prescribed compensation payable to the payphone providers by
certain IXCs for dial-around calls
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placed from payphones and, 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 ("Flex Ani"). The FCC required
that LECs make such coding available to the payphone providers as a transmit
item included in the local access line service. The 1996 Payphone Order set an
initial monthly rate of $45.85 per pay telephone for the first year after its
implementation (the "First Phase"), an increase from the monthly per pay
telephone rate of $6.00 in periods prior to its implementation, and thereafter,
set dial-around compensation on a per-call basis, at the assumed deregulated
coin rate of $0.35. The First Phase monthly rate was arrived at by the product
of the assumed deregulated coin rate ($0.35) and the then monthly average
compensable dial-around calls per payphone. A finding from the record
established at the time that the monthly average compensable calls was 131 per
phone.
The 1996 Payphone Order was appealed by various parties, including the
IXCs, to the United States Court of Appeals for the District of Columbia Circuit
(the "Appeals Court"). Among other items, the Appeals Court found that the FCC
erred in utilizing a market-based methodology for calculating the amount of
dial-around compensation and further determined that the methodology for
determining the allocation of payment among IXCs was erroneous. The Appeals
Court remanded the 1996 Payphone Order to the FCC for further consideration.
In response to the remand by the Appeals Court, in October 1997 the FCC
issued a new order implementing Section 276 (the "1997 Payphone Order"). The FCC
utilized a market-based methodology to arrive at a per call compensation rate
and then reduced it by certain costs attributable to a coin call which it did
not believe applied to a dial-around call, and adjusted the per-call rate from
$0.35 to $0.284 (the "Default Rate"). The FCC concluded that the Default Rate
should be retroactively utilized in determining compensation during the First
Phase and reiterated that payphone providers were entitled to compensation for
each and every call pursuant to the provisions of Section 276; however, the FCC
deferred for later decision the method of allocation of the payment among the
IXCs.
The 1997 Payphone Order was subsequently appealed by various parties. In
May, 1998 the Appeals Court again remanded the per-call compensation rate to the
FCC for further explanation, without vacating the Default Rate, indicating that
the FCC had failed to adequately explain its derivation of the Default Rate.
In response to the remand of the 1997 Payphone Order, 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 to $0.238, (the "Adjusted Default Rate) retroactive to October 7,
1997. In adjusting the rate, the FCC shifted its methodology from the
market-based method utilized in the 1997 and 1998 Payphone Orders 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
Adjusted Default Rate, the FCC incorporated its prior treatment of certain
payphone costs and 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 $0.002 for amounts charged by LECs for providing Flex Ani) will serve as
the Adjusted Default Rate for coinless payphone calls 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.
The 1999 Payphone Order deferred a final ruling on the First Phase
treatment of dial-around compensation to a later, as yet unreleased order;
however, it appears from the 1999 Payphone Order that the Adjusted Default Rate
will be applied for periods in the First Phase. The FCC further ruled that a
true-up will be made for all payments or credits, together with applicable
interest due and owing among the IXCs and the payphone service providers for the
payment period November 7, 1996 through the effective date of the Adjusted
Default Rate.
The 1999 Payphone Order has been appealed by various parties. The Appeals
Court heard oral arguments on the matter on February 2, 2000 but has not yet
ruled on the arguments presented.
Effect of federal regulation of local coin and dial-around calls
- ----------------------------------------------------------------
DIAL-AROUND CALLS. The payments for dial-around calls prescribed in the
1999 Payphone Order significantly increased dial-around compensation revenues to
PhoneTel over the levels received prior to implementation of the
Telecommunications Act. Market forces and factors outside PhoneTel's control,
however, could significantly affect the resulting revenue impact. These factors
include the following: (1) subsequent court appeals relating to the 1999
Payphone Order, (2) resolution by the FCC of the method of allocating the
initial interim period flat-rate assessment
-8-
<PAGE> 10
among the IXCs and the number of calls to be used in determining the amount of
the assessment, (3) the possibility of other litigation seeking to modify or
overturn the 1999 Payphone Order or portions thereof, (4) pending litigation in
the federal courts concerning the constitutionality or validity of the
Telecommunications Act, (5) the IXCs' reaction to the FCC's recognition that
existing regulations do not prohibit an IXC from blocking 800 subscriber numbers
from payphones in order to avoid paying per-call compensation on such calls, and
(6) ongoing technical or other difficulties in the responsible carriers' ability
and willingness to properly track or pay for dial-around calls actually
delivered to them. Based on the FCC's tentative conclusion in the 1997 Payphone
Order, PhoneTel adjusted the amounts of dial-around compensation previously
recorded for the period, November 6, 1996 to June 30, 1997, from $45.85 to
$37.20 per phone, per month ($0.284 per call multiplied by 131 calls). Based on
this adjustment, PhoneTel recorded a charge of $395,000 in the three-month
period ended September 30, 1997 to reflect the retroactive reduction in revenue
from dial-around compensation relating to 1996. Beginning with the fourth
quarter 1997, PhoneTel began receiving dial-around compensation on a per-call
basis or, to the extent per-call information was not available, dial-around
compensation based on a surrogate rate. In the third quarter of 1997 through the
third quarter of 1998, PhoneTel continued to record dial-around compensation at
the rate of $37.20 per payphone per month. In the fourth quarter of 1998, based
on the reduction in the per-call compensation rate from $0.284 to $0.238 in the
FCC's 1999 Payphone Order, PhoneTel recorded an adjustment, which included
$3,733,000 applicable to prior years, to further reduce revenue recognized from
dial-around compensation for the period November 6, 1996 to September 30, 1998.
Beginning in the fourth quarter of 1998, PhoneTel recorded dial-around
compensation at the rate of $31.18 per payphone, per month ($0.238 per call
multiplied by 131 calls per month).
Effective March 1999, the per-call compensation rate includes 0.2 cents for
Flex Ani costs and became $0.24 per call (or $31.44 per payphone, per month
based upon 131 calls per month).
LOCAL COIN CALLS. In ensuring fair compensation for all calls, the FCC
previously determined that local coin rates from payphones should be generally
deregulated by October 7, 1997, but provided for possible modifications or
exemptions from deregulation upon a detailed showing by an individual state that
there are market failures within the state that would not allow market-based
rates to develop. On July 1, 1997, the Appeals Court issued an order which
upheld the FCC's authority to deregulate local coin call rates, which issue the
United States Supreme Court has declined to consider on appeal. In accordance
with the FCC's rulings and the Court's orders, certain LECs and IPPs, including
PhoneTel, began to adjust rates for local coin calls to reflect market based
pricing. PhoneTel believes that due to the historical subsidization of local
coin rates under regulation, such deregulation, where implemented, will likely
result in higher rates charged for local coin calls and increase revenues from
such calls.
Initial experience with local coin call rate increases indicates that price
sensitivity of consumers for the service does exist and has resulted and will
result in some reduction in the number of calls made. Although PhoneTel believes
that deregulation of local coin rates will ultimately result in revenue
increases, PhoneTel is unable to predict at this time with any degree of
certainty the magnitude or likelihood of the increase, if any. PhoneTel is also
unable to provide assurance that deregulation, if and where implemented, will
lead to higher local coin call rates, and PhoneTel is thus unable to predict the
ultimate impact on its operations of local coin rate deregulation.
Other provisions of the Telecommunications Act and FCC Rules
------------------------------------------------------------
As a whole, the Telecommunications Act and FCC Rules should significantly
alter the competitive framework of the payphone industry. PhoneTel believes that
implementation of the Telecommunications Act and FCC Rules will address certain
historical inequities in the payphone marketplace and lead to a more equitable
competitive environment for all payphone providers. There are numerous
uncertainties in the implementation and interpretation of the Telecommunications
Act, however, which make it impossible for PhoneTel to provide assurance that
the Telecommunications Act or the FCC Rules will result in a long-term positive
impact on PhoneTel. Those uncertainties include the following:
- There are various matters pending in several federal courts which,
while not directly challenging section 276 of the Telecommunications
Act, relate to the validity and constitutionality of the
Telecommunications Act, as well as other uncertainties related to the
impact, timing and implementation of the Telecommunications Act.
- The FCC Rules required that LEC payphone operations be removed from
the regulated rate base on April 15, 1997. The LECs were also required
to make the access lines that are provided for their own payphones
equally available to IPPs and to ensure that the cost to payphone
providers for obtaining
-9-
<PAGE> 11
local lines and services met the FCC's new services test guidelines
which require that LECs price payphone access lines at the cost to the
LEC plus a reasonable margin of profit.
- In the past, RBOCs were allegedly impaired in their ability to compete
with the IPPs because they were not permitted to select the interLATA
carrier to serve their payphones. Recent changes to the FCC Rules
remove this restriction. Under the new rules, the RBOCs are now
permitted to participate with the Location Owner in selecting the
carrier of interLATA services to their payphones effective upon FCC
approval of each RBOC's Comparably Efficient Interconnection plans.
Existing contracts between Location Owners and payphone or
long-distance providers which were in effect as of February 8, 1996
are grandfathered and will remain in effect.
- The FCC Rules preempt state regulations that may require IPPs to route
intraLATA calls to the LEC by containing provisions that allow all
payphone providers to select the intraLATA carrier of their choice.
The FCC Rules did not preempt state regulations that, for public
safety reasons, require routing of "0-" calls to the LEC, provided
that the state does not require that such calls be routed to the LEC
when the call is determined to be non-emergency in nature.
- The FCC Rules determined that the administration of programs for
maintaining public interest payphones should be left to the states
within certain guidelines.
Billed Party Preference and rate disclosure
-------------------------------------------
The FCC issued a Second Notice of Proposed Rulemaking regarding Billed
Party Preference and associated call rating issues, including potential rate
benchmarks and caller notification requirements for 0+ and 0- interstate
long-distance calls. On January 29, 1998, the FCC released its Second Report and
Order on Reconsideration entitled In the Matter of Billed Party Preference for
InterLATA 0+ Calls, Docket No. 92-77. Effective July 1, 1998, all carriers
providing operator services were required to give consumers using payphones the
option of receiving a rate quote before a call is connected when making a 0+
interstate call. All of the IXCs servicing PhoneTel's payphones are in
compliance with this requirement and have been since November 1998; however,
PhoneTel is unable at this time to assess the ultimate impact, if any, on its
future operations or results.
Universal Services Fund
-----------------------
The Telecommunications Act provided for the establishment of a Joint Board
to make recommendations to the FCC concerning the continued provision of
"universally available" telecommunications services throughout the United
States. Congress directed the FCC, upon the recommendation of the Joint Board,
to implement and provide funding for (1) access to advanced telecommunications
services in rural, insular, and high-cost areas at the same cost as similar
services are provided in urban areas, (2) access to advanced telecommunications
services for health care providers in rural areas and (3) below-cost access to
advanced telecommunications services for schools and libraries. On May 8, 1997,
the FCC affirmed the Universal Services Order which required all
telecommunications providers, including payphone providers such as PhoneTel, to
contribute to universal services support beginning in January 1998. The FCC
established mechanisms in the Universal Services Order and related subsequent
orders whereby carriers and payphone providers would be billed monthly, based on
previously filed semi-annual gross revenue call traffic reports, at rates
assessed quarterly by Universal Service Administrative Co. ("USAC"). In February
1998, the USAC issued its first monthly assessment, which applied to January
1998. The FCC initially determined that carriers and payphone providers would be
assessed at a factor of 0.0072 on its interstate, intrastate, and international
coin and long-distance revenues to meet the anticipated needs of the schools,
libraries, and rural health care funds and at 0.0319 on its interstate and
international coin and long-distance revenues for the high-cost and low-income
funds. These factors are subject to periodic modification. The Universal Service
Fee ("USF") assessments have increased the monthly costs to PhoneTel, which it
is currently paying under protest.
In July 1999, the U.S. Court of Appeals for the Fifth Circuit ruled that
federal USF payments could not be based on the intrastate revenues of USF
payers. The Court required the FCC to re-evaluate the assessment of USF payments
based on the international revenues of payers and reversed the FCCs decision to
require LECs to recover USF payments only through their interstate access
charges.
-10-
<PAGE> 12
On October 8, 1999, the FCC issued an order implementing the Court's
ruling, (1) eliminating intrastate revenues from the USF base, (2) creating a
limited international revenue exception for assessing international revenues,
and (3) allowing LECs to recover their USF payments through either access
charges or end user charges. This ruling became effective November 1, 1999. With
the limitations placed on the USF by the FCC, the Company anticipates that the
amount of USF payments the Company is required to pay will decrease.
Presubscribed IXC charge
------------------------
Other changes in federal regulations affect the charges incurred by
PhoneTel for local and long distance telecommunications services. For example,
in May 1997, the FCC adopted new regulations that restructure interstate access
charges. As a result of these changes, LECs were required to reduce the
per-minute interstate access charges to IXCs. To partially offset these
reductions, LECs were authorized to assess IXCs a flat "Presubscribed
Interexchange Carrier Charge" that averages approximately $2.75 per line per
month and which, at the IXC's option, could be passed through to the end users.
In the event that an end user elects not to designate a presubscribed IXC, the
LEC is authorized to assess an equivalent charge to the end user. As a net
result of these and other changes, many carriers have restructured their rates.
Based upon these latter FCC actions, PhoneTel is experiencing an increase in
carrier costs that will be subsumed within, and to some extent offset by, the
carrier cost reductions otherwise expected from application of the FCC's new
services test and the advent of competition in LEC services.
State and local regulation
--------------------------
State regulatory authorities have primarily been responsible for regulating
the rates, terms, and conditions for intrastate payphone services. Regulatory
approval to operate payphones in a state typically involves submission of a
certification application and an agreement by PhoneTel to comply with applicable
rules, regulations and reporting requirements. The 49 states that currently
permit IPPs to supply local and long-distance payphone service, and the District
of Columbia, have adopted a variety of state-specific regulations that govern
rates charged for coin and non-coin calls as well as a broad range of technical
and operational requirements. The Telecommunications Act contains provisions
that require all states to allow payphone competition on fair terms for both
LECs and IPPs. State authorities also regulate LECs' tariffs for interconnection
of independent payphones, as well as the LECs' own payphone operations and
practices.
PhoneTel is also affected by state regulation of operator services. Most
states have capped the rates that consumers can be charged for coin toll calls
and non-coin local and intrastate toll calls made from payphones. In addition,
PhoneTel must comply with regulations designed to afford consumers notice at the
payphone location of the long-distance company servicing the payphone and the
ability to obtain access to alternate carriers. PhoneTel believes that it is
currently in material compliance with all regulatory requirements pertaining to
their offerings of operator services directly or through other long-distance
companies.
In accordance with requirements under the Telecommunications Act, state
regulatory authorities are currently reviewing the rates that LECs charge IPPs
for local line access and associated services. Local line access charges have
been reduced in certain states and PhoneTel believes that selected states'
continuing review of local line access charges, coupled with competition for
local line access service resulting from implementation of the
Telecommunications Act, could lead to more options available to PhoneTel for
local line access at competitive rates. No assurance can be given, however, that
such options or local line access rates will become available. The
Telecommunications Act and FCC Rules also contain other provisions that will
affect the rates payphone providers can charge for local coin calls and other
aspects of the regulation of payphone services by the states, although the
extent of any future federal preemption of state regulation cannot be accurately
predicted.
PhoneTel believes that an increasing number of municipalities and other
units of local government have begun to impose taxes, license fees, and
operating rules on the operations and revenues of payphones. PhoneTel believes
that some of these fees and restrictions may violate provisions of the
Telecommunications Act prohibiting barriers to entry into the business of
operating payphones and the policy of the Telecommunications Act to encourage
wide deployment of payphones. In at least one instance involving a challenge to
a payphone ordinance adopted by the Village of Huntington Park, California,
however, the FCC declined to overturn a total ban on payphones in a
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<PAGE> 13
downtown area. The proliferation of local government licensing, restriction,
taxation, and regulation of payphone services could have an adverse affect on
PhoneTel unless the industry is successful in resisting this trend.
SERVICEMARK
The Company uses the servicemark "PhoneTel" on its telephones, letterhead,
and in various other manners. On November 22, 1988, the United States Patent and
Trademark Office granted the Company a Certificate of Registration for the
servicemark "PhoneTel" for providing telecommunications services for a period of
twenty years.
COMPETITION
The public payphone industry is, and can be expected to remain, highly
competitive. While PhoneTel's principal competition comes from RBOCs and other
LECs, PhoneTel also competes with other IPPs, major OSPs, and IXCs. In addition,
PhoneTel competes with providers of cellular communications services and
personal communications services, which provide an alternative to the use of
public payphones. Furthermore, pursuant to section 276 of the Telecommunications
Act and the FCC's implementing regulations, RBOCs are permitted to negotiate
with Location Owners and select interLATA long distance service providers for
their public payphones. See "Regulatory Matters." This will enable RBOCs to
generate revenues from a new service, as well as to compete with IPPs for
locations to install their public payphones by offering Location Owners higher
commissions for long distance calls than those currently offered by IPPs.
Some of the other public payphone companies, such as Davel Communications
Group, Inc. ("Davel"), have pursued an acquisition strategy similar to
PhoneTel's and frequently compete with PhoneTel for the most favorable public
payphone contracts and sites. Although PhoneTel is one of the largest IPPs, most
RBOCs and other LECs and long distance carriers have, and some IPPs with which
PhoneTel competes may have, substantially greater financial, marketing and other
resources than PhoneTel. In addition, in response to competition from public
payphone companies, many RBOCs and other LECs have increased their compensation
arrangement with Location Owners by offering higher commissions.
PhoneTel believes the principal competitive factors in the public payphone
industry are: (i) the amount of commission payments to Location Owners; (ii) the
ability to serve accounts with locations in several LATAs or states; and (iii)
the quality of service provided to Location Owners and public payphone users.
EMPLOYEES
PhoneTel had 388 employees as of February 29, 2000. The Company considers
its relations with its employees to be satisfactory. None of the employees of
PhoneTel is a party to agreements with any unions.
IMPACT OF SEASONALITY
PhoneTel completed eight acquisitions that added approximately 20,100
telephones in the first six months of 1997 and approximately 3,400 telephones
during 1998. The seasonality of PhoneTel's historical operating results has been
affected by shifts in the geographic concentrations of its telephones resulting
from such acquisitions. Historically revenues and related expenses during the
first three months of the year have been lower than comparable periods during
the remainder of the year due to weather conditions that affect pay telephone
usage.
ITEM 2. PROPERTIES
The Company's executive offices are located at North Point Tower, 7th
Floor, 1001 Lakeside Avenue, Cleveland, Ohio 44114-1195, where the Company
initially leased approximately 20,000 square feet of space at a monthly rental
of $24,167 subject to certain adjustments. The leased area increased to 32,919
square feet on November 1, 1998 with corresponding increases in monthly rent to
$39,777 per month on November 1, 1998 and to $41,148 per month on November 1,
2000. The lease expires on October 31, 2003. The Company also leases
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<PAGE> 14
approximately 40 district operations facilities with lease terms that are
generally three years or less. The Company considers its facilities adequate for
its purposes.
ITEM 3. LEGAL PROCEEDINGS
On September 29, 1998, PhoneTel received a letter from Davel Communications
Group, Inc. purporting to terminate a merger agreement with PhoneTel (the "Davel
Merger Agreement"). On October 1, 1998, a complaint against PhoneTel under Civil
Action No. 16675 was filed in the Court of Chancery of New Castle County,
Delaware by Davel, which was subsequently amended on October 9, 1998, alleging
among other things, equitable fraud and breach of contract relating to the Davel
Merger Agreement. Davel is seeking a declaratory judgement terminating the Davel
Merger Agreement or, alternatively, an order to rescind the merger agreement,
and compensatory damages and costs of an amount in excess of $1,000,000.
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. On the same date, PhoneTel filed a third
party claim against Peoples Telephone Company, Inc. ("Peoples") for tortuous
interference with contract alleging that Peoples induced Davel not to 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 claim against Davel and Peoples.
The Company is not a party to any other legal proceedings which,
individually or in the aggregate, would have a material adverse effect on the
Company's business, results of operations, financial condition, or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1999, no
matters were submitted to a vote of the Company's shareholders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
On November 17, 1999, the Company consummated its Prepackaged Plan and all
of the Common Stock (Predecessor Company) and 14% Preferred was converted to
Common Stock (Successor Company). In addition, other issues of preferred stock
and all outstanding options and warrants ceased to exist. The Common Stock
(Successor Company), $0.01 par value, began trading over-the-counter on the
electronic bulletin board ("OTC:BB") under the symbol PHTE in December 1999.
Initial market price quotations were not deemed to be representative of the
market value of the Company's shares. Accordingly, the reported high and low
sales prices of the Common Stock (Successor Company) have been presented below
for the period January 1 to March 16, 2000, the latest practicable date such
information was available.
Pursuant to the terms of the Prepackaged Plan, the Company issued and has
outstanding New Warrants to purchase 1,074,721 shares of Common Stock,
(Successor Company) through November 17, 2002 at an exercise price of $10.50 per
share. The New Warrants are to be traded over-the-counter and quoted on the
National Quotation Service Pink Sheets under the symbol PHTEW. To date, no
established public trading market has developed for the New Warrants.
Effective February 16, 1999, following the decision by the American Stock
Exchange ("AMEX") to remove the Company's Common Stock (Predecessor Company)
from listing and registration on the exchange, the Company's
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<PAGE> 15
Common Stock (Predecessor Company), $0.01 par value, had traded over the counter
and was quoted on the National Quotation Service Pink Sheets under the symbol
"PHNT". Prior to February 12, 1999, the Company's Common Stock (Predecessor
Company) was listed on the AMEX under the symbol "PHN". The following table sets
forth on a per share basis, for the periods indicated, the high and low sales
prices of the Common Stock as reported by the AMEX or the high and low bid
prices for over-the-counter quotations, as applicable. Over-the-counter market
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions. Furthermore, market prices
for the Common Stock (Predecessor Company) are not necessarily representative of
any trading patterns that may develop for the Common Stock (Successor Company).
<TABLE>
<CAPTION>
Price Range
High Low
---- ---
COMMON STOCK (PREDECESSOR COMPANY)
<S> <C> <C>
1998:
First Quarter................................................................. $ 2 15/16 $ 1 5/8
Second Quarter................................................................ 2 9/16 1 1/16
Third Quarter................................................................. 2 5/8 1/16
Fourth Quarter................................................................ 9/32 1/16
1999:
First Quarter................................................................. 5/16 3/64
Second Quarter................................................................ 1/8 1/16
Third Quarter................................................................. 7/64 3/64
Fourth Quarter (Through November 17, 1999).................................... 1/16 1/32
COMMON STOCK (SUCCESSOR COMPANY)
2000:
January 1 through March 16, 2000.............................................. 2 3/8 1 1/32
</TABLE>
As of February 29, 2000, there were 1,854 shareholders of record.
DIVIDEND POLICY ON COMMON STOCK
The Company has never declared or paid any dividends on its Common Stock.
The Company currently intends to retain its earnings to finance the growth and
development of its business and does not anticipate paying cash dividends in the
foreseeable future. The Company was not permitted to pay any dividends on its
Common Stock (Predecessor Company) unless dividends were paid to the holders of
the Series A Preferred (as defined herein) in an amount equal to that which such
holders would have been entitled to receive if such holders had converted their
shares of Series A Preferred (as defined herein) into Common Stock (Predecessor
Company) prior to the record date used by the Board of Directors for determining
the holders of Common Stock (Predecessor Company) entitled to receive such
dividends. Any future declaration of dividends will be subject to the discretion
of the Board of Directors of the Company. The timing, amount and form of
dividends, if any, will depend, among other things, on the Company's financial
condition, capital requirements, cash flow, profitability, plans for expansion,
business outlook and other factors deemed relevant by the Board of Directors of
the Company.
-14-
<PAGE> 16
SALES AND ISSUANCES OF COMMON STOCK
Sales and issuances of the Company's Common Stock during 1997, 1998 and
1999 were as follows:
<TABLE>
<CAPTION>
Number of Average
Common Price Per
Shares Share
------ -----
<S> <C> <C>
COMMON STOCK (PREDECESSOR COMPANY)
1997: Company Equity Offering (registered) 1,012,500 $ 2.79
Exercise of nominal value
warrants by Directors 221,125 .01
Other exercises of nominal value warrants 88,629 .01
Exercise of stock options 100,000 1.02
Issued to Directors for services 75,000 2.78
Conversion of Series A Preferred 250,000 .01
Issued to executive upon conversion of
debt and accrued interest 124,747 3.00
--------------
Total issuances of Common Stock in 1997 1,872,001
==============
1998: Exercise of nominal value warrants by Directors 89,998 .01
Other exercises of nominal value warrants 275,124 .01
Exercise of other warrants 10,682 2.34
Conversion of Series A Preferred 2,017,500 .01
--------------
Total issuances of Common Stock in 1998 2,393,304
==============
Total issuances of Common Stock in 1999 - -
==============
COMMON STOCK (SUCCESSOR COMPANY)
1999: Issued pursuant to Prepackaged Plan
in exchange for:
Senior Notes 9,500,000 6.20
14% Preferred 325,000 6.20
Common Stock (Predecessor Company) 175,000 6.20
Services 205,000 6.20
--------------
Total issuances of Common Stock in 1999 10,205,000
==============
</TABLE>
PREFERRED STOCK
On February 23, 1996, the Company created three new classes of preferred
stock: (i) Series A Special Convertible Preferred Stock, $0.20 par value, $0.20
Stated Value, 250,000 authorized shares, with each share immediately convertible
into 20 shares of Common Stock (Predecessor Company), and non-voting; (ii)
Series B Special Convertible Preferred Stock, $0.20 par value, $120 Stated
Value, 250,000 authorized shares, with each share immediately convertible into
20 shares of Common Stock (Predecessor Company), and non-voting ("Series B
Preferred"); and (iii) 14% Convertible Cumulative Redeemable Preferred Stock,
without par value, $60 Stated Value, non-voting, 200,000 authorized shares,
with each share immediately convertible into 10 shares of Common Stock. Each
share of the 14% Preferred was entitled to receive a quarterly dividend of 0.035
shares of 14% Preferred.
On February 7, 1997, a former lender to the Company exercised warrants for
12,500 shares of Series A
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<PAGE> 17
Preferred which were immediately converted into 250,000 shares of Common Stock
(Predecessor Company). On October 13, 1998, the Company received notice from
this former lender which purported to exercise its put right, as defined in the
agreement for the Series A Warrants (the "Warrant Agreement"), with respect to
89,912 Series A Warrants and 124,300 Common Shares. The Warrant Agreement
specified that the Company was to redeem Series A Warrants that were convertible
into shares of Common Stock (or shares of Common Stock obtained from such
conversion) at a value determined by a formula, subject to certain limitations,
set forth therein. In 1998, the Company recorded an accrued liability and a
charge to additional paid-in-capital of $1,452,000 relating to this put. The
Company was not permitted to make payment pursuant to this purported exercise of
a put right under the indenture for the Company's Senior Notes. On November 13,
1998, another former lender exercised warrants to purchase 100,875 shares of
Series A Preferred, net of stock not issued in lieu of cash payment, which were
immediately converted into 2,017,500 shares of Common Stock.
On October 18, 1999, in connection with the Prepackaged Plan, the Company
reached an agreement with the former lender to settle its claim for the
purported exercise of a put right for $1,000,000 in the form of a note payable,
subject to certain reductions for early payment, which is payable together with
deferred interest at 5% per annum in five years. In addition, the former lender
agreed to forfeit its shares of Common Stock (Successor Company) and New
Warrants which were issued pursuant to the Prepackaged Plan and immediately
canceled. The adjustment to reduce the amount of the warrant put obligation to
$1,000,000, to record a note payable for this obligation and to credit
additional paid-in capital was recorded by the Company as of November 17, 1999.
At December 31, 1999, there were no shares of preferred stock outstanding.
All classes of preferred stock existing prior to the consummation of the
Prepackaged Plan were cancelled pursuant to the terms of the Prepackaged Plan.
-16-
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data are derived from the
consolidated financial statements of the Company. The data should be read in
conjunction with the consolidated financial statements, related notes thereto
and other financial information included herein.
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
(In thousands except share and per share amounts) YEAR ENDED DECEMBER 31
-----------------------------------------------------------
1995 1996 1997 1998
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Coin calls $ 12,130 $ 26,212 $ 58,520 $ 52,544
Non-coin telecommunication services 6,458 17,649 50,624 42,432
Dial-around compensation adjustment - - (395) (3,733)
Other 130 943 500 143
----------- ------------ ------------ ------------
18,718 44,804 109,249 91,386
----------- ------------ ------------ ------------
COSTS AND EXPENSES:
Line and transmission charges 5,149 11,153 24,518 29,607
Telecommunication and validation fees 1,258 5,608 11,599 11,344
Location commissions 3,468 6,072 16,628 14,179
Field operations 4,934 8,733 21,100 22,009
Selling, general and administrative 2,645 4,381 10,713 12,354
Depreciation and amortization(1) 4,383 12,800 21,525 23,731
Other unusual charges and contractual settlements 2,170 6,072 9,095 2,762
----------- ------------ ------------ ------------
24,007 54,819 115,178 115,986
----------- ------------ ------------ ------------
Loss from operations (5,289) (10,015) (5,929) (24,600)
----------- ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense - related parties(1) - (5,235) (1,994) (1,400)
Interest expense - others(1) (837) (1,504) (15,891) (19,364)
Interest and other income 16 182 560 547
----------- ------------ ------------ ------------
(821) (6,557) (17,325) (20,217)
----------- ------------ ------------ ------------
Loss before extraordinary item (6,110) (16,572) (23,254) (44,817)
Extraordinary item:
Gain (loss) on extinguishment of debt - (10,077) - -
----------- ------------ ------------ ------------
NET INCOME (LOSS) ($ 6,110) ($ 26,649) ($ 23,254) ($ 44,817)
=========== ============ ============ ============
Net income ( loss) applicable to common shareholders ($ 6,420) ($ 29,090) ($ 24,262) ($ 46,213)
Net income (loss) per common share, basic and diluted ($ 3.29) ($ 5.29) ($ 1.51) ($ 2.73)
Weighted average number of shares, basic and diluted 1,950,561 5,494,011 16,040,035 16,923,499
EBITDA from recurring operations (2) $ 1,264 $ 8,857 $ 24,691 $ 1,893
Cash flow provided by (used in):
Operating activities ($ 580) ($ 269) ($ 4,720) ($ 6,470)
Investing activities (2,354) (63,062) (57,197) (6,763)
Financing activities 3,168 109,056 21,998 12,482
BALANCE SHEET DATA:
Total assets $ 28,917 $ 159,770 $ 169,826 $ 150,674
Long-term debt and mandatorily redeemable preferred
stock, less current portion of debt (3) 12,563 132,086 157,938 9,118
Shareholders' equity (deficit) 9,711 16,705 (4,042) (51,598)
Cash dividends per common share - - - -
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
COMPANY COMPANY
--------------- ------------
TEN MONTHS ONE MONTH
STATEMENT OF OPERATIONS DATA: AND SEVENTEEN AND THIRTEEN
(In thousands except share and per share amounts) DAYS ENDED DAYS ENDED
NOVEMBER 17 DECEMBER 31
1999 1999
------------- ------------
<S> <C> <C>
REVENUES:
Coin calls $ 36,220 $ 4,378
Non-coin telecommunication services 33,227 3,568
Dial-around compensation adjustment - -
Other 210 26
------------ ---------
69,657 7,972
------------ ---------
COSTS AND EXPENSES:
Line and transmission charges 17,575 2,088
Telecommunication and validation fees 8,507 960
Location commissions 11,263 968
Field operations 18,043 2,184
Selling, general and administrative 9,156 1,359
Depreciation and amortization (1) 20,719 2,316
Other unusual charges and contractual settlements 1,894 (333)
------------ ---------
87,157 9,542
------------ ---------
Loss from operations (17,500) (1,570)
------------ ---------
OTHER INCOME (EXPENSE):
Interest expense - related parties (1) - -
Interest expense - others (1) (19,575) (1,162)
Interest and other income 191 38
------------ ---------
(19,384) (1,124)
------------ ---------
Loss before extraordinary item (36,884) (2,694)
Extraordinary item:
Gain (loss) on extinguishment of debt 77,172
------------ ---------
NET INCOME (LOSS) $ 40,288 ($ 2,694)
============ =========
Net income ( loss) applicable to common shareholders $ 39,078 ($ 2,694)
Net income (loss) per common share, basic and diluted $ 2.08 ($ 0.26)
Weighted average number of shares, basic and diluted 18,754,133 10,188,630
EBITDA from recurring operations (2) $ 5,113 $ 413
Cash flow provided by (used in):
Operating activities ($ 685) ($ 852)
Investing activities (1,882) (420)
Financing activities 3,375 396
BALANCE SHEET DATA:
Total assets $ 127,804 $ 124,399
Long-term debt and mandatorily redeemable preferred
stock, less current portion of debt (3) 47,992 48,642
Shareholders' equity (deficit) 63,492 60,798
Cash dividends per common share - -
</TABLE>
-17-
<PAGE> 19
(1) Certain costs and expenses for prior years have been reclassified to
conform to the current year presentation. The reclassifications have
had no impact on net loss as previously reported.
(2) EBITDA from recurring operations represents earnings before interest
income and expense, depreciation, amortization, other unusual charges
and contractual settlements, and extraordinary items. EBITDA from
recurring operations is not intended to represent an alternative to
operating income (as defined in accordance with generally accepted
accounting principles) as an indicator of the Company's operating
performance, or as an alternative to cash flows from operating
activities (as defined in accordance with generally accepted
accounting principles) as a measure of liquidity. The Company believes
that EBITDA from recurring operations 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.
(3) At December 31, 1998, long-term debt was classified as a current
liability because the Company was in default on such debt.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Statements, other than historical facts, contained in this Form 10-K are
"forward looking statements" within the meaning of section 27A of the Securities
Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934,
as amended. Although the Company believes that its forward looking statements
are based on reasonable assumptions, it cautions that such statements are
subject to a wide range of risks and uncertainties with respect to the Company's
operations in fiscal 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, including, without limitation, the risks
and uncertainties identified in this report, general economics and business
conditions, the business opportunities (or lack thereof) that may be presented
to and pursued by the Company, changes in laws or regulations and other factors,
many of which are beyond the control of the Company. Investors and prospective
investors are cautioned that any such statements are not guarantees of future
performance and that actual results or developments may differ materially from
those projected in the forward looking statements.
OVERVIEW
The Company derives substantially all of its revenues from coin calls and
non-coin calls placed from its public pay telephones. Coin revenue is generated
from local and long-distance calls that are placed from the Company's public pay
telephones. Non-coin revenue is generated from calling card, credit card,
collect and third party billed calls. Typically, each public pay telephone has a
presubscribed (dedicated) provider of long distance and operator services. The
Company receives revenues for non-coin calls placed from its public pay
telephones in the form of commissions from its presubscribed long distance and
operator service provider ("OSP") based on the volume of calls carried by the
OSP and the amount of revenue generated by those calls. The Company also
receives dial-around compensation (revenue from non-coin calls placed from the
Company's payphones utilizing a carrier other than the Company's presubscribed
OSP). Net revenue from dial-around compensation was $18,705,000, $12,454,000 and
$14,980,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
-18-
<PAGE> 20
Effective November 6, 1996, pursuant to FCC regulations, the Company
derived additional revenues from dial-around calls placed from its public pay
telephones. From November 6, 1996 to June 30, 1997, the Company recorded gross
dial-around revenues at the then mandated rate of $45.85 per telephone per
month, as compared with the flat fee of $6.00 per telephone per month in place
prior to November 6, 1996. Pursuant to the FCC's Second Report and Order, in the
third quarter of 1997, the Company began recording gross dial-around revenue at
a rate of $37.20 per installed pay telephone per month and recorded a charge for
the retroactive reduction in the dial-around compensation rate from $45.85 to
$37.20 per telephone per month, applicable to the November 6, 1996 to September
30, 1997 period. The third quarter 1997 adjustment included a charge of $395,000
applicable to the November 6 to December 31, 1996 period. From October 1997 to
September 1998, the Company recorded dial-around compensation at a per-call rate
of $0.284 based on the Company's estimate of the actual number of dial-around
calls ($37.20 per month based on 131 calls per month) placed from each of its
public pay telephones. In the fourth quarter 1998, pursuant to the FCC's Third
Report and Order, the Company recorded revenues from dial-around compensation
based upon a per-call rate of $0.238 and recorded a retroactive adjustment to
reduce revenues previously recorded at a rate of $0.284 per-call. This
adjustment included a charge of $3,733,000 in 1998 to reflect the reduction in
the dial-around compensation rate for the period November 6, 1996 to December
31, 1997 as a result of this regulatory change. Additionally, the states were
required to deregulate the price of a local phone call, which has allowed the
Company to increase its local coin call rate thereby generating additional
revenues. Effective October 7, 1997, the Company increased the local coin call
rate at a majority of its pay telephones to $0.35 in states in which the local
call rate was previously limited to $0.25. A majority of the Company's pay
telephones currently have a local coin rate of $0.35. However, there can be no
assurance as to the ultimate effect that the rules and policies adopted by the
FCC on its own or after any judicial review will have on the Company's business,
results of operations or financial condition. See "Business -- Governmental
Regulations."
The Company's principal operating expenses consist of: (i) telephone line
and transmission charges; (ii) commissions paid to location providers which are
typically expressed as a percentage of revenues and are fixed for the term of
the agreements with each respective location providers; (iii) telecommunication
and validation fees; and (iv) field operations costs which are principally
comprised of personnel, service vehicle and repair part costs of collecting
coins from and maintaining the Company's public pay telephones. The Company pays
monthly local access and usage charges to RBOCs and other LECs for
interconnection to the local network for local calls, which are generally
computed on a flat monthly charge, and may also include either a per message or
usage rate based on the time and duration of the call. The Company also pays
fees to RBOCs and other LECs and long distance carriers based on usage for local
or long distance coin calls.
At the end of 1998 and during 1999, the Company initiated several profit
improvement measures. The Company was able to obtain lower local access line
charges through negotiations and promotional programs with certain of its
incumbent LECs or by utilizing competitive LECs ("CLECs"). The Company entered
into agreements with new OSPs to obtain an improvement in rates for operator
service revenues and long distance line charges. The Company reduced the number
of field operations personnel and related costs, abandoned location contracts
relating to approximately 2,000 unprofitable phones and closed three district
operations facilities to reduce costs. The Company also reduced the number of
administrative and sales personnel and eliminated or reduced certain
non-essential expenses. The Company believes these measures will continue to
have a positive impact on the results of its operations.
Debt Restructuring and Chapter 11 Bankruptcy Filing
On July 14, 1999, the Company commenced a case under chapter 11 of the
United States Bankruptcy Code (the "Case") by filing a prepackaged plan of
reorganization (the "Prepackaged Plan") in the United States Bankruptcy Court
for the Southern District of New York (the "Court"). On October 20, 1999, the
Court entered an order confirming the Company's Prepackaged Plan, which became
effective on November 17, 1999 ("the Consummation Date").
Pursuant to the terms of the Prepackaged Plan, claims of employees, trade
and other creditors of the company, other than holders of the Company's
$125,000,000 aggregate principal amount 12% Senior Notes (the "Senior Notes"),
are to be paid in full in the ordinary course, unless otherwise agreed, with the
Company retaining its rights and defenses with respect to such claims. Holders
of the Senior Notes received 9,500,000 shares of a new issue of common stock
("Common Stock (Successor Company)") in exchange for the Senior Notes. In
addition, the
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<PAGE> 21
Unofficial Committee representing a majority in principal amount of the Senior
Notes appointed four of the five members of the Board of Directors of the
Company (the "New Board").
Holders of the Company's 14% Cumulative Redeemable Convertible Preferred
Stock ("14% Preferred") received 325,000 shares of Common Stock (Successor
Company) and warrants to purchase up to 722,200 shares of Common Stock
(Successor Company) at an exercise price of $10.50 per share which expire three
years from the date of grant ("New Warrants"). Holders of existing Common Stock
("Common Stock (Predecessor Company)") received 175,000 shares of Common Stock
(Successor Company). Options and warrants to purchase existing common stock were
extinguished pursuant to the Prepackaged Plan.
The equity interests issued in connection with the Prepackaged Plan are
subject to dilution by certain other equity issuances, including the issuance of
205,000 shares of Common Stock (Successor Company) to certain financial advisors
for services rendered in connection with the reorganization, and issuances
resulting from the exercise of certain options to purchase up to 5% of Common
Stock (Successor Company) to be issued by the New Board pursuant to the terms of
a management incentive plan and other awards included as part of the Prepackaged
Plan.
Results of Operations
Upon emergence from its Chapter 11 proceedings, the Company adopted fresh
start reporting pursuant to the provisions of AICPA Statement of Position 90-7
("SOP 90-7"). The Company has recorded the effects of fresh start reporting as
of November 17, 1999, the Consummation Date of the Company's Prepackaged Plan.
In accordance with SOP 90-7, assets and liabilities have been restated as of
November 17, 1999 to reflect the reorganization value of the Company, which
approximates their fair values at the Consummation Date. In addition, the
accumulated deficit of the Company through the Consummation Date was eliminated
and the debt and capital structure of the Company was recast pursuant to the
provisions of the Prepackaged Plan.
The Predecessor Company's financial statements (through to November 17,
1999) are not comparable to the reorganized Company's financial statements
(subsequent to November 17, 1999). (See Note 1 to the Company's Consolidated
Financial Statements.) However, for purposes of management's discussion and
analysis of results of operations, the year ended December 31, 1999 is being
compared to 1998 since the results of operations are comparable except for the
extraordinary item and the elimination of interest expense relating to the
Predecessor Company's Senior Notes, which resulted from the implementation of
the Prepackaged Plan, and the effect on depreciation and amortization of
adopting fresh start reporting.
-20-
<PAGE> 22
The following table sets forth, for the periods indicated, certain
information derived from the Company's Consolidated Statements of Operations,
included elsewhere in this Form 10-K. Certain information for the years ended
December 31, 1997 and 1998 has been reclassified to conform to the presentation
for the year ended December 31, 1999. The reclassifications had no impact on the
net loss as previously reported.
<TABLE>
<CAPTION>
(In thousands)
Year Ended December 31
-----------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Coin calls ............................ $ 58,520 $ 52,544 $ 40,598
Non-coin telecommunication services ... 50,624 42,432 36,795
Dial-around compensation adjustment ... (395) (3,733) --
Other ................................. 500 143 236
--------- --------- ---------
Total revenues ........................ 109,249 91,386 77,629
--------- --------- ---------
Costs and expenses:
Line and transmission charges ......... 24,518 29,607 19,663
Telecommunication and validation fees . 11,599 11,344 9,467
Location commissions .................. 16,628 14,179 12,231
Field operations ...................... 21,100 22,009 20,227
Selling, general and administrative
expenses ............................ 10,713 12,354 10,515
Depreciation and amortization ......... 21,525 23,731 23,035
Other unusual charges and
contractual settlements ............ 9,095 2,762 1,561
--------- --------- ---------
Total operating expenses .............. 115,178 115,986 96,699
--------- --------- ---------
Loss from operations ....................... (5,929) (24,600) (19,070)
--------- --------- ---------
Other income (expense):
Interest expense - related parties .... (1,994) (1,400) --
Interest expense - others ............. (15,891) (19,364) (20,737)
Interest and other income ............. 560 547 229
--------- --------- ---------
Total other income (expense) .......... (17,325) (20,217) (20,508)
--------- --------- ---------
Loss before extraordinary item ............. (23,254) (44,817) (39,578)
Extraordinary gain on extinguishment of debt -- -- 77,172
--------- --------- ---------
Net income (loss) .......................... ($ 23,254) ($ 44,817) $ 37,594
========= ========= =========
Cash flow provided by (used in):
Operating activities .................. ($ 4,720) ($ 6,470) ($ 1,537)
Investing activities .................. (57,197) (6,763) (2,302)
Financing activities .................. 21,998 12,482 3,771
EBITDA from recurring operations (1) ....... 24,691 1,893 5,526
</TABLE>
(1) See Item 6, Selected Financial Data for definition of EBITDA from recurring
operations.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES Total revenues decreased by $13,757,000 or 15.1% from $91,386,000
for the year ended December 31, 1998 to $77,629,000 for the year ended December
31, 1999. This decrease is primarily due to a decrease in the average number of
installed pay telephones, a decline in coin call volume, and the decrease in
revenues from non-coin telecommunication services, including dial-around
compensation, as discussed below. The average number of installed pay telephones
decreased from 43,282 for the year ended December 31, 1998 to 40,063 for the
year ended December 31, 1999, a decrease of 3,219 or 7.4%. This decrease was
principally due to decreases in pay telephones resulting from expired location
contracts which were not renewed and the removal of approximately 2000
unprofitable pay telephones in the fourth quarter of 1999.
Revenues from coin calls decreased by $11,946,000 or 22.7%, from
$52,544,000 for the year ended December 31, 1998 to $40,598,000 for the year
ended December 31, 1999. The decrease is primarily due to a decrease in the
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<PAGE> 23
average number of payphones and a decline in the number of local and long
distance coin calls. 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. Coin
revenue from long distance calls have also declined due to the impact of
dial-around calls placed from the Company's payphones as discussed below.
Revenues from non-coin telecommunication services decreased by $5,637,000
or 13.3%, from $42,432,000 for the year ended December 31, 1998 to $36,795,000
for the year ended December 31, 1999. Of this decrease, long distance revenues
from operator service providers decreased by $4,430,000 or 16.9% principally due
to a reduction in the number of operator service calls as a result of continuing
aggressive dial-around advertising by long distance carriers such as AT&T and
MCI Worldcom. Long distance revenues from operator service providers have also
been adversely affected by the growth in wireless communications. Revenues from
dial-around compensation decreased by $1,207,000 or 7.5% compared to 1998
primarily due to the decrease in the average number of installed pay telephones.
The Company also recorded an adjustment to revenues from dial-around
compensation as a result of the regulatory changes in the rate of dial-around
compensation as discussed below. Net revenues from dial-around compensation
consists of:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Amount included in revenue from
non-coin telecommunication services ... $ 16,187,000 $ 14,980,000
Retroactive adjustment for changes in
accounting estimates of revenues
recorded in prior years ............... (3,733,000) --
------------ ------------
Net revenue from dial-around compensation $ 12,454,000 $ 14,980,000
============ ============
</TABLE>
Of the amount recorded as a retroactive adjustment to dial-around
compensation in 1998, $3,222,000 relates to the Company's 1997 fiscal year and
$511,000 relates to the Company's 1996 fiscal year. If revenues from dial-around
compensation had been recorded at the then current rate ($0.238 per call or
$31.18 per month based on 131 calls) the net revenue would have been $16,187,000
in 1998.
Effective November 6, 1996, pursuant to the rules and regulations
promulgated by the FCC under section 276 of the Telecommunications Act ("Section
276"), the FCC issued an order to achieve fair compensation for dial-around
calls placed from pay telephones through deregulation and competition (the "1996
Payphone Order). Among other things, the 1996 Payphone Order prescribed
compensation payable to the payphone providers by certain interexchange carriers
("IXCs") for dial-around calls placed from payphones and, 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 ("Flex Ani"). The FCC required that the local exchange carriers
("LECs") make such coding available to the payphone providers as a transmit item
included in the local access line service. The 1996 Payphone Order set an
initial monthly rate of $45.85 per pay telephone for the first year after its
implementation (the "First Phase"), an increase from the monthly per pay
telephone rate of $6.00 in periods prior to its implementation, and thereafter,
set dial-around compensation on a per-call basis, at the assumed deregulated
coin rate of $0.35. The First Phase monthly rate was arrived at by the product
of the assumed deregulated coin rate ($0.35) and the then monthly average
compensable dial-around calls per payphone. A finding from the record
established at the time that the monthly average compensable calls was 131.
The 1996 Payphone Order was appealed by various parties, including the
IXCs, to the United States Court of Appeals for the District of Columbia Circuit
(the "Appeals Court"). Among other items, the Appeals Court found that the FCC
erred in utilizing a market-based methodology for calculating the amount of
dial-around compensation and further determined that the methodology for
determining the allocation of payment among IXCs was erroneous. The Appeals
Court remanded the 1996 Payphone Order to the FCC for further consideration.
In response to the remand by the Appeals Court, in October 1997 the FCC
issued a new order implementing Section 276 (the "1997 Payphone Order"). The FCC
utilized a market-based methodology to arrive at a per call compensation rate
and then reduced it by certain costs attributable to a coin call which it did
not believe applied to a dial-around call, and adjusted the per-call rate from
$0.35 to $0.284 (the "Default Rate"). The FCC concluded that the Default Rate
should be retroactively utilized in determining compensation during the First
Phase and reiterated
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<PAGE> 24
that payphone providers were entitled to compensation for each and every call
pursuant to the provisions of Section 276; however, the FCC deferred for later
decision the method of allocation of the payment among the IXCs.
The 1997 Payphone Order was subsequently appealed by various parties. In
May 1998, the Appeals Court again remanded the per-call compensation rate to the
FCC for further explanation, without vacating the Default Rate, indicating that
the FCC had failed to adequately explain its derivation of the Default Rate.
In response to the remand of the 1997 Payphone Order, 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 to $0.238, (the "Adjusted Default Rate) retroactive to October 7,
1997. In adjusting the rate, the FCC shifted its methodology from the
market-based method utilized in the 1997 and 1998 Payphone Orders 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
Adjusted Default Rate, the FCC incorporated its prior treatment of certain
payphone costs and examined new estimates of payphone costs submitted
as part of the proceeding. Pursuant to the 1999 Payphone Order, the $0.24 amount
($0.238 plus $0.002 for amounts charged by LECs for providing Flex Ani) will
serve as the Adjusted Default Rate for coinless payphone calls 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.
The 1999 Payphone Order deferred a final ruling on the First Phase
treatment of dial-around compensation to a later, as yet unreleased order;
however, it appears from the 1999 Payphone Order that the Adjusted Default Rate
will be applied for periods in the First Phase. The FCC further ruled that a
true-up will be made for all payments or credits, together with applicable
interest due and owing among the IXCs and the payphone service providers for the
payment period November 7, 1996 through the effective date of the Adjusted
Default Rate. 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 Adjusted Default Rate.
This adjustment of $6,075,000 included $2,342,000 recorded as revenue in the
first nine months of 1998 and $3,733,000 recorded as revenue in prior years.
The 1999 Payphone Order has been appealed by various parties. The Appeals
Court heard oral arguments on the matter on February 2, 2000. Based upon the
information available, the Company believes that the minimum amount it is
entitled to receive as fair compensation under Section 276 for prior periods 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 $19,287,000, or
16.6%, from $115,986,000 for the year ended December 31, 1998 to $96,699,000 for
the year ended December 31, 1999. The decrease was due to decreases in line and
transmission charges and all other categories of operating expenses. Such
decreases were due in part to decreases in amounts charged by LECs for the
provision of local telephone service, the decrease in the average number of
installed pay telephones, the decrease in the number of sales, administrative
and operating personnel and other cost reduction programs.
Line and transmission charges decreased $9,944,000, or 33.6%, from
$29,607,000 for the year ended December 31, 1998 to $19,663,000 for the year
ended December 31, 1999. Line and transmission charges represented 32.4% of
total revenues for the year ended December 31, 1998 and 25.3% of total revenues
for the year ended December 31, 1999, a decrease of 7.1%. 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 CLECs. In
1999, the Company also recovered approximately $500,000 of current and prior
year line charges resulting from cost-based rate reductions ordered by state
regulators, $524,000 of promotional allowances, and approximately $664,000 of
sales and excise taxes charged by LECs. The decrease as a percentage of revenues
is primarily due to the lower line charges from CLECs and the amounts recovered
from LECs as described above.
Telecommunication and validation fees which consist primarily of processing
costs relating to operator services decreased by $1,877,000, or 16.5%, from
$11,344,000 for the year ended December 31, 1998 to
-23-
<PAGE> 25
$9,467,000 for the year ended December 31, 1999. As a percentage of total
revenues, telecommunication and validation fees decreased slightly from 12.4% of
total revenues for the year ended December 31, 1998 to 12.2% for the year ended
December 31, 1999. The dollar decrease was primarily the result of the decrease
in the average number of installed pay telephones and the decrease in operator
service calls in 1999 compared to 1998.
Location commissions decreased $1,948,000, or 13.7%, from $14,179,000 for
the year ended December 31, 1998 to $12,231,000 for the year ended December 31,
1999. Location commissions represented 15.5% of total revenues for the year
ended December 31, 1998 and 15.8% for the year ended December 31, 1999, an
increase of 0.3%. The dollar decrease reflects the effect of the decrease in
revenues in 1999 compared to 1998 which is used as the basis for calculating
location commissions. The percentage increase is due to the increase in
commission rates in response to competitive demands for new location providers
as well as renewal of location contracts with existing location providers.
Field operations, which consist principally of personnel costs, rents and
utilities of the local service facilities, and repair and maintenance of the
Company's installed pay telephone base, decreased $1,782,000, or 8.1%, from
$22,009,000 for the year ended December 31, 1998 to $20,227,000 for the year
ended December 31, 1999. Field operations represented 24.1% of total revenues
for the year ended December 31, 1998 and 26.1% of total revenues for the year
ended December 31, 1999. The dollar decrease in 1999 compared to 1998 was
primarily due to a decrease in sales and excise taxes as a result of the
reduction in coin revenues in 1999, a decrease in the number of personnel,
decreases in expenses resulting from closing three district operations
facilities and other expense reduction efforts in 1999. The percentage increase
was a result of the lower revenues during 1999.
Selling, general and administrative expenses ("SG&A") expenses decreased
$1,839,000, or 14.9%, from $12,354,000 for the year ended December 31, 1998 to
$10,515,000 for the year ended December 31, 1999. SG&A expenses represented
13.5% of total revenues for the years ended December 31, 1998 and 1999. The
dollar decrease was primarily due to a decrease in administrative and sales
personnel, a reduction in corporate office telephone expense and other decreases
in administrative expenses as a result of cost reduction efforts in 1999.
Decreases in SG&A expenses were offset in part by higher legal costs contributed
by the Company to a trade association that is initiating legal action to collect
dial-around compensation from IXCs on behalf of payphone providers.
Depreciation and amortization decreased $696,000, or 2.9%, from $23,731,000
for the year ended December 31, 1998 to $23,035,000 for the year ended December
31, 1999. Depreciation and amortization represented 26.0% of total revenues for
the year ended December 31, 1998 and 29.7% of total revenues for the year ended
December 31, 1999, an increase of 3.7%. The dollar decrease was primarily due to
the adoption of fresh start reporting on November 17, 1999. The Company's
property and equipment and intangible assets were restated to reflect the
reorganization value of the Company and depreciated or amortized over the
estimated remaining useful life of such assets. The adoption of fresh start
reporting resulted in lower depreciation and amortization in 1999 and is
expected to result in lower depreciation and amortization in the future. The
percentage increase in depreciation and amortization was due to the reduction in
total revenues in 1999.
Other unusual charges and contractual settlements decreased $1,201,000, or
43.5% from $2,762,000 for the year ended December 31, 1998 to $1,561,000 for the
year ended December 31, 1999. For the year ended December 31, 1999, other
unusual charges and contractual settlements consisted of: (i) professional fees
and other costs related to the Company's Prepackaged Plan, $883,000; (ii) the
write-off of abandoned location contracts, $864,000; (iii) other matters,
$178,000; less (iv) recovery of expense relating to settlement of professional
fees $364,000. Other unusual charges and contractual settlements represented
3.0% of total revenue in 1998 and 2.0% of total revenue in 1999, a decrease of
1.0%.
OTHER INCOME (EXPENSE). Other income (expense) is comprised principally of
interest expense incurred on debt and interest income. Total interest expense
decreased $27,000, or 0.1%, from $20,764,000 for the year ended December 31,
1998 to $20,737,000 for the year ended December 31, 1999. Interest expense
represented 22.7% of total revenues for the year ended December 31, 1998 and
26.7% of total revenues for the year ended December 31, 1999, an increase of
4.0%. The dollar decrease occurred as a result of the conversion of the
Company's Senior Notes to Common Stock (Successor Company) pursuant to the
Company's Prepackaged Plan.
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<PAGE> 26
Interest relating to the Senior Notes, including amortization of deferred
financing costs, was $15,791,000 in 1998 and $13,905,000 in 1999 (through
November 17, 1999), a decrease of $1,886,000. This decrease was offset by an
increase in interest expense relating to the Company's secured debt as a result
of additional borrowings in 1998 and 1999 and an increase in interest rates.
Interest expense is expected to decline in the future due to the elimination of
interest relating to the Senior Notes. The increase in interest expense as a
percentage of total revenues was due to the decrease in revenues in 1999.
Interest and other income decreased $318,000, from $547,000 in 1998 to $229,000
in 1999. This decrease consisted of a decrease in interest income in 1999 and a
decrease in other income, primarily due to the gain on the sale of the Company's
Jacksonville, Texas land and building in 1998.
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT. The extraordinary gain on
extinguishment of debt of $77,172,000 in 1999 consists of the gain on conversion
of Senior Notes to Common Stock (Successor Company) of $79,267,000 less a loss
of $2,095,000 due to the write-off of deferred financing costs upon refinancing
of the Company's Credit Agreement.
EBITDA FROM RECURRING OPERATIONS. EBITDA from recurring operations (income
before interest income, interest expense, taxes, depreciation and amortization,
other unusual charges and contractual settlements and extraordinary items)
increased $3,633,000, or 191.9%, from $1,893,000 for the year ended December 31,
1998 to $5,526,000 for the year ended December 31, 1999. EBITDA from recurring
operations represented 2.1% of total revenues for the year ended December 31,
1998 and 7.1% of total revenues for the year ended December 31, 1999, an
increase of 5.0%. The dollar and percentage increases are primarily due to a
$3,733,000 retroactive reduction in revenues from dial-around compensation in
1998 relating to regulatory changes in the rate of dial-around compensation
applicable to prior years and the decrease in revenues in 1999. EBITDA from
recurring operations 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. See "Liquidity and
Capital Resources" for a discussion of cash flows from operating, investing and
financing activities. The Company believes that EBITDA from recurring operations
is a meaningful measure of performance because it is commonly used in the public
pay telephone industry to analyze comparable public pay telephone companies on
the basis of operating performance, leverage and liquidity.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES Total revenues decreased by $17,863,000 or 16.4% from $109,249,000
for the year ended December 31, 1997 to $91,386,000 for the year ended December
31, 1998. This decrease was 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 revenues from non-coin telecommunication services, including
dial-around compensation, as discussed below. The average number of installed
pay telephones increased from 42,590 for the year ended December 31, 1997 to
43,282 for the year ended December 31, 1998, an increase of 692 or 1.6%. This
increase was principally due to acquisitions in the second quarter of 1997 and
in 1998 offset by decreases in pay telephones resulting from expired location
contracts.
Revenues from coin calls decreased by $5,976,000 or 10.2%, from $58,520,000
for the year ended December 31, 1997 to $52,544,000 for the year ended December
31, 1998. The decrease was primarily due to a decline in the number of local
coin calls which historically represented 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. In addition, long distance and local call volumes and
coin revenues were adversely affected by the growth of wireless communication
services, which serves as an increasingly competitve alternative to payphone
usage. To a lesser extent, coin revenues were adversely affected by changes in
customer and geographic mix and adverse weather conditions in the first quarter
of 1998.
Revenues from non-coin telecommunication services decreased by $8,912,000
or 16.2%, from $50,624,000 for the year ended December 31, 1997 to $42,432,000
for the year ended December 31, 1998. Of this decrease, long distance revenues
from operator service providers decreased by $5,280,000 or 16.7% principally due
to a reduction in the number of operator service calls as a result of continuing
aggressive dial-around advertising by long distance carriers such as AT&T and
MCI Worldcom. Long distance revenues from operator service providers were also
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<PAGE> 27
adversely affected by the growth in wireless communications. In addition,
revenues from dial-around compensation decreased by $2,913,000 or 15.3% compared
to 1997 primarily due to the decrease in the dial-around compensation rate as a
result of regulatory changes discussed above. Net revenues from dial-around
compensation consisted of:
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
Amount included in revenue from
non-coin telecommunication services ... $ 19,100,000 $ 16,187,000
Retroactive adjustment for changes in
accounting estimates of revenues
recorded in prior years ............... (395,000) (3,733,000)
------------ ------------
Net revenue from dial-around compensation $ 18,705,000 $ 12,454,000
============ ============
</TABLE>
Of the amount recorded as a retroactive adjustment to dial-around
compensation in 1998, $3,222,000 related to the Company's 1997 fiscal year and
$511,000 related to the Company's 1996 fiscal year. The retroactive adjustment
to dial-around compensation of $395,000 in 1997 related to the Company's 1996
fiscal year. If revenues from dial-around compensation had been recorded at the
current rate ($0.238 per call or $31.18 per month based on 131 calls) the net
revenue would have been $15,878,000 in 1997 and $16,187,000 in 1998.
Other revenues decreased $357,000 from $500,000 for the year ended December
31, 1997 to $143,000 for the year ended December 31, 1998. This decrease was
primarily due to revenues recognized in 1997 for the remaining portion of a
deferred operator services bonus received in 1996.
OPERATING EXPENSES. Total operating expenses increased $808,000, or 0.7%, from
$115,178,000 for the year ended December 31, 1997 to $115,986,000 for the year
ended December 31, 1998. The increase was due to increases in line and
transmission charges, selling, general and administrative expenses ("SG&A
expense"), and depreciation and amortization. Such increases were due in part to
increases in amounts charged by LECs for the provision of local telephone
service, the increase in the average number of installed pay telephones, and the
increase in the number of sales and administrative personnel added as a result
of acquisitions in the first and second quarters of 1997. These increases were
offset in part by the decreases in location commissions and other unusual
charges and contractual settlements as explained below.
Line and transmission charges increased $5,089,000, or 20.8%, from
$24,518,000 for the year ended December 31, 1997 to $29,607,000 for the year
ended December 31, 1998. Line and transmission charges represented 22.4% of
total revenues for the year ended December 31, 1997 and 32.4% of total revenues
for the year ended December 31, 1998, an increase of 10.0%. The dollar increase
was due to the increase in the average number of installed pay telephones and
the increase in the average line and transmission charge per phone. The average
line and transmission charge per phone increased as a result of the increased
charges by LECs for end user common line charges, Preferred Interexchange
Carrier charges ("PICC"), Flex Ani charges for identification of dial-around
calls originating from the Company's payphones, 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 reflected the effect of the decrease in revenues discussed above.
Telecommunication and validation fees which consist primarily of processing
costs relating to operator services decreased by $255,000, or 2.2%, from
$11,599,000 for the year ended December 31, 1997 to $11,344,000 for the year
ended December 31, 1998. Telecommunication and validation fees represented 10.6%
of total revenues for the year ended December 31, 1997 and 12.4% for the year
ended December 31, 1998, an increase of 1.8%. The dollar decrease was primarily
the result of the decrease in operator service calls in 1998 compared to 1997.
The percentage increase was mostly the result of changes in the mix and call
volumes processed by various operator service providers pursuant to contracts
with different rates for providing such services.
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<PAGE> 28
Location commissions decreased $2,449,000, or 14.7%, from $16,628,000 for
the year ended December 31, 1997 to $14,179,000 for the year ended December 31,
1998. Location commissions represented 15.2% of total revenues for the year
ended December 31, 1997 and 15.5% for the year ended December 31, 1998, an
increase of 0.3%. The dollar decrease reflected the effect of the decrease in
revenues and the increase in line and transmission charges which enter into the
calculation of commissions. The percentage increase was due to the increase in
commission rates in response to competitive demands for new location providers
as well as renewal of location contracts with existing location providers.
Higher commission rates on location contracts relating to acquisitions completed
at the end of the second quarter of 1997 also contributed to the increase.
Field operations which consist principally of personnel costs, rents and
utilities of the local service facilities, and repair and maintenance of the
Company's installed pay telephone base, increased $909,000, or 4.3%, from
$21,100,000 for the year ended December 31, 1997 to $22,009,000 for the year
ended December 31, 1998. Field operations represented 19.3% of total revenues
for the year ended December 31, 1997 and 24.1% of total revenues for the year
ended December 31, 1998. The dollar increase in 1998 compared to 1997 was
primarily due to the increase in service vehicle costs and Universal Service
Fees, offset in part by efficiencies achieved in integrating the operations of
companies previously acquired. The Company incurred $627,000 for Universal
Service Fees for the first time in 1998 which the Company is paying under
protest. The percentage increase was a result of the lower revenues during 1998.
SG&A expenses increased $1,641,000, or 15.3%, from $10,713,000 for the year
ended December 31, 1997 to $12,354,000 for the year ended December 31, 1998.
SG&A expenses represented 9.8% of total revenues for the year ended December 31,
1997 and 13.5% of total revenues for the year ended December 31, 1998, an
increase of 3.7%. 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 (former Cherokee headquarters)
local service facility to the Company's headquarters in the second quarter of
1997, and an increase in telephone expense. The personnel increases at the
Company's headquarters following the acquisitions in 1997 were later reduced at
the end of 1998 in an effort to reduce costs.
Depreciation and amortization increased $2,206,000, or 10.2%, from
$21,525,000 for the year ended December 31, 1997 to $23,731,000 for the year
ended December 31, 1998. Depreciation and amortization represented 19.7% of
total revenues for the year ended December 31, 1997 and 26.0% of total revenues
for the year ended December 31, 1998, an increase of 6.3%. The dollar and
percentage increases were primarily due to the acquisitions previously completed
and expansion of the Company's public pay telephone base. The percentage
increase was also due to the reduction in total revenues in 1998.
Other unusual charges and contractual settlements decreased $6,333,000, or
69.6% from $9,095,000 for the year ended December 31, 1997 to $2,762,000 for the
year ended December 31, 1998. For the year ended December 31, 1998, other
unusual charges and contractual settlements consisted of: (i) costs incurred in
connection with the Davel Merger Agreement which has been terminated,
$1,426,000; (ii) certain fees relating to amendments to the Company's Credit
Agreement, $328,000; (iii) legal and professional fees relating to the
settlement of litigation relating to a former operator services agreement,
$545,000; and (iv) settlement of other contractual obligations and other
matters, $463,000. For the year ended December 31, 1997, other unusual charges
and contractual settlements consisted of: (i) a forfeited deposit, professional
fees and related expenses applicable to the termination of the proposed
acquisition of Communications Central Inc., $7,771,000; (ii) legal and note
holder consent solicitation fees relating to the amendments to the indenture for
the Senior Notes, $761,000; and (iii) settlement of other contractual
obligations and other items totaling $563,000. Other unusual charges and
contractual settlements represented 8.3% of total revenue in 1997 and 3.0% of
total revenue in 1998, a decrease of 5.3%.
OTHER INCOME (EXPENSE). Other income (expense) was comprised principally of
interest expense incurred on debt and interest income. Total interest expense
increased $2,879,000, or 16.1%, from $17,885,000 for the year ended December 31,
1997 to $20,764,000 for the year ended December 31, 1998. Interest expense
represented 19.0% of total revenues for the year ended December 31, 1997 and
22.7% of total revenues for the year ended
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<PAGE> 29
December 31, 1998, an increase of 3.7%. The dollar and percentage increases were
a result of the additional borrowings under the Company's Credit Agreement in
1997 and 1998 and the increase in the interest rate under the Third Amendment to
the Credit Agreement in the second quarter of 1998. Interest and other income
decreased $13,000, from $560,000 in 1997 to $547,000 in 1998. This decrease
consists of a $351,000 decrease in interest income due to lower cash balances
available for investment in 1998, offset by a $338,000 increase in other income.
The increase in other income was primarily due to the sale of the Company's
Jacksonville, Texas land and building in 1998.
EBITDA FROM RECURRING OPERATIONS. EBITDA from recurring operations
decreased $22,798,000, or 92.3%, from $24,691,000 for the year ended December
31, 1997 to $1,893,000 for the year ended December 31, 1998. EBITDA from
recurring operations represented 22.6% of total revenues for the year ended
December 31, 1997 and 2.1% of total revenues for the year ended December 31,
1998, a decrease of 20.5%. 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 costs and expenses from
operations. 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 Net cash used in operating activities
during the fiscal years ended December 31, 1997, 1998 and 1999 was $4,720,000,
$6,470,000 and $1,537,000, respectively. Net cash used in operating activities
consisted primarily of the funding of operating losses (before extraordinary
item), the increase in current assets in 1997 and the decrease in current
liabilities in 1999, offset by depreciation and amortization, the increase in
current liabilities in 1998, and non-cash interest charged to expense in 1999.
The decrease in cash used in operating activities in 1999 compared to 1997
and 1998 reflects the reduction in cash interest paid on the Company's Senior
Notes. Pursuant to the Company's Prepackaged Plan, interest relating to the
Senior Notes was discharged and the amount charged to expense in 1999 was
included in non-cash interest. In 1997 and 1998, the Company paid $15,000,000
and $7,500,000 of interest on the Senior Notes, respectively, a portion of which
was paid from the proceeds of additional borrowings.
The decrease in cash used in operating activities from 1998 to 1999
reflects the decrease in the Company's loss before extraordinary items from
$44,817,000 in 1998 to $39,578,000 in 1999, a decrease of $5,239,000. The
reduction in such loss is due to the decreases in all operating expense
categories offset by the reduction in revenues from 1998 to 1999. The decreases
in expenses were due in part to cost reduction initiatives implemented at the
end of 1998 and during 1999.
CASH FLOWS FROM INVESTING ACTIVITIES Cash used in investing activities
during the fiscal years ended December 31, 1997, 1998 and 1999 was $57,197,000,
$6,763,000 and $2,302,000, respectively. Cash used in investing activities
consisted primarily of payments to acquire companies (including the Cherokee
acquisition in January 1997) and capital expenditures resulting primarily from
the purchase and installation of new pay telephone equipment and other
expenditures to extend the useful life of existing pay telephone equipment.
CASH FLOWS FROM FINANCING ACTIVITIES Cash provided by financing activities
during the fiscal years ended December 31, 1997, 1998 and 1999 was $21,998,000,
$12,482,000 and $3,771,000, respectively, which consisted primarily of net
proceeds from borrowings under the Company's credit facilities and the Company
Equity Offering offset by payments of debt related to refinancings, payment of
debt financing costs other repayments of debt.
THE COMPANY EQUITY OFFERING AND THE COMPANY DEBT OFFERING On December 18,
1996, the Company closed the following publicly underwritten offerings: (i) the
sale of 6,750,000 shares of Common Stock (the "Company Equity Offering"), at a
price to the public of $3.00 per share, for net proceeds to the Company
therefrom of $18,295,000 and (ii) the sale of $125,000,000 aggregate principal
amount of its 12% Senior Notes due 2006 (the "Company Debt Offering"), for net
proceeds to the Company therefrom of $119,149,000. In connection with the
Company Equity Offering, the Company also granted the underwriters a 45-day
option to purchase up to 1,012,500
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<PAGE> 30
additional shares of Common Stock, at $3.00 per share (less an underwriting
discount of $0.21 per share), solely to cover over-allotments (the
"Over-Allotment Option"). The Company received $2,825,000 at the time the
underwriters exercised their Over-Allotment Option on January 29, 1997. The
Company used the net proceeds from the Company's Equity Offering and the Company
Debt Offering to repay all of the remaining outstanding debt under the Company's
former credit facility, to repay certain capital lease obligations and other
indebtedness and to finance the Cherokee and Texas Coinphone acquisitions.
Interest on the Senior Notes accrued at the rate of 12% per annum and was
payable semi-annually in arrears on June 15 and December 15 each year. The
Senior Notes contained covenants which, among other things, limited the
Company's ability to incur additional indebtedness or pay dividends and which
required the Company, in the event of a change in control of the Company, to
offer to purchase the Senior Notes for 101% of their aggregate outstanding
principal value plus accrued and unpaid interest. On December 30, 1997, the
Company solicited and received the consent from its Noteholders to amend the
indenture to increase the limit of permitted indebtedness and to modify the
definition of consolidated net income to exclude certain non-recurring expenses
and non-operating charges when calculating certain restrictive covenants. The
Company incurred $625,000 in deferred financing costs to the Noteholders and
$761,000 in fees relating to the solicitation of the Noteholders' consent to
amend the indenture.
The Company did not pay the semiannual interest payments which were due
December 15, 1998 and June 15, 1999 on the Senior Notes and, pursuant to the
terms of the indenture, the Company was in default on this debt. As of December
31, 1998, the principal balance due was classified as a current liability in the
Company's consolidated balance sheet. On November 17, 1999, the Company
converted the Senior Notes and accrued interest, net of deferred financing cost,
to Common Stock (Successor Company) and recognized an extraordinary gain on
extinguishment of this debt of $79,267,000.
CREDIT AGREEMENT On May 30, 1997, the Company entered into an agreement (
the "Credit Agreement") with various lenders (collectively referred to as the
"Lenders"). ING (US) Capital Corporation ("ING") was Agent for the Lenders and
Transamerica Business Credit Corporation and Finova Capital Corporation were
Co-Agents for the Lenders. ING was a significant shareholder of the Company's
common equity. The Credit Agreement provided a $75,000,000 commitment of which
$60,000,000 was to be utilized for future acquisitions ("Expansion Loan
Commitment"), and $15,000,000 was to be utilized for general working capital
requirements ("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 assets, including the installed public pay telephones, were pledged as
collateral. The Company borrowed $17,700,000 under the Expansion Loan Commitment
to complete the acquisitions of Advance, American, and London and to pay related
acquisition and credit facility fees. The Company also borrowed $7,300,000 of
the Revolving Credit Commitment for interest payments due under the Senior Notes
and for general working capital purposes.
The Credit Agreement included covenants which, among other things, required
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 limited the incurrence of additional long-term debt, the level of
capital expenditures, the incurrence of lease obligations and permitted
investments.
On February 24, 1998, the Credit Agreement was amended to increase the
Revolving Credit Commitment to $20,000,000 and to decrease the Expansion Loan
Commitment to $55,000,000 (the "First Amendment"). The amount available for
letters of credit under the working capital commitment was reduced from
$5,000,000 to $3,000,000 and certain of the covenants therein were modified. On
the same date, the Company was permitted to borrow an additional $3,000,000 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 ("Foothill"), 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
$20,000,000 and the Expansion Loan Commitment was reduced to $20,000,000.
Interest was 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
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<PAGE> 31
was extended to May 8, 2001. Certain financial covenants under the Credit
agreement were also modified. The Company incurred $1,174,000 in fees and
expenses in connection with the Third Amendment of which $328,000 was included
in other unusual charges and contractual settlements in the Company's
consolidated statements of operations in 1998.
During the second quarter of 1998, the Company borrowed $10,547,000 under
the Revolving Credit Commitment for interest payments due under the Company's
Senior Notes, to fund acquisition and financing costs and for working capital.
On July 3, 1998, the Company borrowed an additional $1,453,000, the remaining
amount available under the Credit Agreement, to finance the cost of equipment
upgrades relating to the pay telephones acquired in connection with the TDS
acquisition.
Beginning December 31, 1998, the Company was not in compliance with certain
financial covenants and was in default under its Credit Agreement. Accordingly,
the Company classified the amounts due under the Credit Agreement as a current
liability in its consolidated balance sheet at December 31, 1998. In addition,
beginning April 1, 1999, the Company was required to pay the default rate of
interest, which was two percent per annum higher than the otherwise applicable
rate (11.75% through July 21, 1999).
In April 1999, the Company requested and received an additional advance of
$2,500,000 which increased the principal balance outstanding under its Revolving
Credit Commitment to $22,500,000. Proceeds of the advance were used for the
payment of professional fees and expenses, loan fees and certain accounts
payable. The Company also received a commitment from the Lenders to provide
$45,900,000 in debtor-in-possession financing ("D.I.P." financing) in
anticipation of the Case filed on July 14, 1999. The Company incurred $250,000
in fees relating to the additional advance and a $250,000 fee for the D.I.P.
financing commitment.
On July 21, 1999, the outstanding balance of the Credit Agreement was paid
from the proceeds of the D.I.P. financing, the terms of which are described
below. The Company incurred an extraordinary loss from extinguishment of debt of
$2,095,000 due to the write-off of deferred financing costs related to the
Credit Agreement.
DEBTOR-IN-POSSESSION LOAN AGREEMENT On July 14, 1999, the Company entered into a
D.I.P. financing agreement ("D.I.P. Agreement") with Foothill. The D.I.P.
Agreement provided a $45,900,000 revolving credit commitment, which was used to
pay the outstanding balance, due under the Credit Agreement, including accrued
interest on July 21, 1999. The Company also received advances totaling
$2,649,000 for working capital purposes.
Interest on the D.I.P. Agreement was payable monthly in arrears at 3% above
the base rate (as defined therein) through November 12, 1999 and 3.75% above the
base rate thereafter. The loan was secured by substantially all of the assets of
the Company. The D.I.P. Agreement included covenants, which limited the
incurrence of additional debt, capital leases, liens and the disposition of
assets. On November 17, 1999, the Company refinanced the D.I.P. Agreement with
its current lenders from the proceeds of the post reorganization loan described
below.
POST REORGANIZATION LOAN AGREEMENT The Company executed an agreement with
Foothill for post reorganization financing ("Exit Financing Agreement") on
November 17, 1999. The Exit Financing Agreement provides for a $46,000,000
revolving credit commitment (the "Maximum Amount"), excluding interest and fees
capitalized as part of the principal balance. The Exit Financing Agreement is
secured by substantially all of the assets of the Company and matures on
November 16, 2001.
The Exit Financing Agreement provides for various fees aggregating
$9,440,000 over the term of the loan, including a $1,150,000 deferred line fee,
which is payable one year from the date of closing, together with interest
thereon, and a $10,000 servicing fee which is payable each month. At the option
of the Company, payment of other fees, together with interest due thereon, may
be deferred and added to the then outstanding principal balance. Fees due
pursuant to the Exit Financing Agreement are subject to certain reductions for
early prepayment, providing the Company is not in default on the Exit Financing
Agreement.
The Exit Financing Agreement provides for interest on the outstanding
principal balance at 3% above the base rate (as defined in the Exit Financing
Agreement), with interest on the Maximum Amount payable monthly in
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<PAGE> 32
arrears. The Exit Financing Agreement, as amended on December 31, 1999, includes
covenants, which among other things, require the Company to maintain ratios as
to fixed charges, debt to earnings, current ratio, interest coverage and minimum
levels of earnings, payphones and operating cash (all as defined in the Exit
Financing Agreement). Other covenants limit the incurrence of long-term debt,
the level of capital expenditures, the payment of dividends, and the disposal of
a substantial portion of the Company's assets.
WARRANT PUT OBLIGATION AND NOTE PAYABLE On October 18, 1999, in connection with
the Prepackaged Plan, the Company reached an agreement with a former lender to
settle a claim for the purported exercise of a put right relating to warrants to
purchase shares of Series A Special Convertible Preferred Stock ("Series A
Preferred"). The Series A Preferred was convertible into Common Stock. The claim
was settled for $1,000,000 in the form of a note payable, subject to certain
reductions for early payment, together with deferred interest at 5 % per annum,
in five years. In addition, the former lender agreed to forfeit its shares of
Common Stock (Successor Company) and New Warrants which were issued pursuant to
the Prepackaged Plan and immediately canceled.
LIQUIDITY AND CAPITAL EXPENDITURES Management expects its recent profit
improvement measures and the conversion of the Company's Senior Notes to Common
Stock (Successor Company), including the elimination of required interest
payments, to have a beneficial impact on cash flows provided by operating
activities. Although there is no additional credit available under the Company's
Exit Financing Agreement, the financial position of the reorganized Company has
improved. The Company is currently seeking financing to replace the Exit
Financing Agreement, to improve the liquidity of the Company and to reduce the
cost of its debt service.
For the year ended December 31, 1999, the Company had capital expenditures
of $1,677,000 which were financed by cash flows from operating activities and
proceeds from the Company's debt agreements. Capital expenditures are
principally for replacement and expansion of the Company's installed public pay
telephones, related equipment, operating equipment and computer hardware. The
Company has no significant commitments for capital expenditures at December 31,
1999.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In accordance with SOP 90-7, the Company is required to adopt new
accounting pronouncements that have an effective date within twelve months of
the date of adoption of fresh start reporting. In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"), which requires companies to recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 (as amended by SFAS No. 137) is
effective for fiscal years beginning after June 15, 2000. The Company has not
entered and has no current plans to enter into any transactions involving
derivative financial instruments. Accordingly, the new standard had no effect on
the Company's financial statements.
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 could have recognized a date
using "00" as the year 1900 rather than the year 2000. The Company has not
experienced any system failures or miscalculations resulting in disruptions of
operations, or the inability to process transactions, send commissions, or
engage in similar normal business activities. The cost to achieve full
compliance in 1999 was not significant.
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<PAGE> 33
ITEM 7A. QUANTITIVE 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
approximately $49 million in borrowings under the Company's Exit Financing
Agreement.
The Company's earnings and cash flows are subject to market risk resulting
from changes in interest rates with respect to its borrowings under its Exit
Financing 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.
ITEM 8. FINANCIAL STATEMENTS
The consolidated financial statements of the Company are set forth in Item
14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in the Registrant's accountants during the two
most recent fiscal years, other than as previously reported. There have been no
disagreements with the Registrant's accountants on any accounting or financial
disclosure matters.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The description of the directors and executive officers of the Registrant
is incorporated herein by reference to the section of the definitive Proxy
Statement for the 2000 Annual Meeting of Shareholders (the "Proxy Statement"),
entitled "Election of Directors", which Proxy Statement is expected to be filed
in April 2000. In addition, the information set forth in the section of the
Proxy Statement entitled "Section 16(a), Beneficial Ownership Reporting
Compliance" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the section of the definitive Proxy
Statement for the 2000 Annual Meeting of Shareholders entitled "Executive
Compensation", which Proxy Statement is expected to be filed in April 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the section of the definitive Proxy
Statement for the 2000 Annual Meeting of Shareholders entitled "Security
Ownership of Certain Beneficial Owners and Management", which Proxy Statement is
expected to be filed in April 2000.
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<PAGE> 34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the section of the definitive Proxy
Statement for the 2000 Annual Meeting of Shareholders entitled "Executive
Compensation-Certain Transactions", which Proxy Statement is expected to be
filed in April 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
<TABLE>
<CAPTION>
<S> <C>
1. FINANCIAL STATEMENTS
Report of BDO Seidman, LLP, Independent Accountants....................................................F-1
Report of PricewaterhouseCoopers LLP, Independent Accountants..........................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999...........................................F-3
Consolidated Statements of Operations for the Years Ended December 31,
1997 and 1998, the Ten Months and Seventeen Days Ended November
17, 1999 and the One Month and
Thirteen Days Ended December 31, 1999.............................................................F-4
Statements of Changes in Mandatorily Redeemable Preferred Stock for the
Years Ended December 31, 1997 and 1998, the Ten Months and
Seventeen Days Ended November 17, 1999 and the One Month and
Thirteen Days Ended December 31, 1999.............................................................F-5
Statements of Changes in Non-mandatorily Redeemable Preferred Stock,
Common Stock and Other Shareholders' Equity (Deficit) for the Years
Ended December 31, 1997 and 1998, the Ten Months and Seventeen Days
Ended November 17, 1999 and the One Month and Thirteen Days Ended
December 31, 1999..................................................................................F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and 1998,
The Ten Months and Seventeen Days Ended November 17, 1999 and
the One Month and Thirteen Days Ended December 31, 1999............................................F-8
Notes to Consolidated Financial Statements for the Years Ended December
31, 1997 and 1998, the Ten Months and Seventeen Days Ended
November 17, 1999 and the One Month and Thirteen Days Ended
December 31, 1999.................................................................................F-9
2. FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts........................................................F-28
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes
thereto.
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<PAGE> 35
3. EXHIBITS
EXHIBIT NO. DESCRIPTION
2.1 Agreement and Plan of Merger and Reorganization, dated June 11, 1998,
by and among Davel Communications Group, Inc., Davel Holdings, Inc., D
Subsidiary, Inc., PT Merger Corp. and PhoneTel Technologies, Inc. (12)*
2.2 Joint Reorganization Plan of PhoneTel Technologies, Inc. and Cherokee
Communications, Inc. dated May 11, 1999 (16)*
2.3 Findings of Fact, Conclusions of Law and Order Confirming the Joint
Reorganization Plan of PhoneTel Technologies, Inc. and Cherokee
Communications, Inc. dated May 11, 1999. (16)*
3.1 Amended and Restated Articles of Incorporation of PhoneTel
Technologies, Inc. dated as of November 17, 1999. (18)*
3.2 Amended and Restated Code of Regulations of PhoneTel Technologies, Inc.
dated as of November 17, 1999. (18)*
4.1 Warrant Agreement dated as of November 15, 1999 between PhoneTel
Technologies, Inc. and American Securities Transfer and Trust, Inc.
with respect to New Warrants, including the form of Warrant
Certificate. (18)*
4.2 Indenture relating to the Notes offered in the Company Debt Offering
(including the form of Note). (4)*
5.1 Opinion of Tammy L. Martin, Esq. regarding validity of the Notes
registered. (4)*
10.1 Master Agreement between The Cafaro Company and PhoneTel Technologies,
Inc. dated December 23, 1992. (1)*
10.2 Agreement and Plan of Merger dated as of November 21, 1996 among
PhoneTel Technologies, Inc., PhoneTel CCI, Inc., Cherokee
Communication, Inc. and all of the shareholders of Cherokee
Communications, Inc. (the "Cherokee Merger Agreement") (2)*
10.3 Escrow Agreement dated as of November 21, 1996 among Comerica
Bank-Texas, as escrow agent, Cherokee Communications, Inc., Bill H.
Bailey, Jr. and J. Bruce Duty, as duly authorized agents for all of the
shareholders of Cherokee Communications, Inc., PhoneTel Technologies,
Inc. and Bill H. Bailey, Jr., Jerry T. Beddow and Edward L. Marshall,
individually. (2)*
10.4 Amendment dated as of December 31, 1996 to the Cherokee Merger
Agreement. (3)*
10.5 Asset Purchase Agreement dated January 13, 1997, among PhoneTel
Technologies, Inc., an Ohio Corporation, Texas Coinphone, a Texas
general partnership, Pete W. Catalena and Dennis H. Goehring. (3)*
10.6 Agreement and Plan of Merger by and among PhoneTel Technologies, Inc.,
PhoneTel Acquisition Corp. and Communications Central Inc. dated as of
March 14, 1997. (5)*
10.7 First Supplemental Indenture, dated as of January 3, 1997,
supplementing the Indenture, Dated as of December 18, 1996, among
PhoneTel Technologies, Inc., the Subsidiary Guarantors named on
Schedule I thereto and Marine Midland Bank, as Trustee, $125,000,000
12% Senior Notes Due 2006. (6)*
10.8 Second Supplemental Indenture, dated as of May 29, 1997, supplementing
the Indenture, Dated as of December 18, 1996, as supplemented by the
First Supplemental Indenture dated as of January 3, 1997, among
PhoneTel Technologies, Inc., the Subsidiary Guarantors named on
Schedule I thereto and Marine Midland Bank, as Trustee, $125,000,000
12% Senior Notes Due 2006. (6)*
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<PAGE> 36
10.9 First Amendment to Agreement and Plan of Merger by and among PhoneTel
Technologies, Inc., PhoneTel Acquisition Corp. and Communications
Central Inc. dated as of May 15, 1997. (6)*
10.10 $75,000,000 Credit Agreement dated as of May 30, 1997 among PhoneTel
Technologies, Inc., as the Borrower, Various Lenders and ING (U.S.)
Capital Corporation, as the Agent for the Lenders and Transamerica
Business Credit Corporation and Finova Capital Corporation, as
Co-Agents for the Lenders. (6)*
10.11 Settlement Agreement as of August 8, 1997 together with the Release and
Termination of escrow agent between PhoneTel Technologies, Inc. and
Bill H. Bailey, Jr. and J. Bruce Duty, as duly authorized agents on
behalf of Bill H. Bailey, Jr., Edward L. Marshall, Jerry T. Beddow, C.
Nelson Trimble, Berthel Fisher & Company Investments, Inc., Capital
Southwest Corporation, Capital Southwest Venture Corporation, and Bank
One Capital Partners, L.P., and Comerica Bank-Texas as escrow agent.
(7)*
10.12 Third Supplemental Indenture, dated as of December 30, 1997,
supplementing the Indenture, dated as of December 18, 1996, as
supplemented by the First Supplemental Indenture, dated as of January
3, 1997, and the Second Supplemental Indenture, dated as of May 29,
1997, among PhoneTel Technologies, Inc., the Subsidiary Guarantors
named on Schedule I thereto and Marine Midland Bank, as Trustee,
$125,000,000 12% Senior Notes due 2006. (8)*
10.13 First Amendment to Credit Agreement, dated as of February 24, 1998,
amending the $75,000,000 Credit Agreement dated as of May 30, 1997
among PhoneTel Technologies, Inc. as the Borrower, Various Lenders and
ING (U.S.) Capital Corporation, as Agent for the Lenders and
Transamerica Business Credit Corporation and Finova Capital
Corporation, as Co-Agents for the Lenders. (8)*
10.14 PhoneTel Technologies, Inc. 1997 Stock Incentive Plan (9) *
10.15 Second Amendment to Credit Agreement and Waiver, dated as of March 31,
1998, amending the $75,000,000 Credit Agreement dated as of May 30,
1997, among PhoneTel Technologies, Inc. as the Borrower, various
Lenders and ING (U.S.) Capital Corporation, as Agent for the Lenders
and Transamerica Business Credit Corporation and Finova Capital
Corporation, as Co-Agents for the Lenders (10)*
10.16 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. (11)*
10.17 Voting Agreement, dated June 11, 1998, by and between PhoneTel
Technologies, Inc. and Mr. David R. Hill (12)*
10.18 Voting Agreement, dated June 11, 1998, by and between PhoneTel
Technologies, Inc. and Samstock, L.L.C. (12)*
10.19 Voting Agreement, dated June 11, 1998, by an between PhoneTel
Technologies, Inc. and Samstock, L.L.C. (12)*
10.20 Consulting and Non-Competition Agreement, dated June 11, 1998, by and
between PhoneTel Technologies, Inc. and Mr. Peter Graf (12)*
10.21 Employment and Non-Competition Agreement, dated June 11, 1998, by and
between PhoneTel Technologies, Inc. and Ms. Tammy Martin (12)*
10.22 Pay Phone Communications Services Agreement dated as of November 16,
1998 by and between Qwest Communications Corporation and USLD
Communications, Inc. and PhoneTel Technologies, Inc. (14)*
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<PAGE> 37
10.23 Employment Agreement dated March 30, 1999 between PhoneTel
Technologies, Inc. and John Chichester. (15)*
10.24 Loan and Security Agreement by and among PhoneTel Technologies, Inc.
and Cherokee Communications, Inc. as Borrower and the Financial
Institutions that are Signatories Hereto and Foothill Capital
Corporation as Agent dated July 14, 1999. (17)*
10.25 Loan and Security Agreement dated as of November 17, 1999, by and among
PhoneTel Technologies, Inc., Cherokee Communications, Inc., the
financial institutions that are signatories thereto and Foothill
Capital Corporation as agent. (18)*
10.26 PhoneTel Technologies, Inc. 1999 Management Incentive Plan. (18)*
10.27 Registration Rights Agreement dated November 17, 1999 among PhoneTel
Technologies, Inc. and the parties identified on Exhibit A thereto.
(18)*
10.28 Operator Services Agreement for COCOT Payphones by and between One Call
Communications, Inc. (d/b/a Opticom) and PhoneTel Technologies, Inc.
dated January 21, 2000.
10.29 Lump Sum Bonus Addendum to Operator Services Agreement dated January
21, 2000 by and between Opticom and PhoneTel Technologies, Inc. dated
January 21, 2000.
10.30 International Services Addendum to Operator Services Agreement dated
January 21, 2000 by and between One Call Communications, Inc.
("Opticom") and PhoneTel Technologies, Inc. dated February 16, 2000.
10.31 Amendment Number One to Loan and Security Agreement dated as of
December 31, 1999 by and among PhoneTel Technologies, Inc. and Cherokee
Communications, Inc. ("Borrowers") and the financial institutions that
are signatories thereto and Foothill Capital Corporation as agent
(together "Lenders") amending the Loan and Security Agreement dated as
of November 17, 1999 by and between Borrowers and Lenders.
99.1 Voting Agreement, dated June 11, 1998, by and between Davel
Communications Group, Inc. and Mr. Peter Graf (12)*
99.2 Voting Agreement, dated June 11, 1998, by and between Davel
Communications Group, Inc. and Mr. Steven Richman (12)*
99.3 Voting Agreement, dated June 11, 1998, by and between Davel
Communications Group, Inc. and Mr. George Henry (12)*
99.4 Voting Agreement, dated June 11, 1998, by and between Davel
Communications Group, Inc. and Mr. Aron Katzman (12)*
99.5 Voting Agreement, dated June 11, 1998, by and between Davel
Communications Group, Inc. and Mr. Joseph Abrams (12)*
99.6 Voting Agreement, dated June 11, 1998, by and between Davel
Communications Group, Inc. and ING (U.S.) Investment Corporation (12)*
99.7 Voting Agreement, dated June 11, 1998, by and between Davel
Communications Group, Inc. and Cerberus Partners, L. P. (12)*
99.8 Joint Press Release of PhoneTel Technologies, Inc. and Davel
Communications Group, Inc. dated June 12, 1998 (26)*
99.9 Press Release of PhoneTel Technologies, Inc. dated September 29, 1998
announcing the termination of merger with Davel Communications Group,
Inc. and notification by AMEX regarding listing requirements. (13)*
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<PAGE> 38
21.1 Subsidiaries of PhoneTel Technologies, Inc.
27 Financial Data Schedule for the Year Ended December 31, 1999
- ----------------
* Previously filed.
(1) Incorporated by reference from the Company's Form 10-KSB for the year
ended December 31, 1992.
(2) Incorporated by reference from Amendment No. 2 to the Company's
Registration Statement on Form SB-2 (Registration No. 333-13767), filed
with the Securities and Exchange Commission on December 12, 1996.
(3) Incorporated by reference from the Company's Form 8-K dated January 3,
1997.
(4) Incorporated by reference from Amendment No. 2 to the Company's
Registration Statement on Form SB-2 (Registration No. 333-15611), filed
with the Securities and Exchange Commission on December 13, 1996.
(5) Incorporated by reference from the Company's Form 10-KSB for the year
ended December 31, 1996.
(6) Incorporated by reference from the Company's Form 10-QSB for the
quarter ended June 30, 1997.
(7) Incorporated by reference from the Company's Form 10-QSB for the
quarter ended September 30, 1997.
(8) Incorporated by reference from the Company's Form 10-K for the year
ended December 31, 1997.
(9) Incorporated by reference from the Company's Proxy Statement for the
1997 Annual Meeting of Shareholders.
(10) Incorporated by reference from the Company's Form 10-K/A-1 for the year
ended December 31, 1997.
(11) Incorporated by reference from the Company's Form 10-Q for the quarter
ended March 31, 1998.
(12) Incorporated by reference from the Company's Form 8-K dated June 11,
1998.
(13) Incorporated by reference from the Company's Form 8-K dated September
28, 1998.
(14) Incorporated by reference from the Company's Form 10-K for the year
ended December 31, 1998.
(15) Incorporated by reference from the Company's Form 8-K dated April 6,
1999.
(16) Incorporated by reference from the Company's Form 8-K dated November 4,
1999.
(17) Incorporated by reference from the Company's Form 10-Q for the quarter
ended September 30, 1999.
(18) Incorporated by reference from the Company's Form 8-K dated November
17, 1999.
(B) REPORT 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. The Company filed a report on
Form 8-K dated November 4, 1999, reporting under Item 3, Bankruptcy or
Receivership, the confirmation of the Company's plan of reorganization
by the U.S. Bankruptcy Court for the Southern District of New York on
October 20, 1999. The Company also filed a report on Form 8-K dated
November 17, 1999, reporting under item 5, other events, the
consumation of the Company's plan of reorganization previously
confirmed by the U.S. Bankruptcy Court.
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<PAGE> 39
(C) EXHIBITS
The response to this portion of Item 14 is submitted as a separate
section of this report. See Item 14(a) 3 for a list of Exhibits hereto.
(D) FINANCIAL STATEMENT SCHEDULE
The Financial Statement Schedules to this Form 10-K are set forth as
Exhibits 21.1 and 27.
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<PAGE> 40
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
PhoneTel Technologies, Inc.
Cleveland, Ohio
We have audited the accompanying consolidated balance sheets of
PhoneTel Technologies, Inc. and its subsidiary as of December 31, 1999
(Successor Company) and the related consolidated statements of operations,
changes in mandatorily redeemable preferred stock, changes in non-mandatorily
redeemable preferred stock, common stock and other shareholders' equity
(deficit), and cash flows for the ten month and seventeen day period ended
November 17, 1999 (Predecessor Company) and the one month and thirteen day
period ended December 31, 1999 (Successor Company). We have also audited the
consolidated balance sheet of PhoneTel Technologies, Inc. and its subsidiary as
of December 31, 1998 and the related consolidated statements of operations,
changes in mandatorily redeemable preferred stock, changes in non-mandatorily
redeemable preferred stock, common stock and other shareholders' equity
(deficit), and cash flows for the year then ended (Predecessor Company). Our
audits also included the financial statement schedule listed in the accompanying
index. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements and schedule. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
PhoneTel Technologies, Inc. and its subsidiary as of December 31, 1999
(Successor Company) and the consolidated results of their operations and their
cash flows for the ten month and seventeen day period ended November 17, 1999
(Predecessor Company) and the one month and thirteen day period ended December
31, 1999 (Successor Company), as well as the consolidated financial position as
of December 31, 1998 and the consolidated results of their operations and their
cash flows for the year then ended (Predecessor Company), in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
February 24, 2000
F-1
<PAGE> 41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
PhoneTel Technologies, Inc.
In our opinion, the accompanying consolidated statements of operations, changes
in mandatorily redeemable preferred stock, changes in non-mandatorily redeemable
preferred stock, common stock and the other shareholders' equity (deficit) and
of cash flows present fairly, in all materials respects, the results of
operations for PhoneTel Technologies, Inc. and its subsidiaries and their cash
flows for the year ended December 31, 1997, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company's working capital declined
from $34,491,000 at December 31, 1996 to $7,839,000 at December 31, 1997, a
decrease of $31,652,000. Cash flows used in operating activities increased from
$269,000 in 1996 to $4,720,000 in the year ended December 31, 1997, and the
Company incurred net losses of $23,254,000 and $26,643,000 for the years ending
December 31, 1997 and 1996, respectively. The Company has suffered recurring
losses from operations and has a net capital deficiency that raises substantial
doubt about its ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Cleveland, Ohio
March 31, 1998
F-2
<PAGE> 42
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREDECESSOR SUCCESSOR
COMPANY COMPANY
DECEMBER 31 DECEMBER 31
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 5,768 $ 5,700
Accounts receivable, net of allowance for doubtful accounts
of $935 and $ 1,339, respectively 14,021 11,246
Other current assets 1,389 1,144
--------- ---------
Total current assets 21,178 18,090
Property and equipment, net 27,837 22,741
Intangible assets, net 101,073 83,057
Other assets 586 511
--------- ---------
$ 150,674 $ 124,399
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
12% Senior Notes $ 125,000 --
Current portion of long-term debt and other liabilities 41,691 $ 1,172
Accounts payable 8,063 5,272
Accrued expenses:
Location commissions 2,756 2,841
Line and transmission charges 3,191 1,902
Personal property and sales tax 3,145 2,672
Interest 8,728 461
Salaries, wages and benefits 335 502
Other 251 137
--------- ---------
Total current liabilities 193,160 14,959
Long-term debt and other liabilities -- 48,642
Commitments and contingencies -- --
14% Cumulative Convertible Preferred Stock Mandatorily Redeemable - $60
stated value; 200,000 shares authorized, 107,918 shares issued and
outstanding at December 31, 1998 (redemption amount of $9,512,
originally due June 30, 2000) 9,112 --
Non-mandatorily Redeemable Preferred Stock, Common Stock
and Other Shareholders' Equity (Deficit):
Series A Special Convertible Preferred Stock - $0.20 par value, $0.20
stated value; 250,000 shares authorized at December 31,1998, no
shares outstanding -- --
Common Stock (Predecessor Company) - $0.01 par value;
50,000,000 shares authorized, 18,754,133 shares issued and
outstanding at December 31, 1998 188 --
Common Stock (Successor Company) - $0.01 par value;
15,000,000 shares authorized, 10,188,630 shares issued and
outstanding at December 31, 1999 102
Additional Paid-in Capital 61,233 63,390
Accumulated Deficit (113,019) (2,694)
--------- ---------
Total Non-mandatorily Redeemable Preferred Stock, Common
Stock and Other Shareholders' Equity (Deficit) (51,598) 60,798
--------- ---------
$ 150,674 $ 124,399
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 43
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUCCESSOR
PREDECESSOR COMPANY COMPANY
-------------------------------------------- ------------
TEN MONTHS ONE MONTH
AND SEVENTEEN AND THIRTEEN
YEAR ENDED DECEMBER 31 DAYS ENDED DAYS ENDED
---------------------------- NOVEMBER 17 DECEMBER 31
1997 1998 1999 1999
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Coin calls $ 58,520 $ 52,544 $ 36,220 $ 4,378
Non-coin telecommunication services 50,624 42,432 33,227 3,568
Dial-around compensation adjustment (395) (3,733) -- --
Other 500 143 210 26
------------ ------------ ------------ ------------
109,249 91,386 69,657 7,972
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Line and transmission charges 24,518 29,607 17,575 2,088
Telecommunication and validation fees 11,599 11,344 8,507 960
Location commissions 16,628 14,179 11,263 968
Field operations 21,100 22,009 18,043 2,184
Selling, general and administrative 10,713 12,354 9,156 1,359
Depreciation and amortization 21,525 23,731 20,719 2,316
Other unusual charges (income) and contractual settlements 9,095 2,762 1,894 (333)
------------ ------------ ------------ ------------
115,178 115,986 87,157 9,542
------------ ------------ ------------ ------------
Loss from operations (5,929) (24,600) (17,500) (1,570)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest expense - related parties (1,994) (1,400) -- --
Interest expense - others (15,891) (19,364) (19,575) (1,162)
Interest and other income 560 547 191 38
------------ ------------ ------------ ------------
(17,325) (20,217) (19,384) (1,124)
------------ ------------ ------------ ------------
Loss before extraordinary item (23,254) (44,817) (36,884) (2,694)
Extraordinary item:
Gain on extinguishment of debt -- -- 77,172 --
------------ ------------ ------------ ------------
NET INCOME (LOSS) ($ 23,254) ($ 44,817) $ 40,288 ($ 2,694)
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE CALCULATION:
Loss before extraordinary item ($ 23,254) ($ 44,817) ($ 36,884) ($ 2,694)
Preferred dividend payable in kind (514) (268) (13) --
Accretion of 14% Preferred to its redemption value (494) (1,128) (1,197) --
------------ ------------ ------------ ------------
Loss before extraordinary item applicable to
common shareholders (24,262) (46,213) (38,094) (2,694)
Extraordinary item:
Gain on extinguishment of debt -- -- 77,172 --
------------ ------------ ------------ ------------
Net income (loss) applicable to common shareholders ($ 24,262) ($ 46,213) $ 39,078 ($ 2,694)
============ ============ ============ ============
Loss per common share before extraordinary item ($ 1.51) ($ 2.73) ($ 2.03) ($ 0.26)
Extraordinary gain per common share, basic and diluted -- -- 4.11 --
------------ ------------ ------------ ------------
Net income (loss) per common share, basic and diluted ($ 1.51) ($ 2.73) $ 2.08 ($ 0.26)
============ ============ ============ ============
Weighted average number of shares, basic and diluted 16,040,035 16,923,499 18,754,133 10,188,630
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 44
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
STATEMENTS OF CHANGES IN MANDATORILY REDEEMABLE PREFERRED STOCK
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREDECESSOR COMPANY SUCCESSOR COMPANY
---------------------------------------------------------- ------------------
YEAR ENDED DECEMBER 31 TEN MONTHS AND ONE MONTH AND
----------------------------------- SEVENTEEN DAYS ENDED THIRTEEN DAYS ENDED
1997 1998 NOVEMBER 17, 1999 DECEMBER 31, 1999
---------------- ---------------- -------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ------ ------- ------ -------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
14% CUMULATIVE
REDEEMABLE CONVERTIBLE
PREFERRED STOCK
Balance, beginning of period 120,387 $6,708 138,147 $7,716 158,527 $ 9,112 -- --
Dividends payable-in-kind 17,760 514 20,380 268 17,234 13 -- --
Accretion of carrying value
to amount payable at
redemption on June 30, 2000 -- 494 -- 1,128 -- 1,197 -- --
Shares exchanged for Common Stock
of Successor Company -- -- -- -- (175,761) (10,322) -- --
------- ------ ------- ------ -------- -------- ------ ------
Balance, end of period 138,147 $7,716 158,527 $9,112 -- $ -- -- --
======= ====== ======= ====== ======== ======== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 45
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
STATEMENTS OF CHANGES IN NON-MANDATORILY REDEEMABLE PREFERRED STOCK,
COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 TEN MONTHS AND
------------------------------------------------ SEVENTEEN DAYS ENDED
1997 1998 NOVEMBER 17, 1999
----------------------- ---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------- ----------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
SERIES A SPECIAL CONVERTIBLE
PREFERRED STOCK
Balance, beginning of period -- -- -- -- -- --
Exercise of Warrants 12,500 $ 3 100,875 $ 20 89,912 $ 18
Conversion to Common Stock
(Predecessor Company) (12,500) (3) (100,875) (20) (89,912) (18)
----------- ------- ----------- ------- ----------- -------
Balance, end of period -- -- -- -- -- --
=========== ------- =========== ------- =========== -------
COMMON STOCK (PREDECESSOR COMPANY)
Balance, beginning of period 14,488,828 145 16,360,829 164 18,754,133 188
Company Equity Offering 1,012,500 10 -- -- -- --
Exercise of warrants and options 409,754 4 375,804 4 -- --
Conversion of Series A Preferred 250,000 3 2,017,500 20 1,798,240 18
Exchanged for new Common Stock -- -- -- -- (20,552,373) (206)
Other issuances of stock 199,747 2 -- -- -- --
----------- ------- ----------- ------- ----------- -------
Balance, end of period 16,360,829 164 18,754,133 188 -- --
=========== ------- =========== ------- =========== -------
COMMON STOCK (SUCCESSOR COMPANY)
Balance, beginning of period -- -- -- -- -- --
New Common Stock issued in exchange for:
12% Senior Notes -- -- -- -- 9,500,000 95
14% Preferred Stock -- -- -- -- 325,000 3
Old Common Stock -- -- -- -- 175,000 2
Services -- -- -- -- 205,000 2
Redemption in settlement of Warrant
Put Obligation -- -- -- -- (16,370) --
----------- ------- ----------- ------- ----------- -------
Balance, end of period -- -- -- -- 10,188,630 102
=========== ------- =========== ------- =========== -------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period 59,104 62,600 61,233
Company Equity Offering, net 2,815 -- --
Exercise of warrants and options 101 25 --
New Common Stock issued in exchange for:
12% Senior Notes -- -- 58,805
14% Preferred Stock -- -- 10,102
Old Common Stock -- -- 87
Services -- -- 1,269
Warrants issued in exchange for old
Common Stock and 14% Preferred 333
Exercise of warrants - Series A Preferred -- (20) (18)
Put under warrants issued for
Series A Preferred -- (1,452) 452
Other issuances of stock and warrants 580 80 --
Fresh start accounting adjustment -- -- (68,873)
------- ------- -------
Balance, end of period 62,600 61,233 63,390
------- ------- -------
ACCUMULATED DEFICIT
Balance, beginning of period (42,544) (66,806) (113,019)
Net income (loss ) (23,254) (44,817) 40,288
Dividends payable in-kind on 14%
Preferred and accretion (1,008) (1,396) (1,210)
Fresh start accounting adjustment -- -- 73,941
------- ------- -------
Balance, end of period (66,806) (113,019) --
------- ------- -------
TOTAL NON-MANDATORILY REDEEMABLE
PREFERRED STOCK, COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY (DEFICIT) ($4,042) ($51,598) $63,492
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SUCCESSOR COMPANY
--------------------
ONE MONTH AND
THIRTEEN DAYS ENDED
DECEMBER 31, 1999
--------------------
SHARES AMOUNT
---------- -------
<S> <C> <C>
SERIES A SPECIAL CONVERTIBLE
PREFERRED STOCK
Balance, beginning of period -- --
Exercise of Warrants -- --
Conversion to Common Stock
(Predecessor Company) -- --
---------- -------
Balance, end of period -- --
========== -------
COMMON STOCK (PREDECESSOR COMPANY)
Balance, beginning of period -- --
Company Equity Offering -- --
Exercise of warrants and options -- --
Conversion of Series A Preferred -- --
Exchanged for new Common Stock -- --
Other issuances of stock -- --
---------- -------
Balance, end of period -- --
========== -------
COMMON STOCK (SUCCESSOR COMPANY)
Balance, beginning of period 10,188,630 $ 102
New Common Stock issued in exchange for:
12% Senior Notes -- --
14% Preferred Stock -- --
Old Common Stock -- --
Services -- --
Redemption in settlement of Warrant
Put Obligation -- --
---------- -------
Balance, end of period 10,188,630 102
========== -------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period 63,390
Company Equity Offering, net --
Exercise of warrants and options --
New Common Stock issued in exchange for:
12% Senior Notes --
14% Preferred Stock --
Old Common Stock --
Services --
Warrants issued in exchange for old
Common Stock and 14% Preferred --
Exercise of warrants - Series A Preferred --
Put under warrants issued for
Series A Preferred --
Other issuances of stock and warrants --
Fresh start accounting adjustment --
-------
Balance, end of period 63,390
-------
ACCUMULATED DEFICIT
Balance, beginning of period --
Net income (loss ) (2,694)
Dividends payable in-kind on 14%
Preferred and accretion --
Fresh start accounting adjustment --
-------
Balance, end of period (2,694)
-------
TOTAL NON-MANDATORILY REDEEMABLE
PREFERRED STOCK, COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY (DEFICIT) $60,798
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 46
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUCCESSOR
PREDECESSOR COMPANY COMPANY
----------------------------------------- -------------
TEN MONTHS ONE MONTH
AND SEVENTEEN AND THIRTEEN
YEAR ENDED DECEMBER 31 DAYS ENDED DAYS ENDED
------------------------- NOVEMBER 17 DECEMBER 31
1997 1998 1999 1999
--------- --------- ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net income (loss) ($23,254) ($44,817) $ 40,288 ($2,694)
Adjustments to reconcile net income (loss) to net cash flows
used in operating activities:
Depreciation and amortization 21,525 23,731 20,719 2,316
Extraordinary gain on extinguishment of debt -- -- (77,172) --
Amortization of deferred revenues (300) -- -- --
Increase in allowance for doubtful accounts 267 428 345 59
Non-cash interest expense 1,275 1,852 15,154 407
Write-off of intangible assets -- -- 864 --
Gain on disposal of assets -- (335) (51) (4)
Changes in current assets, net of assets acquired (4,735) 1,413 2,178 438
Change in current liabilities, net of liabilities assumed and
reclassification of long-term debt 502 11,258 (3,010) (1,374)
-------- -------- -------- -------
(4,720) (6,470) (685) (852)
-------- -------- -------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisitions (48,687) (2,669) -- --
Purchases of property and equipment (7,937) (3,580) (1,538) (139)
Proceeds from sale of assets 789 468 72 4
Acquisition of intangible assets (1,265) (737) (469) (306)
Other deferred charges (97) (245) 53 21
-------- -------- -------- -------
(57,197) (6,763) (1,882) (420)
-------- -------- -------- -------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from debt issuances 110 12,002 96,105 630
Proceeds from shareholder debt 25,000 3,090 -- --
Net proceeds from Company Equity Offering 2,825 -- -- --
Principal payments on borrowings (1,642) (724) (88,206) (4)
Debt financing costs (4,402) (1,915) (3,191) (230)
Debt restructuring costs -- -- (1,333) --
Proceeds from warrant and option exercises 107 29 -- --
-------- -------- -------- -------
21,998 12,482 3,375 396
-------- -------- -------- -------
Increase (decrease) in cash (39,919) (751) 808 (876)
Cash, beginning of period 46,438 6,519 5,768 6,576
-------- -------- -------- -------
Cash, end of period $ 6,519 $ 5,768 $ 6,576 $ 5,700
======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 47
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SUCCESSOR
PREDECESSOR COMPANY COMPANY
----------------------------------------- ------------
TEN MONTHS ONE MONTH
AND SEVENTEEN AND THIRTEEN
YEAR ENDED DECEMBER 31 DAYS ENDED DAYS ENDED
-------------------------- NOVEMBER 17 DECEMBER 31
1997 1998 1999 1999
--------- --------- ------------- ------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE:
Interest paid during the period $ 16,395 $ 11,171 $ 4,970 $ 223
========= ========= ========= =======
NON-CASH TRANSACTIONS:
Common Stock (Successor Company) issued in exchange for:
12% Senior Notes -- -- $ 58,900 --
14% Preferred -- -- 2,015 --
Old Common Stock -- -- 1,085 --
Services -- 1,271 --
Warrants for Common Stock (Successor Company) issued in
exchange for old Common Stock and 14% Preferred -- -- 333 --
Common Stock or warrants for Common Stock issued for services $ 208 $ 80 -- --
Put related to warrants issued for Series A Preferred -- 1,452 (452) --
Common Stock issued in payment of debt and interest 374 -- -- --
--------- --------- --------- -------
$ 582 $ 1,532 $ 63,152 --
========= ========= ========= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE> 48
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND
1998, THE TEN MONTHS AND SEVENTEEN DAYS ENDED NOVEMBER 17,
1999 (PREDECESSOR COMPANY) AND THE ONE MONTH AND THIRTEEN DAYS
ENDED DECEMBER 31, 1999 (SUCCESSOR COMPANY)
(IN THOUSANDS EXCEPT INSTALLED PUBLIC PAY TELEPHONES,
PER CALL, SHARE AND PER SHARE AMOUNTS)
1. DEBT RESTRUCTURING AND CHAPTER 11 BANKRUPTCY FILING
PhoneTel Technologies, Inc. and its subsidiary, Cherokee
Communications, Inc., (the "Company") operate in a single business segment
within the telecommunications industry. The Company specializes in the business
of installing and operating public pay telephones on a revenue sharing basis and
offering operator assisted long distance services. At December 31, 1997, 1998
and 1999, the Company operated 43,847, 43,248 and 36,747 installed public pay
telephones, respectively. The Company's operations are regulated by the Public
Service or Utility Commissions of the various States and the Federal
Communications Commission.
In January 1999, the Company announced that it had reached an agreement in
principle with an unofficial committee of Senior Noteholders (the "Unofficial
Committee") of its $125,000 aggregate principal amount 12% Senior Notes, due
2006 (the "Senior Notes") providing for the conversion, through a prepackaged
plan of reorganization (the "Prepackaged Plan"), of the Senior Notes and accrued
interest thereon into 95% of a new issue of common stock, $0.01 par value per
share ("Common Stock (Successor Company)") of the reorganized Company (the
"Restructuring").
The Company solicited acceptances of the Prepackaged Plan from the holders
of the Senior Notes and the 14% Cumulative Redeemable Convertible Preferred
Stock (the "14% Preferred") in anticipation of the commencement of a case under
chapter 11 of the Bankruptcy Code (the "Case"). Effective June 11, 1999, the
Company obtained acceptances of the Prepackaged Plan from holders of 99.9
percent of the Senior Notes and 100 percent of the 14% Preferred shares voting
in response to the solicitation. Such acceptances substantially exceeded the
levels required to confirm the Prepackaged Plan.
On July 14, 1999, the Company commenced the Case in the U.S. Bankruptcy
Court in the Southern District of New York (the "Court") and thereafter
continued to operate its business as a debtor-in-possession. The Company also
obtained an order from the Court which allowed the Company to pay prepetition
and postpetition claims of employees, trade and other creditors, other than the
Senior Note claims, in the ordinary course of business.
On October 20, 1999, the Court confirmed the Prepackaged Plan. On November
17, 1999, the Company executed a post reorganization loan agreement ("Exit
Financing Agreement") and consummated the Prepackaged Plan. Pursuant to the
terms of the Prepackaged Plan, claims of employees, trade and other creditors of
the Company, other than holders of the Senior Notes are to be paid in full in
the ordinary course, unless otherwise agreed, with the Company retaining its
rights and defenses with respect to such claims. Holders of the Senior Notes
received 9,500,000 shares of the Common Stock (Successor Company) in exchange
for the Senior Notes. In addition, the Unofficial Committee representing a
majority in principal amount of the Senior Notes appointed four of the five
members of the Board of Directors of the Company (the "New Board"). Peter G.
Graf, the former Chairman and Chief Executive Officer, continues to serve as a
Director on the New Board for a period of one year following the consummation of
the Prepackaged Plan.
Holders of the 14% Preferred received 325,000 shares of Common Stock
(Successor Company) and warrants to purchase up to 722,200 shares of Common
Stock (Successor Company) at an exercise price of $10.50 per share which expire
three years from the date of grant ("New Warrants"). Holders of existing Common
Stock received 175,000 shares of Common Stock (Successor Company) and New
Warrants to purchase up to 388,900 shares of Common Stock (Successor Company).
Options and warrants to purchase existing common stock were extinguished
pursuant to the Prepackaged Plan.
F-9
<PAGE> 49
The equity interests issued in connection with the Prepackaged Plan are
subject to dilution by certain other equity issuances, including the issuance of
205,000 shares of Common Stock (Successor Company) to certain financial advisors
for services rendered in connection with the reorganization, and issuances
resulting from the exercise of certain options to purchase up to 5% of Common
Stock (Successor Company) to be issued by the New Board pursuant to the terms of
a management incentive plan ("1999 Management Incentive Plan") and other awards
included as part of the Prepackaged Plan.
As of November 17, 1999 (the "Consummation Date"), the total amount of
Common Stock (Successor Company) outstanding, after giving effect to the Common
Stock (Successor Company) and New Warrants forfeited in connection with the
warrant put obligation settlement described in Note 10, was 10,188,630 shares.
In addition, 1,074,721 shares of Common Stock (Successor Company) are reserved
for future issuance upon the exercise of the New Warrants, and an amount equal
to 5% of the shares of Common Stock (Successor Company) is reserved for issuance
pursuant to the terms of the 1999 Management Incentive Plan. Under its Amended
and Restated Articles of Incorporation confirmed as part of the Prepackaged
Plan, the total authorized capital stock of the Company is 15,000,000 shares of
Common Stock (Successor Company).
2. FRESH START REPORTING
Upon emergence from its Chapter 11 proceedings, the Company adopted fresh
start reporting pursuant to the provisions of AICPA Statement of Position 90-7
("SOP 90-7"). The Company has recorded the effects of fresh start reporting as
of November 17, 1999, the Consummation Date of the Company's Prepackaged Plan.
In accordance with SOP 90-7, assets and liabilities have been restated as of
November 17, 1999 to reflect the reorganization value of the Company, which
approximates their fair value at the Consummation Date. In addition, the
accumulated deficit of the Company through the Consummation Date has been
eliminated and the debt and capital structure of the company has been recast
pursuant to the provisions of the Prepackaged Plan. Thus, the balance sheet as
of December 31, 1999 reflects a new reporting entity (the "Successor Company")
and is not comparable to prior periods (the "Predecessor Company"). Furthermore,
the accompanying consolidated statements of operations and cash flows of the
Predecessor Company report operations prior to the Consummation Date and the
effect of adopting fresh start reporting and are thus not comparable with the
results of operations and cash flows of the Successor Company.
The reorganization value of the Company's common equity of approximately
$63,500 was determined by the Company with the assistance of its financial
advisor. This advisor (1) reviewed certain historical information for recent
years and interim periods; (2) reviewed certain internal financial and operating
data; (3) met with senior management to discuss operations and future prospects;
(4) reviewed publicly available financial data and considered the market values
of public companies deemed generally comparable to the operating business of the
Company; (5) considered certain economic and industry information relevant to
the operating business; (6) reviewed a four year forecast prepared by the
Company; and (7) conducted such other analysis as appropriate. Based upon the
foregoing, the financial advisor determined a range of values for the Company as
of the Consummation Date. In developing this range of values the advisor, using
rates of 15% to 20%, discounted the Company's four year forecasted free cash
flows and an estimate of sales proceeds which would be received if the Company
was sold at the end of the four year period within a range of comparable Company
multiples. A portion of the reorganization value of the Company's common equity
was assigned to the New Warrants issued to holders of the 14% Preferred and
Common Stock of the Predecessor Company based upon the fair value of the New
Warrants ($333 or $0.30 per warrant) with the remaining amount assigned to the
Common Stock of the Successor Company (approximately $6.20 per share).
Under fresh start reporting, the accumulated deficit of the Company at
November 17, 1999 of approximately $73,941, which included the effects of the
reorganization adjustments and the extraordinary gain on extinguishment of debt,
was eliminated. In addition, the accumulated depreciation and accumulated
amortization balances relating to the Company's property and equipment and
intangible assets were reduced to zero as part of the fresh start reporting
adjustment recognized to restate assets and liabilities to reflect the
reorganization value of the Company.
F-10
<PAGE> 50
The effects of the Company's Prepackaged Plan and fresh start reporting on the
Company's condensed consolidated balance sheet at November 17, 1999 are as
follows.
PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET
November 17, 1999
<TABLE>
<CAPTION>
Predecessor
Company (a) (b) Successor
Pre-emergence Reorganization Fresh Start Company
Balance Sheet Adjustments Adjustment Balance Sheet
------------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash $ 6,576 $ 6,576
Accounts receivable, net 11,179 11,179
Other current assets 1,708 1,708
--------- --------- --------- --------
Total current assets 19,463 -- -- 19,463
Property and equipment, net 21,979 $ 1,315 23,294
Intangible assets, net 80,762 3,753 84,515
Other assets 532 532
--------- --------- --------- --------
$ 122,736 -- $ 5,068 $127,804
========= ========= ========= ========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Current portion of long-term debt $ 1,159 $ 1,159
Accounts payable 9,174 9,174
Accrued expenses 5,987 5,987
--------- --------- --------- --------
Total current liabilities 16,320 -- -- 16,320
12% Senior Notes, net 139,438 ($139,438) --
Other long-term debt 47,992 47,992
14% Preferred 10,322 (10,322) --
Shareholders' Equity (Deficit):
Series A Preferred -- --
Common Stock (Predecessor Company) 188 (188) --
Common Stock (Successor Company) -- 102 102
Additional Paid-in Capital 61,684 70,579 ($ 68,873) 63,390
Accumulated Deficit (153,208) 79,267 73,941 --
--------- --------- --------- --------
Shareholders' Equity (Deficit) (91,336) 149,760 5,068 63,492
--------- --------- --------- --------
$ 122,736 $ -- $ 5,068 $127,804
========= ========= ========= ========
</TABLE>
(a) To record the issuance of Common Stock (Successor Company) in exchange
for the Senior Notes, 14% Preferred, Common Stock (Predecessor Company)
and services rendered by certain financial advisors in connection with
the Restructuring, less Common Stock (Successor Company) and New
Warrants forfeited upon settlement of the warrant put obligation and
the extraordinary gain on extinguishment of debt.
(b) To record assets and liabilities at their fair value pursuant to fresh
start reporting and eliminate the existing accumulated deficit.
F-11
<PAGE> 51
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary. Intercompany transactions and
balances have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all investments with original maturities of three
months or less to be cash equivalents. Cash and cash equivalents includes $1,419
on deposit under an informal arrangement at a bank, which is collateral for
letters of credit issued to suppliers.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost or, if acquired through a
business combination, at the amount established by purchase price allocation.
Depreciation for financial reporting and tax purposes is computed using the
straight-line method and accelerated methods, respectively, over the estimated
useful lives of the assets commencing when the equipment is placed in service.
The Company also capitalizes certain costs related to installing telephones and
depreciates those costs over the estimated useful life of the telephone or the
term of the location contract, whichever is shorter.
INTANGIBLE ASSETS
Intangible assets include costs incurred in obtaining new locations or
in the acquisition of installed public pay telephones through business
combinations ("location contracts"), non-compete agreements and deferred
financing costs. Intangible assets are amortized over the estimated economic
life of the respective location contracts, the term of the respective
non-compete or financing agreement.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates potential impairment of long-lived
assets based upon the cash flows derived from each of the Company's operating
districts, the lowest level for which operating cash flows for such asset
groupings are identifiable. A loss relating to an impairment of assets occurs
when the aggregate of the estimated undiscounted future cash inflows to be
generated by the Company's assets groups (including any salvage values) are less
than the related assets' carrying value. Impairment is measured based on the
difference between the higher of the fair value of the assets or present value
of the discounted expected future cash flows and the assets' carrying value. No
impairment was recorded in 1997, 1998 or 1999.
REVENUE RECOGNITION
Revenues from coin calls, reselling operator assisted and long distance
services, and compensation for dial-around calls are recognized in the period in
which the customer places the related call.
COMPREHENSIVE INCOME
The Company has no items of comprehensive income or expense.
Accordingly, the Company's comprehensive income and net income are equal for all
periods presented.
F-12
<PAGE> 52
EARNINGS PER SHARE
Basic earnings per share amounts are computed by dividing income or
loss applicable to common shareholders by the weighted average number of shares
outstanding during the period.
Diluted earnings per share amounts are determined in the same manner as
basic earnings per share except the number of shares is increased assuming
exercise of stock options and warrants using the treasury stock method and
conversion of the 14% Preferred. In addition, income or loss applicable to
common shareholders is not adjusted for dividends and other transactions
relating to preferred shares for which conversion is assumed. Diluted earnings
per share amounts have not been reported because the Company has a net loss
before extraordinary items and the impact of the assumed exercise of the stock
options and warrants and the assumed conversion of the 14% Preferred is not
dilutive.
INCOME TAXES
The Company utilizes the asset and liability method to account for
income taxes whereby deferred tax assets and liabilities are recognized to
reflect the future tax consequences attributable to temporary differences
between the financial reporting basis of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are measured
using enacted tax rates expected to be recovered and settled. The effect of a
change in tax rates on deferred tax assets and liabilities is recognized in the
period in which the change is enacted.
RECLASSIFICATIONS
Certain amounts relating to 1997 and 1998 have been reclassified to
conform to the current year presentation. The reclassifications have had no
impact on total assets, shareholders' equity or net loss as previously reported.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of financial instruments are based on a variety of
factors. Where available, fair values represent quoted market prices for
identical or comparable instruments. In other cases, fair values have been
estimated based on assumptions concerning the amount and timing of estimated
future cash flows and assumed discount rates reflecting varying degrees of risk.
Accordingly, the fair values may not represent actual values of the financial
instruments that could have been realized as of December 31, 1998 and 1999, or
that will be realized in the future. At December 31, 1998 and 1999, the
difference between the estimated fair values of financial instruments and their
carrying values was not material due to either short maturity terms or
similarity to terms available to comparable companies in the open market.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In accordance with SOP 90-7, the Company is required to adopt new
accounting pronouncements that have an effective date within twelve months of
the date of adoption of fresh start reporting. In June 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities." ("SFAS
No. 133"), which requires companies to recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 (as amended by SFAS No. 137) is
effective for fiscal years beginning after June 15, 2000. The Company has not
entered and has no current plans to enter into any transactions involving
derivative financial instruments. Accordingly, the new standard had no effect on
the Company's financial statements.
F-13
<PAGE> 53
4. TERMINATION OF MERGER WITH DAVEL COMMUNICATIONS GROUP, INC.
On June 11, 1998, the Company 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, the Company received a letter from Davel purporting
to terminate the Davel Merger Agreement. Thereafter, a complaint against the
Company 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, the Company 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.
The Company 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. The Company 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 the Company are without merit and is
vigorously pursuing its claims against Davel and Peoples.
At December 31, 1999, the Company had incurred $1,446 of costs relating to
the Davel Merger Agreement and related litigation. Such costs are included in
other unusual charges and contractual settlements in the accompanying
consolidated statements of operations.
5. ACQUISITIONS AND MERGERS
TERMINATION OF PROPOSED ACQUISITION
On March 14, 1997, the Company 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 the company
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 depositary. On August 21, 1997, the Company 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.
TDS TELECOMMUNICATIONS CORPORATION - MAY 18, 1998 ("TDS")
The Company entered into an asset purchase agreement to acquire
approximately 3,400 installed pay telephones from TDS's network of local
exchange carriers for a purchase price of $851. The majority of the pay
telephones acquired had to be upgraded with microprocessor technology needed to
operate the pay telephones under the Company's operating and management
information systems. The cost incurred to upgrade these pay telephones was
approximately $1,717. The Company began operating these pay telephones during
the last half of 1998.
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.
F-14
<PAGE> 54
ADVANCE PAY SYSTEMS, INC. - MAY 30, 1997 ("ADVANCE")
The Company acquired 800 installed public pay telephones for $2,709 and
incurred related acquisition expenses of $62.
AMERICAN PUBLIC TELECOM, INC. - MAY 30, 1997 ("AMERICAN")
The Company acquired 859 installed public pay telephones for $3,312 and
incurred related acquisition expenses of $69.
TEXAS COINPHONE - JANUARY 14, 1997 ("TEXAS COINPHONE")
The Company acquired 1,250 installed public pay telephones, parts and
supplies inventories, and certain other assets for $3,660 and incurred related
acquisition expenses of approximately $50.
CHEROKEE COMMUNICATIONS, INC. - JANUARY 1, 1997 ("CHEROKEE")
The Company acquired 13,131 public pay telephones for a purchase price
consisting of: $53,953; $1,250 for non-competition agreements; $4,174 for
acquired outstanding accounts receivable, prepaid expenses, deposits and coin in
the installed pay telephones; and the assumption of $5,443 in liabilities.
Additionally, the Company incurred approximately $1,656 in acquisition related
expenses.
PURCHASE PRICE ACCOUNTING
The Company recorded each of the above acquisitions as purchases and
has included the operating results of the acquired entities in the statements of
operations from the respective dates of acquisition. The difference between the
total purchase price and the current assets and liabilities assumed has been
allocated to property and equipment, location contracts and non-compete
agreements based on the relative fair values. Fair values of location contracts
are determined using discounted cash flows over the remaining estimated economic
lives of the acquired location contracts. The amount of location contracts
recorded for each acquisition and the estimated economic life of the acquired
location contracts are as follows: London - $8,608, 102 months; Advance -
$2,313, 120 months; American - $2,763, 103 months; Texas Coinphone - $3,097, 101
months; Cherokee - $53,103, 113 months.
PRO FORMA FINANCIAL DATA (UNAUDITED)
Set forth below is the Company's unaudited pro forma condensed
statement of operations data for the year ended December 31, 1997 as though the
Texas Coinphone, Advance, American and London acquisitions had occurred at the
beginning of 1997.
<TABLE>
<CAPTION>
<S> <C>
Total revenues $ 114,638
Net loss (24,093)
Net loss applicable to common shareholders (25,101)
Net loss per Common Share (1.56)
</TABLE>
The unaudited pro forma data above does not include TDS because the effect
on such operating results would not be significant. The unaudited pro forma
results 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 depreciation of property and equipment, amortization of
intangible assets, interest expense on borrowings used to finance the
acquisitions and the weighted average number of common shares outstanding after
giving effect to the acquisitions and excludes the assets and results of
operations not acquired.
F-15
<PAGE> 55
6. 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). Dial-around calls include 1 (800) subscriber calls, as
well as 1010xxx calls to access a long distance carrier or operator service
provider selected by the caller. 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 revenue at the beginning of the most recent period prior to the
announcement of such changes by the FCC. At December 31, 1998 and 1999, accounts
receivable included $13,095 and $10,636, respectively arising from dial-around
compensation. Such receivables are received on a quarterly basis at the
beginning of the second quarter following the quarter in which such revenues are
recognized. For the following periods, revenues from dial-around compensation
consisted of:
<TABLE>
<CAPTION>
Predecessor Company Successor Company
------------------------------------------- -------------------
Ten Months and One Month and
Year Ended December 31 Seventeen Days Ended Thirteen Days Ended
---------------------- November 17 December 31
1997 1998 1999 1999
----------- ------------- ---------------- ---------
<S> <C> <C> <C> <C>
Amount included in revenue from
non-coin telecommunication services $ 19,100 $ 16,187 $ 13,325 $ 1,655
Retroactive adjustment for changes in
accounting estimates of revenues
recorded in prior years (395) (3,733) - -
------------ ------------- ---------- ----------
Net revenue from dial-around compensation $ 18,705 $ 12,454 $ 13,325 $ 1,655
========== ============= ========= ==========
</TABLE>
Of the amount recorded as a retroactive adjustment to dial-around
compensation in 1998, $3,222 relates to the Company's 1997 fiscal year and $511
relates to the Company's 1996 fiscal year. The retroactive adjustment to
dial-around compensation of $395,000 in 1997 relates to the Company's 1996
fiscal year. If revenues from dial-around compensation had been recorded at the
then current rate ($0.238 per call or $31.18 per month based on 131 calls), the
net revenue for dial-around calls would have been $15,878 in 1997 and $16,187 in
1998.
Effective November 6, 1996, pursuant to the rules and regulations
promulgated by the FCC under section 276 of the Telecommunications Act ("Section
276"), the FCC issued an order to achieve fair compensation for dial-around
calls placed from pay telephones through deregulation and competition (the "1996
Payphone Order). Among other things, the 1996 Payphone Order prescribed
compensation payable to the payphone providers by certain interexchange carriers
("IXCs") for dial-around calls placed from payphones and, 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 ("Flex Ani"). The FCC required that the local exchange carriers
("LECs") make such coding available to the payphone providers as a transmit item
included in the local access line service. The 1996 Payphone Order set an
initial monthly rate of $45.85 per pay telephone for the first year after its
implementation (the "First Phase"), an increase from the monthly per pay
telephone rate of $6.00 in periods prior to its implementation, and thereafter,
set dial-around compensation on a per-call basis, at the assumed deregulated
coin rate of $0.35. The First Phase monthly rate was arrived at by the product
of the assumed deregulated coin rate ($0.35) and the then monthly average
compensable dial-around calls per payphone. A finding from the record
established at the time that the monthly average compensable calls was 131.
The 1996 Payphone Order was appealed by various parties, including the
IXCs, to the United States Court of Appeals for the District of Columbia Circuit
(the "Appeals Court"). Among other items, the Appeals Court found that the FCC
erred in utilizing a market-based methodology for calculating the amount of
dial-around compensation and further determined that the methodology for
determining the allocation of payment among IXCs was erroneous. The Appeals
Court remanded the 1996 Payphone Order to the FCC for further consideration.
F-16
<PAGE> 56
In response to the remand by the Appeals Court, in October 1997 the FCC
issued a new order implementing Section 276 (the "1997 Payphone Order"). The FCC
utilized a market-based methodology to arrive at a per call compensation rate
and then reduced it by certain costs attributable to a coin call which it did
not believe applied to a dial-around call, and adjusted the per-call rate from
$0.35 to $0.284 (the "Default Rate"). The FCC concluded that the Default Rate
should be retroactively utilized in determining compensation during the First
Phase and reiterated that payphone providers were entitled to compensation for
each and every call pursuant to the provisions of Section 276; however, the FCC
deferred for later decision the method of allocation of the payment among the
IXCs.
The 1997 Payphone Order was subsequently appealed by various parties. In
May, 1998 the Appeals Court again remanded the per-call compensation rate to the
FCC for further explanation, without vacating the Default Rate, indicating that
the FCC had failed to adequately explain its derivation of the Default Rate.
In response to the remand of the 1997 Payphone Order, 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 to $0.238, (the "Adjusted Default Rate) retroactive to October 7,
1997. In adjusting the rate, the FCC shifted its methodology from the
market-based method utilized in the 1997 and 1998 Payphone Orders 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
Adjusted Default Rate, the FCC incorporated its prior treatment of certain
payphone costs and 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 $0.002 for amounts charged by LECs for providing Flex Ani) will serve as
the Adjusted Default Rate for coinless payphone calls 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.
The 1999 Payphone Order deferred a final ruling on the First Phase
treatment of dial-around compensation to a later, as yet unreleased order;
however, it appears from the 1999 Payphone Order that the Adjusted Default Rate
will be applied for periods in the First Phase. The FCC further ruled that a
true-up will be made for all payments or credits, together with applicable
interest due and owing among the IXCs and the payphone service providers for the
payment period November 7, 1996 through the effective date of the Adjusted
Default Rate. 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 Adjusted Default Rate.
This adjustment of $6,075,000 included $2,342,000 recorded as revenue in the
first nine months of 1998 and $3,733,000 recorded as revenue in prior years.
The 1999 Payphone Order has been appealed by various parties. The Appeals
Court heard oral arguments on the matter on February 2, 2000. Based upon the
information available, the Company believes that the minimum amount it is
entitled to receive as fair compensation under Section 276 for prior periods 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.
7. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 and 1999 consisted of the
following:
<TABLE>
<CAPTION>
Estimated Predecessor Successor
Useful Lives Company Company
(in years) 1998 1999
---------- ---------------- ---------------
<S> <C> <C> <C>
Telephone boards, enclosures and cases 3-10 $ 47,518 $ 22,427
Furniture, fixtures and other equipment 3-5 3,138 766
Leasehold improvements 2-5 473 241
---------------- --------------
51,129 23,434
Less - accumulated depreciation (23,292) (693)
---------------- --------------
$ 27,837 $ 22,741
================ ==============
</TABLE>
F-17
<PAGE> 57
Under fresh start reporting, the carrying values of property and equipment
have been restated as of November 17, 1999 to reflect the reorganization value
of the Company and accumulated depreciation amounts have been eliminated.
Depreciation expense was $7,270, $8,451, $7,374, and $693 for the years ended
December 31, 1997 and 1998, the ten months and seventeen days ended November 17,
1999 and the one month and thirteen days ended December 31, 1999, respectively.
8. INTANGIBLE ASSETS
Intangible assets at December 31, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
Predecessor Successor
Amortization Company Company
Period 1998 1999
-------------- ---------------- --------------
<S> <C> <C> <C>
Location contracts 60-113 months $ 127,425 $ 81,266
Deferred financing costs 24-120 months 12,178 2,663
Non-compete agreements 24-60 months 3,733 1,099
Other 36-60 months 589 22
---------------- --------------
143,925 85,050
Less: accumulated amortization (42,852) (1,993)
---------------- --------------
$ 101,073 $ 83,057
================ ==============
</TABLE>
Under fresh start reporting, the carrying values of intangible assets have
been restated as of November 17, 1999 to reflect the reorganization value of the
Company and accumulated amortization amounts have been eliminated. Amortization
of intangible assets, other than deferred financing costs, amounted to $14,255,
$15,280, $13,345 and $1,623 for the years ended December 31, 1997 and 1998, the
ten months and seventeen days ended November 17, 1999 and the one month and
thirteen days ended December 31, 1999, respectively. Amortization of deferred
financing costs is included in interest expense in the accompanying consolidated
statements of operations.
9. 12% SENIOR NOTES
On December 18, 1996, the Company completed a public debt offering of
$125,000 aggregate principal amount 12% Senior Notes, due 2006, with interest
payable semiannually on June 15 and December 15. The net proceeds of $119,149
were used to complete the Cherokee and Texas Coinphone acquisitions in January
1997, to repay other outstanding indebtedness, and for general corporate
purposes. The Senior Notes contained covenants which, among other things,
limited the Company's ability to incur additional indebtedness or pay dividends
and which required the Company, in the event of a change in control of the
Company, to offer to purchase the Senior Notes for 101% of their aggregate
outstanding principal value plus accrued and unpaid interest. On December 30,
1997, the Company solicited and received the consent from its Noteholders to
amend the indenture to increase the limit of permitted indebtedness and to
modify the definition of consolidated net income to exclude certain
non-recurring expenses and non-operating charges when calculating certain
restrictive covenants. The Company incurred $625 in deferred financing costs to
the Noteholders and $761 in fees relating to the solicitation of the
Noteholders' consent to amend the indenture.
F-18
<PAGE> 58
The Company did not pay the semiannual interest payments which were due December
15, 1998 and June 15, 1999 on the Senior Notes and, pursuant to the terms of the
indenture, the Company was in default on this debt. As of December 31, 1998, the
principal balance due was classified as a current liability in the accompanying
consolidated balance sheet. As discussed in Note 1, the Company converted the
Senior Notes and accrued interest to Common Stock (Successor Company) on
November 17, 1999 and recognized an extraordinary gain on extinguishment of this
debt, determined as follows:
<TABLE>
<S> <C>
Senior Notes $ 125,000
Accrued Interest (from June 16, 1998 to November 17, 1999) 21,458
Deferred financing costs, net (5,556)
Debt restructuring costs (including $1,271 of Common Stock
(Successor Company) issued for services) (2,735)
-------------
Net carrying value of Senior Notes 138,167
Fair value of 9,500,000 Common Shares (Successor Company)
at $6.20 per share 58,900
-------------
Extraordinary gain on extinguishment of debt $ 79,267
=============
</TABLE>
10. LONG-TERM DEBT AND OTHER LIABILITIES
Long-term debt at December 31, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
Predecessor Successor
Company Company
1998 1999
---------------- ----------------
<S> <C> <C>
Related Party Debt and Credit Agreement,
with interest payable monthly at 2%
above the Lenders' reference rate $ 40,014 -
Exit Financing Agreement, due November 16, 2001
with interest payable monthly at 3% above
the base rate (11.5% at December 31, 1999) - $ 48,799
Warrant Put Obligation and Note Payable 1,452 1,010
Other notes payable 225 5
---------------- --------------
41,691 49,814
Less current maturities (41,691) (1,172)
-------------------- --------------
$ - $ 48,642
================ ==============
</TABLE>
Following are maturities of long-term debt for each of the next five
years:
<TABLE>
<S> <C>
2000 $ 1,172
2001 47,632
2002 -
2003 -
2004 1,010
----------------
$ 49,814
================
</TABLE>
F-19
<PAGE> 59
RELATED PARTY DEBT AND CREDIT AGREEMENT
On May 30, 1997, the Company entered into an agreement (the "Credit
Agreement") with various lenders (collectively referred to as the "Lenders").
ING (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 was 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 assets, including the installed public pay telephones, were 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 Senior Notes and
for general working capital purposes.
The Credit Agreement included covenants which, among other things,
required 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 limited the 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 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 ("Foothill"), 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 was 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
in 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 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 pay telephones acquired in connection with the TDS acquisition
(See Note 5).
Beginning December 31, 1998, the Company was not in compliance with certain
financial covenants and was in default under the Credit Agreement. Accordingly,
the Company classified the amounts due under the Credit Agreement as a current
liability at December 31, 1998. In addition, beginning April 1, 1999, the
Company was required to pay the default rate of interest, which was two percent
per annum higher than the otherwise applicable rate (11.75% through July 21,
1999).
In April 1999, the Company requested and received an additional advance of
$2,500, which increased the principal balance outstanding under its Revolving
Credit Commitment to $22,500. Proceeds of the advance were used for the payment
of professional fees and expenses, loan fees and certain accounts payable. The
Company also received a commitment from the Lenders to provide $45,900 in
debtor-in-possession financing ("D.I.P." financing) in anticipation of the Case
described in Note 1. The Company incurred $250 in fees relating to the
additional advance and a $250 fee for the D.I.P. financing commitment.
F-20
<PAGE> 60
On July 21, 1999, the outstanding balance of the Credit Agreement was paid
from the proceeds of the D.I.P. financing, the terms of which are described
below. The Company incurred an extraordinary loss from extinguishment of debt of
$2,095 due to the write-off of deferred financing costs related to the Credit
Agreement.
DEBTOR-IN-POSSESSION LOAN AGREEMENT
On July 14, 1999, the Company entered into a D.I.P. financing agreement
("D.I.P. Agreement") with Foothill. The D.I.P. Agreement provided a $45,900
revolving credit commitment, which was used to pay the outstanding balance, due
under the Credit Agreement, including accrued interest on July 21, 1999. The
Company also received advances totaling $2,649 for working capital purposes.
Interest on the D.I.P. Agreement was payable monthly in arrears at 3% above
the base rate (as defined therein) through November 12, 1999 and 3.75% above the
base rate thereafter. The loan was secured by substantially all of the assets of
the Company. The D.I.P. Agreement included covenants, which limited the
incurrence of additional debt, capital leases, liens and the disposition of
assets. On November 17, 1999, the Company refinanced the D.I.P. Agreement with
its current lenders from the proceeds of the post reorganization loan described
below.
POST REORGANIZATION LOAN AGREEMENT
The Company executed an agreement with Foothill for post reorganization
financing ("Exit Financing Agreement") on November 17, 1999. The Exit Financing
Agreement provides for a $46,000 revolving credit commitment (the "Maximum
Amount"), excluding interest and fees capitalized as part of the principal
balance. The Exit Financing Agreement is secured by substantially all of the
assets of the Company and matures on November 16, 2001.
The Exit Financing Agreement provides for various fees aggregating $9,440
over the term of the loan, including a $1,150 deferred line fee, which is
payable one year from the date of closing, together with interest thereon, and a
$10 servicing fee which is payable each month. At the option of the Company,
payment of other fees, together with interest due thereon, may be deferred and
added to the then outstanding principal balance. Fees due pursuant to the Exit
Financing Agreement are subject to certain reductions for early prepayment,
providing the Company is not in default on the Exit Financing Agreement.
The Exit Financing Agreement provides for interest on the outstanding
principal balance at 3% above the base rate (as defined in the Exit Financing
Agreement), with interest on the Maximum Amount payable monthly in arrears. The
Exit Financing Agreement, as amended on December 31, 1999, includes covenants,
which among other things, require the Company to maintain ratios as to fixed
charges, debt to earnings, current ratio, interest coverage and minimum levels
of earnings, payphones and operating cash (all as defined in the Exit Financing
Agreement). Other covenants limit the incurrence of long-term debt, the level of
capital expenditures, the payment of dividends, and the disposal of a
substantial portion of the Company's assets.
WARRANT PUT OBLIGATION AND NOTE PAYABLE
In 1996, the Company issued warrants to purchase shares of Series A Special
Convertible Preferred Stock (the "Series A Warrants") to two former lenders, at
an exercise price of $0.20 per share. Each share of Series A Special Convertible
Preferred Stock was convertible into 20 shares of Common Stock (Predecessor
Company). On October 13, 1998, the Company received notice from a former lender
which purported to exercise its put right as defined in the agreement for the
Series A Warrants (the "Warrant Agreement"), with respect to 89,912 Series A
Warrants and 124,300 Common Shares. The Warrant Agreement specified that the
Company was to redeem Series A Warrants that were convertible into shares of
Common Stock (or shares of Common Stock obtained from such conversion) at a
value determined by a formula, subject to certain limitations, set forth
therein. In 1998, the Company recorded an accrued liability and a charge to
additional paid-in-capital of $1,452 relating to this purported put exercise.
F-21
<PAGE> 61
On October 18, 1999, in connection with the Prepackaged Plan, the Company
reached an agreement with the former lender to settle the claim for $1,000 in
the form of a note payable, subject to certain reductions for early payment,
together with deferred interest at 5 % per annum, in five years. In addition,
the former lender agreed to forfeit its shares of Common Stock (Successor
Company) and New Warrants which were issued pursuant to the Prepackaged Plan and
immediately canceled. The adjustment to reduce the amount of the warrant put
obligation to $1,000, to record a note payable for this obligation and to credit
additional paid-in capital was recorded by the Company as of November 17, 1999.
11. OPERATING LEASES
The Company leases its corporate offices and other locations, office
equipment and field operations service vehicles under noncancellable operating
leases expiring at various times through 2004.
Future minimum noncancellable payments under operating leases are as
follows:
<TABLE>
<S> <C>
2000 $ 2,173
2001 1,608
2002 938
2003 486
2004 44
---------------
$ 5,249
===============
</TABLE>
Rent expense under all operating leases was $1,868, $2,622, $2,269 and $299
for the years ended December 31, 1997 and 1998, the ten months and seventeen
days ended November 17, 1999 and the one month and thirteen days ended December
31, 1999, respectively.
12. INCOME TAXES
No provisions for income tax were required and no income taxes were paid
for the years ended December 31, 1997 and 1998 because of operating losses
generated by the Company. In 1999, the Company has a taxable loss of
approximately $23,000 as a result of the Federal tax exclusion relating to the
extraordinary gain recognized upon conversion of the Senior Notes to Common
Stock (Successor Company) pursuant to the Prepackaged Plan. Special tax rules
apply to cancellation of indebtedness income ("COD Income") arising in
bankruptcy. COD Income of $79,267 is excluded from taxation but must be applied
to reduce the 1999 taxable loss, tax net operating loss carryforwards and other
tax attributes of the Company. Accordingly, no provisions for income tax were
required and no income taxes are payable for the year ended December 31, 1999.
Deferred tax assets and (liabilities) at December 31, 1998 and 1999 are as
follows:
<TABLE>
<CAPTION>
Predecessor Successor
Company Company
1998 1999
------- -------
<S> <C> <C>
Federal net operating loss carryforward $19,248 $ 398
Depreciation and amortization 3,057 4,150
Allowance for doubtful accounts receivable 324 454
------- -------
Gross deferred tax assets 22,629 5,002
Basis adjustment to assets-fresh start reporting -- (440)
Valuation allowance on deferred tax assets (22,629) (4,562)
------- -------
Net deferred tax assets $ -- $ --
======= =======
</TABLE>
F-22
<PAGE> 62
A valuation allowance has been provided against the deferred tax assets
since management cannot predict, based on the weight of available evidence, that
it is more likely than not that such assets will be ultimately realized. The tax
net operating loss carryforward of approximately $1,200 will expire in the year
2018. The tax benefit of such preconfirmation net operating loss carryforward,
if utilized, will be reported as an increase in additional paid-in capital.
Internal Revenue Code Section 382 provides for an annual limitation on the use
of net operating loss carryforwards in years subsequent to significant changes
in ownership. As a result of the Company's Restructuring in 1999, a change in
ownership has occurred resulting in an annual limitation which exceeds the
amount of the Company's net operating loss carryforward. In addition, any
significant change in ownership that occurs within two years after the November
17, 1999 ownership change will result in a loss of tax benefits relating to the
then existing tax net operating loss carryforwards. The tax benefit as a
percentage of the loss before taxes differs from the statutory tax rate due
primarily to the amortization of intangibles, which is not deductible for tax
purposes, and the valuation allowance on deferred tax assets.
13. 14% CUMULATIVE CONVERTIBLE PREFERRED STOCK MANDATORILY REDEEMABLE
(PREDECESSOR COMPANY)
At December 31, 1998, the Predecessor Company had 107,918 shares of 14%
Preferred issued and outstanding and cumulative dividends issuable of 50,609
shares (valued at $1,118). The Company recorded dividends, declared and
undeclared, at their fair market value and recognized the difference between the
carrying value of the 14% Preferred and the mandatory redemption amount ($9,512
at December 31, 1998) through monthly accretions using the interest method. The
carrying value of the 14% Preferred was increased by $494 in 1997, $1,128 in
1998 and $1,197 in the first ten months and seventeen days of 1999 through
accretions. Each share of 14% Preferred was entitled to receive a quarterly
dividend of 0.035 shares of 14% Preferred. Each share of 14% Preferred was
convertible into 10 shares of Common Stock (Predecessor Company) and was subject
to mandatory redemption on June 30, 2000.
As discussed in Note 1, the Successor Company issued 325,000 shares of
Common Stock and 722,200 New Warrants in exchange for the 14% Preferred.
14. NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY (DEFICIT)
Non-mandatorily Redeemable Preferred Stock, Common Stock and Other
Shareholders' Equity (Deficit) at December 31, 1998 and 1999 consisted of the
following:
<TABLE>
<CAPTION>
Predecessor Successor
Company Company
1998 1999
----------------- ----------------
<S> <C> <C>
Series A Special Convertible Preferred Stock ($0.20 par value, $0.20
stated value - 250,000 shares authorized at December 31, 1998; no
shares outstanding).
Common Stock (Predecessor Company) ($0.01 par value - 50,000,000 shares
authorized; 18,754,133 shares issued and
outstanding at December 31, 1998). $ 188
Common Stock (Successor Company) ($0.01 par value-
15,000,000 shares authorized; 10,188,630 shares
issued and outstanding) $ 102
Additional paid-in capital 61,233 63,390
Accumulated deficit ( 113,019) (2,694)
----------------- ----------------
($ 51,598) $ 60,798
================= ================
</TABLE>
F-23
<PAGE> 63
Under the Amended and Restated Articles of Incorporation confirmed as part
of the Company's Prepackaged Plan, the total authorized capital stock of the
Successor Company is 15,000,000 shares of Common Stock.
COMPANY EQUITY OFFERING AND OTHER ISSUANCES OF COMMON STOCK
On December 18, 1996, the Company sold 6,750,000 shares of Common Stock
(Predecessor Company) at the price of $3.00 per share and received proceeds, net
of offering expenses, of $18,295. On January 29, 1997, the Company exercised its
over-allotment option and issued an additional 1,012,500 shares of Common Stock
at the price of $3.00 per share and received net proceeds of $2,825.
On January 2, 1997, an executive officer of the Company converted an
outstanding loan and accrued interest of $374 to 124,747 shares of Common Stock
(Predecessor Company). On October 23, 1997, the Company issued 75,000 shares of
Common Stock to the five non-employee directors of the Company for services
rendered for the two years ended May 1997.
Effective November 17, 1999, the Company issued 10,205,000 shares of
Common Stock (Successor Company) upon consummation of the Company's Prepackaged
Plan.
STOCK WARRANT ACTIVITY
Activity for warrants exercisable into Common Stock (Predecessor
Company) during 1997, 1998 and 1999 was as follows:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
--------- --------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1996 2,112,114 2.40
Granted pursuant to
anti-dilution provisions 16,798 2.33
Exercised ( 309,754) 0.01
Canceled ( 189,991) 7.71
-----------
BALANCE, DECEMBER 31, 1997 1,629,167 2.22
Granted to Directors 100,000 1.88
Exercised (375,804) 0.08
Canceled (118,006) 5.45
-----------
BALANCE, DECEMBER 31, 1998 1,235,357 2.54
Canceled upon expiration or consummation
of the Company's Prepackaged Plan (1,235,357) 2.54
----------
BALANCE, NOVEMBER 17, 1999 -
==========
</TABLE>
All warrants outstanding at each period end were exercisable.
In April 1998, the Company granted warrants to purchase 100,000 shares
of Common Stock (Predecessor Company) at an exercise price of $1.875 per share
to its non-employee Directors as compensation for services during the 1997-98
service year. The fees for such services, valued at $80 using the Black-Scholes
valuation method, were included in selling, general and administrative expenses.
F-24
<PAGE> 64
On February 7, 1997, one of the Company's former lenders exercised warrants
for 12,500 shares of Series A Preferred (with net proceeds to the Company of $3)
which were immediately converted into 250,000 shares of Common Stock
(Predecessor Company). On November 13, 1998, the other former lender exercised
warrants to purchase 100,875 shares of Series A Preferred and immediately
converted their Series A Preferred to Common Stock (Predecessor Company). This
exercise resulted in the issuance of 2,017,500 shares of Common Stock
(Predecessor Company), net of Common Stock not issued in lieu of cash payment.
At December 31, 1998, there were 89,912 warrants which were exercisable
into Series A Preferred. These warrants were canceled in 1999 in connection with
the settlement of the warrant put obligation discussed in Note 10.
On November 17, 1999, the Company granted New Warrants to purchase
1,111,100 shares of Common Stock (Successor Company) at an exercise price of
$10.50 per share to the holders of the 14% Preferred and Common Stock of the
Predecessor Company upon consummation of the Prepackaged Plan. Each New Warrant
is exercisable through November 17, 2002. New Warrants to purchase 36,379 shares
of Common Stock (Successor Company) were forfeited and immediately canceled on
the date of grant in connection with the settlement of the warrant put
obligation for the Series A Preferred.
STOCK OPTION ACTIVITY
On February 4, 1997, the Company's Board of Directors adopted and its
shareholders ratified the Company's 1997 Stock Incentive Plan (the " 1997
Plan"). The 1997 Plan provided for the issuance of incentive and non-qualified
stock options to purchase up to 2,000,000 shares of Common Stock (Predecessor
Company) by officers, directors, employees and independent contractors of the
Company. In 1997, the Company granted 1,592,400 incentive and non-qualified
stock options at exercise prices equal to the market value of the Company's
Common Stock (Predecessor Company) on the dates of grant to substantially all
officers and employees. The options granted provided for graduated vesting,
one-third each year on the anniversary of the date of grant, and had a term of
eight years.
Other options to purchase Common Stock (Predecessor Company) were
granted by the Company at the discretion of the Board of Directors to employees,
officers, directors and others, and generally were exercisable immediately upon
issuance, had terms of three to five years and were issued with exercise prices
at or slightly below quoted market value of the Company's Common Stock on the
date of grant. At December 31, 1997 and 1998, 726,813 and 1,165,243 options,
respectively, were exercisable.
On November 17, 1999, pursuant to the terms of the Prepackaged Plan,
the Company adopted the 1999 Management Incentive Plan. The 1999 Plan provides
for the issuance of incentive and non-qualified stock options, stock
appreciation rights and other awards to purchase up to 391,647 shares of Common
Stock (Successor Company) by officers, directors and management employees. The
1999 Plan will continue in effect until December 31, 2009. No options or other
awards were granted during 1999.
On January 6, 2000, the Company granted options to purchase 85,000
shares of Common Stock (Successor Company) with an exercise price of $1.14 per
share to four non-employee directors of the Company pursuant to the 1999
Management Incentive Plan. Such options became vested on the date of grant and
expire January 5, 2003. On March 9, 2000, pursuant to the 1999 Plan, the Company
granted options to purchase 193,000 shares of Common Stock (Successor Company)
to certain management employees at an exercise price of $1.56 per share. Such
options vest equally over a three-year period beginning March 9, 2001 and expire
March 8, 2005.
F-25
<PAGE> 65
Activity for stock options exerciseable into Common Stock (Predecessor Company)
during 1997, 1998 and 1999 was as follows:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
--------- --------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1996 1,021,330 2.98
Granted:
1997 Stock Incentive Plan 1,592,400 3.12
Pursuant to anti-dilution provisions 37,743 2.19
-----------
Total options granted 1,630,143 3.10
Exercised ( 100,000) 1.02
Canceled ( 467,660) 3.61
-----------
BALANCE, DECEMBER 31, 1997 2,083,813 2.99
Granted to former executive 105,000 0.81
Canceled ( 272,078) 3.02
----------
BALANCE, DECEMBER 31, 1998 1,916,735 2.87
Granted to former executive 35,000 0.81
Canceled upon expiration, termination
or consummation of the Company's
Prepackaged Plan (1,951,735) 2.83
---------
BALANCE, NOVEMBER 17, 1999 -
===========
</TABLE>
STOCK BASED COMPENSATION
Under SFAS No. 123 "Accounting for Stock-Based Compensation", the fair
value of each option and warrant granted is estimated on the grant date using
the Black-Scholes option pricing model. The fair value of options and warrants
issued to non-employees is charged to operations over the periods such options
and warrants vest. The Company recognizes compensation expense for options or
warrants issued to employees using the intrinsic value method. Under that
method, compensation expense is charged for the excess of the market value of
the Company's shares over the exercise price of the options or warrants , if
any, on the date of grant. The following assumptions were made in estimating
fair value: (i) dividend yield of 0%; (ii) risk-free interest rates of 6.35% for
1997 and 5.95% for 1998; (iii) expected life equal to the period of time
remaining in which the options or warrants can be exercised; and (iv) expected
volatility of 81% in 1997 and 85% in 1998. There were no compensation costs
charged to operations in 1997, 1998 and 1999 for stock options issued to
employees. Had compensation cost been determined on the basis of fair value
pursuant to SFAS No. 123, net income (loss) and the income (loss) per share
would have been as follows:
<TABLE>
<CAPTION>
Ten Months
and Seventeen
Years Ended December 31 Days Ended
-------------------------- November 17
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net income (loss):
As reported ($23,254) ($44,817) $ 40,288
Pro forma (24,668) (46,418) 43,302
Net income (loss) per share (basic and diluted):
As reported (1.51) (2.73) 2.08
Pro forma (1.60) (2.83) 2.24
</TABLE>
F-26
<PAGE> 66
The weighted average fair value of options and warrants granted to
employees was $2.42 in 1997, $0.42 in 1998, and $0.03 in 1999. All options and
warrants that were granted to employees and outstanding at November 17, 1999
were canceled pursuant to the Company's Prepackaged Plan. Under SFAS No. 123,
the proforma net income and net income per share amounts for the ten months and
seventeen days ended November 17, 1999 reflect the reversal of compensation
expense from prior years due to the cancelation of such options.
Options and warrants outstanding at December 31, 1999 consist of the
New Warrants to purchase 1,074,721 shares of Common Stock (Successor Company).
At December 31, 1999, all warrants were exercisable at an exercise price of
$10.50 per share and had a remaining contractual life of 2.88 years.
15. COMMITMENTS AND 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.
16. OTHER REVENUES, OTHER UNUSUAL CHARGES AND CONTRACTUAL SETTLEMENTS, AND
EXTRAORDINARY ITEMS
Other revenues include $300 of income in 1997 relating to amortization of
deferred revenue resulting from a signing bonus received in connection with a
services agreement with an operator service provider.
Other unusual charges (income) and contractual settlements is comprised of:
<TABLE>
<CAPTION>
Predecessor Company Successor Company
----------------------------------------------- --------------------
Ten Months and One Month and
Year Ended December 31 Seventeen Days Ended Thirteen Days Ended
---------------------- November 17 December 31
1997 1998 1999 1999
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Professional fees and other
costs related to the Prepackaged Plan $ 852 $ 31
Settlement of employee
contractual obligations $ 147 $ 92 - -
Termination of CCI acquisition 7,771 - - -
Termination of Davel Merger - 1,426 20 -
Write-off of abandoned location contracts - - 864 -
Settlement - operator service agreement - 545 - -
Settlement - professional fees - - - (364)
Other contractual settlements 210 190 - -
Amendment to Credit Agreement - 328 - -
Amendment to Indenture
12% Senior Notes 761 - - -
Other 206 181 158 -
---------- ----------- ---------- ----------
$ 9,095 $ 2,762 $ 1,894 $ (333)
========== =========== ========== ===========
</TABLE>
The extraordinary gain on extinguishment of debt of $77,172 for the ten
months and seventeen days ended November 17, 1999 consists of the gain on
conversion of Senior Notes to Common Stock (Successor Company) of $79,267 less
the loss of $2,095 due to the write-off of deferred financing costs upon
refinancing of the Credit Agreement.
F-27
<PAGE> 67
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Additions
Balance ----------------------------- Deductions for
at Charge (credit) From write offs and Balance
beginning to costs, expenses acquired fresh start at end
of period or tax benefit company reporting of period
--------- ------------------ -------- -------------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Allowances deducted from related
balance sheet accounts:
Accounts Receivable $ 92 $ 267 $ 148 $ 507
Deferred Tax Assets 9,703 3,054 12,757
Intangible Assets 10,192 15,528 25,720
YEAR ENDED DECEMBER 31, 1998
Allowances deducted from related
balance sheet accounts:
Accounts Receivable 507 428 935
Deferred Tax Assets 12,757 9,872 22,629
Intangible Assets 25,720 17,132 42,852
TEN MONTHS AND SEVENTEEN DAYS
ENDED NOVEMBER 17, 1999
Allowances deducted from related
balance sheet accounts:
Accounts Receivable 935 345 1,280
Deferred Tax Assets 22,629 (15,506) ($ 447) 6,676
Intangible Assets 42,852 15,279 (58,131) --
ONE MONTH AND THIRTEEN DAYS
ENDED DECEMBER 31, 1998
Allowances deducted from related
balance sheet accounts:
Accounts Receivable 1,280 59 1,339
Deferred Tax Assets 6,676 (2,114) 4,562
Intangible Assets -- 1,993 1,993
</TABLE>
F-28
<PAGE> 68
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHONETEL TECHNOLOGIES, INC.
March 30, 2000 By: /s/ John D. Chichester
-------------------------------------
John D. Chichester
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/ Thomas M. Barnhart, II Chairman of the Board of Directors March 30, 2000
- ------------------------------
Thomas M. Barnhart, II
/s/ John D. Chichester President, March 30, 2000
- --------------------------------- Chief Executive Officer,
John D. Chichester and Director
/s/ Richard P. Kebert Chief Financial Officer, March 30, 2000
- ---------------------------------- Treasurer and Secretary
Richard P. Kebert
/s/ Eugene I. Davis Director March 30, 2000
- -----------------------------------
Eugene I. Davis
/s/ Peter G. Graf Director March 30, 2000
- -------------------------------------
Peter G. Graf
/s/ Kevin L.P. Schottlaender Director March 30, 2000
- -----------------------------
Kevin L.P. Schottlaender
</TABLE>
<PAGE> 69
EXHIBIT INDEX
10.28 Operator Services Agreement for COCOT Payphones by and between One Call
Communications, Inc. (d/b/a Opticom) and PhoneTel Technologies, Inc.
dated January 21, 2000.
10.29 Lump Sum Bonus Addendum to Operator Services Agreement dated January
21, 2000 by and between Opticom and PhoneTel Technologies, Inc. dated
January 21, 2000.
10.30 International Services Addendum to Operator Services Agreement dated
January 21, 2000 by and between One Call Communications, Inc.
("Opticom") and PhoneTel Technologies, Inc. dated February 16, 2000.
10.31 Amendment Number One to Loan and Security Agreement dated as of
December 31, 1999 by and among PhoneTel Technologies, Inc. and Cherokee
Communications, Inc. ("Borrowers") and the financial institutions that
are signatories thereto and Foothill Capital Corporation as agent
(together "Lenders") amending the Loan and Security Agreement dated as
of November 17, 1999 by and between Borrowers and Lenders.
21.1 Subsidiaries of PhoneTel Technologies, Inc.
27 Financial Data Schedule for the Year Ended December 31, 1999
- ----------------
<PAGE> 1
EXHIBIT 10.28
THE TERMS OF THIS AGREEMENT AND EXHIBITS ARE PROPRIETARY TO OPTICOM AND ARE
SUBJECT TO A CONFIDENTIALITY AGREEMENT SET FORTH IN SECTION 5 OF THIS AGREEMENT.
THIS AGREEMENT AND THE PRINTED PORTIONS OF ALL EXHIBITS MAY NOT BE AMENDED OR
MODIFIED (OR ANY PART DELETED OR ADDED TO) WITHOUT THE WRITTEN CONSENT OF
OPTICOM'S GENERAL COUNSEL OBTAINED IN ACCORDANCE WITH THE PROVISIONS OF SECTION
21 OF THIS AGREEMENT.
OPERATOR SERVICES AGREEMENT
(FOR COCOT PAYPHONES)
THIS AGREEMENT, dated January 21, 2000 entered into by and between ONE CALL
COMMUNICATIONS, INC., an Indiana Corporation d/b/a Opticom, of 801 Congressional
Boulevard, Suite 100, Carmel, Indiana, 46032 (herein referred to as "Opticom")
and PHONETEL TECHNOLOGIES, INC., whose address is shown on the last page of this
Agreement (herein referred to as "Customer"),
PURPOSE:
- - Opticom is an operator service provider engaged in the business of
providing operator long distance services which are more fully
described on Exhibit "A" which is attached hereto (the "Operator
Services") through a telecommunications network maintained by it;
- - Customer owns or controls coin-operated pay telephone equipment located
at various places and sites (herein "COCOT Payphones"), each telephone
or place where such telephone equipment is located having a discrete
telephone number which is used to identify the originating location of
the telephone (herein "ANI"), said COCOT Payphones being sometimes
herein referred to as either "COCOT Locations" or "Locations" ; and
- - Customer desires to have Opticom provide Operator Services.
- - Customer and Opticom are parties to a Regular Long Distance Service
Agreement and Standby Operator Services Agreement dated October 26,
1999 (the "Long Distance and Standby Agreement");
ACCORDINGLY, OPTICOM AND CUSTOMER AGREE AS FOLLOWS:
1. Contract for Services. Customer hereby contracts with Opticom for
Opticom to provide Operator Services for the telephone equipment at the places
and sites designated from time to time by Customer (herein "Locations"), and
Opticom agrees to provide Operator Services at such Locations in accordance with
the terms and provisions of this Agreement.
2. Location Information. As to each Location which is to be provided
Operator Services by Opticom, Customer shall provide to Opticom in a form and in
a media mutually acceptable to
<PAGE> 2
Opticom and Customer all information and data required by Opticom to provide
Operator Services for such Location. All Locations submitted by Customer to
Opticom for Operator Services are subject to approval by Opticom.
3. Customer Warranty as to Minimum Billings. Customer acknowledges that, in
order to provide Customer Operator Services pursuant to this Agreement, Opticom
will make a substantial investment in facilities and personnel. Accordingly,
Customer warrants that, during each six (6) billing month period commencing with
the first full billing month, the gross billings for Operator Services provided
by Opticom pursuant to this Agreement will average not less than
_________________________________________________________ per month. If, during
any of the four (4) six billing month periods during the term of this Agreement,
the average gross monthly billings for Operator Services during said six (6)
billing month period are less than ____________________________________________,
Customer shall pay to Opticom liquidated damages in the amount of
_______________________________________for each of the billing months during
said six (6) billing month period the actual gross monthly billings for that
month were less than _________________________________________, it being agreed
by the parties that the damages which would be sustained by Opticom would be
substantial but would be difficult of ascertainment. Any liquidated damages
owing by Customer may be deducted by Opticom from commissions and property
surcharges payable to Customer pursuant to this Agreement.
a. Sale of Business by Customer. If, during the term of this Agreement,
Customer sells all or substantially all of its assets and if the
purchaser thereof does not assume and agree to discharge all of
Customer's obligations under this Agreement and any Addendum thereto
(or if Opticom is unwilling to consent, for reasonable business
reasons, to the assignment by Customer to the purchaser of this
Agreement and any Addendum thereto, all liquidated damages provided for
in this Section 3 shall, at the option of Opticom, become immediately
due and payable in full calculated for the entire period from the
effective date of such sale through the end of the term of this
Agreement.
4. Commissions.
a. Computation. Commissions payable to Customer are determined based on
gross billings for Minutes of Use (herein "MOU") charges and Operator
Assisted Surcharges (herein "OAS charges") billable to third parties
for Operator Service long distance calls placed from Customer's
Locations. Charges for MOU are determined by utilizing the Interstate
and Intrastate Rate Plans selected by Customer for its Locations which
are set forth on Exhibit B which is attached hereto and made a part
hereof. Gross commissions are determined by multiplying the commission
percentages stated on Exhibit B for the Interstate and Intrastate Rate
Plans applicable to each Location times the gross billings for MOU
charges and AOS charges for Interstate calls and the gross billings for
Intrastate calls. Gross commissions are subject to the Bad Debt
Deduction described in Subsection b below. Billings upon which
commissions are computed do not include (i) local, state, and/or
federal taxes which are payable by a billed party for Operator Services
and (ii) billings for information or directory assistance calls.
Commissions for calls to Alaska,
2
<PAGE> 3
Hawaii, and Canada which are to be billed to United States telephone
numbers will be paid at the applicable Intrastate commission rate.
b. Bad Debt Deduction. Gross commissions and amounts billed for
Customer's Property Surcharges are subject to a percentage deduction
("Bad Debt Deduction") for write-offs on Operator Services billings.
The Bad Debt Deduction includes deductions and write offs for LEC
standard bad debt deductions, unbillable and uncollectible calls,
fraud; credits granted to billed parties upon request; rating changes
required for billings; and call records which are either unbillable or
uncollectible for any reason. The application of this deduction to
gross commissions payable to Customer results in Net Commissions. The
percentage amounts of the Bad Debt Deductions for billings for
Interstate and Intrastate MOU charges, OAS charges, and Customer's
Property Surcharges are stated separately on page 1 of Exhibit B.
c. Customer's Property Surcharges. Opticom will also pay to Customer
the Property Surcharges specified on Exhibit B which are to be
collected by Opticom for Customer less the Bad Debt Deduction described
above ("Adjusted Property Surcharges").
d. Payment. Commencing on March 3, 2000, net Commissions and Customer's
Adjusted Property Surcharges will be paid weekly by wire transfer to
Customer's designated bank account on or before 11:00 a.m. (E.S.T.) on
the Friday which follows the end of each Billing Week (12:01 a.m.
Monday through 12:00 midnight Sunday) based upon Operator Services
billings rendered by Opticom during the previous Billing Week. Any true
ups which are necessary shall be made in the third weekly payment each
month. No commissions and Adjusted Property Surcharges will be payable
for any billing week for which the total commissions and Adjusted
Property Surcharges otherwise payable to Customer do not exceed Ten
Dollars ($10.00), and any such amounts not paid for any month shall not
carry over to future Billing Weeks
e. Reports. For each billing month, Opticom will provide to Customer an
original computer-generated monthly report which will include
individual call detail for each Operator Services Call made from each
of Customer's Locations during the billing month. Opticom will use
reasonable efforts to provide such reports as Customer reasonably
requests.
f. Changes in Opticom Billing Rates. Opticom may, from time to time
with written notice to Customer, change the rates it charges third
parties for MOU under the Rate Plans selected by Customer and/or the
amount of Operator Surcharges payable to Opticom by such third parties
for Operator Services provided by Opticom. Customer shall have a right
to terminate this Agreement upon not less than thirty (30) days written
notice to Opticom if Opticom makes any change in such billing rates
which has a material adverse effect upon Customer and its business.
5. Confidentiality. The parties hereto agree to keep and maintain the terms
and provisions of this Agreement in confidence, and Opticom agrees to keep and
maintain the names, addresses, and ANI's of all of Customer's Operator Service
Locations, confidential and not to disclose the
3
<PAGE> 4
same to any third party except for such disclosure as may be compelled by legal
process or required by any regulatory agency having jurisdiction and such
disclosure as may be necessary in order for Opticom to arrange for Operator
Services for such Locations. Opticom acknowledges and agrees that information
provided and submitted by Customer to Opticom as the identity of owners and
operators of Locations is and shall always remain confidential information
subject to the provisions of this section of this Agreement, and Opticom agrees
that at no time will it utilize such confidential information for any purpose
other than to arrange to provide Operator Services to such Locations for
Customer pursuant to this Agreement, nor will Opticom disclose such confidential
information to any other person, firm, corporation or other entity without the
express written consent of Customer.
6. Term of Agreement. The initial term of this Agreement shall be for a
period of twenty-five (25) months commencing on the date hereof after which this
Agreement shall continue on a month-to-month basis until terminated by either
party on not less than thirty (30) days written notice.
7. Quality of Service. Opticom agrees to provide the Operator Services
hereunder to Customer's Locations in conformity with the appropriate industry
standards for like services and in accordance with the performance standards set
forth on Schedule 1 which shall be signed and dated by both parties and attached
hereto.
8. Branding. At Customer's option, all operator calls handled by Opticom
from Customer's COCOT Locations will be branded in Customer's name.
9. 211 Trouble Calls. Opticom will answer, respond to, and process 211
trouble reports ("211 Calls") from Customer' COCOT Locations. Opticom will also
process requests for refunds and requests for credits ("Home Credits"). Customer
shall pay a fee of ______________________________ per trouble ticket to process
Home Credits, and Customer shall also pay all of Opticom's costs and expenses
incurred in processing and paying refunds and in granting credits. To foster
public relations, all callers will be offered a courtesy long distance call of
three (3) minutes in duration without charge to the caller. For those callers
accepting such a courtesy call, Customer will be charged a fee of
_____________________________________ per call. Up to five hundred (500)
completed trouble ticket calls (including those trouble ticket calls which
involve courtesy calls) will be provided for Customer each month without charge
at no cost to Customer. If the number of 211 Calls processed by Opticom in any
month is in excess of five hundred (500), Customer shall pay a charge of
___________________ for each 211 Call in excess of the five hundred (500). Those
trouble reports which include courtesy calls will be counted as part of the
monthly free five hundred (500) call ceiling. All charges owing by Customer to
Opticom for trouble reports will be deducted from commissions and property
surcharges payable to Customer pursuant to this Agreement.
10. Letters of Authorization ("LOA's"). Prior to Opticom commencing
Operator Services for any Location which is not owned by Customer ("Non-Owned
Location"), Customer shall obtain an authorization ("Authorization") from such
Location which either directly authorizes Opticom to provide service to the
Location or authorizes Customer, as agent for the Location, to select an
operator services provider, such as Opticom, to provide operator long distance
services for such
4
<PAGE> 5
Location. Such authorization shall comply with (i) all applicable local, state,
and federal regulations (ii) all requirements and procedures of the local
operating company (LEC) with respect to the selection of a preferred
interconnection long distance carrier for the Location and (iii) all procedures
and requirements of Opticom. As to all Non-Owned Locations submitted by Customer
to Opticom, Customer represents and warrants that Customer has obtained for the
Location an Authorization which complies with the requirements of this
Agreement, that such Authorization is valid and authentic and constitutes and
represents the most current Authorization for said Location to the best of
Customer's knowledge, and Customer agrees to and shall indemnify and hold
harmless Opticom from and against all losses, claims, fines, penalties, and
expenses (including reasonable attorney fees) asserted or levied against or
sustained or incurred by Opticom arising from or related to the invalidity of
any Authorization or the contention that such Authorization was superseded by a
more recent Authorization. As to all Locations owned by Customer (COCOT's),
Customer represents and warrants to Opticom that the telephone equipment at such
Locations to be served by Opticom pursuant to this Agreement is owned by
Customer and that Customer has the power and authority to select the operator
service provider for such Locations without the consent, approval, or
authorization of any other person, firm, corporation, or other entity, and
Customer agrees to and shall indemnify and hold harmless Opticom from and
against all claims, liabilities, damages, fines, penalties, or other costs and
expenses, including reasonable attorney fees, incurred or paid by Opticom
arising out of or which involves, in any manner, the contention of a third party
(i) that Customer is or was not the owner of the COCOT telephone equipment at
such Locations or (ii) that Customer did not have the power and authority to
select the operator service provider for such Locations without the consent,
approval, or authorization of any other person, firm, corporation, or other
entity. In the event another customer of Opticom presents to Opticom an
Authorization for a Location which is then subject to Customer's Authorization
or in the event Customer presents to Opticom an Authorization for a Location
which is then subject to an Authorization of another customer of Opticom,
Customer authorizes and empowers Opticom, in its sole and absolute discretion
exercised in good faith pursuant to internal Opticom policies consistently and
uniformly applied, to determine which Authorization is to be honored.
11. Regulatory Matters. Customer and all Location owners and/or operators
shall at all times comply with and conform to all federal, state, and local
laws, rules, regulations, ordinances, tariffs, dockets, orders, and guidelines
applicable to the Operator Services to be provided by Opticom hereunder
including all requirements with regard to posting guidelines, alternate carrier
access, branding, transfer of calls to local exchanges, screening, blocking, and
routing of emergency calls.
Customer and all Locations shall permit Opticom to take whatever steps are
necessary to insure that Opticom is in compliance with all of the regulations
and requirements pertaining to the provision of Alternate Operator Services as
established by the Federal Communications Commission and the regulatory
authority(ies) of the state wherein such services will be provided.
Opticom and Customer shall each indemnify, defend, and hold the other
harmless of and from any and all claims, liabilities, fines, penalties, or other
costs and expenses, including reasonable attorney fees, incurred or paid by such
party by reason of the other party's failure to
5
<PAGE> 6
comply with any applicable federal or state laws, rules, regulations, tariffs,
dockets, laws, ordinances, orders, or guidelines or other regulatory
requirements applicable to such party.
12. Access and Other Charges. Customer shall be responsible for all
Presubscribed Interexchange Carrier Charges imposed with regard to Customer's
Locations and the telephone lines serving such Locations; any FCC Universal
Service Fund Contributions and Assessments levied and imposed upon Customer as a
telecommunications provider; and any other similar charges and assessments which
may be due and payable with regard to either Customer's telephone lines and
equipment or with regard to the telecommunications services provided by Customer
at its Locations.
13. Location Relations. Customer acknowledges that, by reason of regulatory
requirements requiring the identification of Opticom as the Operator Services
Provider at Locations, the persons who own or control Locations will likely
contact Opticom in the event there exist unresolved problems between the
Locations and Customer regarding the payment of commissions by Customer for the
Location or other matters and that the industry reputation of Opticom may be
adversely affected if such problems are not satisfactorily resolved in an
expeditious manner. Customer agrees to promptly endeavor to satisfactorily
resolve problems with Location owners and operators which are brought to
Customer's attention by Opticom, and Customer agrees that, if Customer fails to
promptly resolve such complaints, Opticom may take whatever measures it deems
appropriate to resolve the problem and maintain its reputation in the industry.
14. Suspension and Termination of Services. Opticom shall have the right at
any time and from time to time, with as much notice to Customer as is
practicable under the circumstances, to temporarily suspend or terminate all or
some Operator Services provided at or to any Location because of (i) defects or
malfunctions of or in subscriber equipment at the Location over which Opticom
has no control; (ii) an unacceptable level of fraudulent or uncollectible
telephone calls; (iii) for violations of local, state, or federal laws and
regulations; (iv) for violations of published rules, regulations, and tariffs;
(v) an unacceptable quality of transmission by reason of factors over which
Opticom has no control; (vi) abuse of the Operator Services provided hereunder;
or (vii) compliance with any order of a regulatory agency having jurisdiction.
15. Relationship of the Parties. Opticom and Customer are independent
parties, and there exists no relationship of joint venture, partnership, or
agency between them. Customer and Opticom each agree to indemnify, defend, and
hold each other harmless from all losses, claims, costs, including reasonable
attorney fees, damages, or expenses arising out of, in whole or in part,
directly or indirectly, the acts or omissions of such party or persons acting
for or on its behalf.
16. Force Majeure. To the extent that either Customer or Opticom shall be
prevented or delayed from performing hereunder or giving any notice because of
any event or circumstance over which such parties have no reasonable control
(including, without limitation, war, fire, civil commotion, strike, flood, power
shortages or outages, communication breakdowns and outages, acts or orders of
regulatory agencies having jurisdiction, and the like), then such party shall be
excused from performing or giving such notice for the duration of such event or
force majeure,
6
<PAGE> 7
provided, however, that if the duration of the delay caused by such event shall
exceed thirty (30) days, the party who was to benefit from the performance of
such act shall have the right to terminate this Agreement by giving written
notice to the other party.
17. Default and Termination. In addition to all other rights of termination
as herein provided, both Customer and Opticom shall have a right to terminate
this Agreement by reason of any material default in the performance of duties
and responsibilities by the other party if such default is not cured within
thirty (30) days after written notice of such default is given to the defaulting
party. Other than for (i) obligations for the payment of money or commissions
due pursuant to this Agreement, (ii) indemnity obligations which are expressly
provided for in this Agreement, (iii) confidentiality obligations under Section
5 of this Agreement, and (iv) amounts or damages (liquidated or otherwise) for
which either party is liable pursuant to the terms and provisions of any
addendum to this Agreement, any loan agreement between the parties, or any other
agreement which supplements this Agreement (all of which obligations shall
survive termination of this Agreement), neither party hereto shall have any
liability to the other party for any direct, indirect, incidental,
consequential, punitive or other damages sustained by a party by reason of the
default of the other party under this Agreement, it being agreed that
termination of this Agreement shall be the sole recourse and remedy of a
non-defaulting party for the default of the other party.
In the event (i) this Agreement is terminated by Opticom for any reason,
(ii) this Agreement terminates at the end of any term by reason of the election
of either party not to permit this Agreement to renew for another term, or (iii)
Opticom elects to terminate Operator Services for any Location of Customer for
any reason, Customer shall be responsible for diligently and timely changing,
prior to the effective date of any such termination, the preferred
interconnection carrier from Opticom to another operator services provider for
all Locations of Customer affected by any such termination. If Customer fails to
change the preferred interconnection carrier for any Location prior to the
effective date of the termination of this Agreement or termination by Opticom of
such Location(s) and such Location(s) remains on Opticom's Operator Services
network after the effective date of termination, no commissions or property
surcharges will be payable to Customer for any Operator Services provided by
Opticom for such Location after the effective date of the termination. As to all
Locations of Customer which remain on Opticom's Operator Services network
following termination of this Agreement or termination by Opticom of such
Location(s), Customer agrees to and shall indemnify, defend, and hold Opticom
harmless of and from any and all claims, liabilities, fines, penalties, or other
costs and expenses, including reasonable attorney fees, incurred or paid by
Opticom by reason of the Customer's failure (i) to change the preferred
interconnection carrier for such Location(s) or (ii) to comply with any
applicable federal or state laws, rules, regulations, tariffs, dockets, laws,
ordinances, orders, or guidelines or other regulatory requirements applicable to
Customer and such Locations, Customer expressly agreeing that this indemnity
obligation shall survive termination of this Agreement.
18. Changed Business and Economic Conditions. The parties hereto recognize
and affirm that the Commission Schedules set forth on Exhibit B are based upon
current business and economic conditions in the telecommunications industry in
the United States and that such business and economic conditions may adversely
change in the future by reason of competition,
7
<PAGE> 8
industry consolidation, governmental regulation, loss by Opticom of current
network facilities or arrangements, and factors which are beyond the control of
Opticom. The parties further recognize that changed business and economic
conditions may make it uneconomical and impractical, with regard to existing
Commission Schedules, for Opticom to profitably accept new Locations, to
profitably continue to provide some Operator Services, to profitably continue to
serve some or all existing Locations, and to otherwise be profitably competitive
in the marketplace with regard to existing and future Locations. In the event
bona fide changed business and economic conditions do occur and Opticom, in good
faith, determines that it is uneconomical and impractical, in relation to
existing Commission Schedules, for Opticom to profitably serve some or all
existing Locations and to accept new Locations and to otherwise be profitably
competitive in the marketplace with regard to some or all existing Locations and
future Locations, Opticom may give Customer written notice of such situation and
may, on sixty (60) days' notice to Customer, terminate some or all existing
Locations or some Operator Services provided to Locations, in which event
Customer's right to receive commissions as to such terminated Locations or
terminated Operator Services shall cease, and Customer shall have no recourse
against Opticom for loss of commissions occurring by reason of Opticom's
termination of such Locations or services, but Opticom shall remain accountable
to Customer for all commissions for Operator Services usage by such terminated
Locations prior to the effective date of termination. In any such situation,
Opticom agrees to negotiate in good faith with Customer regarding a new mutually
satisfactory arrangement between Customer and Opticom pursuant to which the
termination of existing Locations or Operator Services may be avoided and new
Locations can be accepted. In the event the parties are unable to reach a new
mutual agreement within a reasonable period of time, Customer may terminate this
Agreement on not less than thirty (30) days written notice to Opticom
19. Bankruptcy. In the event either Opticom or Customer becomes bankrupt
(files a petition in bankruptcy or has an involuntary petition in bankruptcy
filed against them and said petition is not dismissed within sixty (60) days of
such filing), the other party may elect to terminate this Agreement by written
notice effective at the end of the calendar month such notice was given. If
Opticom becomes bankrupt, all commissions owing to Customer shall become
immediately due and payable and Customer may immediately commence to transfer
Locations to another operator services provider, in which event this Agreement
shall continue in full force and effect as to all matters, including commissions
for Customer, as to all Locations which remain on Opticom's network for as long
as they remain on Opticom's network. In the event Customer becomes bankrupt,
Opticom may, at its option, make advances to Locations for unpaid commissions,
surcharges, and other compensation owing to such Locations by Customer in order
to maintain such Locations on Opticom's network, and, if Opticom does so,
Opticom may repay itself for such advances out of commissions due and payable to
Customer for business arising subsequent to the date Customer became bankrupt.
20. Arbitration. Except as may be expressly provided otherwise in an
addendum to this Agreement or in any other agreement which is entered into be
the parties to this Agreement, all claims or disputes arising out of this
Agreement, the relationship of the parties created by this Agreement, or the
alleged breach thereof shall be decided by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association then
obtaining unless the parties mutually agree otherwise. Notice of the demand for
arbitration shall be submitted in
8
<PAGE> 9
writing to the other party and to the American Arbitration Association. All
arbitration proceedings and hearings shall be held in Indianapolis, Indiana. Any
arbitration award shall be binding and enforceable in any court having
jurisdiction of the parties hereto. The cost of the arbitration proceeding,
exclusive of each party's own attorney fees and out-of-pocket expenses, shall be
borne equally by the parties. If the provisions of any addendum or other
agreement between the parties provides for an alternate means of dispute
resolution (including litigation in a court of law), the provisions of such
addendum or other agreement shall supersede this agreement with regard to the
resolution of the claims arising out of or under such addendum or other
agreement.
21. Modification and Amendment. The advance written approval of Opticom's
General Counsel shall be required to amend, modify, or add to this Agreement,
the printed portions of all attached exhibits, and any approved Addendum
thereto. To be effective, such written approval must be endorsed in writing on
this Agreement or by way of an attachment hereto. Any modification or amendment
(or any deletion from or addition to) the form of this Agreement, its exhibits,
or any addendum to this Agreement not so approved in writing by such General
Counsel shall be void and of no effect even if signed by an officer of Opticom.
No officer, employee, sales representative, or agent of Opticom other than its
General Counsel has the authority to vary or modify the form of this Agreement,
the printed portions of the exhibits, or any approved addendum or to otherwise
agree or consent to any amendment or addendum thereto. Opticom's General Counsel
is:
Jeffrey R. Kinney, Esq.
Mailing Address: 1 Riverfront Place, 20 N.W. First Street,
Suite 700, Evansville, IN 47708
Courier Address: same as above
Telephone Number:(812) 425-5200
Fax Number: (812) 425-2464
E-Mail: [email protected]
22. Notices. Any notice either party desires to give to the other party
hereunder shall be in writing and shall be delivered by first class United
States mail, postage prepaid, addressed to the parties at their addresses set
forth below unless such addresses are changed by written notice from time to
time. Written notices may also be faxed to either party, but, to be effective,
the notice must also be mailed as aforesaid.
If to Opticom: One Call Communications, Inc.
801 Congressional Boulevard, Suite 100
Carmel, Indiana 46032
Attn: President
Fax Number: (317) 575-3231
If to Customer: To the Customer at the address set
forth below.
23. Non-Waiver. No term or provision of this Agreement shall be deemed
waived and no breach or default shall be deemed excused unless such waiver or
consent shall be in writing and
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<PAGE> 10
signed by the party claimed to have waived or consented. No consent by any party
to, or waiver of, a breach or default by the other, whether express or implied,
shall constitute a consent to, waiver of, or excuse for any different or
subsequent breach or default.
24. Assignment. This Agreement may not be assigned by Customer except with
the written consent of Opticom, which consent shall not be unreasonably
withheld, provided,however, Customer may, without Opticom's consent, assign its
rights to receive payment of commissions and Property Surcharges to secure
financial obligations of Customer.
25. Governing Law. This Agreement and any dispute relating thereto shall be
governed by the laws of the State of Indiana.
26. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the successors and permitted assigns of the parties.
27. Headings and Titles. The headings and titles in this Agreement are for
convenience of reference only and shall not be construed to define or limit any
of the terms herein or affect the meanings or interpretations of this Agreement.
28. The Long Distance and Standby Agreement and Other Agreements. The Long
Distance and Standby Agreement is terminated as of the date of this Agreement.
This Agreement shall supersede and replace all existing arrangements or
agreements between Opticom and Customer for the provision of telecommunications
services by Opticom for Customer.
29. Execution; Counterparts; Facsimile Delivery. A copy of this Agreement signed
by one party which is received by the other party by means of a facsimile
transmission made by the signing party shall be binding upon the signing party
and shall constitute delivery of this Agreement by the signing party for all
purposes. The exchange by the parties of duly signed counterpart copies of this
Agreement transmitted by such parties to each other by facsimile transmission
shall result in a legally enforceable contract binding upon both parties.
THE FOREGOING IS OUR AGREEMENT.
ONE CALL COMMUNICATIONS, INC. PHONETEL TECHNOLOGIES, INC.
By:/s/ Brad Benge By:/s/ John D. Chichester
Executive Vice President President
Address: North Point Tower
1001 Lakeside Avenue
Seventh Floor
Cleveland, OH 44114
10
<PAGE> 11
EXHIBIT "A"
The following is a listing of types of Opticom services available at this
time.
All long distance billable calls (InterLATA, IntraLATA, and/or Interstate),
except as noted below, which are originated from Customer's Locations, but
which either (i) are not billed to Customer or to the Location, and/or (ii)
require operator assistance, including, but not limited to:
(a) Operator assisted calls utilizing participating Bell Operating
Company ("BOC") calling cards and other calling cards issued
by other operating companies;
(b) Operator assisted calls utilizing participating commercial
credit cards;
(c) Collect calls;
(d) Calls which are billed to third party telephones;
(e) Person-to-Person Credit Card and/or Calling Card calls;
(f) 0 + Area Code + seven digits + credit cards ("0+") listed (a)
and (b) above;
(g) 0 without additional digits ("0-").
Services to be provided by Opticom do not include Local Operator Services
which shall mean telephone calls (local collect, local person-to-person
collect, local billed to a calling card, local third party person-to-person
calls billed to another number) which are originated in and terminate in a
geographic area which is a toll free local calling area. If Customer's
Locations are used for Local Operator Services which cannot be billed by
Opticom on an elapsed time basis, the difference between the charge allowed
to be collected by Opticom and the elapsed time charges shall be deducted
from amounts payable to Customer.
Operator Services for International Long Distance Calls from Customer's
Locations may be arranged for by Customer pursuant to an Addendum to the
Operator Services Agreement.
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<PAGE> 12
EXHIBIT B Page 1 of 4
COMMISSION AND PROPERTY SURCHARGE SCHEDULES
The commission percentage rate specified below for each of the Interstate and
Intrastate Rate Plans (Billing Groups) selected by Customer for its Locations
used to determine the amount of commissions payable to Customer is applied to
Adjusted Billings for Minutes of Use ("MOU") charges and operator assisted
surcharges ("OAS charges") for Interstate or Intrastate Telephone Calls made
from Customer's Locations under each of the Rate Plans applicable to such
Locations. Customer may select any of the Rate Plans for different Locations,
but only one Interstate and one Intrastate Rate Plan may be selected for a
Location. Opticom will bill and, subject to the applicable Bad Debt Deduction,
collect for Customer the Property Surcharges ("PIF") specified below for each
completed Interstate and, where applicable, Intrastate Long Distance Call.
INTERSTATE RATE PLANS
The Interstate Bad Debt Percentage is ______%
/ / Check here if Tiered, Volume-Sensitive Commission Rate Plans
are attached and are to to be used in lieu of the following
Interstate Rate Plan Schedule.
<TABLE>
<CAPTION>
Billing
Rate Plans Group
---------- -----
<S> <C>
Optibase 115
New Optibase-Day 116
Old Optibase-Day 117
Optimize 119
Optfive 120
Optiplus 121
Optimum 123
Optispan 125
Opti75 126
Optimax 127
Optibest 138
Other
Other
Other
</TABLE>
<PAGE> 13
Page 2 of 4
INTRASTATE RATE PLANS
The Intrastate Bad Debt Percentage is ______%
A Customer may elect to use either (i) the General Intrastate Rate Plan which is
set forth below for all States in which the Customer does business or (ii) the
State-specific Rate Plans which
are set forth one the following pages or (iii) a combination of both.
/ / Check here if the General Intrastate Rate Plan is to be used in all States
/ / Check here if the General Intrastate Rate Plan is to be used in all states
EXCEPT for those states for which information is completed on the following
pages for state-specific rate plans.
GENERAL INTRASTATE RATE PLAN FOR ALL STATES
Billing Group Commission Rate
<PAGE> 14
INDIVIDUAL STATE RATE PLANS Page 3 of 4
Instructions: Complete Commission Rates ONLY for rate plans in states where (i)
Customer will do business or (ii) those states where Customer does not want the
General Intrastate Plan to be used.
<TABLE>
<CAPTION>
Billing
State Group
----- -----
<S> <C>
Alabama 18
Alaska 18
Arizona 18
Arkansas 18
California 18
10
7
20
Colorado 18
28
Connecticut
DC (see Washington, DC)
Delaware 18
Florida 18
44
Georgia 18
Hawaii 18
Idaho 18
Illinois 18
2
57
Indiana 18
7
Iowa 18
Kansas 18
Kentucky 18
Louisiana 18
Maine 18
Maryland 18
Massachusetts 18
Michigan 18
32
31
Minnesota 18
Mississippi 18
Missouri 18
40
Montana 18
17
40
Nebraska 18
Nevada 18
New Hampshire 18
22
New Jersey 18
38
55
New Mexico 18
New York 18
North Carolina 18
151
North Dakota 18
Ohio 18
Oklahoma 18
150
35
Oregon 18
39
Pennsylvania 18
Rhode Island 18
South Carolina 18
South Dakota 18
Tennessee 18
Texas 18
43
53
Utah 18
Vermont 18
Virginia 18
9
Washington 18
39
Washington, DC 18
West Virginia 18
Wisconsin 18
Wyoming 18
</TABLE>
BILLING GROUP NOTES
Billing Group 7--Confinement Facilities
Billing Group 18--Pay Telephones in Cal and Virginia
Billing Group 22--Customer-Owned Pay Telephones (COCOT's) in NH
Billing Group 39--Local Default for OR and WASH
Billing Groups 43 or 53--Pay Telephones in Tex
Billing Group 44--Customer-Owned Pay Telephones (COCOT's) in Fla
<PAGE> 15
INTERSTATE PROPERTY SURCHARGES (PIF) Page 4 of 4
Interstate Property Surcharges are subject to the Bad Debt Deduction percentage
stated on Page 1 of this Exhibit B.
/ / Check here if a Ramp-Up Interstate Property Surcharge (PIF) schedule is
attached and is to be used in lieu of the following-stated Interstate
Property Surcharge amount.
Amount of Interstate Property Surcharge (PIF) per completed Interstate call
$_______________
/ / Check here if the Interstate Property Surcharges are to vary in amount
from Location to Location as designated in writing by Customer. (If this
is applicable, the amount of the Interstate Property Surcharge for any
Location may not exceed the Property Surcharge amounts stated above.)
INTRASTATE PROPERTY SURCHARGES
Property Surcharges for Intrastate Long Distance Operator Service Telephone
Calls may be prohibited in some states, limited in amount in other states,
further restricted in some states as to (i) the types of telephones utilized to
make such calls, eg. only pay telephones, only COCOT pay telephones, etc., (ii)
the places where the telephone is located, eg. only hotel and motel rooms, only
hospitals, no confinement facilities, etc., (iii) the locale where the telephone
equipment is located, eg. New York City, (iv) whether such calls are IntraLata
or InterLata, and (v) other variables. Customer may elect to have billed the
maximum Intrastate Property Surcharge permitted in the state(s) where Customer's
Locations are located or a lesser amount. Intrastate Property Surcharges are
subject to the Intrastate Bad Debt Deduction percentage stated on Page 1 of this
Exhibit B.
/ / Check here if the authorized Intrastate Property Surcharges are to vary in
amount from Location to Location as designated in writing by Customer.
/ / Check here if Opticom is to bill the maximum authorized Intrastate Property
Surcharge for all of Customer's Locations to the extent permitted by law in
each state where Customer has Locations.
/ / Check here and complete the following table if the following Intrastate
Surcharges are to be uniformly billed in the following States for the following
types or classes of telephones, places, or locales to the extent permitted by
law. Use more than one line for each state if necessary. (The use of this table
will not prevent Customer from varying the amount of the surcharge for certain
Locations as designated in writing by Customer.)
<TABLE>
<CAPTION>
Type of Telephone Amount of
or Locations Intrastate
(eg. COCOT, payphone, Property
State hotel/motel, NYC) Surcharge
----- ----------------- ---------
<S> <C> <C>
$
</TABLE>
<PAGE> 1
EXHIBIT 10.29
THE TERMS OF THIS ADDENDUM ARE PROPRIETARY TO OPTICOM AND ARE
SUBJECT TO A CONFIDENTIALITY AGREEMENT SET FORTH IN SECTION 6 OF THIS
ADDENDUM
THIS ADDENDUM MAY NOT BE AMENDED OR MODIFIED (OR ANY PART DELETED
OR ADDED TO) WITHOUT THE WRITTEN CONSENT OF OPTICOM'S GENERAL
COUNSEL OBTAINED IN ACCORDANCE WITH THE PROVISIONS OF
THE OPERATOR SERVICES AGREEMENT IDENTIFIED BELOW
LUMP SUM BONUS ADDENDUM
ONE CALL COMMUNICATIONS, INC., ("Opticom") and PHONETEL TECHNOLOGIES,
INC., ("Customer") shall modify and supplement the Operator Services Agreement
("Operator Services Agreement") between Opticom and Customer dated January 21,
2000.
1. Lump Sum Bonus. In consideration of the Agreements of Customer
contained in Sections 2 and 3 of this Addendum, Opticom agrees to and will pay
to Customer a lump sum bonus (herein "Bonus") in the amount of
__________________________________thirty (30) days after the end of the first
billing month during which Customer has at least ____________________ Active
Locations (as hereinafter defined) being provided Operator Services by Opticom
on Opticom's Operator Services Network. As used in this Addendum, the term
"Active Location" shall mean a payphone Location owned by Customer which, during
the applicable billing month, has Operator Services MOS and OAS charges (as
those terms are defined in the Operator Services Agreement) which are billable
by Opticom pursuant to the Operator Services Agreement.
2. Minimum Gross Monthly Billings Guarantee; Liquidated Damages. In
consideration of the payment of the Bonus by Opticom, Customer guarantees that,
at all times during the term of the Operator Services Agreement, the gross
billings for Operator Services provided by Opticom pursuant to the Operator
Services Agreement during each billing month during the full term of this
Agreement will always be not less than_______________
____________________________________ per month (the "Minimum Monthly Billings
Guarantee"). If, during any billing month during the first twelve (12) month
period from the commencement date of the Operator Services Agreement and after
the Bonus is paid, the gross monthly billings for Operator Services provided by
Opticom pursuant to the Operator Services Agreement are less than the Minimum
Monthly Billings Guarantee, Customer shall repay to Opticom, as liquidated
damages and not as a penalty, the full amount of the Bonus theretofore paid to
Customer, to-wit, the sum of ______________________________________. If Customer
satisfies the Minimum Monthly Billings Guarantee during the first twelve (12)
month period but, at during any billing month during the second twelve (12)
month period from the commencement date of the Operator Services Agreement, the
gross monthly billings for Operator Services provided by Opticom pursuant to the
Operator Services Agreement are less than the Minimum Monthly Billings
Guarantee, Customer shall repay to Opticom, as liquidated damages and not as a
penalty, one-half (1/2) of the Bonus, to-wit, the sum of
_______________________________________________.
<PAGE> 2
3. Exclusivity Agreement. In further consideration of the payment of
the Bonus by Opticom, Customer agrees that, as to all Locations of Customer
which were used by Customer to qualify for payment of the Bonus, Opticom shall
be, during the full term of the Operator Services Agreement, the exclusive
provider of all Operator Services provided for such Locations which shall be one
hundred percent (100%) of all Operator Service Long Distance calls (both
automated and live operator calls) made from such Locations excepting only (i)
those calls which must be processed through another carrier by reason of any law
or regulation (including, but not limited to, "dial around") and (ii) calls made
during verifiable periods of time during which Opticom's Operator Services
Network is unable to process such calls. Customer further agrees that, during
the full term of the Operator Services Agreement, Customer will not (i) utilize
store and forward equipment to process Operator Service calls from such
Locations or (ii) employ or use any device, mechanism, procedure, or protocol
which causes some types of Operator Services calls to be directed to a
telecommunications carrier other than Opticom except for calls made during
verifiable periods of time during which Opticom's Operator Services Network is
unable to process such calls. Customer additionally agrees to utilize Opticom as
the exclusive 1+ telecommunications provider for all coin-paid long distance
calls made from such Locations during the full term of the Operator Services
Agreement except for calls made during verifiable periods of time during which
Opticom' is unable to process such calls. All of the aforesaid agreement
contained in this Section 3 of this Addendum are collectively referred to herein
as the "Exclusivity Agreements".
3.1 Liquidated Damages for Breach. If Customer fails to fully cure any
breach by Customer of any of its Exclusivity Agreements within seven
(7) calendar days after Opticom gives Customer written notice thereof
in accordance with the provisions of the Operator Services Agreement,
Customer shall be liable to Opticom for liquidated damages for each
separate billing month during which an uncured breach occurs or
continues in an amount determined as set forth below.
3.2 Computation of Liquidated Damages. The amount of liquidated damages
payable by Customer during each billing month an uncured breach of any
of its Exclusivity Agreements occurs shall be determined by (i)
dividing the gross MOS and AOS revenue from Customer's Locations for
the highest gross revenue billing month theretofore experienced during
the term of the Operator Services Agreement ("Highest Gross Revenue")
by the total number of completed Operator Services calls from all of
such Locations made during such billing month to determine the average
per call revenue for such billing month ("Average Call Revenue"); by
(ii) multiplying the Average Call Revenue times the total number of
Operator Services calls placed from all of Customer's Locations during
the month such uncured breach occurred to determine the damage factor
("Damage Factor"); and (iii) subtracting the Damage Factor amount from
the Highest Gross Revenue amount, with the difference to be the amount
of liquidated damages payable by Customer for such month.
4. Payment of Liquidated Damages; Attorney Fees; Interest; Set Off. All
liquidated damages payable by Customer pursuant to the provisions of this
Addendum shall be payable fifteen (15) calendar days after Opticom makes demand
for payment thereof, and such liquidated damages shall be payable with
reasonable attorney fees if not paid by Customer when due. If any liquidated
2
<PAGE> 3
damage payments are not paid when due, interest shall accrue on the unpaid
amount commencing on the date the payment was due at a rate which is three (3)
percentage points higher than the Prime Rate as published in the Money Rates
Column of the Wall Street Journal on the first business day after the liquidated
damages payment is due and payable. Opticom may set off any unpaid liquidated
damages against commissions and property surcharges and any other amounts
payable to Customer pursuant to the Operator Services Agreement.
5. Choice of Law and Place of Litigation. This Addendum shall be
governed by the laws of the State of Indiana. Opticom and Customer stipulate,
consent, and agree that the only and exclusive place for litigation of any claim
for liquidated damages or other damages asserted by Opticom against Customer
arising out of or under this Addendum shall be in either (i) the Circuit or
Superior Courts located in Hamilton County, Indiana or (ii) the United States
District Court for the Southern District of Indiana, Indianapolis Division, and
Customer consents and waives all objections to the exercise of personal
jurisdiction over it by the aforesaid courts.
6. Additional Confidentiality Agreement. Customer further agrees to
maintain in strict confidence and not disclose or permit any officer, employee,
agent, or affiliate to disclose to any person, firm, corporation, or other
entity or organization this Addendum, any information pertaining to this
Addendum, and the payment to Customer of the Lump Sum Bonus pursuant to this
Addendum except such disclosure as may be required by court order, regulations
and to comply with the law. In the event any such prohibited disclosure is made
by Customer or by any officer, employee, agent, or affiliate of Customer,
Customer shall pay to Opticom, as liquidated damages, an amount equal to the
Lump Sum Bonus paid to Customer pursuant to this Addendum.
7. Headings and Titles. The headings and titles in this Addendum are
for convenience of reference only and shall not be construed to define or limit
any of the terms herein or affect the meanings or interpretations of this
Agreement.
8. Entire Agreement. This Addendum represents the entire agreement and
understanding of the parties hereto with respect to the subject matter hereof,
and all prior and concurrent agreements, understandings, representations with
respect to such subject matter, whether written or oral, are and have been
merged herein and superseded hereby.
9. Defined Terms. All defined words and terms contained in the Operator
Service Agreement which are utilized in this Addendum shall have the same
meanings in this Addendum as in the Operator Service Agreement.
10. Execution; Counterparts; Facsimile Delivery. This Addendum may be
executed by each of the parties in counterparts, and, if it is, each counterpart
shall be deemed to be an original instrument, but the counterparts together
shall constitute only one Addendum. This Addendum will be deemed fully executed
by all parties if the counterparts, taken together, bear the signatures of duly
authorized representatives of each of the parties. A copy of this Addendum
showing the signature of a party's authorized representative which is received
by a party by means of an electronic or facsimile telephonic transmission
initiated or made by the other party shall be binding upon the other party and
shall constitute delivery of this Addendum by such other party for all
3
<PAGE> 4
purposes. The exchange by all of the parties of duly signed copies of this
Addendum transmitted by such parties to each other by means of electronic or
facsimile telephonic transmissions shall result in a legally enforceable
contract binding upon all parties.
IN WITNESS WHEREOF, Opticom and Customer have executed this Addendum by
their duly authorized officers this 21st day of January, 2000.
ONE CALL COMMUNICATIONS, INC. PHONETEL TECHNOLOGIES, INC.
By: /s/ Brad Benge By: /s/ John D. Chichester
----------------------------- ------------------------------
Title: Executive Vice President Title: President and CEO
-------------------------- --------------------------
4
<PAGE> 1
EXHIBIT 10.30
THE TERMS OF THIS ADDENDUM ARE PROPRIETARY TO OPTICOM AND ARE
SUBJECT TO A CONFIDENTIALITY AGREEMENT SET FORTH IN THE OPERATOR
SERVICES AGREEMENT IDENTIFIED BELOW
THIS ADDENDUM MAY NOT BE AMENDED OR MODIFIED (OR ANY PART
DELETED OR ADDED TO) WITHOUT THE WRITTEN CONSENT OF OPTICOM'S
GENERAL COUNSEL OBTAINED IN ACCORDANCE WITH THE PROVISIONS OF
THE OPERATOR SERVICES AGREEMENT IDENTIFIED BELOW
INTERNATIONAL SERVICES ADDENDUM TO OPERATOR SERVICES AGREEMENT
Opticom and the undersigned Customer agree that this Addendum shall
modify and supplement the Operator Services Agreement ("Operator Services
Agreement") between ONE CALL COMMUNICATIONS, INC. ("Opticom") and PHONETEL
TECHNOLOGIES, INC. ("Customer") dated January 21, 2000.
1. International Services. Customer hereby requests that Opticom
provide international operator long distance services ("International Services")
for those Locations (ANI's) of Customer which Customer designates in writing,
from time to time. Opticom agrees to provide International Services for such
Locations designated in writing by Customer but only upon the terms and
conditions set forth in this Addendum which shall supersede any provisions to
the contrary contained in the Operator Services Agreement and the exhibits
thereto. Customer may, from time to time, in writing, add and delete Locations
which are to be provided with International Services.
2. Fraudulent International Services Calls. Opticom will utilize its
existing standard verification procedures and contractors to verify the validity
of calling cards and credit cards (collectively "Cards") utilized by an
International Services user and will otherwise utilize standard verification
procedures for International Services calls, but Customer and Opticom
acknowledge and agree that (i) as to Cards, such verification procedures are
only effective if a Card has been reported lost or stolen or if a Card has
otherwise been revoked or terminated and (ii) a person can utilize unreported
lost or stolen Cards or illicitly obtained data for a Card which has not been
lost or stolen and to otherwise use improper procedures to fraudulently obtain
International Services for which the call charges are uncollectible. The parties
further acknowledge that uncollectible telephone charges for fraudulently
obtained International Services can be very substantial and material in both
amount and volume and that the carrier charges incurred by Opticom to complete
such calls can be substantial in amount.
3. Customer to Bear Risk of Fraudulent International Services Calls. In
consideration of Opticom providing International Services for Customer's
Locations, Customer agrees to be totally responsible and to assume all economic
risks for carrier charges incurred by Opticom for fraudulently obtained
International Services placed from Customer's Locations. Customer shall
reimburse Opticom for Opticom's carrier costs for such fraudulent International
Services calls at rate of _____________________________ per minute of use of
such calls, the minutes of use for
<PAGE> 2
such calls to be determined from Opticom's recorded minutes of use for such
calls. In addition, if Opticom has paid to Customer commissions and additional
surcharges on such fraudulent International Services calls, Customer shall
refund such commissions and additional surcharges to Opticom, it being agreed
that no commission and additional surcharge shall be payable to Customer for or
on such fraudulent International Services calls. The parties agree that the
uniform deduction for write-offs ("Bad Debt") for operator services billings
which is provided for by Customer's Operator Services Agreement used to
determine Adjusted Billings shall not limit Customer's liability under this
Addendum for fraudulent International Services calls. Opticom may deduct all
sums owing by Customer to Opticom pursuant to the foregoing provisions of this
Addendum from commissions payable by Opticom to Customer pursuant to the
Operator Services Agreement.
4. Commissions. Opticom agrees to pay to Customer commissions for all
International Services calls which will be a percentage of Opticom's Adjusted
Billings for International Services calls placed from Customer's designated
Locations at a rate of ____________________________, subject, however, to the
terms and provisions of this Addendum. Adjusted Billings for International
Services are to be computed in the manner specified in Customer's Operator
Services Agreement.
5. No International Direct Dial. Opticom agrees to program all of its
switches to block international direct dial long distance service from all of
Customers Locations which are subject to the Operator Services Agreement.
6. No Other Changes. Except as herein modified and amended, all other
terms and provisions of the Operator Services Agreement shall remain in full
force and effect.
7. Headings and Titles. The headings and titles in this Addendum are
for convenience of reference only and shall not be construed to define or limit
any of the terms herein or affect the meanings or interpretations of this
Addendum.
8. Defined Terms. All defined words and terms contained in the Operator
Service Agreement which are utilized in this Addendum shall have the same
meanings in this Addendum as in the Operator Service Agreement unless the
context of this Addendum requires otherwise.
9. Entire Agreement. This Addendum represents the entire agreement and
understanding of the parties hereto with respect to the subject matter hereof,
and all prior and concurrent agreements, understandings, representations with
respect to such subject matter, whether written or oral, are and have been
merged herein and superseded hereby.
10. Execution; Counterparts; Facsimile Delivery. This Addendum may be
executed by each of the parties in counterparts, and, if it is, each counterpart
shall be deemed to be an original instrument, but the two counterparts together
shall constitute only one Addendum. This Addendum will be deemed fully executed
by both parties if the counterparts, taken together, bear the signatures of duly
authorized representatives of each of the parties. A copy of this Addendum
showing the signature of the other party's authorized representative which is
received by a party by means of an electronic or facsimile telephonic
transmission initiated or made by the other party shall be binding upon the
other party and shall constitute delivery of this Addendum by such other party
for all purposes. The exchange by the parties of duly signed copies of this
Addendum transmitted by such parties to each other by means of electronic or
facsimile telephonic transmissions shall result in a legally enforceable
contract binding upon both parties.
<PAGE> 3
IN WITNESS WHEREOF, Opticom and Customer have executed this Addendum by
their duly authorized officers this 16th day of February, 2000.
ONE CALL COMMUNICATIONS, INC. PHONETEL TECHNOLOGIES, INC.
By: /s/ Joseph Pence By: /s/John D. Chichester
----------------------------- ------------------------------
Title: President Title: President and CEO
-------------------------- ---------------------------
<PAGE> 1
EXHIBIT 10.31
AMENDMENT NUMBER ONE
TO LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT (this
"Amendment") dated as of December 31, 1999, is entered into among PHONETEL
TECHNOLOGIES, INC., an Ohio corporation ("Phonetel"), CHEROKEE COMMUNICATIONS,
INC., a Texas corporation ("Cherokee," and together with Phonetel, each a
"Borrower" and collectively, jointly and severally, the "Borrowers"), on the one
hand, and, on the other hand, Agent (as hereinafter defined) and the financial
institutions (collectively, the "Lenders" and individually, a "Lender") that are
signatories to that certain Loan and Security Agreement, dated as of November
17, 1999 (as amended, restated, supplemented, or otherwise modified from time to
time, the "Loan Agreement"), entered into among the Borrowers, Lenders, and
FOOTHILL CAPITAL CORPORATION, a California corporation, as agent for the Lenders
(herein, in such capacity, referred to as "Agent") , in light of the following:
RECITALS
A. Borrowers have requested that the Lenders amend the Loan
Agreement.
B. Lenders are willing to amend the Loan Agreement under the
terms and conditions set forth in this Amendment.
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:
1. Definitions. Capitalized terms not otherwise defined herein shall have
the meaning ascribed thereto in the Loan Agreement.
2. Amendments To The Loan Agreement. Upon the First Amendment Effective
Date, the parties agree to amend the Loan Agreement as follows:
(a) The definition of "Fixed Charge Coverage Ratio" set forth in
Section 1.1 of the Loan Agreement hereby is amended by deleting the text ", plus
(E) all amounts paid or payable by Borrower on Operating Lease Obligations
having a scheduled due date during such period" appearing in said definition.
(b) Section 1.1 of the Loan Agreement hereby is amended by inserting
the following new defined terms in the proper alphanumerical order:
-1-
<PAGE> 2
"First Amendment" means that certain Amendment Number One to
Loan and Security Agreement, dated as of December 31, 1999, among
Borrowers, Lenders and Agent.
"First Amendment Effective Date" means December 31, 1999,
provided that all conditions set forth in Section 3 of the First
Amendment have been satisfied.
(c) Section 7.20 of the Loan Agreement hereby is amended by deleting
clause (a) of said Section and inserting the following new clause (a) in lieu
thereof:
(a) Fixed Charge Coverage Ratio. Borrower will not
permit its Fixed Charge Coverage Ratio on the last day of the
fiscal period set forth below, cumulative with the applicable
fiscal periods preceding such fiscal period (if any) shown on the
chart below, to be less than the ratio set forth opposite such
fiscal period (calculated without reference to any interest and
fees under this Agreement as to which Borrower has exercised its
option to make payment in kind):
<TABLE>
<CAPTION>
PERIOD ENDING RATIO
- --------------------------------------------------------------------------------
<S> <C>
fiscal quarter ending .70
December 31, 1999
- --------------------------------------------------------------------------------
month ending .70
January 31, 2000 for the immediately
preceding 4 month period
- --------------------------------------------------------------------------------
month ending .70
February 29, 2000 for the immediately
preceding 5 month period
- --------------------------------------------------------------------------------
month ending .75
March 31, 2000 for the immediately
preceding 6 month period
- --------------------------------------------------------------------------------
month ending .75
April 30, 2000 for the immediately
preceding 7 month period
- --------------------------------------------------------------------------------
month ending .80
May 31, 2000 for the immediately preceding
8 month period
- --------------------------------------------------------------------------------
</TABLE>
-2-
<PAGE> 3
<TABLE>
<CAPTION>
PERIOD ENDING RATIO
- --------------------------------------------------------------------------------
<S> <C>
month ending .85
June 30, 2000 for the immediately preceding
9 month period
- --------------------------------------------------------------------------------
month ending .90
July 31, 2000 for the immediately preceding
10 month period
- --------------------------------------------------------------------------------
month ending .95
August 31, 2000 for the immediately
preceding 11 month period
- --------------------------------------------------------------------------------
month ending 1.0
September 30, 2000 for the immediately
preceding 12 month period and as of the end
of each month thereafter for the
immediately preceding 12 months
- --------------------------------------------------------------------------------
</TABLE>
3. Conditions Precedent to Amendment. The satisfaction of each of the
following unless waived or deferred by Lenders, in their sole discretion, shall
constitute conditions precedent to the effectiveness of this Amendment and each
and every provisions hereof:
(a) Agent shall have received this Amendment, in form and substance
satisfactory to Agent, duly executed by each party hereto, and in full force and
effect;
(b) The representations and warranties in this Amendment, the Loan
Agreement as amended by this Amendment, and the other Loan Documents shall be
true and correct in all respects on and as of the date hereof, as though made on
such date (except to the extent that such representations and warranties relate
solely to an earlier date);
(c) No Default or Event of Default shall have occurred and be
continuing on the date hereof, nor shall result from the consummation of the
transactions contemplated herein, unless any such Event of Default has
previously been waived by in accordance with Section 15 of the Loan Agreement;
and
(d) No injunction, writ, restraining order, or other order of any
nature prohibiting, directly or indirectly, the consummation of the transactions
contemplated herein shall have been issued and remain in force by any
Governmental Authority against either of the Borrowers, Agent or any of the
Lenders.
-3-
<PAGE> 4
4. Representations and Warranties. Each Borrower hereby represents and
warrants to the Lenders that (a) the execution, delivery, and performance of
this Amendment and of the Loan Agreement, as amended by this Amendment, are
within such Borrower's corporate powers, have been duly authorized by all
necessary corporate action, and are not in contravention of any law, rule, or
regulation, or any order, judgment, decree, writ, injunction, or award of any
arbitrator, court, or Governmental Authority, or of the terms of its Governing
Documents, or of any contract or undertaking to which it is a party or by which
any of its properties may be bound or affected, (b) this Amendment and the Loan
Agreement, as amended by this Amendment, constitute such Borrower's legal,
valid, and binding obligation, enforceable against such Borrower in accordance
with its terms, and (c) this Amendment has been duly executed and delivered by
such Borrower.
5. Choice of Law. The validity of this Amendment, its construction,
interpretation and enforcement, the rights of the parties hereunder, shall be
determined under, governed by, and construed in accordance with the laws of the
State of New York.
6. Counterparts; Telefacsimile Execution. This Amendment may be executed
in any number of counterparts and by different parties and separate
counterparts, each of which when so executed and delivered, shall be deemed an
original, and all of which, when taken together, shall constitute one and the
same instrument. Delivery of an executed counterpart of a signature page to this
Amendment by telefacsimile shall be effective as delivery of a manually executed
counterpart of this Amendment. Any party delivering an executed counterpart of
this Amendment by telefacsimile also shall deliver a manually executed
counterpart of this Amendment but the failure to deliver a manually executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Amendment.
7. Effect on Loan Agreement. The Loan Agreement, as amended hereby, shall
be and remain in full force and effect in accordance with its respective terms
and hereby is ratified and confirmed in all respects. The execution, delivery,
and performance of this Amendment shall not operate as a waiver of or, except as
expressly set forth herein, as an amendment of, any right, power, or remedy of
Agent or any Lender under the Loan Agreement, as in effect prior to the date
hereof.
8. Further Assurances. Each Borrower shall execute and deliver all
agreements, documents, and instruments, in form and substance satisfactory to
Agent, and take all actions as Agent may reasonably request from time to time,
to perfect and maintain the perfection and priority of Liens in the Collateral
held by Agent for the benefit of the Lenders and to fully consummate the
transactions contemplated under this Amendment and the Loan Agreement, as
amended by this Amendment.
9. Miscellaneous.
(a) Upon and after the effectiveness of this Amendment, each
reference in the Loan Agreement to "this Agreement", "hereunder", "herein",
"hereof" or words of like
-4-
<PAGE> 5
import referring to the Loan Agreement, and each reference in the other Loan
Documents to "the Loan Agreement", "thereunder", "therein", "thereof" or words
of like import referring to the Loan Agreement, shall mean and be a reference to
the Loan Agreement as modified and amended hereby.
(b) The Loan Agreement and all other Loan Documents, are and shall
continue to be in full force and effect and are hereby in all respects ratified
and confirmed and shall constitute the legal, valid, binding and enforceable
obligations of each Borrower to Agent and Lenders.
[Remainder of page intentionally left blank]
-5-
<PAGE> 6
IN WITNESS WHEREOF, the parties have entered into this Amendment as of the
date first above written.
PHONETEL TECHNOLOGIES, INC.,
an Ohio corporation
By /s/ John D. Chichester
--------------------------------
Name: John D. Chichester
--------------------------------
Title: President and CEO
-------------------------------
CHEROKEE COMMUNICATIONS, INC.,
a Texas corporation
By /s/ John D. Chichester
--------------------------------
Name: John D. Chichester
--------------------------------
Title: President
-------------------------------
[signature page continues]
<PAGE> 7
FOOTHILL CAPITAL CORPORATION, a California
corporation, as Agent and a Lender
By /s/ Thomas S. Sigurdson
--------------------------------
Name: /s/ Thomas S. Sigurdson
--------------------------------
Title: Vice President
-------------------------------
[signature page continues]
-2-
<PAGE> 8
FOOTHILL PARTNERS III, L.P.,
a Delaware limited partnership, as a Lender
By /s/ Dennis R. Ascher
--------------------------------
Name: Dennis R. Ascher
--------------------------------
Title: Managing General Partner
-------------------------------
[signature page continues]
-3-
<PAGE> 9
ABLECO FINANCE LLC,
a Delaware limited liability company,
as a Lender
By /s/ Kevin Genda
--------------------------------
Name: Kevin Genda
--------------------------------
Title: SVP -- Chief Credit Officer
-------------------------------
-4-
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF PHONETEL TECHNOLOGIES, INC.
The following is a wholly-owned subsidiary of PhoneTel Technologies, Inc.
Cherokee Communications, Inc.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> NOV-18-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,700
<SECURITIES> 0
<RECEIVABLES> 12,585
<ALLOWANCES> (1,339)
<INVENTORY> 0
<CURRENT-ASSETS> 18,090
<PP&E> 23,434
<DEPRECIATION> (693)
<TOTAL-ASSETS> 124,399
<CURRENT-LIABILITIES> 14,959
<BONDS> 48,642
0
0
<COMMON> 102
<OTHER-SE> 60,696
<TOTAL-LIABILITY-AND-EQUITY> 124,399
<SALES> 0
<TOTAL-REVENUES> 7,972
<CGS> 0
<TOTAL-COSTS> 9,542
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (59)
<INTEREST-EXPENSE> 1,124
<INCOME-PRETAX> (2,694)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,694)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,694)
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> NOV-17-1999
<CASH> 6,576
<SECURITIES> 0
<RECEIVABLES> 12,459
<ALLOWANCES> (1,280)
<INVENTORY> 0
<CURRENT-ASSETS> 19,463
<PP&E> 23,294
<DEPRECIATION> 0
<TOTAL-ASSETS> 127,804
<CURRENT-LIABILITIES> 16,230
<BONDS> 47,992
0
0
<COMMON> 102
<OTHER-SE> 63,390
<TOTAL-LIABILITY-AND-EQUITY> 127,804
<SALES> 0
<TOTAL-REVENUES> 69,657
<CGS> 0
<TOTAL-COSTS> 87,157
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (345)
<INTEREST-EXPENSE> 19,384
<INCOME-PRETAX> (36,884)
<INCOME-TAX> 0
<INCOME-CONTINUING> (36,884)
<DISCONTINUED> 0
<EXTRAORDINARY> 77,172
<CHANGES> 0
<NET-INCOME> 40,288
<EPS-BASIC> 2.08
<EPS-DILUTED> 2.08
</TABLE>
