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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, 2000
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[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
COMMISSION FILE NUMBER 0-16715
PHONETEL TECHNOLOGIES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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
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(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 27, 2001 was $1,009,000.
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 21, 2000 was 10,189,684.
Documents Incorporated by Reference
Portions of the Registrant's Proxy Statement for use at the 2001 Annual Meeting
of Shareholders are incorporated by reference in Part III hereof.
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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 34,528 at March 2, 2001. 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 1993 through 1998, the Company's objective was to expand its
payphone base through acquisitions, as well as through internal growth, thereby
achieving economies of scale while implementing cost savings principally through
elimination of duplicate functions. Selective acquisitions enabled PhoneTel to
expand its geographic presence and further its strategy of clustering its public
payphones more rapidly than would have been possible through internal growth.
Since 1998 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 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 in January 2000
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 the time in which it is reported.
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 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.
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EVENTS LEADING UP TO THE COMPANY'S CHAPTER 11 BANKRUPTCY REORGANIZATION
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 and received 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"). 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. 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 were to be paid
in full in the ordinary course of business, unless otherwise agreed. 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").
The former Chairman and Chief Executive Officer continues to serve as a Director
on the New Board.
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.
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
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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) were 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) was 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 was 15,000,000 shares of Common Stock (Successor Company). On July
18, 2000, the shareholders approved an amendment to the Amended and Restated
Articles of Incorporation to increase the total authorized capital stock of the
Successor Company to 45,000,000 shares of Common Stock.
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 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.
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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 1993 through 1998, the Company 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.
Number of
Date of Installed Primary
Company Acquired Acquisition Payphones Areas Served
----------------- ------------ --------- -------------
C>
TDS Telecommunications Corporation May 18, 1998 3,407 Tennessee,
("TDS") 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 13,949 Texas, New Mexico,
------ Colorado, Utah,
Montana
Total installed public payphones acquired
in the two year period ended December 31, 1998 23,475
======
Total installed public payphones at March 2, 2001 34,528
======
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.
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.
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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, 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."
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 installs or acquires.
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 booths at trade shows and referrals from existing customers.
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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 46 states and the District of Columbia (approximately 94% of
such public payphones are located in 26 states including, 16.1% in Texas)
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, 1998, 1999, or 2000.
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 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;
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- 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 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 LECs to 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. Thereafter, the FCC 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 using a market-based method for calculating the amount of dial-around
compensation and further determined that the method of allocating payment among
IXCs was erroneous. In July 1997, the Appeals Court vacated the 1996 Payphone
Order and remanded it 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
-7-
9
the Default Rate should be retroactively utilized in determining compensation
during the First Phase and reiterated that payphone providers were entitled to
compensation for 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 1996 and 1997 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, issues
related to technological advances, and expected 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 April 1999.
The 1999 Payphone Order has been appealed by various parties. The
Appeals Court heard oral arguments on February 2, 2000 and issued its ruling on
the matter in June 2000. The Appeals Court denied all petitions for review of
the per-call compensation rate and kept in place the adjusted Default Rate
mandated by the 1999 Payphone Order.
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) resolution by the FCC of the method of allocating the
initial interim period flat-rate assessment among the IXCs and the number of
calls to be used in determining the amount of the assessment, (2) the
possibility of other litigation seeking to modify or overturn the 1999 Payphone
Order or portions thereof, (3) pending litigation in the federal courts
concerning the constitutionality or validity of the Telecommunications Act, (4)
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 (5) 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).
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Effective April 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). The Company continued to record revenue from
dial-around compensation at this rate until September 30, 2000. For the year
ended December 31, 2000, the Company recorded bad debt losses of $4,944,000
related to dial-around compensation. Of this amount, $4,429,000 applicable to
amounts previously recognized as revenue for the period November 1996 to
September 2000 was recorded in the fourth quarter of 2000 due to the lack of
progress by the FCC in ordering a true-up for underpayments by IXCs in the First
Phase and a true up to the Adjusted Default Rate for the November 1996 to April
1999 period, as well as the Company's historical collection experience. The
Company began recording dial-around compensation based on the estimated number
of calls per pay telephone that the Company expects to collect (114 calls per
month in the fourth quarter of 2000) at a rate of $0.24 per call.
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 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
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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.
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 amount of USF payments the
Company is required to pay has decreased. This decrease however, has been offset
by USF fees that are assessed by certain states. See "State and Local
Regulation".
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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. 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.
In an effort to fund "universally available" telecommunication services
beyond that which is available from USAC, certain states have adopted
regulations requiring carriers and payphone providers to contribute to state USF
funds. Such contributions, while not material, have increased the cost of
providing payphone service in these states. Although the Company cannot predict
how many states will create and require contributions to their own USF funds,
the Company expects that the number of such states will increase in the future.
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.
Management 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. 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 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.
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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.
While RBOCs and other LECs control the largest share of the public
payphone markets, the extent to which they will continue to compete with
PhoneTel in the future cannot be predicted. In February 2001, Bell South, an
RBOC that operates in nine states in the southeastern part of the United States
has announced that it plans to phase-out its payphone operations over the next
two years. In addition, other IPPs have experienced financial difficulties in
recent times which may impair their ability to compete. The Company perceives
these situations as opportunties for obtaining new location contracts and plans
to pursue these opportunities in the future. The extent to which the Company
will be able to secure additional locations for its payphones as a result of
these opportunities cannot be determined.
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 313 employees as of March 8, 2001. 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.
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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
leases 32,919 square feet with rent of $41,148 per month. The lease expires on
October 31, 2003. The Company also leases approximately 35 district operations
facilities with lease terms that are generally three years or less. Such
facilities are generally less than 3,000 square feet. 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, at this
time, cannot predict the outcome of this litigation, but the parties have both
indicated a willingness to discuss settlement of the case.
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, 2000, 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 were cancelled. 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 by management 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 periods beginning January 1, 2000 to December 31,
2000.
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Pursuant to the terms of the Prepackaged Plan, the Company issued and at
December 31, 2000 had outstanding New Warrants to purchase 1,077,024 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 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).
Price Range
High Low
---- ---
COMMON STOCK (PREDECESSOR COMPANY)
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:
First Quarter 2 3/8 1
Second Quarter 1 1/4 9/32
Third Quarter 17/32 9/32
Fourth Quarter 5/16 1/8
As of February 28, 2001, there were 1,991 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. Under the Company's current and prior debt
agreements, the Company was not permitted to pay any dividends on its Common
Stock, other than stock dividends, during the Company's two most recent fiscal
years. Further, the Company was not permitted to pay any dividends on its Common
Stock (Predecessor Company) unless dividends were paid to the holders of the
Company's Series A Special Convertible Preferred Stock ("Series A Preferred") 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 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, if
permitted, 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.
SALES AND ISSUANCES OF COMMON STOCK
There were no unregistered sales or issuances of the Company's
securities during 2000.
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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.
PREDECESSOR COMPANY
---------------------------------------------------------------------
TEN MONTHS
AND SEVENTEEN
STATEMENT OF OPERATIONS DATA: DAYS ENDED
(In thousands except share and per share amounts) YEAR ENDED DECEMBER 31 NOVEMBER 17
------------------------------------------------
1996 1997 1998 1999
------------- -------------- --------------- -------------------
REVENUES:
Coin calls $26,212 $58,520 $52,544 $36,220
Non-coin telecommunication services (1) 12,133 39,292 31,516 25,065
Dial-around compensation adjustment - (395) (3,733) -
Other 943 500 143 210
------------- -------------- --------------- -------------------
39,288 97,917 80,470 61,495
------------- -------------- --------------- -------------------
OPERATING EXPENSES:
Line and transmission charges 11,153 24,518 29,607 17,575
Location commissions 6,072 16,628 14,179 11,263
Field operations 8,733 21,100 22,009 18,043
Selling, general and administrative 4,381 10,713 12,354 9,156
Depreciation and amortization 12,800 21,525 23,731 20,719
Provision for uncollectible accounts receivable (1) 92 267 428 345
Charges relating to location contracts (1) - - - 864
Other unusual charges and contractual settlements (1) 6,072 9,095 2,762 1,030
------------- -------------- --------------- -------------------
49,303 103,846 105,070 78,995
------------- -------------- --------------- -------------------
Loss from operations (10,015) (5,929) (24,600) (17,500)
------------- -------------- --------------- -------------------
OTHER INCOME (EXPENSE):
Interest expense - related parties (5,235) (1,994) (1,400) -
Interest expense - others (1,504) (15,891) (19,364) (19,575)
Interest and other income 182 560 547 191
------------- -------------- --------------- -------------------
(6,557) (17,325) (20,217) (19,384)
------------- -------------- --------------- -------------------
Loss before extraordinary item (16,572) (23,254) (44,817) (36,884)
Extraordinary item:
Gain (loss) on extinguishment of debt (10,077) - - 77,172
------------- -------------- --------------- -------------------
NET INCOME (LOSS) ($26,649) ($23,254) ($44,817) $40,288
============= ============== =============== ===================
Net income (loss) applicable to common shareholders ($29,090) ($24,262) ($46,213) $39,078
Net income (loss) per common share, basic and diluted ($5.29) ($1.51) ($2.73) $2.08
Weighted average number of shares, basic and diluted 5,494,011 16,040,035 16,923,499 18,754,133
EBITDA from recurring operations (2) $8,857 $24,691 $1,893 $5,113
Cash flow provided by (used in):
Operating activities ($269) ($4,720) ($6,470) ($685)
Investing activities (63,062) (57,197) (6,763) (1,882)
Financing activities 109,056 21,998 12,482 3,375
BALANCE SHEET DATA:
Total assets $159,770 $169,826 $150,674 $127,804
Long-term debt and mandatorily redeemable preferred
stock, less current portion of debt (3) 132,086 157,938 9,118 47,992
Shareholders' equity (deficit) 16,705 (4,042) (51,598) 63,492
Cash dividends per common share - - - -
SUCCESSOR COMPANY
-----------------------------------------
ONE MONTH
AND THIRTEEN
STATEMENT OF OPERATIONS DATA: DAYS ENDED YEAR ENDED
(In thousands except share and per share amounts) DECEMBER 31 DECEMBER 31
1999 2000
------------------- -------------------
REVENUES:
Coin calls $4,378 $33,110
Non-coin telecommunication services (1) 2,667 25,147
Dial-around compensation adjustment - -
Other 26 587
------------------- -------------------
7,071 58,844
------------------- -------------------
OPERATING EXPENSES:
Line and transmission charges 2,088 17,211
Location commissions 968 8,467
Field operations 2,184 17,405
Selling, general and administrative 1,359 9,056
Depreciation and amortization 2,316 17,469
Provision for uncollectible accounts receivable (1) 59 4,944
Charges relating to location contracts (1) - 21,205
Other unusual charges and contractual settlements (1) (333) 579
------------------- -------------------
8,641 96,336
------------------- -------------------
Loss from operations (1,570) (37,492)
------------------- -------------------
OTHER INCOME (EXPENSE):
Interest expense - related parties - -
Interest expense - others (1,162) (11,168)
Interest and other income 38 254
------------------- -------------------
(1,124) (10,914)
------------------- -------------------
Loss before extraordinary item (2,694) (48,406)
Extraordinary item:
Gain (loss) on extinguishment of debt - -
------------------- -------------------
NET INCOME (LOSS) ($2,694) ($48,406)
=================== ===================
Net income (loss) applicable to common shareholders ($2,694) ($48,406)
Net income (loss) per common share, basic and diluted ($0.26) ($4.75)
Weighted average number of shares, basic and diluted 10,188,630 10,189,684
EBITDA from recurring operations (2) $413 $1,761
Cash flow provided by (used in):
Operating activities ($852) $1,260
Investing activities (420) (2,429)
Financing activities 396 (106)
BALANCE SHEET DATA:
Total assets $124,399 $81,189
Long-term debt and mandatorily redeemable preferred
stock, less current portion of debt (3) 48,642 1,062
Shareholders' equity (deficit) 60,798 12,431
Cash dividends per common share - -
- 15 -
17
(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 income (loss) as
previously reported.
(2) EBITDA from recurring operations represents earnings before
interest income and expense, depreciation, amortization, charges
relating to location contracts, 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 and 2000, certain long-term debt was
classified as a current liability because the Company was not in
compliance with certain financial covenants or 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 2001 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, increased use of wireless communications, 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; (iii)
impairment of the Company's liquidity arising from potential actions of lenders
with respect to defaults under the Company's debt agreement; and (iv) 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 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 $12,454,000, $14,980,000 and $13,442,000 for
the years ended December 31, 1998, 1999, and 2000, respectively.
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
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recorded gross dial-around revenues at the then mandated rate of $45.85 per
telephone per month, 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 pay telephone per month, applicable
to the November 6, 1996 to September 30, 1997 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. In the fourth quarter of 2000,
the Company began reporting revenues at a rate of $27.00 per pay telephone per
month based on the current per-call compensation rate of $0.24 and an estimated
114 calls per month. In the fourth quarter of 2000, the Company also recorded a
bad debt loss of $4,429,000 applicable to amounts previously recognized as
revenue for the period November 1996 to September 2000 to more closely reflect
the Company's historical collection experience and the number of calls for which
the Company expects to be compensated.
In October 1997, 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 provider; and (iii) 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.
Since the end of 1998, the Company has 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 5,300 unprofitable phones and closed eight 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
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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"),
were to be paid in full in the ordinary course, unless otherwise agreed. 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 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) 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.
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 were 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 4 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 for the
Predecessor and Successor Company combined is being compared to 1998 and 2000
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.
-18-
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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, 1998 and 1999 has been reclassified to conform to the presentation
for the year ended December 31, 2000. The reclassifications had no impact on the
net income (loss) as previously reported.
(In thousands)
Year Ended December 31
-----------------------
1998 1999 2000
---- ---- ----
Revenues:
Coin calls $ 52,544 $ 40,598 $ 33,110
Non-coin telecommunication services 31,516 27,732 25,147
Dial-around compensation adjustment (3,733) - -
Other 143 236 587
--------- ---------- ----------
Total revenues 80,470 68,566 58,844
--------- ---------- ----------
Operating expenses:
Line and transmission charges 29,607 19,663 17,211
Location commissions 14,179 12,231 8,467
Field operations 22,009 20,227 17,405
Selling, general and administrative
expenses 12,354 10,515 9,056
Depreciation and amortization 23,731 23,035 17,469
Provision for uncollectible accounts receivable 428 404 4,944
Charges relating to location contracts - 864 21,205
Other unusual charges and
contractual settlements 2,762 697 579
--------- ---------- ----------
Total operating expenses 105,070 87,636 96,336
--------- ---------- ----------
Loss from operations (24,600) (19,070) (37,492)
--------- ---------- ----------
Other income (expense):
Interest expense - related parties (1,400) - -
Interest expense - others (19,364) (20,737) (11,168)
Interest and other income 547 229 254
--------- ---------- ----------
Total other income (expense) (20,217) (20,508) (10,914)
--------- ---------- ----------
Loss before extraordinary item (44,817) (39,578) (48,406)
Extraordinary gain on extinguishment of debt - 77,172 -
--------- ---------- ----------
Net income (loss) ($44,817) $ 37,594 ($48,406)
========= ========== ==========
Cash flow provided by (used in):
Operating activities ($6,470) ($1,537) $ 1,260
Investing activities (6,763) (2,302) (2,429)
Financing activities 12,482 3,771 (106)
EBITDA from recurring operations(1) 1,893 5,526 1,761
(1) See Item 6, Selected Financial Data for definition of EBITDA from recurring
operations.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
REVENUES Total revenues decreased by $9,722,000 or 14.2% from
$68,566,000 for the year ended December 31, 1999 to $58,844,000 for the year
ended December 31, 2000. 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 40,063 for the year ended December 31, 1999 to
36,841 for the year ended December 31, 2000, a decrease of 3,222, or 8.0%. This
decrease was principally due to expired location contracts which were not
renewed and the removal of approximately 2,000 unprofitable pay telephones in
the fourth quarter of 1999 and approximately 1,500 unprofitable pay telephones
in the third quarter of 2000.
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Revenues from coin calls were $40,598,000 and $33,110,000 for the years
ended December 31, 1999 and 2000, respectively. This decrease of $7,488,000, or
18.4%, is primarily due to a decrease in the 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 revenues 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
$2,585,000 or 9.3%, from $27,732,000 for the year ended December 31, 1999 to
$25,147,000 for the year ended December 31, 2000. Of this decrease, long
distance revenues from operator service providers decreased by $1,047,000 or
8.2% principally due to a reduction in the number of operator service calls
resulting from the decline in the average number of installed pay telephones,
continuing aggressive dial-around advertising by long distance carriers such as
AT&T and MCI Worldcom and the use of prepaid phone cards. Long distance revenues
from operator service providers have also been adversely affected by the growth
in wireless communications. These decreases in long distance revenues were
partially offset by higher commission rates received as a result of a change in
the Company's primary operator service provider in January 2000. Revenues from
dial-around compensation decreased by $1,538,000 or 10.3% compared to 1999
primarily due to the decrease in the average number of installed pay telephones
and a reduction in the estimated number of dial-around calls used to record
revenues in the fourth quarter of 2000 as discussed below.
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 (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
local exchange carriers ("LECs") to 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.
Thereafter, the FCC 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 using a market-based method for calculating the amount of dial-around
compensation and further determined that the method of allocating payment among
IXCs was erroneous. The Appeals Court vacated the 1996 Payphone Order and
remanded it 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 method 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 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 1996 and 1997 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
-20-
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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, issues related to technological advances, and expected 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 April 1999. 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
decrease in the per-call compensation rate to the Adjusted Default Rate.
The 1999 Payphone Order has been appealed by various parties. The
Appeals Court heard oral arguments on February 2, 2000 and issued its ruling on
the matter in June 2000. The Appeals Court denied all petitions for review of
the per-call compensation rate and kept in place the Adjusted Default Rate
mandated by the 1999 Payphone Order. 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.
However, based on the lack of progress by the FCC in ordering a true-up for
underpayment by IXCs during the First Phase and a true-up to the Adjusted
Default Rate for the November 1996 to April 1999 period, as well as the
Company's historical collection experience, the Company has recorded a bad debt
loss of $4,944,000 in 2000. Of this amount, $4,429,000 applicable to amounts
previously recognized as revenue for the period November 1996 to September 2000
was recorded in the fourth quarter of 2000.
In the fourth quarter of 2000, the Company began reporting revenues at a
rate of $27.00 per pay telephone per month based on $0.24 per call and an
estimated 114 calls per pay telephone per month to more closely reflect the
actual number of calls for which the Company expects to be compensated.
OPERATING EXPENSES. Total operating expenses increased $8,700,000, or
9.9%, from $87,636,000 for the year ended December 31, 1999 to $96,336,000 for
the year ended December 31, 2000. The increase was due to an increase in the
provision for uncollectible accounts receivable and in charges relating to
location contracts offset by decreases in other operating expense categories.
Such decreases in other operating expenses were due in part to decreases in
depreciation and amortization resulting from the adoption of fresh start
reporting, 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 $2,452,000, or 12.5%, from
$19,663,000 for the year ended December 31, 1999 to $17,211,000 for the year
ended December 31, 2000. Line and transmission charges represented 28.7% of
total revenues for the year ended December 31, 1999 and 29.2 % of total revenues
for the year ended December 31, 2000, an increase of 0.5%. 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
2000, the Company also recovered approximately $1,783,000 of prior years' sales
and excise taxes charged by LECs compared to $1,688,000 of reductions in line
and transmission charges in 1999 relating to cost-based rate reductions ordered
by state regulators, promotional allowances, and sales and excise taxes charged
by LECs. The increase as a percentage of revenues is primarily due to the lower
revenues reported in 2000.
Location commissions were $12,231,000 in 1999 and $8,467,000 in 2000.
Location commissions declined by $3,764,000, or 30.8%, and represented 17.8% and
14.4% of total revenues for the years ended December 31, 1999 and 2000,
respectively. The dollar decrease reflects the effect of the decrease in
revenues in 2000 compared to 1999 which is used as the basis for calculating
location commissions. The percentage decrease is due to the use of higher
commission accrual rates in 1999 to recognize the increasing commission rates
resulting from location contracts with new and 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 $2,822,000, or 14.0%, from
$20,227,000 in 1999 to $17,405,000 for the year ended December 31, 2000. Field
operations as a
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percentage of total revenues increased slightly from 29.5% of total revenues for
the year ended December 31, 1999 to 29.6% of total revenues in 2000. The dollar
decrease in 2000 compared to 1999 was primarily due to lower aggregate salaries
and wages resulting from the reduction in personnel, a decrease in sales and
other taxes based on revenues during 2000 and other cost reduction measures.
Included in the decrease in sales and other taxes is $920,000 for reductions in
sales tax assessments previously recorded as expense and lower universal
telephone service fees ("USF fees"). As a result of a court ruling in the first
quarter of 2000, USF fees can only be assessed on interstate coin revenues which
reduces the amount of such fees the Company is required to pay. The percentage
increase was a result of the lower revenues during 2000.
Selling, general and administrative expenses ("SG&A") expenses decreased
$1,459,000, or 13.9%, from $10,515,000 for the year ended December 31, 1999 to
$9,056,000 for the year ended December 31, 2000. SG&A expenses represented 15.3%
of total revenues for the year ended December 31, 1999 and 15.4% in 2000. The
dollar decrease was 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 2000. The
increase as a percentage of revenues is primarily due to lower revenues reported
in 2000.
Depreciation and amortization decreased in 2000 primarily due to the
adoption of fresh start reporting as of November 17, 1999, the Consummation Date
of the Company's Prepackaged Plan. Under fresh start reporting, the carrying
values of property and equipment and of intangible assets were adjusted to equal
the fair value of such assets at that date. The new cost basis of these assets
is being depreciated or amortized over their remaining useful lives.
Depreciation and amortization decreased $5,566,000, or 24.2%, from $23,035,000
for the year ended December 31, 1999 to $17,469,000 for the year ended December
31, 2000. Depreciation and amortization represented 33.6% of total revenues for
the year ended December 31, 1999 and 29.7% of total revenues for the year ended
December 31, 2000, a decrease of 3.9%.
The provision for uncollectible accounts receivable increased $4,540,000
from $404,000 in 1999 to $4,944,000 in 2000. The provision for uncollectible
accounts receivable represented 0.6% of total revenues in 1999 and 8.4% in 2000,
an increase of 7.8%. The dollar and percentage increases were due to the
write-off of accounts receivable relating to dial-around compensation in 2000 to
more closely reflect the actual number of dial-around calls for which the
Company currently expects to be paid.
Charges relating to location contracts increased $20,341,000 from
$864,000 for the year ended December 31, 1999 to $21,205,000 for the year ended
December 31, 2000. The loss in 1999 related to the removal of 1,839 pay
telephones as part of the Company's continuing program to evaluate the
profitability of its payphones. In 2000, the loss consisted of $6,418,000
relating to the removal of 3,376 unprofitable pay telephones and an asset
impairment loss of $14,787,000 to write-down the carrying value of the Company's
payphone location contracts to their estimated fair value. Charges relating to
location contracts represented 1.3% of total revenues in 1999 and 36.0% of total
revenues in 2000.
Other unusual charges and contractual settlements decreased $118,000
from $697,000 for the year ended December 31, 1999 to $579,000 for the year
ended December 31, 2000. For the year ended December 31, 2000, other unusual
charges and contractual settlements consisted of: (i) professional fees and
other costs related to the company's Prepackaged Plan, $78,000; (ii) other
contractual settlements, $284,000; and (iii) costs relating to unsuccessful
refinancing efforts and other matters, $217,000. 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) other matters, $178,000; less (iii) recovery of expense relating
to settlement of professional fees, $364,000. Other unusual charges and
contractual settlements represented 1.0% of total revenues in 1999 and 2000.
OTHER INCOME (EXPENSE). Other income (expense) is comprised principally
of interest expense incurred on debt and interest income. Total interest expense
decreased $9,569,000, or 46.1%, from $20,737,000 for the year ended December 31,
1999 to $11,168,000 for the year ended December 31, 2000. Interest expense
represented 30.2% of total revenues for the year ended December 31, 1999 and
19.0% of total revenues for the year ended December 31, 2000, a decrease of
11.2%. 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. Interest relating to the Senior Notes, including
amortization of deferred financing costs, was $13,905,000 in 1999 (through
November 17, 1999). This decrease was offset by an increase in interest expense
relating to the
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Company's secured debt as a result of additional borrowings in 1999 and an
increase in the effective rate of interest arising principally from the
amortization of higher fees relating to the Company's Exit Financing Agreement.
Interest and other income increased $25,000, from $229,000 in 1999 to $254,000
in 2000. This increase consisted of a decrease in interest income offset by an
increase in other income in 2000.
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, charges relating to location contracts, other unusual charges and
contractual settlements and extraordinary items) decreased $3,765,000, or 68.1%,
from $5,526,000 for the year ended December 31, 1999 to $1,761,000 for the year
ended December 31, 2000. EBITDA from recurring operations represented 8.1% of
total revenues for the year ended December 31, 1999 and 3.0% of total revenues
for the year ended December 31, 2000, a decrease of 5.1%. The dollar and
percentage decreases are primarily due to the decrease in revenues and the
increase in the provision for uncollectible accounts receivable relating to
dial-around compensation offset by decreases in certain operating expenses .
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, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES Total revenues decreased by $11,904,000 or 14.8% from
$80,470,000 for the year ended December 31, 1998 to $68,566,000 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
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 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
$3,784,000 or 12.0%, from $31,516,000 for the year ended December 31, 1998 to
$27,732,000 for the year ended December 31, 1999. Of this decrease, long
distance revenues from operator service providers decreased by $2,577,000 or
16.8% 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 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
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regulatory change in the rate of dial-around compensation from $0.284 to $0.238
per call as discussed above. Net revenues from dial-around compensation
consisted of:
1998 1999
---- ----
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
============== ==============
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.
OPERATING EXPENSES. Total operating expenses decreased $17,434,000, or
16.6%, from $105,070,000 for the year ended December 31, 1998 to $87,636,000 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 36.8% of
total revenues for the year ended December 31, 1998 and 28.7% of total revenues
for the year ended December 31, 1999, a decrease of 8.1%. 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
was primarily due to the lower line charges from CLECs and the amounts recovered
from LECs as described above.
Location commissions decreased from $14,179,000 in 1998 to $12,231,000
in 1999. Location commissions decreased $1,948,000, or 13.7%, and represented
17.6% of total revenues for the year ended December 31, 1998 and 17.8% in 1999,
an increase of 0.2%. The dollar decrease reflected 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 was due to the increase in
commission rates in response to competitive demands by new location providers as
well as renewal of location contracts with existing location providers.
Field operations, which consisted 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 27.4% and 29.5% of total
revenues for the years ended December 31, 1998 and 1999, respectively. 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.
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 15.4% and 15.3% of total revenues for the years
ended December 31, 1998 and 1999, respectively. The dollar and percentage
decreases were 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 pursuing legal action to collect
dial-around compensation from IXCs on behalf of payphone providers.
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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 29.5% of
total revenues for the year ended December 31, 1998 and 33.6% of total revenues
for the year ended December 31, 1999, an increase of 4.1%. 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 during the later
part of 1999. The percentage increase in depreciation and amortization was due
to the reduction in total revenues in 1999.
The provision for uncollectible accounts receivable decreased slightly
from $428,000 in 1998 to $404,000 in 1999 and represented 0.5% and 0.6% of total
revenues for the years ended December 31, 1998 and 1999, respectively. The
dollar decrease and percentage increase were primarily due to the decline in
revenues which enters into the determination of the Company's normal provision
for uncollectible accounts receivable.
In 1999, the Company incurred a charge relating to location contracts of
$864,000 which resulted from removal of 1,839 pay telephones from locations that
were no longer profitable. There were no abandoned location contracts in 1998.
Other unusual charges and contractual settlements decreased $2,065,000,
or 74.8% from $2,762,000 for the year ended December 31, 1998 to $697,000 for
the year ended December 31, 1999. 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, $1,426,00;
(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. Other
unusual charges and contractual settlements represented 3.4% of total revenue in
1998 and 1.0% of total revenue in 1999, a decrease of 2.4%.
OTHER INCOME (EXPENSE). Other income (expense) was 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 25.8% of total revenues for the year ended December 31, 1998 and
30.2% of total revenues for the year ended December 31, 1999, an increase of
4.4%. 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. 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. 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 consisted 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 operationsd
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 2.4% of total revenues for the year ended December 31,
1998 and 8.1% of total revenues for the year ended December 31, 1999, an
increase of 5.7%. 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. See "Liquidity
and Capital Resources" for a discussion of cash flows from operating, investing
and financing activities.
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LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATING ACTIVITIES Net cash provided by (used in)
operating activities during the fiscal years ended December 31, 1998, 1999 and
2000 was ($6,470,000), ($1,537,000) and $1,260,000, respectively. Net cash
provided by (used in) operating activities consisted primarily of the funding of
operating losses (before extraordinary item) and the decrease in current
liabilities in 1999, offset by depreciation and amortization, the increase in
current liabilities in 1998 and 2000, non-cash interest charged to expense and
non-cash charges relating to location contracts and accounts receivable. The
decrease in cash used in operating activities in 1999 and 2000 compared to 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 1998, the Company paid $7,500,000 of interest on the
Senior Notes, a portion of which was paid from the proceeds of additional
borrowings.
CASH FLOWS FROM INVESTING ACTIVITIES Cash used in investing activities
during the fiscal years ended December 31, 1998, 1999 and 2000 was $6,763,000,
$2,302,000 and $2,429,000, respectively. Cash used in investing activities
consisted primarily of payments relating to the TDS acquisition in 1998, 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, and costs relating to new location contracts.
CASH FLOWS FROM FINANCING ACTIVITIES Cash provided by financing
activities during the fiscal years ended December 31, 1998 and 1999 was
$12,482,000 and $3,771,000, respectively, which consisted primarily of net
proceeds from borrowings under the Company's credit facilities offset by
payments of debt related to refinancings, payment of debt financing costs and
other repayments of debt. In 2000, cash used in financing activities was $106
which consisted primarily of payments of existing debt and debt financing costs.
12% SENIOR NOTES On December 18, 1996, the Company completed a public
debt offering of $125,000,000 aggregate principal amount 12% Senior Notes, due
2006, with interest payable semiannually. The net proceeds of $119,149,000 were
used to complete certain business acquisitions in January 1997, to repay other
outstanding indebtedness, and for general corporate purposes.
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. 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.
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"), a significant shareholder of the Company's common equity, was Agent for
the Lenders. On May 8, 1998, the Company amended the Credit Agreement and
Foothill Capital Corporation ("Foothill"), as replacement Agent and Lender,
assumed all of the rights and obligations of the former Lenders. Under the
Credit Agreement, the revolving credit commitment was $20,000,000 and the
expansion loan commitment was $20,000,000. Interest was payable monthly in
arrears at 2% above the Lender's reference rate and the maturity date of the
Credit Agreement was extended to May 8, 2001. The Company incurred $1,174,000 in
fees and expenses in connection with this amendment to the Credit Agreement, of
which $328,000 was included in other unusual charges and contractual settlements
in the Company's consolidated statements of operations in 1998.
In April, 1999 the Company received a commitment from Foothill to
provide $45,900,000 in debtor-in-possession financing ("D.I.P." financing) in
anticipation of the Case described above. The Company incurred $250,000 in fees
relating to an 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 in 1999.
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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 was originally
scheduled to mature 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 was originally 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 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.
At December 31, 2000, the Company was not in compliance with certain
financial covenants under the Exit Financing Agreement. In addition, the Company
has not paid the monthly interest that was originally due on February 1 and
March 1, 2001 nor the deferred line fee that was originally due on November 17,
2000. Effective November 13, 2000, February 1, 2001, and March 1, 2001, the
Company executed amendments to the Exit Financing Agreement (the "Amendments")
which extended the due date of the deferred line fee to April 1, 2001 and the
maturity date of the Exit Financing Agreement to January 1, 2002. The Amendments
also provide for the capitalization of interest that was originally due on
February 1 and March 1, 2001 as part of the principal balance and waives the
default as of December 31, 2000 for the Company's failure to comply with certain
financial covenants. Although the lenders have waived the default by the Company
at December 31, 2000, there can be no assurances that the Company will be able
to pay the deferred line fee or the monthly interest as such amounts become due
or comply with all financial covenants through the remainder of 2001. If a
default occurs with respect to the Company's Exit Financing Agreement, this
obligation, at the option of the lenders, could become immediately due and
payable. Accordingly, the Company classified the amounts due under the Exit
Financing Agreement as a current liability at December 31, 2000.
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.
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FINANCIAL CONDITION The Company's working capital (deficiency),
excluding the reclassification of long-term debt to current liabilities,
declined from $3,131,000 at December 31,1999 to ($4,026,000) at December 31,
2000, a decrease of $7,157,000. This decrease was primarily due to the write-off
of accounts receivable relating to dial-around compensation and an increase in
accounts payable. Although the Company's cash provided by (used in) operating
activities increased from ($1,537,000) for the year ended December 31, 1999 to
$1,260,000 for the year ended December 31, 2000, the Company has incurred
continuing operating losses. The Company was not in compliance with certain
financial covenants under its Exit Financing Agreement at December 31, 2000 and
presently has no additional credit available thereunder. In addition, the
Company has not paid the monthly interest that was originally due on February 1
and March 1, 2001 nor the principal payment relating to the deferred line fee
that was originally due on November 17, 2000. As a result of certain amendments
to the Company's Exit Financing Agreement, the lenders have waived the default
relating to the Company's failure to comply with certain financial covenants at
December 31, 2000 and have deferred or extended the due dates of the payments
described above. In the event the Company is unable to remain in compliance with
the Exit Financing Agreement and the lenders do not waive such defaults, the
outstanding balance could become immediately due and payable. As a result, the
report of the Company's independent accountants refers to the substantial doubt
regarding the Company's ability to continue as a going concern.
The Company's working capital, liquidity and capital resources may be
limited by its ability to generate sufficient cash flow from its operations or
its investing or financing activities. Cash flow from operations depends on
revenues from coin and non-coin sources, including dial-around compensation, and
management's ability to control expenses. There can be no assurance that coin
revenues will not decrease, that revenues from dial-around compensation will
continue at the rates anticipated, or that operating expenses can be maintained
at present or reduced to lower levels. To the extent that cash flow from
operating activities is insufficient to meet the Company's cash requirements,
there can be no assurance that the Company's lender will grant additional
advances under the Exit Financing Agreement or that the Company can obtain
additional financing to meet its debt service and other cash requirements.
The Company has had discussions with its lenders and has requested an
additional advance under its Exit Financing Agreement. Although the Company's
lenders have been supportive, the Company has not been able to obtain additional
advances from its lenders. The Company continues to negotiate with its lenders
and to evaluate alternate financing arrangements. The Company has also taken
additional steps to further reduce operating expenses and to seek alternate
sources of revenue. Management believes, but cannot assure, that cash flow from
operations, including any new sources of revenue, and the additional liquidity
that its current or alternate lenders may provide, will allow the Company to
sustain its operations and meet its obligations through the remainder of 2001.
CAPITAL EXPENDITURES For the year ended December 31, 2000, the Company
had capital expenditures of $1,229,000 which were financed by cash flows from
operating activities. 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, 2000.
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 ("FASB") 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.
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In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation", an Interpretation of APB No.
25 ("FIN No. 44"). FIN No. 44 clarifies the application of Opinion No. 25 for
certain issues including: (a) the definition of employee for purposes of
applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, and (c) the accounting for an exchange of
stock compensation awards in a business combination. In general, FIN No. 44 was
effective July 1, 2000. The adoption of FIN No. 44 did not have a material
impact on the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements", which provides guidance related to revenue reported by companies in
their financial statements. In March 2000, the SEC issued SAB No. 101A, which
delayed the implementation date of SAB No. 101. In June 2000, the SEC issued SAB
No. 101B that further delayed the implementation of SAB No. 101 to the fourth
quarter of fiscal 2000. On various dates through July 2000, the FASB's Emerging
Issues Task Force provided additional guidance in applying SAB No. 101 relating
to the reporting of gross versus net revenues in financial statements.
In the fourth quarter of 2000, the Company adopted SAB No. 101 and began
reporting long distance revenues from operator service providers net of
telecommunication and validation fees. Previously telecommunication and
validation fees were reported as an operating expense and the gross long
distance revenues were included in non-coin telecommunication services in the
accompanying consolidated financial statements. The effect of adopting SAB No.
101, including the retroactive application to prior periods, was to decrease
total revenues and operating expenses by $10,916,000, $8,162,000, $901,000 and
$6,436,000 in the year ended December 31, 1998, the ten months and seventeen
days ended November 17, 1999, the one month and thirteen days ended December 31,
1999 and the year ended December 31, 2000, respectively. The reclassifications
to offset expenses against revenues have had no effect on net income (loss) as
previously reported.
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.
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 $52 million in borrowings and capitalized fees and interest 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
-29-
31
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 nor
disagreements on any accounting or financial disclosure matters during the two
most recent fiscal years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The description of the directors and executive officers of the
Registrant is incorporated herein by reference to the sections of the definitive
Proxy Statement for the 2001 Annual Meeting of Shareholders (the "Proxy
Statement"), entitled "Election of Directors" and "Executive Officers", which
Proxy Statement is expected to be filed in April 2001. 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 2001 Annual Meeting of Shareholders entitled "Executive
Compensation", which Proxy Statement is expected to be filed in April 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the section of the definitive Proxy
Statement for the 2001 Annual Meeting of Shareholders entitled "Security
Ownership of Certain Beneficial Owners and Management", which Proxy Statement is
expected to be filed in April 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the section of the definitive Proxy
Statement for the 2001 Annual Meeting of Shareholders entitled "Executive
Compensation-Certain Transactions", which Proxy Statement is expected to be
filed in April 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
1. FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1999 and 2000 F-2
-30-
Consolidated Statements of Operations for the Year Ended December 31, 1998,
the Ten Months and Seventeen Days Ended November 17, 1999, the One
Month and Thirteen Days Ended December 31, 1999 and the Year Ended
December 31, 2000 F-3
Statements of Changes in Mandatorily Redeemable Preferred Stock for the Year
Ended December 31, 1998, the Ten Months and Seventeen Days Ended November
17, 1999, the One Month and Thirteen Days Ended December 31, 1999 and the
Year Ended December 31, 2000 F-4
Statements of Changes in Non-mandatorily Redeemable Preferred Stock, Common
Stock and Other Shareholders' Equity (Deficit) for the Year Ended December
31, 1998, the Ten Months and Seventeen Days Ended November 17, 1999, the One
Month and Thirteen Days Ended December 31, 1999 and the Year Ended December
31, 2000 F-5
Consolidated Statements of Cash Flows for the Year Ended December 31, 1998, the
Ten Months and Seventeen Days Ended November 17, 1999, the One Month and
Thirteen Days Ended December 31, 1999 and the Year Ended December 31, 2000 F-6
Notes to Consolidated Financial Statements for the Year Ended December 31, 1998,
the Ten Months and Seventeen Days Ended November 17, 1999, the One Month
and Thirteen Days Ended December 31, 1999 and the Year Ended December 31,
2000 F-7
2. FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts F-28
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
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. (1)*
2.2 Joint Reorganization Plan of PhoneTel Technologies, Inc. and Cherokee
Communications, Inc. dated May 11, 1999 (3)*
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. (3)*
3.1 Amended and Restated Articles of Incorporation of PhoneTel
Technologies, Inc. dated as of October 12, 2000. (7)*
3.2 Amended and Restated Code of Regulations of PhoneTel Technologies,
Inc. dated as of November 17, 1999. (4)*
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. (4)*
-31-
32
10.1 Voting Agreement, dated June 11, 1998, by and between PhoneTel
Technologies, Inc. and Mr. David R. Hill (1)*
10.2 Voting Agreement, dated June 11, 1998, by and between PhoneTel
Technologies, Inc. and Samstock, L.L.C. (1)*
10.3 Voting Agreement, dated June 11, 1998, by and between PhoneTel
Technologies, Inc. and Samstock, L.L.C. (1)*
10.4 Consulting and Non-Competition Agreement, dated June 11, 1998, by
and between PhoneTel Technologies, Inc. and Mr. Peter Graf (1)*
10.5 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. (4)*
10.6 PhoneTel Technologies, Inc. 1999 Management Incentive Plan. (4)* **
10.7 Registration Rights Agreement dated November 17, 1999 among PhoneTel
Technologies, Inc. and the parties identified on Exhibit A thereto.
(4)*
10.8 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. (5)*
10.9 Lump Sum Bonus Addendum to Operator Services Agreement dated
January 21, 2000 by and between Opticom and PhoneTel Technologies,
Inc. dated January 21, 2000. (5)*
10.10 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.
(5)*
10.11 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. (5)*
10.12 Employment Agreement dated as of April 1, 2000 by and between
PhoneTel Technologies, Inc. and John D. Chichester. (6)* **
10.13 Amendment Number Two to Loan and Security Agreement dated as of
November 13, 2000 by and among PhoneTel Technologies, Inc. and
Cherokee Communications, Inc. ("Borrower") 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, as amended,
between Borrowers and Lenders. (7)*
10.14 Amendment Number Three to Loan and Security Agreement dated as of
February 1, 2001 by and among PhoneTel Technologies, Inc. and
Cherokee Communications, Inc. ("Borrower") 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, as amended,
between Borrowers and Lenders.
10.15 Amendment Number Four to Loan and Security Agreement dated as of
March 1, 2001 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, as amended, between Borrowers and
Lenders.
21 Subsidiaries of PhoneTel Technologies, Inc.
-32-
33
99.1 Voting Agreement, dated June 11, 1998, by and between Davel Communications
Group, Inc. and Mr. Peter Graf (7)*
99.2 Voting Agreement, dated June 11, 1998, by and between Davel Communications
Group, Inc. and Mr. Steven Richman (7)*
99.3 Voting Agreement, dated June 11, 1998, by and between Davel Communications
Group, Inc. and Mr. George Henry (7)*
99.4 Voting Agreement, dated June 11, 1998, by and between Davel Communications
Group, Inc. and Mr. Aron Katzman (7)*
99.5 Voting Agreement, dated June 11, 1998, by and between Davel Communications
Group, Inc. and Mr. Joseph Abrams (7)*
99.6 Voting Agreement, dated June 11, 1998, by and between Davel Communications
Group, Inc. and ING (U.S.) Investment Corporation (7)*
99.7 Voting Agreement, dated June 11, 1998, by and between Davel Communications
Group, Inc. and Cerberus Partners, L. P. (7)*
99.8 Joint Press Release of PhoneTel Technologies, Inc. and Davel Communications
Group, Inc. dated June 12, 1998 (7)*
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. (8)*
- ----------------
* Previously filed.
** Management contract or compensatory plan or arrangement.
(1) Incorporated by reference from the Company's Form 8-K dated June 11, 1998.
(2) Incorporated by reference from the Company's Form 8-K dated September 28,
1998.
(3) Incorporated by reference from the Company's Form 8-K dated November 4,
1999.
(4) Incorporated by reference from the Company's Form 8-K dated November 17,
1999.
(5) Incorporated by reference from the Company's Form 10-K for the year ended
December 31, 1999.
(6) Incorporated by reference from the Company's Form 10-K/A-1 for the year
ended December 31, 1999.
(7) Incorporated by reference from the Company's Form 10-Q for the quarter
ended September 30, 2000.
(b) REPORT ON FORM 8-K
The Registrant filed no reports on Form 8-K during the fourth quarter of
2000.
(c) EXHIBITS
The response to this portion of Item 14 is submitted as a separate section
of this report. See Item 14(a) 3 for a list of Exhibits hereto.
(d) FINANCIAL STATEMENT SCHEDULES
The Financial Statement Schedule to this Form 10-K is set forth as Exhibit
21.
-33-
34
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
PhoneTel Technologies, Inc.
Cleveland, Ohio
We have audited the accompanying consolidated balance sheets of PhoneTel
Technologies, Inc. and subsidiary as of December 31, 2000 and 1999 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
ended December 31, 2000, the one month and thirteen day period ended December
31, 1999 (Successor Company), the ten month and seventeen day period ended
November 17, 1999, and the year ended December 31, 1998 (Predecessor Company).
Our audits also included the financial statement schedule listed in the
accompanying text. These financial statements and schedule are the
responsibility of the management of PhoneTel Technologies, Inc. (the Company).
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated 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, 2000 and 1999,
and the consolidated results of their operations and their cash flows for the
year ended December 31, 2000, the one month and thirteen day period ended
December 31, 1999 (Successor Company), the ten month and seventeen day period
ended November 17, 1999 and the year ended December 31, 1998 (Predecessor
Company), in conformity with accounting principles generally accepted in the
United States of America. 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 2 and 11 to the
financial statements, the Company has suffered recurring losses from operations,
has a working capital deficiency and has been unable to comply with the terms of
its debt agreement. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
February 21, 2001, except for Notes 2 and 11 as to which the date is March 1,
2001.
F-1
35
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
SUCCESSOR COMPANY
--------------------------
DECEMBER 31 DECEMBER 31
1999 2000
------------ -----------
ASSETS
Current assets:
Cash $ 5,700 $ 4,425
Accounts receivable, net of allowance for doubtful accounts
of $1,339 and $84, respectively 11,246 7,632
Other current assets 1,144 1,294
--------- ---------
Total current assets 18,090 13,351
Property and equipment, net 22,741 18,858
Intangible assets, net 83,057 48,374
Other assets 511 606
--------- ---------
$ 124,399 $ 81,189
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,172 $ 51,647
Accounts payable 5,272 6,792
Accrued expenses:
Location commissions 2,841 2,702
Line and transmission charges 1,902 1,865
Personal property and sales tax 2,672 2,753
Other 1,100 1,937
--------- ---------
Total current liabilities 14,959 67,696
Long-term debt and other liabilities 48,642 1,062
Commitments and contingencies -- --
--------- ---------
Total liabilities 63,601 68,758
--------- ---------
Shareholders' equity:
Common Stock (Successor Company) - $0.01 par value; 15,000,000 and
45,000,000 shares authorized, 10,188,630 and 10,189,684 shares
issued and outstanding at December 31, 1999 and 2000,
respectively 102 102
Additional paid-in capital 63,390 63,429
Accumulated deficit (2,694) (51,100)
--------- ---------
Total shareholders' equity 60,798 12,431
--------- ---------
$ 124,399 $ 81,189
========= =========
The accompanying notes are an integral part of these financial statements
F-2
36
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
PREDECESSOR COMPANY SUCCESSOR COMPANY
---------------------------- ------------------------------
TEN MONTHS ONE MONTH
AND SEVENTEEN AND THIRTEEN
YEAR ENDED DAYS ENDED DAYS ENDED YEAR ENDED
DECEMBER 31 NOVEMBER 17 DECEMBER 31 DECEMBER 31
1998 1999 1999 2000
------------ ------------ ------------ ------------
REVENUES:
Coin calls $52,544 $36,220 $4,378 $33,110
Non-coin telecommunication services 31,516 25,065 2,667 25,147
Dial-around compensation adjustment (3,733) - - --
Other 143 210 26 587
------------ ------------ ------------ ------------
80,470 61,495 7,071 58,844
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Line and transmission charges 29,607 17,575 2,088 17,211
Location commissions 14,179 11,263 968 8,467
Field operations 22,009 18,043 2,184 17,405
Selling, general and administrative 12,354 9,156 1,359 9,056
Depreciation and amortization 23,731 20,719 2,316 17,469
Provision for uncollectible accounts receivable 428 345 59 4,944
Charges relating to location contracts - 864 - 21,205
Other unusual charges (income) and contractual settlements 2,762 1,030 (333) 579
------------ ------------ ------------ ------------
105,070 78,995 8,641 96,336
------------ ------------ ------------ ------------
Loss from operations (24,600) (17,500) (1,570) (37,492)
OTHER INCOME (EXPENSE):
Interest expense - related parties (1,400) - - -
Interest expense - others (19,364) (19,575) (1,162) (11,168)
Interest and other income 547 191 38 254
------------ ------------ ------------ ------------
(20,217) (19,384) (1,124) (10,914)
------------ ------------ ------------ ------------
Loss before extraordinary item (44,817) (36,884) (2,694) (48,406)
Extraordinary item - gain on extinguishment of debt - 77,172 - -
------------ ------------ ------------ ------------
NET INCOME (LOSS) ($44,817) $40,288 ($2,694) ($48,406)
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE CALCULATION:
Loss before extraordinary item ($44,817) ($36,884) ($2,694) ($48,406)
Preferred dividend payable in kind (268) (13) - -
Accretion of 14% Preferred to its redemption value (1,128) (1,197) - -
------------ ------------ ------------ ------------
Loss before extraordinary item applicable to
common shareholders (46,213) (38,094) (2,694) (48,406)
Extraordinary item - gain on extinguishment of debt - 77,172 - -
------------ ------------ ------------ ------------
Net income (loss) applicable to common shareholders ($46,213) $39,078 ($2,694) ($48,406)
============ ============ ============ ============
Loss per common share before extraordinary item ($2.73) ($2.03) ($0.26) ($4.75)
Extraordinary gain per common share, basic and diluted - 4.11 - -
------------ ------------ ------------ ------------
Net income (loss) per common share, basic and diluted ($2.73) $2.08 ($0.26) ($4.75)
============ ============ ============ ============
Weighted average number of shares, basic and diluted 16,923,499 18,754,133 10,188,630 10,189,684
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-3
37
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
STATEMENTS OF CHANGES IN MANDATORILY REDEEMABLE PREFERRED STOCK
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
PREDECESSOR COMPANY
---------------------------------------------------------------
TEN MONTHS AND
YEAR ENDED SEVENTEEN DAYS ENDED
DECEMBER 31, 1998 NOVEMBER 17, 1999
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- ------------- -------------- -------------
14% CUMULATIVE
REDEEMABLE CONVERTIBLE
PREFERRED STOCK
Balance, beginning of period 138,147 $7,716 158,527 $9,112
Dividends payable-in-kind 20,380 268 17,234 13
Accretion of carrying value
to amount payable at
redemption on June 30, 2000 - 1,128 - 1,197
Shares exchanged for Common Stock
of Successor Company - - (175,761) (10,322)
-------------- ------------- -------------- -------------
Balance, end of period 158,527 $9,112 - -
============== ============= ============== =============
SUCCESSOR COMPANY
--------------------------------------------------------------------
ONE MONTH AND
THIRTEEN DAYS ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 2000
------------------------------ -----------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- ------------- ---------------- ----------------
14% CUMULATIVE
REDEEMABLE CONVERTIBLE
PREFERRED STOCK
Balance, beginning of period - - - -
Dividends payable-in-kind - - - -
Accretion of carrying value
to amount payable at
redemption on June 30, 2000 - - - -
Shares exchanged for Common Stock
of Successor Company - - - -
-------------- ------------- ---------------- ----------------
Balance, end of period - - - -
============== ============= ================ ================
The accompanying notes are an integral part of these financial statements.
F-4
38
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)
- --------------------------------------------------------------------------------
PREDECESSOR COMPANY
---------------------------------------------------------------
TEN MONTHS AND
YEAR ENDED SEVENTEEN DAYS ENDED
DECEMBER 31, 1998 NOVEMBER 17, 1999
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- ------------- -------------- -------------
SERIES A SPECIAL CONVERTIBLE
PREFERRED STOCK
Balance, beginning of period - - - -
Exercise of warrants 100,875 $20 89,912 $18
Conversion to Common Stock
(Predecessor Company) (100,875) (20) (89,912) (18)
-------------- ------------- -------------- -------------
Balance, end of period - - - -
============== ------------- ============== -------------
COMMON STOCK (PREDECESSOR COMPANY)
Balance, beginning of period 16,360,829 164 18,754,133 188
Exercise of warrants 375,804 4 - -
Conversion of Series A Preferred 2,017,500 20 1,798,240 18
Exchanged for new Common Stock - - (20,552,373) (206)
-------------- ------------- -------------- -------------
Balance, end of period 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-Series A Preferred - - (16,370) -
Exercise of warrants and other
capital transactions - - - -
-------------- ------------- -------------- -------------
Balance, end of period - - 10,188,630 102
============== ------------- ============== -------------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period 62,600 61,233
Exercise of warrants and other capital
transactions 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
Excercise of warrants - Series A
Preferred (20) (18)
Put under warrants issued for
Series A Preferred (1,452) 452
Options granted to officer - -
Issuance of warrants 80 -
Fresh start accounting adjustment - (68,873)
------------- -------------
Balance, end of period 61,233 63,390
------------- -------------
ACCUMULATED DEFICIT
Balance, beginning of period (66,806) (113,019)
Net income (loss) (44,817) 40,288
Dividends payable in-kind on 14%
Preferred and accretion (1,396) (1,210)
Fresh start accounting adjustment - 73,941
------------- -------------
Balance, end of period (113,019) -
------------- -------------
TOTAL NON-MANDATORILY REDEEMABLE
PREFERRED STOCK, COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY (DEFICIT) ($51,598) $63,492
============= =============
SUCCESSOR COMPANY
-------------------------------------------------------------------
ONE MONTH AND
THIRTEEN DAYS ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 2000
---------------------------- -----------------------------------
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ---------------- ----------------
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 - - - -
Exercise of warrants - - - -
Conversion of Series A Preferred - - - -
Exchanged for new Common Stock - - - -
------------- ------------- ---------------- ----------------
Balance, end of period - - - -
============= ------------- ================ ----------------
COMMON STOCK (SUCCESSOR COMPANY)
Balance, beginning of period 10,188,630 $102 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-Series A Preferred - - - -
Exercise of warrants and other
capital transactions - - 1,054 -
------------- ------------- ---------------- ----------------
Balance, end of period 10,188,630 102 10,189,684 102
============= ------------- ================ ----------------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning of period 63,390 63,390
Exercise of warrants and other capital
transactions - 11
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 - -
Excercise of warrants - Series A
Preferred - -
Put under warrants issued for
Series A Preferred - -
Options granted to officer - 28
Issuance of warrants -
Fresh start accounting adjustment - -
------------- ----------------
Balance, end of period 63,390 63,429
------------- ----------------
ACCUMULATED DEFICIT
Balance, beginning of period - (2,694)
Net income (loss) (2,694) (48,406)
Dividends payable in-kind on 14%
Preferred and accretion - -
Fresh start accounting adjustment - -
------------- ----------------
Balance, end of period (2,694) (51,100)
------------- ----------------
TOTAL NON-MANDATORILY REDEEMABLE
PREFERRED STOCK, COMMON STOCK AND
OTHER SHAREHOLDERS' EQUITY (DEFICIT) $60,798 $12,431
============= ================
The accompanying notes are an integral part of these financial statements.
F-5
39
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
PREDECESSOR COMPANY SUCCESSOR COMPANY
--------------------------- -------------------------
TEN MONTHS ONE MONTH
AND SEVENTEEN AND THIRTEEN
YEAR ENDED DAYS ENDED DAYS ENDED YEAR ENDED
DECEMBER 31 NOVEMBER 17 DECEMBER 31 DECEMBER 31
1998 1999 1999 2000
-------- -------- -------- --------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) ($44,817) $40,288 ($2,694) ($48,406)
Adjustments to reconcile net income (loss) to net
cash flow from operating activities:
Depreciation and amortization 23,731 20,719 2,316 17,469
Extraordinary gain on extinguishment of debt - (77,172) - -
Provision for uncollectible accounts receivable 428 345 59 4,944
Non-cash interest expense 1,852 15,154 407 5,193
Charges relating to location contracts - 864 - 21,205
Gain on disposal of assets (335) (51) (4) (107)
Other - - - 180
Changes in current assets 1,413 2,178 438 (1,480)
Changes in current liabilities, excluding
reclassification of long-term debt 11,258 (3,010) (1,374) 2,262
-------- -------- -------- --------
(6,470) (685) (852) 1,260
-------- -------- -------- --------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Acquisition (2,669) - - -
Purchases of property and equipment (3,580) (1,538) (139) (1,229)
Proceeds from sale of assets 468 72 4 126
Acquisition of intangible assets (737) (469) (306) (1,231)
Other deferred charges (245) 53 21 (95)
-------- -------- -------- --------
(6,763) (1,882) (420) (2,429)
-------- -------- -------- --------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from debt issuance 12,002 96,105 400 -
Proceeds from shareholder debt 3,090 - - -
Principal payments on borrowings (724) (88,206) (4) (53)
Debt financing costs (1,915) (3,191) - (64)
Exercise of warrants and other capital transactions 29 - - 11
Debt restructuring costs - (1,333) - -
-------- -------- -------- --------
12,482 3,375 396 (106)
-------- -------- -------- --------
Increase (decrease) in cash (751) 808 (876) (1,275)
Cash, beginning of period 6,519 5,768 6,576 5,700
-------- -------- -------- --------
Cash, end of period $5,768 $6,576 $5,700 $4,425
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE:
Interest paid during the period $11,171 $4,970 $223 $5,928
======== ======== ======== ========
NON-CASH FINANCING TRANSACTIONS:
Deferred financing costs - - $230 $2,300
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 issued for services $80 - - -
Warrants for Common Stock (Successor Company) issued in
exchange for old Common Stock and 14% Preferred - 333 - -
Put related to warrants issued for Series A Preferred 1,452 (452) - -
Other - - - 39
-------- -------- -------- --------
$1,532 $63,152 $230 $2,339
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-6
40
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998, THE TEN MONTHS
AND SEVENTEEN DAYS ENDED NOVEMBER 17, 1999 (PREDECESSOR COMPANY),
THE ONE MONTH AND THIRTEEN DAYS ENDED DECEMBER 31, 1999
AND THE YEAR ENDED DECEMBER 31, 2000 (SUCCESSOR COMPANY)
(IN THOUSANDS EXCEPT INSTALLED PUBLIC PAY TELEPHONES,
PER CALL, SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
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, 1998, 1999
and 2000, the Company operated 43,248, 36,747 and 36,410 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 (the "FCC").
BASIS OF REPORTING
As of November 17, 1999, the date the Company emerged from its Chapter
11 proceedings (see Notes 3 and 4), the Company adopted fresh start reporting.
Pursuant to the provisions of AICPA Statement of Position 90-7 ("SOP 90-7"),
assets and liabilities were restated to reflect the reorganization value of the
Company, which approximates their fair value at that date. In addition, the
accumulated deficit of the Company through November 17, 1999 was eliminated and
the debt and capital structure of the Company was recast pursuant to the
provisions of the Company's plan of reorganization. Thus, the balance sheets as
of December 31, 1999 and 2000 reflect a new reporting entity (the "Successor
Company") and are 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 date of adopting
fresh start reporting and are thus not comparable with the results of operations
and cash flows of the Successor Company.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. The financial statements do not
include any adjustments that might result if the Company was unable to continue
as a going concern (see Note 2).
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. Such estimates, among others, include amounts relating to the
carrying value of the Company's accounts receivable and payphone location
contracts and the related revenues and expenses applicable to dial-around
compensation and asset impairment. Actual results could differ from those
estimates.
F-7
41
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 $1,429
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 prior 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 or 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 incurred in 1998 or 1999. In 2000, the Company incurred an asset
impairment loss relating to its payphone location contracts of $14,787 (see Note
9).
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.
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 for all periods presented and the impact of the
assumed exercise of the stock options and warrants and the assumed conversion of
the 14% Preferred is not dilutive. The number of shares of Common Stock
(Successor Company) relating to stock options and warrants that could
potentially dilute basic earnings per share in the future that were not included
in the computation of diluted earnings per share were 1,159,719 and 1,478,024
shares for the one month and thirteen days ended December 31, 1999 and the year
ended December 31, 2000, respectively.
F-8
42
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. Deferred tax assets are reduced by a
valuation allowance when it is deemed more likely than not that the asset will
not be utilized.
RECLASSIFICATIONS
Certain amounts relating to 1998 and 1999 have been reclassified to
conform to the current year presentation. The reclassifications have had no
impact on total assets, shareholders' equity or net income or 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, 1999 and 2000, or
that will be realized in the future. At December 31, 1999 and 2000, 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.
In March 2000, the FASB issued Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation an Interpretation of APB No.
25 ("FIN No. 44"). FIN No. 44 clarifies the application of Opinion No. 25 for
certain issues including: (a) the definition of employee for purposes of
applying Opinion No. 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, and (c) the accounting of an exchange of
stock compensation awards in a business combination. In general, FIN No. 44 was
effective July 1, 2000. The adoption of FIN No. 44 did not have a material
impact on the Company's financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements" which provides guidance related to revenue reported by companies in
their financial statements. In March 2000, the SEC issued SAB No. 101A, which
delayed the implementation date of SAB No. 101. In June 2000, the SEC issued SAB
No. 101B that further delayed the implementation of SAB No. 101 to the fourth
quarter of fiscal 2000. On various dates through July 2000, the FASB's Emerging
Issues Task Force provided additional guidance in applying SAB No. 101 relating
to the reporting of gross versus net revenues in financial statements.
F-9
43
In the fourth quarter of 2000, the Company adopted SAB No. 101 and
began reporting long distance revenues from operator service providers net of
telecommunication and validation fees. Previously telecommunication and
validation fees were reported as an operating expense and the gross long
distance revenues were included in non-coin telecommunication services in the
accompanying consolidated financial statements. The effect of adopting SAB No.
101, including the retroactive application to prior periods, was to decrease
total revenues and operating expenses by $10,916, $8,162, $901, and $6,436 in
the year ended December 31, 1998, the ten months and seventeen days ended
November 17, 1999, the one month and thirteen days ended December 31, 1999 and
the year ended December 31, 2000, respectively. The reclassifications to offset
expenses against revenues have had no effect on net income (loss) as previously
reported.
2. FINANCIAL CONDITION
The Company's working capital (deficiency), excluding the
reclassification of long-term debt to current liabilities, declined from $3,131
at December 31, 1999 to ($4,026) at December 31, 2000, a decrease in working
capital of $7,157. This decrease was primarily due to the write-off of accounts
receivable relating to dial-around compensation and an increase in accounts
payable. Although the Company's cash provided by (used in) operating activities
increased from ($1,537) for the twelve months ended December 31, 1999 to $1,260
for the year ended December 31, 2000, the Company has incurred continuing
operating losses. The Company was not in compliance with certain financial
covenants under its Exit Financing Agreement at December 31, 2000 and presently
has no additional credit available thereunder. In addition, the Company has not
paid the monthly interest that was originally due on February 1 and March 1,
2001 nor the principal payment relating to the deferred line fee that was
originally due on November 17, 2000. As a result of certain amendments to the
Company's Exit Financing Agreement, the lenders have waived the default relating
to the Company's failure to comply with certain financial covenants at December
31, 2000 and have deferred or extended the due dates of the payments described
above. In the event the Company is unable to remain in compliance with the Exit
Financing Agreement and the lenders do not waive such defaults, the outstanding
balance could become immediately due and payable.
The Company's working capital, liquidity and capital resources may be
limited by its ability to generate sufficient cash flow from its operations or
its investing or financing activities. Cash flow from operations depends on
revenues from coin and non-coin sources, including dial-around compensation, and
management's ability to control expenses. There can be no assurance that coin
revenues will not decrease, that revenues from dial-around compensation will
continue at the rates anticipated, or that operating expenses can be maintained
at present or reduced to lower levels. To the extent that cash flow from
operating activities is insufficient to meet the Company's cash requirements,
there can be no assurance that the Company's lender will grant additional
advances under the Exit Financing Agreement or that the Company can obtain
additional financing to meet its debt service and other cash requirements.
The Company has had discussions with its lenders and has requested an
additional advance under its Exit Financing Agreement. Although the Company's
lenders have been supportive, the Company has not been able to obtain additional
advances from its lenders. The Company continues to negotiate with its lenders
and to evaluate alternate financing arrangements. The Company has also taken
additional steps to further reduce operating expenses and to seek alternate
sources of revenue. Management believes, but cannot assure, that cash flow from
operations, including any new sources of revenue, and the additional liquidity
that its current or alternate lenders may provide, will allow the Company to
sustain its operations and meet its obligations through the remainder of 2001.
3. DEBT RESTRUCTURING AND CHAPTER 11 BANKRUPTCY FILING
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%
F-10
44
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 and received 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"). 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.
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 were paid in
full in the ordinary course, unless otherwise agreed. 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").
The former Chairman and Chief Executive Officer continues to serve as a Director
on the New Board.
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.
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 11, 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 was 15,000,000 shares of
Common Stock (Successor Company).
4. FRESH START REPORTING
The Company 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 were restated as of November
17, 1999 to reflect the reorganization value of the Company, which approximated
their fair value 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.
F-11
45
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-12
46
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
Predecessor
Company (a) (b) Successor
Pre-emergence Reorganization Fresh Start Company
Balance Sheet Adjustments Adjustment Balance Sheet
--------- -------------- ----------- -------------
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
========= ========= ========= =========
(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 accumutated
deficit.
F-13
47
5. 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
pursuing its claims against Davel and Peoples. The Company, at this time, cannot
predict the outcome of this litigation, but the parties have both indicated a
willingness to discuss settlement of the case.
Through December 31, 2000, 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.
6. ASSET PURCHASE AGREEMENT - TDS TELECOMMUNICATIONS CORPORATION ("TDS")
On May 18, 1998, 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
acquired pay telephones were 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.
The Company recorded the above acquisition as a purchase and included
the operating results of the acquired assets in the statements of operations
from the date of acquisition. The purchase price and the cost to upgrade the
equipment has been allocated to property and equipment and is being depreciated
over the remaining estimated economic lives of the acquired assets.
The unaudited pro forma results of operations for 1998, assuming the
acquisition occurred at the beginning of the year, has not been presented
because the effect on such operating results would not be significant.
7. 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
F-14
48
at the beginning of the most recent period prior to the announcement of such
changes by the FCC. At December 31, 1999 and 2000, accounts receivable included
$10,636 and $6,561, respectively arising from dial-around compensation. Payments
related to such receivables are received on a quarterly basis at the beginning
of the second quarter following the quarter in which such revenues are
recognized.
Net revenue from dial-around compensation was $12,454, $13,325, $1,655
and $13,442, for the year ended December 31, 1998, the ten months and seventeen
days ended November 17, 1999, the one month and thirteen days ended December 31,
1999 and the year ended December 31, 2000, respectively. As further discussed
below, the amount recorded as revenue in 2000 reflects a reduction in revenues
in the fourth quarter to more closely reflect the actual number of calls for
which the Company expects to be compensated. The amount recorded as revenue in
1998 included a retroactive adjustment of $3,733 to reflect a reduction in the
dial-around compensation rate applicable to prior years. Of this amount, $3,222
relates to the Company's 1997 fiscal year and $511 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 per phone based on 131
calls), the net revenue for dial-around calls would have been $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 (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
local exchange carriers ("LECs") to 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.
Thereafter, the FCC 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 using a market-based method for calculating the amount of dial-around
compensation and further determined that the method of allocating payment among
IXCs was erroneous. In July 1997, the Appeals Court vacated the 1996 Payphone
Order and remanded it 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 method 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 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 1996 and 1997 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
F-15
49
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, issues related to technological
advances, and expected 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 April 1999. 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
decrease in the per-call compensation rate to the Adjusted Default Rate.
The 1999 Payphone Order has been appealed by various parties. The Appeals
Court heard oral arguments on February 2, 2000 and issued its ruling on the
matter in June 2000. The Appeals Court denied all petitions for review of the
per-call compensation rate and kept in place the Adjusted Default Rate mandated
by the 1999 Payphone Order. 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. However, based on
the lack of progress by the FCC in ordering a true-up for underpayments by IXCs
during the First Phase and a true-up to the Adjusted Default Rate for the
November 1996 to April 1999 period, as well as the Company's historical
collection experience, the Company has recorded a bad debt loss of $4,944 in
2000. Of this amount, $4,429 applicable to amounts previously recognized as
revenue for the period November 1996 to September 2000 was recorded in the
fourth quarter of 2000.
In the fourth quarter of 2000, the Company began reporting revenues at a
rate of $27.00 per pay telephone per month based on $0.24 per call and an
estimated 114 calls per pay telephone per month to more closely reflect the
actual number of calls for which the Company expects to be compensated.
8. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1999 and 2000 consisted of the
following:
Estimated Successor Company
Useful Lives ----------------------------------
(in years) 1999 2000
---------- ---------------- --------------
Telephone boards, enclosures and cases 3-10 $ 22,427 $ 23,544
Furniture, fixtures and other equipment 3-5 766 827
Leasehold improvements 2-5 241 241
---------------- --------------
23,434 24,612
Less - accumulated depreciation (693) (5,754)
--------------- --------------
$ 22,741 $ 18,858
================ ==============
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 $8,451, $7,374, $693 and $5,132 for the year ended
December 31, 1998, the ten months and seventeen days ended November 17, 1999,
the one month and thirteen days ended December 31, 1999 and the year ended
December 31, 2000, respectively.
F-16
50
9. INTANGIBLE ASSETS
Intangible assets at December 31, 1999 and 2000 consisted of the following:
[CAPTION]
Successor Company
Amortization ------------------------------
Period 1999 2000
-------------- ---------------- --------------
Location contracts 48-120 months $ 81,266 $ 56,101
Deferred financing costs 24-120 months 2,663 5,027
Non-compete agreements 24-60 months 1,099 1,099
Other 120 months 22 22
---------------- --------------
85,050 62,249
Less: accumulated amortization (1,993) (13,875)
-------------------- -------------
$ 83,057 $ 48,374
================ ==============
Under fresh start reporting, the carrying values of intangible assets were
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 $15,280,
$13,345, $1,623, and $12,337 for the year ended December 31, 1998, the ten
months and seventeen days ended November 17, 1999, the one month and thirteen
days ended December 31, 1999, and the year ended December 31, 2000,
respectively. Amortization of deferred financing costs is included as a
component of interest expense in the accompanying consolidated statements of
operations.
As part of the Company's continuing program to evaluate the profitability
of its pay telephones, the Company wrote-off the carrying value of location
contracts for 1,839 and 3,376 pay telephones removed from service in 1999 and
2000, respectively. The Company recorded a loss of $864 in the ten months and
seventeen days ended November 17, 1999 and a loss of $6,418 in the year ended
December 31, 2000 relating to the write-off of these abandoned location
contracts. The Company also evaluated the carrying value of its remaining
payphones and location contracts in each of the Company's operating districts.
In certain operating districts, the carrying value of the Company's payphone
assets exceeded the estimated undiscounted future cash inflows and the Company
recorded an impairment loss of $14,787 to reduce the carrying value of such
assets to its fair value at December 31, 2000. Fair value was determined based
on the estimated market value of such payphone assets. The asset impairment loss
and the write-off of abandoned location contracts is included in charges
relating to locations contracts in the accompanying consolidated statements of
operations.
10. 12% SENIOR NOTES AND EXTRAORDINARY ITEMS
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. The net proceeds of $119,149 were used to complete certain
business acquisitions in January 1997, to repay other outstanding indebtedness,
and for general corporate purposes.
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 discussed in
Note 3, 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:
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
=============
F-17
51
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 Company's Credit Agreement.
11. LONG-TERM DEBT AND OTHER LIABILITIES
Long-term debt at December 31, 1999 and 2000 consisted of the following:
Successor Company
------------------------------
1999 2000
---------------- ----------
Exit Financing Agreement, contractually due January 1, 2002 with
interest payable monthly at 3% above
the base rate (12.5% at December 31, 2000) $ 48,799 $ 51,611
Warrant Put Obligation and Note Payable 1,010 1,062
Other notes payable 5 36
---------- -----------
49,814 52,709
Less current portion of long-term debt (1,172) (51,647)
----------- -----------
$ 48,642 $ 1,062
========== ===========
Following are maturities of long-term debt, as adjusted for amounts
reclassified as current, for each of the next five years:
2001 $ 51,647
2002 -
2003 -
2004 1,062
2005 -
----------------
$ 52,709
================
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"), a significant shareholder of the
Company's common equity, was Agent for the Lenders. On May 8, 1998, the Company
amended the Credit Agreement and Foothill Capital Corporation ("Foothill"), as
replacement Agent and Lender, assumed all of the rights and obligations of the
former Lenders. Under the Credit Agreement, the revolving credit commitment was
$20,000 and the expansion loan commitment was $20,000. Interest was payable
monthly in arrears at 2% above the Lender's reference rate 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 this amendment to the Credit Agreement, of
which $328 was included in other unusual charges and contractual settlements in
the Company's consolidated statements of operations in 1998.
In April 1999, the Company received a commitment from Foothill to provide
$45,900 in debtor-in-possession financing ("D.I.P." financing) in anticipation
of the Case described in Note 3. The Company incurred $250 in fees relating to
an additional advance and a $250 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 due
to the write-off of deferred financing costs related to the Credit Agreement in
1999.
F-18
52
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 was originally scheduled to mature 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 was
originally 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.
At December 31, 2000, the Company was not in compliance with certain
financial covenants under the Exit Financing Agreement. In addition, the Company
has not paid the monthly interest that was originally due on February 1 and
March 1, 2001 nor the deferred line fee that was originally due on November 17,
2000. Effective November 13, 2000, February 1, 2001, and March 1, 2001, the
Company executed amendments to the Exit Financing Agreement (the "Amendments")
which extended the due date of the deferred line fee to April 1, 2001 and the
maturity date of the Exit Financing Agreement to January 1, 2002. The Amendments
also provide for the capitalization of interest that was originally due on
February 1 and March 1, 2000 as part of the principal balance and waives the
default as of December 31, 2000 for the Company's failure to comply with certain
financial covenants. Although the lenders have waived the default by the Company
at December 31, 2000, there can be no assurances that the Company will be able
to pay the deferred line fee or the monthly interest as such amounts become due
or comply with all financial covenants through the remainder of 2001. If a
default occurs with respect to the Company's Exit Financing Agreement, this
obligation, at the option of the lenders, could become immediately due and
payable. Accordingly, the Company classified the amounts due under the Exit
Financing Agreement as a current liability at December 31, 2000.
F-19
53
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 ("Series A Preferred") 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.
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.
12. 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 2005.
Future minimum noncancellable payments under operating leases are as
follows:
2001 $ 1,526
2002 932
2003 505
2004 48
2005 -
---------------
$ 3,011
===============
Rent expense under all operating leases was $2,622, $2,269, $299 and $2,514
for the year ended December 31, 1998, the ten months and seventeen days ended
November 17, 1999, the one month and thirteen days ended December 31, 1999 and
the year ended December 31, 2000, respectively.
13. INCOME TAXES
No provisions for income tax were required and no income taxes were paid
for the years ended December 31, 1998, 1999 and 2000 because of operating losses
generated by the Company. In 1999, the Company had 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
F-20
54
required and no income taxes were payable for the year ended December 31, 1999.
Deferred tax assets and (liabilities) at December 31, 1999 and 2000 are as
follows:
[CAPTION]
Successor Company
----------------------------------
1999 2000
---------------- --------------
Federal net operating loss carryforward $ 398 $ 6,476
Depreciation and amortization 4,150 6,842
Allowance for doubtful accounts receivable 454 28
---------------- --------------
Gross deferred tax assets 5,002 13,346
Basis adjustment to assets-fresh start reporting (440) -
Valuation allowance on deferred tax assets (4,562) (13,346)
--------------- --------------
Net deferred tax assets $ - $ -
================ ==============
A valuation allowance equal to the net deferred tax assets has been
provided because 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 $19,047 will
expire in the year 2018 and 2020. The tax benefit of any 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 from years prior to
the Restructuring. 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 certain
intangibles, which is not deductible for tax purposes, and the valuation
allowance on deferred tax assets.
14. 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 $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 3, the Successor Company issued 325,000 shares of
Common Stock and 722,200 New Warrants in exchange for the 14% Preferred.
F-21
55
15. COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY
Common Stock and Other Shareholders' Equity at December 31, 1999 and 2000
consisted of the following:
Successor Company
------------------------------------
1999 2000
---------------- ----------------
Common Stock (Successor Company) ($0.01 par value- 10,188,630 and
10,189,684 shares issued and outstanding at December 31, 1999
and 2000, respectively) $ 102 $ 102
Additional paid-in capital 63,390 63,429
Accumulated deficit (2,694) (51,100)
---------------- ----------------
$ 60,798 $ 12,431
================ ================
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 was 15,000,000 shares of Common Stock. On July 18, 2000, the
shareholders approved an amendment to the Amended and Restated Articles of
Incorporation to increase the total authorized capital stock of the Successor
Company to 45,000,000 shares of Common Stock.
Effective November 17, 1999, the Company issued 10,205,000 shares of
Common Stock (Successor Company) upon consummation of the Company's Prepackaged
Plan. Prior to the Consumation Date, the Predecessor Company was authorized to
issue up to 50,000,000 shares of Common Stock, $0.01 par value, and had
18,754,133 shares issued and outstanding. As discussed in Note 3, the Successor
Company issued 175,000 shares of Common Stock and 388,900 New Warrants in
exchange for the Common Stock (Predecessor Company). The Predecessor Company was
also authorized to issue up to 250,000 shares of Series A Special Convertible
Preferred Stock, $0.20 par value, $0.20 stated value, none of which were
outstanding as of the Consumation Date.
STOCK WARRANT ACTIVITY
Activity for warrants exercisable into Common Stock during 1998, 1999
and 2000 was as follows:
Number Weighted Average
Predecessor Company of Shares Exercise Price
------------------- ---------- --------------
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 - -
==========
Successor Company
-----------------
NOVEMBER 17, 1999 - Granted pursuant
to Prepackaged Plan 1,111,100 10.50
Canceled - settlement of Series A
Warrant Put Obligation (36,379) 10.50
-----------
BALANCE, DECEMBER 31, 1999 1,074,721
Exercised and other capital transactions 2,303 10.50
-----------
BALANCE, DECEMBER 31, 2000 1,077,024 10.50
===========
All warrants outstanding at each period end were exercisable.
F-22
56
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.
On November 13, 1998, a former lender exercised Series A Warrants to
purchase 100,875 shares of Series A Preferred and immediately converted its
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 11.
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. All outstanding options to purchase Common Stock (Predecessor
Company) were canceled in 1999.
On November 17, 1999, pursuant to the terms of the Prepackaged Plan,
the Company adopted the 1999 Management Incentive Plan (the "1999 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.
On December 27, 1999, 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 Plan.
Such options became vested on the date of grant and expire December 26, 2002. 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. On April 1, 2000,
options to purchase an additional 50,000 shares at an exercise price of $1.16
per share were granted to an officer of the company pursuant to the 1999 Plan.
No compensation expense was recorded because the exercise prices of these
options were equal to the market value of the Company's shares on the respective
dates of grant. Such options vest equally over a three-year period beginning one
year from the date of grant and expire after five years.
F-23
57
On May 23, 2000, the Company granted options to purchase 75,000 shares
of Common Stock (Successor Company) to an officer of the Company pursuant to an
employment agreement. Such options vest immediately, have an exercise price of
$0.01 per share, and expire three years after the date of grant. The Company
recorded $28 of compensation expense under the intrinsic value method of
accounting relating to these options.
Activity for stock options exerciseable into Common Stock (Predecessor
Company) during 1998, 1999 and 2000 was as follows:
Number Weighted Average
Predecessor Company of Shares Exercise Price
------------------- ---------- --------------
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 -
=========
Successor Company
-----------------
Granted to Directors 85,000 1.14
-----------
BALANCE, DECEMBER 31, 1999 85,000 1.14
Granted:
1999 Management Incentive Plan 243,000 1.48
To officer 75,000 .01
-----------
Total options granted 318,000 1.13
Canceled (2,000) 1.56
-----------
BALANCE, DECEMBER 31, 2000 401,000 1.13
===========
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 and directors 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 5.95% for 1998, 6.29% for 1999 and 6.57% for 2000; (iii) expected life equal
to the period of time remaining in which the options or warrants can be
exercised; and (iv) expected volatility of 85% in 1998, 74% in 1999 and 72% in
2000. There were no compensation costs charged to operations in 1998 and 1999
for stock options issued to employees. In 2000, the Company recorded $28 of
compensation expense using the intrinsic value method of
F-24
58
accounting. 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:
Ten Months One Month and
Year and Seventeen Thirteen Days Year
Ended Days Ended Ended Ended
December 31 November 17 December 31 December 31
1998 1999 1999 2000
----------- ----------- ----------- -----------
Net income (loss):
As reported ($44,817) $40,288 ($2,694) ($48,406)
Pro forma (46,418) 43,302 (2,745) (48,520)
Net income (loss) per share
(basic and diluted):
As reported (2.73) 2.08 (0.26) (4.75)
Pro forma (2.83) 2.24 (0.27) (4.76)
The weighted average fair value of options and warrants granted to
employees and directors was $0.42 in 1998, $0.03 in the ten months and seventeen
days ended November 17, 1999, $0.60 in the one month and thirteen days ended
December 31, 1999 and $0.79 in 2000. All options and warrants that were
outstanding prior to November 17, 1999 were canceled pursuant to the Company's
Prepackaged Plan. Under SFAS No. 123, the pro forma 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.
The following is a summary of the status of options and warrants outstanding at
December 31, 2000:
Options and Warrants Outstanding Options and Warrants Exercisable
-------------------------------------------------------------------- ---------------------------------
Weighted Average
Exercise Price Remaining Weighted Average Weighted Average
Range Number Contractual Life Exercise Price Number Exercise Price
----- ------ ---------------- -------------- ------ --------------
$0.00-$0.01 75,000 2.4 years $0.01 75,000 $0.01
1.14-1.56 326,000 3.6 years 1.39 85,000 1.14
10.50 1,077,024 1.9 years 10.50 1,077,024 10.50
16. 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.
In January 2001, the Tennessee Regulatory Authority (the "TRA") denied a
petition for stay of its prior order, which required certain LECs to refund to
payphone service providers amounts billed since April 1997 for local line access
in excess of the applicable LEC's cost plus a reasonable profit. In February
2001, the Company received a refund of approximately $500 from one of these
LECs. Although the TRA's order is subject to appeal by the LECs, the Company
expects to receive additional refunds and will recognize such refunds as a
reduction in line and transmission charges during the period in which such
refunds are received.
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59
17. OTHER REVENUES AND OTHER UNUSUAL CHARGES AND CONTRACTUAL SETTLEMENTS
Other revenues include $240 of income in 2000 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:
Predecessor Company Successor Company
------------------------------- ----------------------------
One Month
Ten Months and and
Seventeen Days Thirteen Days
Year Ended Ended Ended Year Ended
December 31 November 17 December 31 December 31
1998 1999 1999 2000
------------- --------------- ------------- -------------
Professional fees and other
costs related to the Prepackaged Plan $ 852 $ 31 $ 78
Settlement of employee
contractual obligations $ 92 - - -
Termination of Davel Merger 1,426 20 - -
Settlement - operator service agreement 545 - - -
Settlement - professional fees - - (364) -
Other contractual settlements 190 - - 284
Amendment to Credit Agreement 328 - - -
Other 181 158 - 217
---------- ----------- ------- ----------
$ 2,762 $ 1,030 $ (333) $ 579
========== =========== ====== ==========
F-26
60
18. QUARTERLY RESULTS (UNAUDITED)
The following is a summary of unaudited results of operations for the years
ended December 31, 1999 and 2000.
Quarter Ended 2000
(Successor Company) March 31 June 30 September 30 December 31
- ------------------- -------- ------- ------------ -----------
Revenues as previously reported $16,027 $17,008 $17,941 $14,304
Reclassification - SAB No. 101 (1,478) (1,647) (1,924) (1,387)
-------- -------- -------- --------
Revenues as reclassified 14,549 15,361 16,017 12,917
Net loss (5,492) (4,914) (7,814) (30,186)
Net loss per common share,
basic and diluted (0.54) (0.48) (0.77) (2.96)
Quarter Ended 1999
(Predecessor Company, through
November 17, 1999)
- ------------------------------
Revenues as previously reported 19,783 19,981 20,580 17,285
Reclassification - SAB No. 101 (2,382) (2,209) (2,418) (2,054)
-------- -------- -------- --------
Revenues as reclassified 17,401 17,772 18,162 15,231
Loss before extraordinary item (10,688) (9,934) (10,928) (8,028)
Net income (loss) (10,688) (9,934) (13,022) 71,238
Loss per common share before
extraordinary item, basic and diluted (0.59) (0.55) (0.61) --
Net loss per common share,
basic and diluted (0.59) (0.55) (0.72) --
In the fourth quarter of 2000, the Company adopted SAB No. 101 which
requires the Company to report long distance revenues from operator service
providers net of telecommunication and validation fees. Such fees, which were
previously presented as operating expenses, were reclassified as a reduction of
revenues in prior quarters to conform to the presentation in the fourth quarter
of 2000.
During the fourth quarter of 2000, the Company recorded a loss on asset
impairment relating to location contracts of $14,787 ($1.45 per share). The
Company also wrote-off the carrying value of abandoned location contracts of
$864, $2,880 and $3,538 ($0.05, $0.28 and $0.35 per share) during the quarters
ended September 30, 1999, September 30, 2000 and December 31, 2000, respectively
(see Note 9). In the fourth quarter of 2000, the Company recorded a provision
for uncollectible accounts receivable relating to dial-around compensation of
$4,429 ($0.43 per share) to more closely reflect the actual number of
dial-around calls for which the Company expects to be compensated.
The per share amounts presented above for the Successor Company are not
comparable to the per share amounts for the Predecessor Company due to the
adoption of fresh start reporting and the change in the number of Common Shares
outstanding upon consummation of the Company's Prepackaged Plan. Per share
amounts for the fourth quarter of 1999 have not been presented because such
amounts would not be meaningful or comparable to any other quarter due to the
change in the number of Common Shares resulting from the Company's
Reorganization.
F-27
61
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
----------------- ------------------- ------------------------- -------------------
Balance Additions Deductions for
at charged (credited) write-offs and Balance
beginning to costs, expenses fresh start at end
of period or tax benefit reporting of period
----------------- ------------------- ------------------------- -------------------
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, 1999
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
YEAR ENDED DECEMBER 31, 2000
Allowances deducted from related
balance sheet accounts:
Accounts Receivable 1,339 4,944 (6,199) 84
Deferred Tax Assets 4,562 8,784 13,346
Intangible Assets 1,993 16,920 (5,038) 13,875
F-28
62
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.
April 2, 2001 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.
Name Title Date
- ---- ----- ----
/s/ John D. Chichester President, April 2, 2001
- ----------------------------- Chief Executive Officer,
John D. Chichester and Director
/s/ Richard P. Kebert Chief Financial Officer, April 2, 2001
- ----------------------------- Treasurer and Secretary
Richard P. Kebert
/s/ Eugene I. Davis Director April 2, 2001
- -----------------------------
Eugene I. Davis
/s/ Peter G. Graf Director April 2, 2001
- -----------------------------
Peter G. Graf
/s/ Kevin Schottlaender Director April 2, 2001
- -----------------------------
Kevin Schottlaender
/s/ Bruce Ferguson Director April 2, 2001
- -----------------------------
Bruce Ferguson
63
EXHIBIT INDEX
10.14 Amendment Number Three to Loan and Security Agreement dated as of
February 1, 2001 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, as amended, between Borrowers and Lenders.
10.15 Amendment Number Four to Loan and Security Agreement dated as of March 1,
2001 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, as amended, between Borrowers and Lenders.
21 Subsidiaries of PhoneTel Technologies, Inc.
- ----------------