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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
--------------
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE TRANSITION PERIOD FROM_____ TO_____.
COMMISSION FILE NUMBER 0-16715
PHONETEL TECHNOLOGIES, INC.
---------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-1462198
---- ----------
(STATE OF OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
NORTH POINT TOWER, 7TH FLOOR, 1001 LAKESIDE AVENUE, 44114-1195
- ---------------------------------------------------- ----------
CLEVELAND, OHIO (ZIP CODE)
- ---------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(216) 241-2555
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(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: AS OF MAY 8, 1998,
16,551,507 SHARES OF THE REGISTRANT'S COMMON STOCK, $.01 PAR VALUE, WERE
OUTSTANDING.
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PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1997
and March 31, 1998...............................................................3
Consolidated Statements of Operations for the Three
Months Ended March 31, 1997 and 1998.............................................4
Statements of Changes in Mandatorily Redeemable Preferred
Stock as of December 31, 1997 and March 31, 1998.................................5
Statements of Changes in Non-mandatorily Redeemable Preferred Stock,
Common Stock and Other Shareholders' Equity (Deficit) as of
December 31, 1997 and March 31, 1998.............................................6
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1997 and 1998.............................................7
Notes to Consolidated Financial Statements...........................................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....................................14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................19
Signatures.......................................................................................................20
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
(UNAUDITED)
DECEMBER 31 MARCH 31
1997 1998
----------- -----------
ASSETS
Current assets:
Cash $ 6,519 $ 5,023
Accounts receivable, net of allowance for doubtful
accounts of $507 and $548, respectively 16,278 18,403
Other current assets 972 1,342
--------- ---------
Total current assets 23,769 24,768
Property and equipment, net 30,109 29,021
Intangible assets, net 115,607 112,218
Other assets 341 478
--------- ---------
$ 169,826 $ 166,485
========= =========
LIABILITIES AND EQUITY
Current liabilities:
Current portion:
Long-term debt $ 544 $ 432
Obligation under capital leases 92 71
Accounts payable 8,768 7,644
Accrued expenses:
Location commissions 3,142 1,822
Personal property and sales tax 1,927 2,487
Interest 991 4,500
Salaries, wages and benefits 466 698
Other -- 160
--------- ---------
Total current liabilities 15,930 17,814
Long-term debt 150,203 153,112
Obligations under capital leases 19 10
Commitments and contingencies -- --
14% cumulative preferred stock mandatorily redeemable
(redemption amount $8,579 due June 30, 2000) 7,716 8,044
Non-mandatorily redeemable preferred stock,
common stock and other shareholders' equity (deficit) (4,042) (12,495)
--------- ---------
$ 169,826 $ 166,485
========= =========
The accompanying notes are an integral part of these financial statements.
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PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
1997 1998
---------- ----------
REVENUES:
Coin calls $ 14,127 $ 13,188
Non-coin telecommunication services 13,211 10,905
Other 320 30
---------- ----------
27,658 24,123
---------- ----------
COSTS AND EXPENSES:
Line and transmission charges 6,179 6,916
Telecommunication and validation fees 2,846 2,714
Location commissions 3,169 3,150
Field operations 5,699 5,530
Selling, general and administrative 2,096 3,074
Depreciation and amortization 5,296 6,306
Other unusual charges and contractual settlements - 143
---------- ----------
25,285 27,833
---------- ----------
Income (loss) from operations 2,373 (3,710)
---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (3,800) (4,479)
Interest income 279 37
---------- ----------
(3,521) (4,442)
---------- ----------
NET LOSS ($1,148) ($8,152)
========== ==========
Earnings per share calculation:
Preferred dividend payable in kind (147) (97)
Accretion of 14% Preferred to its redemption value (50) (231)
---------- ----------
Net loss applicable to common shareholders ($1,345) ($8,480)
========== ==========
Net loss per common share ($0.09) ($0.51)
========== ==========
Weighted average number of shares 15,525,902 16,535,846
========== ==========
The accompanying notes are an integral part of these financial statements.
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PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN MANDATORILY REDEEMABLE PREFERRED STOCK
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
- --------------------------------------------------------------------------------
(UNAUDITED)
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
---------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
------- ------- ------- -------
14 % CUMULATIVE REDEEMABLE
CONVERTIBLE PREFERRED STOCK
Balance at beginning of year 120,387 $ 6,708 138,147 $ 7,716
Dividends payable-in-kind 17,760 514 4,835 97
Accretion of carrying value to amount
payable at redemption on June 30, 2000 -- 494 -- 231
Total Mandatorily Redeemable
------- ------- ------- -------
Preferred Stock 138,147 $ 7,716 142,982 $ 8,044
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
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PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN NON-MANDATORILY REDEEMABLE PREFERRED STOCK,
COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS EXCEPT FOR SHARE AMOUNTS)
- --------------------------------------------------------------------------------
(UNAUDITED)
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
--------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
SERIES A SPECIAL CONVERTIBLE
PREFERRED STOCK
Balance at beginning of year -- -- -- --
Exercise of warrants 12,500 $ 3 -- --
Conversion to common stock (12,500) (3) -- --
------------ ------------ ------------ ------------
Balance at end of period -- -- -- --
============ ------------ ============ ------------
COMMON STOCK
Balance at beginning of year 14,488,828 145 16,360,829 $ 164
Company Equity Offering 1,012,500 10 -- --
Exercise of warrants and options 409,754 4 190,678 2
Conversion of Series A Preferred 250,000 3 -- --
Other issuances of stock 199,747 2 -- --
------------ ------------ ------------ ------------
Balance at end of period 16,360,829 164 16,551,507 166
============ ------------ ============ ------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 59,104 62,600
Company Equity Offering 2,815 --
Exercise of warrants and options 101 25
Other issuances of stock 580 --
------------ ------------
Balance at end of period 62,600 62,625
------------ ------------
ACCUMULATED DEFICIT
Balance at beginning of year (42,544) (66,806)
Net loss for the period (23,254) (8,152)
14% Preferred dividends payable-in-kind
and accretion (1,008) (328)
------------ ------------
Balance at end of period (66,806) (75,286)
------------ ------------
Total Non-mandatorily Redeemable
Preferred Stock, Common Stock and
Other Shareholders' Equity (Deficit) $ (4,042) $ (12,495)
============ ============
The accompanying notes are an integral part of these financial statements.
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PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
(UNAUDITED)
THREE MONTHS ENDED MARCH 31
1997 1998
-------- --------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $ (1,148) $ (8,152)
Adjustments to reconcile net loss to net cash flow from operating activities:
Depreciation and amortization 5,296 6,306
Increase in allowance for doubtful accounts 243 239
Amortization of deferred revenues (300) --
Changes in current assets and current liabilities,
net of assets acquired (3,948) (716)
-------- --------
143 (2,323)
-------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisitions (26,148) --
Acquisition deposits (11,000) --
Deferred charges on pending acquisitions (41) --
Deferred charges - commissions and signing bonuses (426) (146)
Proceeds from sale of assets -- 27
Change in other assets (2) (142)
Purchases of property and equipment (983) (904)
-------- --------
(38,600) (1,165)
-------- --------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from debt issuances 69 3,090
Principal payments on borrowings (600) (324)
Proceeds from issuance of common stock 2,825 --
Debt financing costs (812) (801)
Proceeds from warrant and option exercises 5 27
-------- --------
1,487 1,992
-------- --------
Decrease in cash (36,970) (1,496)
Cash at beginning of period 46,438 6,519
-------- --------
Cash at end of period $ 9,468 $ 5,023
======== ========
The accompanying notes are an integral part of these financial statements.
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PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER ENDED MARCH 31, 1998
(IN THOUSANDS OF DOLLARS EXCEPT FOR INSTALLED PUBLIC PAY TELEPHONE, SHARE AND
PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three months ended March 31, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
Certain amounts relating to 1997 have been reclassified to conform to
the current quarter presentation. The reclassifications have had no impact on
total assets, shareholders' equity (deficit) or net loss as previously reported.
2. ACQUISITIONS AND MERGERS
TERMINATION OF PROPOSED ACQUISITION
On March 14, 1997, PhoneTel entered into an Agreement and Plan of
Merger (the "merger agreement") to acquire Communications Central Inc. ("CCI"),
pursuant to which on March 20, 1997 a wholly-owned subsidiary of PhoneTel
commenced a tender offer (the "Offer") for all of the outstanding shares of
common stock of CCI ("CCI Shares") at $12.85 per share in cash. The Offer
expired on August 20, 1997. No CCI Shares were purchased and all CCI Shares
tendered and not properly withdrawn at the time of expiration were returned by
the depository. On August 21, 1997, PhoneTel announced that the Merger Agreement
had been terminated and in connection therewith forfeited a $6,000 deposit that
had been paid to CCI. The Company recorded a charge of $7,818 relating to the
transaction, including the forfeited deposit and $1,818 in professional fees and
related expenses in the third quarter of 1997. In the first quarter of 1997, the
Company paid $5,000 of the $6,000 in acquisition deposits related to this
transaction.
Acquisitions completed during the year ended December 31, 1997:
LONDON COMMUNICATIONS, INC. - JUNE 10, 1997 ("LONDON")
The Company acquired 2,519 installed public pay telephones for $9,514
and incurred related acquisition expenses of $204.
ADVANCE PAY SYSTEMS, INC. - MAY 30, 1997 ("ADVANCE")
The Company acquired 800 installed public pay telephones for $2,709
and incurred related acquisition expenses of $62.
AMERICAN PUBLIC TELECOM, INC. - MAY 30, 1997 ("AMERICAN")
The Company acquired 859 installed public pay telephones for $3,312
and incurred related acquisition expenses of $69.
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COINLINK, LLC - FEBRUARY 14, 1997 ("COINLINK")
The Company acquired 300 installed public pay telephones for $938 and
approximately $4 in related acquisition expenses.
RSM COMMUNICATIONS, INC.- JANUARY 31, 1997 ("RSM")
The Company acquired 292 installed public pay telephones for $1,054 and
incurred acquisition expenses of approximately $7.
AMERICOM, INC. - JANUARY 17, 1997 ("AMERICOM")
The Company acquired 99 installed public pay telephones for $264 and
incurred acquisition costs of $10.
TEXAS COINPHONE - JANUARY 14, 1997 ("TEXAS COINPHONE")
The Company acquired 1,250 installed public pay telephones, parts and
supplies inventories, and certain other assets for $3,660 and incurred related
acquisition expenses of approximately $50.
CHEROKEE COMMUNICATIONS, INC. - JANUARY 1, 1997 ("CHEROKEE")
The Company acquired 13,131 public pay telephones for a purchase price
consisting of: $53,953; $1,250 for non-competition agreements; $4,174 for
acquired outstanding accounts receivable, prepaid expenses, deposits and coin in
the installed pay telephones; and the assumption of $5,443 in liabilities.
Additionally, the Company incurred approximately $1,656 in acquisition related
expenses. At March 31, 1997, $6,000 of contingent consideration was included in
acquisition deposits in the consolidated balance sheets.
PURCHASE PRICE ACCOUNTING
The above transactions have been accounted for as purchases and have
been included in the results of operations from the respective dates of
acquisition. The difference between the total purchase price and the current
assets and liabilities assumed has been allocated to property and equipment,
location contracts and non-compete agreements based on the relative fair values.
Fair values of location contracts are determined using discounted cash flows
over the remaining estimated economic lives of the acquired location contracts.
The amount of the location contracts and non-competition agreements recorded for
each acquisition and the estimated economic life of the acquired location
contracts are as follows: London $8,608, 102 months; Advance $2,313, 120 months;
American $2,763, 103 months; Coinlink $838, 103 months; RSM $956, 100 months;
Americom $243, 120 months; Texas Coinphone $3,097, 101 months; Cherokee $53,103,
113 months. Acquired property and equipment is depreciated over three to five
years.
PRO FORMA FINANCIAL DATA (UNAUDITED)
Set forth below is the Company's unaudited pro forma condensed
statement of operations data as though the London, Advance, and American
acquisitions had occurred at the beginning of 1997.
Pro Forma Statement of Operations Data
Three Months Ended March 31, 1997
---------------------------------
Total revenues $30,508
Net loss ( 1,548)
Net loss applicable to
common shareholders ( 1,746)
Net loss per common share ( 0.11)
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The unaudited pro forma results above are not necessarily indicative of
either actual results of operations that would have occurred had the
acquisitions been made at the beginning of 1997 or of future results. The pro
forma statement of operations data includes adjustments related to the
depreciation and amortization of tangible and intangible assets, interest
expense on borrowings used to finance the acquisitions and the weighted average
number of common shares outstanding after giving effect to the acquisitions and
excludes the assets and results of operations not acquired.
3. ACCOUNTS RECEIVABLE AND DIAL-AROUND COMPENSATION
At December 31, 1997 and March 31, 1998, accounts receivable included
$12,938 and $16,109 respectively, arising from dial-around compensation. A
dial-around call occurs when a non-coin call is placed from the Company's public
pay telephone which utilizes any carrier other than the presubscribed carrier
(the Company's dedicated provider of long distance and operator assisted calls).
Such receivables are received quarterly in arrears. For the three months ended
March 31, 1997 and 1998, revenues from non-coin telecommunication services
included $5,607 and $4,833 respectively, for dial-around compensation.
Effective November 6, 1996, pursuant to the rules and regulations
promulgated by the FCC under Section 276 of the Telecommunications Act (the
"1996 Payphone Order"), the Company was to receive dial-around compensation of
$45.85 per installed pay telephone per month from November 6, 1996 through
October 6, 1997 (as compared with the flat fee of $6.00 per installed pay
telephone per month in periods prior to November 6, 1996), and per-call
compensation thereafter, at $0.35 per call from October 7, 1997 to October 6,
1998 (as compared with the flat fee of $45.85 per installed pay telephone per
month) and thereafter, at a per-call rate equal to the local coin rate for each
dial-around call.
Several parties, including interexchange carriers ("IXCs"), filed
petitions with the U. S. Court of Appeals for the District of Columbia Circuit
(the "Court") for review of certain of the FCC regulations, including the
dial-around compensation rate. In 1997, the Court vacated certain portions of
the 1996 Payphone Order, including the dial-around compensation rate, and
remanded the issue to the FCC for further consideration.
On October 9, 1997, the FCC issued its Second Report and Order (the
"1997 Payphone Order") which established a new dial-around compensation rate,
effective October 7, 1997, of $0.284 per call (the market based local coin rate
estimated at $0.35 less certain costs defined by the FCC as $0.066 per call)
multiplied by the actual number of dial-around calls placed from a pay
telephone. Furthermore, the 1997 Payphone Order tentatively concluded that the
dial-around compensation rate of $0.284 per call would be used to calculate
dial-around compensation for the period November 6, 1996 to October 7, 1997.
Evidence initially presented by a pay telephone industry trade association as
part of the Court of Appeals proceeding indicated that the average number of
dial-around calls placed from independent pay telephones equaled 131 calls per
month.
Based on the FCC's tentative conclusions in the 1997 Payphone Order, in
the third quarter of 1997 the Company adjusted the amount of dial-around
compensation recorded in prior quarters from the initial $45.85 rate to $37.20
(131 calls per installed pay telephone per month). Included in this adjustment
was a net charge of $965 for dial-around compensation relating to the first
quarter of 1997. This adjustment amount was included in other unusual charges
and contractual settlements in the third quarter of 1997.
On March 9, 1998, the Common Carrier Bureau of the FCC issued a
Memorandum Opinion and Order (the "Memorandum") which, among other things,
granted a waiver of the time frame previously scheduled and established a
timetable for local exchange carriers to implement a system for identifying
dial-around calls placed from pay telephones ("ANI Identification"). This
Memorandum reiterated the obligation of the IXCs to pay, by April 1, 1998,
$0.284 per call based on the actual number of dial-around calls per pay
telephone if such call data is available. In its Memorandum, the FCC recognized,
given its waiver and extension of the time frame set for certain IXCs for the
implementation of ANI Identification, that certain disputes between carriers and
pay telephone providers were likely to arise about the true number of
compensable calls. Therefore, the FCC identified the
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potential need for it to address true-up requirements for dial-around
compensation in a subsequent order and clarified that the timing of the
subsequent order in no way relieved or delayed the obligations of IXCs to pay
compensation on April 1, 1998. In the first quarter of 1998, the Company has
recorded revenues of $4,833 for dial-around compensation at a rate of $37.20 per
installed pay telephone per month, based on 131 calls per month. As of May 15,
1998, the Company has received $1,570 of the $4,734 receivable relating to
fourth quarter 1997 dial-around compensation.
Certain IXCs have asserted in the past, are asserting and are expected
to assert in the future that the appropriate level of fair compensation should
be lower than the $0.284 per call. A number of parties filed a Motion to Stay
the 1997 Payphone Order pending judicial review and requested expedited
consideration and briefing schedule with the Court. The Court denied the Motion
to Stay and granted the Motion for Expedited Consideration and Briefing
Schedule. On May 7, 1998, the Court heard oral arguments on the appeals
regarding the FCC's Payphone Order. On May 15, 1998 the Court of Appeals issued
an opinion which remanded the Second Report and Order to the FCC for further
consideration in order to justify that dial-around compensation should be based
on the deregulated local coin rate. The Court of Appeals elected not to vacate
the $0.284 per call rate on the understanding that if and when on remand the FCC
establishes some different rate of fair compensation for dial-around calls, the
FCC may adjust the dial-around compensation rate retroactively should the
equities so dictate. Further, the Court stated that if, within 6 months from the
date of issuance of their order, the FCC fails to adequately respond to the
Court's remand, any adversely affected party may request effective relief from
the Court.
Based on the information available, the Company believes that the minimum
amount it is entitled to as fair compensation under the Telecommunications Act
for the period from November 7, 1996 through March 31, 1998 is $37.20 per pay
telephone per month based on $0.284 per call and 131 calls per pay telephone per
month. Further, the Company does not believe that it is reasonably possible that
the amount will be materially less than $37.20 per pay telephone per month.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Estimated
Useful Lives December 31 March 31
(in years) 1997 1998
---------- ---- ----
Telephones, boards, enclosures and cases 3-10 $41,653 $ 42,375
Furniture, fixtures and other equipment 3-5 3,063 3,182
Leasehold improvements 2-5 424 463
------- ----------
45,140 46,020
Less - accumulated depreciation ( 15,031) ( 16,999)
-------- ---------
$30,109 $ 29,021
======= ==========
5. INTANGIBLE ASSETS
Intangible assets consisted of the following:
Amortization Period December 31 March 31
(in months) 1997 1998
----------- ---- ----
Location contracts 60-120 $ 126,775 $ 126,856
Deferred financing costs 120 10,254 11,055
Non-competition agreements 24-60 3,731 3,731
State operating certifications 60 567 571
------------ -------------
141,327 142,213
Less: Accumulated amortization ( 25,720) ( 29,995)
----------- ------------
$ 115,607 $ 112,218
============ =============
6. AMENDMENTS TO CREDIT AGREEMENT
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On May 30, 1997, the Company entered into an agreement (the "Credit
Agreement") with various lenders which were or may, thereafter, become parties
thereto (collectively referred to as the "Lenders"). ING (U.S.) Capital
Corporation ("ING") was Agent for the Lenders and Transamerica Business Credit
Corporation and Finova Capital Corporation were Co-Agents for the Lenders. ING
is a significant shareholder of the Company's common equity. The Credit
Agreement provided a $75,000 commitment of which $60,000 was to be utilized for
future acquisitions ("Expansion Loan Commitment"), and $15,000 was to be
utilized for general working capital requirements. Borrowings accrue interest at
the ING Alternate Base Rate (as defined in the Credit Agreement) plus 1.50%. The
Credit Agreement matures on May 20, 2000 and all the Company's installed public
pay telephones are pledged as collateral. The Company borrowed $17,700 under the
Expansion Loan Commitment to complete the acquisitions of Advance, American, and
London and to pay related acquisition and credit facility fees. The Company also
borrowed $7,300 of the Revolving Credit Commitment for interest payments due
under the $125,000 12% Senior Notes and for general working capital purposes.
Subsequent to the September 16, 1997 Court ruling which vacated dial-around
compensation (see Note 3), and pursuant to certain terms of the Credit
Agreement, the agent gave notice to the Company that it was prohibited from
making additional borrowings under the Credit Agreement, without prior approval
from the Lenders.
The Credit Agreement includes covenants which, among other things, require
the Company to maintain ratios as to fixed charges, debt to earnings, current
ratio and interest coverage (all as defined in the Credit Agreement). Other
covenants limit incurrence of additional long-term debt, the level of capital
expenditures, the incurrence of lease obligations and permitted investments.
On February 24, 1998, the Credit Agreement was amended to increase the
Revolving Credit Commitment to $20,000 and to decrease the Expansion Loan
Commitment to $55,000 (the "First Amendment"). The amount available for
letters of credit under the working capital commitment was reduced from $5,000
to $3,000 and certain of the covenants were amended. On February 24, 1998, the
Company was permitted to borrow an additional $3,000 for working capital
purposes under the Revolving Credit Commitment. On March 31, 1998, the Credit
Agreement was further amended with respect to certain financial covenants (the
"Second Amendment").
On May 8, 1998, the Company amended the Credit Agreement (the "Third
Amendment") and Foothill Capital Corporation, as replacement Agent and Lender,
assumed all of the rights and obligations of the former Lenders. Under the Third
Amendment the Revolving Credit Commitment is $20,000 and the Expansion Loan
Commitment is $20,000. Interest is payable monthly in arrears at 2% above the
Lender's reference rate (as defined in the Third Amendment) and the maturity
date of the Credit Agreement is extended to May 8, 2001. Certain financial
covenants under the Credit Agreement were also amended. The Company incurred
$668 in fees and expenses related to this amendment to the Credit Agreement
which provides the Company with immediate access to approximately $12,000 to
fund expansion and working capital needs.
7. PREFERRED STOCK MANDATORILY REDEEMABLE
Mandatorily redeemable preferred stock consisted of the following:
December 31 March 31
1997 1998
---- ----
14% Cumulative Redeemable Convertible Preferred Stock ($60 stated value
- 200,000 shares authorized; 107,918 shares issued and outstanding,
cumulative dividends issuable of 30,229 shares at December 31, 1997
(valued at $851) and 35,064 shares at March 31, 1998, (valued at $947);
mandatory redemption amount of $8,579 due June 30, 2000 $ 7,716 $ 8,044
The Company records dividends, declared and undeclared, at their fair
market value and recognizes the difference between the carrying value of the 14%
Preferred and the mandatory redemption amount, through monthly accretions, using
the interest method. For the three months ended March 31, 1998, the carrying
value of the 14% Preferred was increased by $231 through accretions. Each share
of 14% Preferred is entitled to receive a
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quarterly dividend of 0.035 shares of 14% Preferred. Each share of 14% Preferred
is convertible into 10 shares of Common Stock.
8. NON-MANDATORILY REDEEMABLE PREFERRED STOCK, COMMON STOCK AND OTHER
SHAREHOLDERS' EQUITY (DEFICIT)
Non-mandatorily redeemable preferred stock, common stock, and other
shareholders' equity (deficit) consisted of the following:
December 31 March 31
1997 1998
Series A Special Convertible Preferred Stock ($0.20 par value, $0.20
stated value - 250,000
shares authorized; no shares issued) --
Common Stock
($0.01 par value - 50,000,000 shares authorized; 16,360,829 and
16,551,507 shares issued and outstanding at December 31, 1997 and
March 31, 1998,
respectively) $ 164 $ 166
Additional paid-in capital 62,600 62,625
Accumulated deficit (66,806) (75,286)
-------- --------
$ (4,042) $(12,495)
======== ========
In January 1998, warrants for 190,678 shares of Common Stock (including
179,996 Nominal Value Warrants) were exercised by their holders. The Company
received proceeds of $27 from the exercise of these warrants.
9. CONTINGENCIES
The Company, in the course of its normal operations, is subject to
regulatory matters, disputes, claims and lawsuits. In management's opinion, all
such outstanding matters of which the Company has knowledge, have been reflected
in the financial statements and are covered by insurance or will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
On September 5, 1997, a complaint against the Company was filed in the
Common Pleas Court of Cuyahoga County, Ohio by Infosystems Resources, Inc.
alleging breach of contract, tortious interference with contract and conversion
of trade secrets. The suit involves a dispute regarding commissions payable
under an operator services agreement. Each of the four counts included a prayer
for damages in the amount to $260,161 and three of the counts included requests
for $10,000 in punitive damages. An additional claim for injunctive relief also
was included. On March 13, 1998, the Company filed a motion for sanctions
including dismissal. The court has not ruled on that motion. Management intends
to vigorously contest the allegations set forth in the complaint, believes the
allegations contained therein are without merit and is of the opinion that this
suit will not have a materially adverse effect on the business, financial
condition or results of operations of the Company.
10. CONDENSED CONSOLIDATING FINANCIAL STATEMENT DATA
The Company's wholly-owned subsidiary, Cherokee Communications, Inc.
("Cherokee") which was acquired January 1, 1997, is a guarantor of the $125,000
12% Senior Notes, due 2006. The following are the condensed consolidating
financial statements of PhoneTel and Cherokee as of March 31, 1998, and for the
quarter ended March 31, 1998.
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Condensed Consolidating Financial Statements
Balance Sheet, at March 31, 1998
PhoneTel Cherokee(a) Eliminations Consolidated
Current assets $ 15,938 $ 8,830 - $ 24,768
Property and equipment, net 23,268 5,753 - 29,021
Intangible assets, net 70,917 41,301 - 112,218
Other non-current assets 59,007 6,700 ($ 65,229) 478
----------- ------------ ---------- --------------
Total $ 169,130 $ 62,584 ($ 65,229) $ 166,485
=========== ============ ========= ==============
Current liabilities $ 7,922 $ 9,892 - $ 17,814
Inter-company debt - 65,229 ($65,229) -
Long-term debt and capital leases 152,308 814 - 153,122
14% Preferred stock 8,044 - - 8,044
Other equity (deficit) 856 ( 13,351) - ( 12,495)
----------- ------------ --------- --------------
Total $ 169,130 $ 62,584 ($65,229) $ 166,485
=========== ============ ========= ==============
Statement of Operations, for the quarter ended March 31, 1998
Total revenues $ 14,759 $ 9,364 - $ 24,123
Operating expenses 18,019 9,814 - 27,833
----------- ------------ --------- --------------
Loss from operations ( 3,260) ( 450) - ( 3,710)
Other income (expense), net ( 2,436) ( 2,006) - ( 4,442)
----------- ------------ --------- --------------
Net loss ($ 5,696) ($ 2,456) - ($ 8,152)
=========== ============ ========= ==============
(a) The Cherokee separate financial statement data reflects the push
down of the Company's debt, related interest expense and allocable debt
issue costs associated with the Company's acquisition of Cherokee.
11. FINANCIAL CONDITION
The Company's working capital, liquidity and capital sources may be
limited by its ability to generate sufficient cash flows from its operations or
its investment or financing activities. Cash flow from operations depends on
revenues from coin and non-coin sources. There can be no assurance that coin
revenues will increase, that revenues from dial-around compensation will
continue at rates anticipated and be received by the Company in the amounts
recorded as receivables, or that operating expenses can be maintained at present
or reduced levels. To the extent that cash flows from operating activities or
amounts available to be borrowed under the Credit Agreement are insufficient to
meet the Company's cash needs, there can be no assurance that the Company's debt
holders will permit or that the Company can obtain additional financing to meet
its debt service and other cash requirements. In the event the Company fails to
meet its debt service, such debt could become immediately due and payable.
Management believes, but cannot assure, that cash flow from operations
(including substantial collections of accounts receivable from dial-around
compensation) or from additional financing will allow the Company to sustain its
operations and meet its obligations through the remainder of 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (IN THOUSANDS OF DOLLARS EXCEPT FOR PUBLIC PAY
TELEPHONES, PER CALL, SHARE AND PER SHARE AMOUNTS)
As described in Note 2 to the consolidated financial statements, the
Company completed various acquisitions during the first and second quarters of
1997. In the third quarter of 1997, the Company also terminated
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its merger agreement to acquire Communications Central Inc. The completed
acquisitions were accounted for as purchases and have been included in the
results of operations from their respective acquisition dates.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
REVENUES Revenues decreased by $3,535 or 12.8%, from $27,658 for the
first three months of 1997 to $24,123 for the first three months of 1998. This
decrease is primarily due to a decline in call volume, offset in part by the
increase in the local coin call rate from $0.25 to $0.35, and the decrease in
the dial-around compensation rate as discussed below. The number of installed
pay telephones increased from 40,829 at March 31, 1997 to 43,069 at March 31,
1998, an increase of 2,240 or 5.5%, principally due to acquisitions during the
second quarter of 1997.
Revenues from coin calls decreased by $939 or 6.6%, from $14,127 for
the three months ended March 31, 1997 to $13,188 for the three months ended
March 31, 1998. The decrease is due primarily to a decline in the number of
local coin calls which represents approximately 70% of total coin revenue.
During the fourth quarter of 1997, the Company increased its local coin call
rate from $0.25 to $0.35 and, as initially expected, experienced a reduction in
call volume. Historically, call volumes have returned to normal levels following
rate increases. However, there can be no assurance that coin call volumes will
return to prior levels or that coin revenue per phone will increase beyond
historical levels. To a lesser extent, coin revenues have been adversely
affected by changes in customer and geographic mix and weather conditions in the
first quarter of 1998.
Revenues from non-coin telecommunication services decreased by $2,306
or 17.5% from $13,211 for the three months ended March 31, 1997 to $10,905 for
the three months ended March 31, 1998. Of this decrease, long distance revenues
from operator service providers decreased by $1,531 principally due to
continuing aggressive dial-around advertising by long distance carriers such as
AT&T and MCI Communications Corporation. In addition, revenues from dial-around
compensation decreased by $775 compared to the first quarter of 1997, due to
regulatory changes effective in October 1997. Among other things, these changes
reduced the rate of compensation for dial-around calls from $45.85 per installed
pay telephones per month to a per call rate of $0.284. The Company recognizes
dial-around compensation at $37.20 per pay telephone per month based on an
estimated 131 calls for each phone per month. In the third quarter of 1997, the
Company recorded an adjustment of $2,361 to reduce dial-around compensation
previously recognized as a result of this regulatory change. Of this amount,
$965 related to the first quarter of 1997.
Effective November 6, 1996, pursuant to the rules and regulations
promulgated by the FCC under Section 276 of the Telecommunications Act (the
"1996 Payphone Order"), the Company was to receive dial-around compensation of
$45.85 per installed pay telephone per month from November 6, 1996 through
October 6, 1997 (as compared with the flat fee of $6.00 per installed pay
telephone per month in periods prior to November 6, 1996), and per-call
compensation thereafter, at $0.35 per call from October 7, 1997 to October 6,
1998 (as compared with the flat fee of $45.85 per installed pay telephone per
month) and thereafter, at a per-call rate equal to the local coin rate for each
dial-around call.
Several parties, including interexchange carriers ("IXCs"), filed
petitions with the U. S. Court of Appeals for the District of Columbia Circuit
(the "Court") for review of certain of the FCC regulations, including the
dial-around compensation rate. In 1997, the Court vacated certain portions of
the 1996 Payphone Order, including the dial-around compensation rate, and
remanded the issue to the FCC for further consideration.
On October 9, 1997, the FCC issued its Second Report and Order (the
"1997 Payphone Order") which established a new dial-around compensation rate,
effective October 7, 1997, of $0.284 per call (the market based local coin rate
estimated at $0.35 less certain costs defined by the FCC as $0.066 per call)
multiplied by the actual number of dial-around calls placed from a pay
telephone. Furthermore, the 1997 Payphone Order tentatively concluded that the
dial-around compensation rate of $0.284 per call would be used to calculate
dial-around compensation for the period November 6, 1996 to October 7, 1997.
Evidence initially presented by a pay telephone
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industry trade association as part of the Court of Appeals proceeding indicated
that the average number of dial-around calls placed from independent pay
telephones equaled 131 calls per month.
Based on the FCC's tentative conclusions in the 1997 Payphone Order, in
the third quarter of 1997 the Company adjusted the amount of dial-around
compensation recorded in prior quarters from the initial $45.85 rate to $37.20
(131 calls per installed pay telephone per month). Included in this adjustment
was a net charge of $965 for dial-around compensation relating to the first
quarter of 1997. This adjustment amount was included in other unusual charges
and contractual settlements in the third quarter of 1997.
On March 9, 1998, the Common Carrier Bureau of the FCC issued a
Memorandum Opinion and Order (the "Memorandum") which, among other things,
granted a waiver of the time frame previously scheduled and established a
timetable for local exchange carriers to implement a system for identifying
dial-around calls placed from pay telephones ("ANI Identification"). This
Memorandum reiterated the obligation of the IXCs to pay, by April 1, 1998,
$0.284 per call based on the actual number of dial-around calls per pay
telephone if such call data is available. In its Memorandum, the FCC recognized,
given its waiver and extension of the time frame set for certain IXCs for the
implementation of ANI Identification, that certain disputes between carriers and
pay telephone providers were likely to arise about the true number of
compensable calls. Therefore, the FCC identified the potential need for it to
address true-up requirements for dial-around compensation in a subsequent order
and clarified that the timing of the subsequent order in no way relieved or
delayed the obligations of IXCs to pay compensation on April 1, 1998. In the
first quarter of 1998, the Company has recorded revenues of $4,833 for
dial-around compensation at a rate of $37.20 per installed pay telephone per
month, based on 131 calls per month. As of May 14, 1998, the Company has
received $1,570 of the $4,734 receivable relating to fourth quarter 1997
dial-around compensation.
Certain IXCs have asserted in the past, are asserting and are expected
to assert in the future that the appropriate level of fair compensation should
be lower than the $0.284 per call. A number of parties filed a Motion to Stay
the 1997 Payphone Order pending judicial review and requested expedited
consideration and briefing schedule with the Court. The Court denied the Motion
to Stay and granted the Motion for Expedited Consideration and Briefing
Schedule. On May 7, 1998, the Court heard oral arguments on the appeals
regarding the FCC's Payphone Order. On May 15, 1998, the Court of Appeals issued
an opinion which remanded the Second Report and Order to the FCC for further
consideration in order to justify that dial-around compensation should be based
on the deregulated local coin rate. The Court of Appeals, elected not to vacate
the $0.284 per call rate on the understanding that if and when on remand the FCC
establishes some different rate of fair compensation for dial-around calls, the
FCC may adjust the dial-around compensation rate retroactively should the
equities so dictate. Further, the Court stated that if, within 6 months from the
date of issuance of their order, the FCC fails to adequately respond to the
Court's remand, any adversely affected party may request effective relief from
the Court.
Based on the information available, the Company believes that the minimum
amount it is entitled to as fair compensation under the Telecommunications Act
for the period from November 7, 1996 through March 31, 1998 is $37.20 per pay
telephone per month based on $0.284 per call and 131 calls per pay telephone per
month. Further, the Company does not believe that it is reasonably possible that
the amount will be materially less than $37.20 per pay telephone per month.
Other revenues decreased $290 from $320 for the three months ended
March 31, 1997 to $30 for the three months ended March 31, 1998. This decrease
was primarily the result of the amortization of a deferred operator services
bonus received in 1996.
OPERATING EXPENSES. Total operating expenses increased $2,548, or 10.1%, from
$25,285 for the three months ended March 31, 1997 to $27,833 for the three
months ended March 31, 1998. The increase was due to increases in line and
transmission charges, location commissions, selling, general and administrative
expenses ("SG&A expense"), and depreciation and amortization due in part to the
increase in the number of installed pay telephones and personnel relating to
acquisitions in the first and second quarters of 1997.
Line and transmission charges increased $737, or 11.9%, from $6,179 for
the three months ended March 31, 1997 to $6,916 for the three months ended March
31, 1998. Line and transmission charges represented 22.3% of total revenues for
the three months ended March 31, 1997 and 28.7% of total revenues for the three
months ended March 31, 1998, an increase of 6.4%. The dollar increase was due to
the increase in the number of installed pay telephones and the increase in the
average line and transmission charge per phone. The average line and
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transmission charge per phone increased due to the increased charges by local
exchange carriers ("LECs") for end user common line charges, Preferred
Interexchange Carrier charges ("PICC"), and to a more limited extent, state
Universal Service Fund fees ("USF") passed through to users such as independent
public pay telephone providers. The increase as a percentage of revenues also
reflects the effect of the decrease in revenues discussed above.
Telecommunication and validation fees (consisting primarily of
processing costs relating to operator services) decreased $132, or 4.6%, from
$2,846 for the three months ended March 31, 1997 to $2,714 for the three months
ended March 31, 1998. Telecommunication and validation fees represented 10.3% of
total revenues for the three months ended March 31, 1997 and 11.3% for the three
months ended March 31, 1998, an increase of 1.0%. The dollar decrease was
primarily the result of the decrease in operator service revenues compared to
the first quarter of 1997. The percentage increase was mostly due to changes
in customer usage under operator service contracts which affect the overall
cost percentage.
Location commissions decreased $19, or 0.6%, from $3,169 for the three
months ended March 31, 1997 to $3,150 for the three months ended March 31, 1998.
Location commissions represented 11.5% of total revenues for the three months
ended March 31, 1997 and 13.1% of total revenues for the three months ended
March 31, 1998, an increase of 1.6%. The dollar and percentage decreases are due
to the reduction in revenues in the first quarter of 1998 offset by increases in
commission rates necessary to meet competition for new customers and in renewing
contracts with existing customers.
Field operations (consisting principally of field operations personnel
costs, rents and utilities of the local service facilities and repair and
maintenance of the installed public pay telephones), decreased $169, or 3.0%,
from $5,699 for the three months ended March 31, 1997 to $5,530 for the three
months ended March 31, 1998. Field operations represented 20.6% of total
revenues for the three months ended March 31, 1997 and 22.9% of total revenues
for the three months ended March 31, 1998. The dollar decrease in 1998 compared
to 1997 was primarily due to the higher repair and servicing costs of installed
pay telephones from acquired companies during the first quarter of 1997 and the
reduction or transfer of technical support and other personnel at the Company's
Jacksonville, Texas (former Cherokee headquarters) local service facility to the
Company's Cleveland, Ohio headquarters, offset in part by an increase in service
vehicle costs. The percentage increase was a result of the lower revenues during
the first quarter of 1998.
Selling, general and administrative ("SG&A") expenses increased $978,
or 46.7%, from $2,096 for the three months ended March 31, 1997 to $3,074 for
the three months ended March 31, 1998. SG&A represented 7.6% of total revenues
for the three months ended March 31, 1997 and 12.7% of total revenues for the
three months ended March 31, 1998, an increase of 5.1%. The dollar and
percentage increases were primarily due to an expansion of the sales force, the
transfer of technical support and other personnel from the Company's
Jacksonville, Texas local service facility to the Company's headquarters, and
increases in telephone, insurance and other costs associated with acquisitions
in the second quarter of 1997.
Depreciation and amortization increased $1,010, or 19.1%, from $5,296
for the three months ended March 31, 1997 to $6,306 for the three months ended
March 31, 1998. Depreciation and amortization represented 19.1% of total
revenues for the three months ended March 31, 1997 and 26.1% of total revenues
for the three months ended March 31, 1998, an increase of 7.0%. The dollar and
percentage increases were primarily due to the Company's acquisitions and
expansion of its public pay telephone base and the reduction in total revenues.
Other unusual charges and contractual settlements were $143 in the
three months ended March 31, 1998 and consisted primarily of legal and
professional fees relating to non-recurring litigation and contractual matters.
OTHER INCOME (EXPENSE). Other income (expense) is comprised principally
of interest expense incurred on debt and interest income. Total interest expense
increased $679, or 17.9%, from $3,800 for the three months ended March 31, 1997
to $4,479 for the three months ended March 31, 1998. Interest expense
represented 13.7% of total revenues for the three months ended March 31, 1997
and 18.6% of total revenues for the three months ended March 31, 1998, an
increase of 4.9%. The dollars and percentage increases were a result of the
additional borrowings under the Company's Credit Agreement for acquisitions in
the second quarter of 1997 and for working capital purposes. Interest income for
the first quarter of 1998 decreased $242 due to the utilization of acquisition
deposits and excess operating cash invested in the first quarter of 1997.
EBITDA. EBITDA (income before interest income, interest expense, taxes,
depreciation and amortization, and other unusual charges and contractual
settlements) decreased $4,930, or 64.3%, from $7,669 for the three
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months ended March 31, 1997 to $2,739 for the three months ended March 31, 1998.
EBITDA represented 27.7% of total revenues for the three months ended March 31,
1997 and 11.4% of total revenues for the three months ended March 31, 1998, a
decrease of 16.3%. The dollar and percentage decreases are primarily due to the
decreases in coin and non-coin telecommunication revenues (including dial-around
compensation), and the increases in line and transmission charges and SG&A
expenses. EBITDA is not intended to represent an alternative to operating income
(as defined in accordance with generally accepted accounting principles) as an
indicator of the Company's operating performance, or as an alternative to cash
flows from operating activities (as determined in accordance with generally
accepted accounting principles) as a measure of liquidity. The Company believes
that EBITDA is a meaningful measure of performance because it is commonly used
in the public pay telephone industry to analyze comparable public pay telephone
companies on the basis of operating performance, leverage and liquidity.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS. The Company had working capital of $6,954 at March 31,
1998, compared to $7,839 at December 31, 1997, a decrease of $885, resulting
from an increase in accrued interest, offset in part by changes in other current
assets and liabilities. Net cash provided by (used in) operating activities
during the three months ended March 31, 1997 and 1998 were $143 and ($2,323)
respectively. Net cash used in operations resulted mainly from the increase in
the net loss for the three months ended March 31, 1998, offset in part by higher
non-cash charges for depreciation and amortization.
Cash used in investing activities during the three months ended March
31, 1997 and 1998 were $38,600 and $1,165, respectively. Cash used in investing
activities in the first quarter of 1997 consisted primarily of payments and
deposits to acquire companies and purchases of property and equipment, offset by
the release of the escrowed cash equivalents for the closing of the Cherokee
acquisition. In the first quarter of 1998, cash used in investing activities
consisted mainly of purchases of telephones and other property and equipment.
Cash flows provided by financing activities during the three months
ended March 31, 1997 and 1998 were $1,487 and $1,992, respectively, which in
1997 consisted primarily of the net proceeds from the exercise of the
underwriters' overallotment pursuant to the Company equity offering completed on
December 18, 1996, offset by additional debt offering expenses. Cash flows
provided by financing activities during the three months ended March 31, 1998
consisted primarily of borrowings under the Company's Credit Agreement for
capital expenditure and working capital purposes, offset by additional debt
financing costs.
On May 8, 1998 the Company's Credit Agreement was amended to provide,
among other changes, immediate access to $12,000 for working capital needs and
to fund expansion, an extension in the term to May 8, 2001, an increase of 0.5
percent in the interest rate, and modification of certain financial covenants.
The Company's working capital, liquidity and capital sources may be
limited by its ability to generate sufficient cash flows from its operations or
its investment or financing activities. Cash flow from operations depends on
revenues from coin and non-coin sources. There can be no assurance that coin
revenues will increase, that revenues from dial-around compensation will
continue at rates anticipated and be received by the Company in the amounts
recorded as receivables, or that operating expenses can be maintained at present
or reduced levels. To the extent that cash flows from operating activities or
amounts available to be borrowed under the Credit Agreement are insufficient to
meet the Company's cash needs, there can be no assurance that the Company's debt
holders will permit or that the Company can obtain additional financing to meet
its debt service and other cash requirements. In the event the Company fails to
meet its debt service, such debt could become immediately due and payable.
Management believes, but cannot assure, that cash flow from operations
(including substantial collections of accounts receivable from dial-around
compensation) or from additional financing will allow the Company to sustain its
operations and meet its obligations through the remainder of 1998.
CAPITAL EXPENDITURES
For the three months ended March 31, 1998, the Company had capital
expenditures (exclusive of acquisitions) of $904, which were financed by cash
flows from operations and proceeds from the Company's Credit Agreement. Capital
expenditures are principally for replacement and expansion of the Company's
installed public
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pay telephone base and include purchases of telephones, related
equipment, site contracts, operating equipment and computer hardware.
SEASONALITY
The seasonality of the Company's historical operating results has been
affected by shifts in the geographic concentrations of its public pay telephones
resulting from acquisitions and other changes to the Company's customer mix.
Historically, first quarter revenues and related expenses have been lower than
other quarters due to weather conditions that affect pay telephone useage.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Statements, other than historical facts, contained in this Form 10-Q
are "forward looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and section 21E of the Securities Exchange
Act of 1934, as amended. Although the Company believes that its forward looking
statements are based on reasonable assumptions, it cautions that such statements
are subject to a wide range of risks and uncertainties with respect to the
Company's operations in fiscal 1998 as well as over the long term such as,
without limitation: (i) a downturn in the public pay telephone industry which is
dependent on consumer spending and subject to the impact of domestic economic
conditions, changes in technology, and regulations and policies regarding the
telecommunications industry; (ii) the ability of the Company to accomplish its
strategic objectives with respect to external expansion through selective
acquisitions and internal expansion; and (iii) increases in the dial-around
compensation rate and the coin drop rate. Any or all of these risks and
uncertainties could cause actual results to differ materially from those
reflected in the forward looking statements. These forward looking statements
are based on certain assumptions and analyses made by the Company in light of
its experience and its perception of historical trends, current conditions,
expected future developments and other factors it believes are appropriate in
the circumstances. In addition, such statements are subject to a number of
assumptions, risks and uncertainties, including, without limitation, the risks
and uncertainties identified in this report, general economics and business
conditions, the business opportunities (or lack thereof) that may be presented
to and pursued by the Company, changes in laws or regulations and other factors,
many of which are beyond the control of the Company. Investors and prospective
investors are cautioned that any such statements are not guarantees of future
performance and that actual results or developments may differ materially from
those projected in the forward looking statements.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Third Amendment to Credit Agreement, dated as of May 8, 1998, between
PhoneTel Technologies, Inc., as the Borrower, and Foothill Capital
Corporation, as Replacement Agent and Lender, amending the Credit
Agreement dated as of May 30, 1997, as amended, restated, supplemented,
or otherwise modified from time to time, among PhoneTel Technologies,
Inc., as the Borrower, Various Lenders and ING (U.S.) Capital
Corporation, as the former Agent of the Lenders.
(27) Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the first
quarter of 1998.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PHONETEL TECHNOLOGIES, INC.
May 15, 1998 By: /s/ Peter G. Graf
----------------------------------
Peter G. Graf
Chairman of the Board and
Chief Executive Officer
May 15, 1998 By: /s/ Richard Kebert
--------------------------------
Richard Kebert
Chief Financial Officer and
Treasurer
(Principal Financial Officer and
Accounting Officer)