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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 JUNE 30, 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 OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
NORTH POINT TOWER, 7TH FLOOR, 1001 LAKESIDE AVENUE, CLEVELAND, OHIO 44114-1195
- ------------------------------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(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 AUGUST 7TH,
1998, 16,736,633 SHARES OF THE REGISTRANT'S COMMON STOCK, $.01 PAR VALUE, WERE
OUTSTANDING.
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PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARIES
FORM 10-Q
SIX AND THREE MONTHS ENDED JUNE 30, 1998
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1997
and June 30, 1998................................................................3
Consolidated Statements of Operations for the Six and
Three Months Ended June 30, 1997 and 1998........................................4
Statements of Changes in Mandatorily Redeemable Preferred Stock
for the Year Ended December 31, 1997
and the Six Months Ended June 30, 1998...........................................5
Statements of Changes in Non-mandatorily Redeemable Preferred Stock,
Common Stock and Other Shareholders' Equity (Deficit)
for the Year Ended December 31, 1997
and the Six Months Ended June 30, 1998...........................................6
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1997 and 1998.....................................................7
Notes to Consolidated Financial Statements
for the Six and Three Months Ended June 30, 1998.................................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................................17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................23
Signatures..................................................................................................24
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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 JUNE 30
1997 1998
----------- -----------
ASSETS
Current assets:
Cash $6,519 $7,028
Accounts receivable, net of allowance for doubtful
accounts of $507 and $625, respectively 16,278 19,386
Other current assets 972 1,380
----------- -----------
Total current assets 23,769 27,794
Property and equipment, net 30,109 29,192
Intangible assets, net 115,607 108,919
Other assets 341 531
----------- -----------
$169,826 $166,436
=========== ===========
LIABILITIES AND EQUITY
Current liabilities:
Current portion:
Long-term debt $544 $335
Obligation under capital leases 92 46
Accounts payable 8,768 9,351
Accrued expenses:
Location commissions 3,142 1,623
Personal property and sales tax 1,927 2,729
Interest 991 1,110
Salaries, wages and benefits 466 723
Other - 171
----------- -----------
Total current liabilities 15,930 16,088
Long-term debt 150,203 163,606
Obligations under capital leases 19 7
Commitments and contingencies - -
14% cumulative preferred stock mandatorily redeemable
(redemption amount $8,879 due June 30, 2000) 7,716 8,385
Non-mandatorily redeemable preferred stock,
common stock and other shareholders' equity (deficit) (4,042) (21,650)
----------- -----------
$169,826 $166,436
=========== ===========
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) (UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30 JUNE 30
------------ ------------ ------------ ------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
REVENUES:
Coin calls $28,142 $26,935 $14,015 $13,747
Non-coin telecommunication services 26,899 22,477 13,688 11,572
Other 338 39 18 9
------------ ------------ ------------ ------------
55,379 49,451 27,721 25,328
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Line and transmission charges 11,833 14,632 5,654 7,716
Telecommunication and validation fees 5,936 5,856 3,090 3,142
Location commissions 6,501 6,559 3,332 3,409
Field operations 10,828 10,534 5,129 5,004
Selling, general and administrative 4,857 6,433 2,761 3,359
Depreciation and amortization 10,553 12,662 5,257 6,356
Other unusual charges and contractual settlements - 994 - 851
------------ ------------ ------------ ------------
50,508 57,670 25,223 29,837
------------ ------------ ------------ ------------
Income (loss) from operations 4,871 (8,219) 2,498 (4,509)
OTHER INCOME (EXPENSE):
Interest expense - related parties (152) (1,036) (152) (320)
Interest expense - others (7,628) (8,103) (3,828) (4,340)
Interest income 449 74 170 37
Other 8 236 8 236
------------ ------------ ------------ ------------
(7,323) (8,829) (3,802) (4,387)
------------ ------------ ------------ ------------
NET LOSS ($2,452) ($17,048) ($1,304) ($8,896)
============ ============ ============ ============
Earnings per share calculation:
Net loss ($2,452) ($17,048) ($1,304) ($8,896)
Preferred dividend payable in kind (278) (213) (131) (116)
Accretion of 14% Preferred to its redemption value (114) (456) (64) (225)
------------ ------------ ------------ ------------
Net loss applicable to common shareholders ($2,844) ($17,717) ($1,499) ($9,237)
============ ============ ============ ============
Net loss per common share ($0.18) ($1.07) ($0.09) ($0.56)
============ ============ ============ ============
Weighted average number of shares 15,813,129 16,567,288 16,097,200 16,598,384
============ ============ ============ ============
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 SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 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 9,839 213
Accretion of carrying value to amount
payable at redemption on June 30, 2000 - 494 - 456
Total Mandatorily Redeemable
------------ ------------ ------------ ------------
Preferred Stock 138,147 $7,716 147,986 $8,385
============ ============ ============ ============
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 SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 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 4 375,804 4
Conversion of Series A Preferred 250,000 3 - -
Other issuances of stock 199,747 2 - -
------------ ------------ ------------ ------------
Balance at end of period 16,360,829 164 16,736,633 168
============ ------------ ============ ------------
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
Warrants issued to Directors - 80
Other issuances of stock 580 -
------------ ------------
Balance at end of period 62,600 62,705
------------ ------------
ACCUMULATED DEFICIT
Balance at beginning of year (42,544) (66,806)
Net loss for the period (23,254) (17,048)
14% Preferred dividends payable-in-kind
and accretion (1,008) (669)
------------ ------------
Balance at end of period (66,806) (84,523)
------------ ------------
Total Non-mandatorily Redeemable
Preferred Stock, Common Stock and
Other Shareholders' Equity (Deficit) ($4,042) ($21,650)
============ ============
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)
SIX MONTHS ENDED JUNE 30
1997 1998
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss ($2,452) ($17,048)
Adjustments to reconcile net loss to net cash flow from operating activities:
Depreciation and amortization 10,553 12,662
Increase in allowance for doubtful accounts 495 476
Gain on disposal of assets - (236)
Amortization of deferred revenues (300) -
Other (5) 3
Changes in current assets and current liabilities,
net of assets acquired (6,161) (3,498)
------------ ------------
2,130 (7,641)
------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisitions (52,733) (1,336)
Acquisition deposits (6,000) -
Deferred charges on pending acquisitions (881) -
Deferred charges - commissions and signing bonuses (843) (376)
Proceeds from sale of assets - 331
Change in other assets (59) (210)
Purchases of property and equipment (2,643) (1,887)
------------ ------------
(63,159) (3,478)
------------ ------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from debt issuances 21,801 13,636
Principal payments on borrowings (1,139) (503)
Proceeds from issuance of common stock 2,825 -
Debt financing costs (4,265) (1,534)
Proceeds from warrant and option exercises 5 29
------------ ------------
19,227 11,628
------------ ------------
Increase (decrease) in cash (41,802) 509
Cash at beginning of period 46,438 6,519
------------ ------------
Cash at end of period $4,636 $7,028
============ ============
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 SIX AND THREE MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS EXCEPT FOR INSTALLED PUBLIC PAY TELEPHONE, SHARE AND
- ------------------------------------------------------------------
PER SHARE AMOUNTS)
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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 six and three months ended June
30, 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. MERGER WITH DAVEL COMMUNICATIONS GROUP, INC.
On June 11, 1998, PhoneTel Technologies, Inc. ("PhoneTel") entered into
an Agreement and Plan of Merger and Reorganization (the "Davel Merger
Agreement") with Davel Communications Group, Inc., a publicly held, national
independent pay telephone provider ("Old Davel"), pursuant to which, among other
things, PhoneTel and Old Davel will combine their operations (the "Transaction")
as subsidiaries of a newly formed holding company which will be named Davel
Communications, Inc. ("New Davel"). Under the terms of the Davel Merger
Agreement, which has been unanimously approved by the Boards of Directors of
both companies, holders of outstanding common stock of PhoneTel ("PhoneTel
Common Stock") will receive shares of common stock of New Davel ("New Davel
Common Stock"), based upon a value of $3.08 per share of PhoneTel Common Stock.
The number of shares of New Davel Common Stock to be issued will be determined
based on the average closing price of the common stock of Old Davel ("Old Davel
Common Stock") for the 30 consecutive trading days ending on the second day
prior to the shareholders' approval of the Davel Merger Agreement, subject to a
cap of 0.13765 shares of New Davel Common Stock for each share of PhoneTel
Common Stock. The Transaction is expected to be accounted for as a pooling of
interests and is further expected to be tax free to PhoneTel Common Stock and
Old Davel Common Stock shareholders.
The Transaction is subject to approval by the Common Stockholders of
PhoneTel and Old Davel, and certain other conditions, including the redemption
of PhoneTel's 14% Cumulative Redeemable Convertible Preferred Stock and
completion of a cash tender offer for PhoneTel's 12% Senior Notes due 2006 (the
"Notes") at a price not exceeding 101% of the principal amount of the Notes,
with a minimum of 80% of the $125,000 outstanding principal amount having been
tendered. Satisfaction of these conditions is dependent upon receipt by Old
Davel of financing, which is expected to be obtained through a combination of
high yield debt and a senior credit facility.
In connection with the Davel Merger Agreement, on June 11, 1998,
PhoneTel entered into a Consulting and Non-Competition Agreement with Mr. Peter
Graf, PhoneTel's Chairman of the Board and Chief Executive Officer ("Consulting
Agreement"). Pursuant to the terms of the Consulting Agreement, Mr. Graf will
provide consulting services to the Company for a period of three years following
the closing date of the Davel Merger Agreement in exchange for continued
participation in PhoneTel's 1997 Stock Incentive Plan and $200 in cash to be
paid in equal quarterly installments in arrears, and a single cash payment of
$2,350 to be paid on the next business day after closing of the Davel Merger
Agreement in exchange for Mr. Graf's agreement not to compete with the Company
for a period of five years thereafter. The Consulting Agreement shall only
become effective as of the
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closing date of the Davel Merger Agreement. If the transactions contemplated by
the Davel Merger Agreement are not consummated, the Company shall have no
obligation thereunder.
On June 11, 1998, PhoneTel also entered into an Employment and
Non-Competition Agreement with Ms. Tammy Martin, PhoneTel's Executive Vice
President, Chief Administrative Officer, General Counsel and Secretary (the
"Employment Agreement") whereby Ms. Martin will provide services to the Company
for a period of six months following the closing date of the Davel Merger
Agreement in exchange for continued health insurance and other employee benefits
and $100 in cash to be paid in accordance with PhoneTel's normal payroll
practices, and a single payment of $340 in cash to be paid on the next business
day after closing of the Davel Merger Agreement in exchange for Ms. Martin's
agreement not to compete with the Company for a period of two years thereafter.
The Employment Agreement shall only become effective as of the closing date of
the Davel Merger Agreement. If the transactions contemplated by the Davel Merger
Agreement are not consummated, the Company shall have no obligation thereunder.
On July 5, 1998, Peoples Telephone Company, Inc., a publicly held,
national independent pay telephone provider ("Peoples"), also entered into a
merger agreement (the "Peoples Merger Agreement") with Old Davel and, if the
Davel Merger with PhoneTel is consummated, New Davel (together "Davel"). Under
the terms of the Peoples Merger Agreement, which has unanimously been approved
by the Board of Directors of each company, holders of common stock of Peoples
("Peoples Common Stock") will receive 0.235 shares of Davel Common Stock for
each outstanding share of Peoples Common Stock. Based on Davel's closing price
of $20 on August 11, 1998, the transaction is valued at $4.70 per share of
Peoples Common Stock.
The Peoples Merger Agreement is subject to the approval of the holders
of Common Stock of both Davel and Peoples and is conditioned on its eligibility
for pooling of interests accounting treatment. The Peoples Merger is also
conditioned upon conversion of Peoples convertible preferred stock into common
stock and receipt by Davel of financing for, and successful consummation of, a
cash tender offer for Peoples' 12-1/4% Senior Notes due 2002, pursuant to which
a minimum of 85% of the aggregate outstanding principal amount of $100 million
shall have been tendered. The refinancing of the combined companies'
indebtedness is expected to be obtained through a combination of high yield debt
and a senior credit facility.
The Davel Merger Agreement and the Peoples Merger Agreement are
independent transactions and neither transaction is conditioned upon the
consummation of the other. If the Davel Merger Agreement is terminated by
PhoneTel under certain circumstances, PhoneTel shall be required to pay Davel a
termination fee in the amount of $3,000 and expenses of up to $1,000.
Additionally, if the Davel Merger Agreement is terminated as a result of a
Davel's failure to obtain the requisite financing to complete the Transaction,
Davel shall be required to pay PhoneTel a termination fee of $1,000 and expenses
not to exceed $500. No assurance can be given that either the Davel Merger
Agreement or the Peoples Merger Agreement will be consummated.
3. PHONETEL ACQUISITIONS
TERMINATION OF PROPOSED ACQUISITION
On March 14, 1997, PhoneTel entered into an Agreement and Plan of
Merger (the "CCI Merger") to acquire Communications Central Inc. ("CCI"),
pursuant to which 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 depositary. On August 21, 1997,
PhoneTel announced that the CCI Merger had been terminated and in connection
therewith forfeited a $6,000 deposit. 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.
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ACQUISITIONS COMPLETED DURING THE SIX MONTHS ENDED JUNE 30, 1998:
TDS TELECOMMUNICATIONS CORPORATION - MAY 18, 1998 ("TDS")
The Company entered into an asset purchase agreement to acquire
approximately 3,450 installed pay telephones from TDS's network of Local
Exchange Carriers ("LECs") for a purchase price of $851. The majority of the pay
telephones acquired must be upgraded with the necessary microprocessor
technology needed to operate the pay telephones under the Company's operating
and management information systems. The estimated aggregate cost to upgrade
these pay telephones is approximately $2,000, of which $485 has been incurred as
of June 30, 1998. The Company expects to install said upgrade equipment and
begin operating these pay telephones during the third and fourth quarters of
1998.
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.
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.
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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 each
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-competition 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
Six Months Ended June 30 Three Months Ended June 30
-----------------------------------------------------
1997 1997
---- ----
Total revenues $ 60,374 $ 29,866
Net loss (3,307) (1,759)
Net loss applicable to
common shareholders (3,699) (1,953)
Net loss per common share (0.23) (0.12)
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.
4. ACCOUNTS RECEIVABLE AND DIAL-AROUND COMPENSATION
At December 31, 1997 and June 30, 1998, accounts receivable arising
from dial-around compensation included $12,938 and $16,994, respectively. A
dial-around call occurs when a non-coin call is placed from the Company's public
pay telephone which utilizes a carrier other than the Company's dedicated
provider of long distance and operator assisted service. Payments relating to
such receivables are normally received quarterly in arrears. For the six months
ended June 30, 1997 and 1998, revenues from non-coin telecommunication services
included $11,380 and $9,637, respectively, relating to 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 from October 7, 1997 to October 6, 1998 at $0.35 per call (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-
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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 a default rate of $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 multiplied by $0.284). Included
in this adjustment was a net charge of $965 for dial-around compensation
relating to the first quarter of 1997 and $1,001 relating to the second quarter
of 1997. These adjustment amounts were 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 new
timetable for LEC's to implement a system for identifying dial-around calls
placed from pay telephones ("ANI Identification"). The 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 regarding 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 six
months of 1998, the Company has recorded revenues of $9,637 for dial-around
compensation based upon a rate of $37.20 per installed pay telephone per month.
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 filed a motion requesting
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 arguments regarding the
pending appeals relating to the FCC's 1997 Payphone Order. On May 15, 1998, the
Court of Appeals issued an opinion which remanded the 1997 Payphone Order to the
FCC for further consideration in order to justify that the dial-around
compensation rate 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 established 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. On June 19, 1998,
the FCC solicited comments from interested parties on the issues remanded. The
Company believes that the FCC will issue its ruling in the current proceeding
within the six month period established by 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 June 30,
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.
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5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Estimated
Useful Lives December 31 June 30
(in years) 1997 1998
---------- ---- ----
Telephones, boards, enclosures and cases 3-10 $ 41,653 $ 44,587
Furniture, fixtures and other equipment 3-5 3,063 3,175
Leasehold improvements 2-5 424 466
--------- ----------
45,140 48,228
Less: accumulated depreciation (15,031) (19,036)
--------- ----------
$ 30,109 $ 29,192
========= ==========
6. INTANGIBLE ASSETS
Intangible assets consisted of the following:
Amortization Period December 31 June 30
(in months) 1997 1998
----------- ---- ----
Location contracts 60-120 $ 126,775 $ 127,086
Deferred financing costs 36-120 10,254 11,788
Non-competition agreements 24-60 3,731 3,733
State operating certifications 60 567 586
--------- ----------
141,327 143,193
Less: Accumulated amortization (25,720) (34,274)
--------- ----------
$ 115,607 $ 108,919
========= ==========
7. AMENDMENTS TO CREDIT AGREEMENT
On May 30, 1997, the Company entered into an agreement (the "Credit
Agreement") with various lenders (collectively referred to as the "Lenders"). On
such date, 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 accrued interest at the ING Alternate Base Rate (as
defined in the Credit Agreement) plus 1.50%. The Credit Agreement was originally
scheduled to mature on May 20, 2000 and all the Company's installed public pay
telephones are pledged as collateral. The 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 Notes and for general working capital purposes. Subsequent to the
September 16, 1997 Court ruling which vacated dial-around compensation (see Note
4), 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
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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 covenants therein were modified. On the same date, the Company was
permitted to borrow an additional $3,000 for working capital purposes under the
Revolving Credit Commitment. On March 31, 1998, the Credit Agreement was further
amended (the "Second Amendment") to modify certain financial covenants.
On May 8, 1998, the Company amended the Credit Agreement (the "Third
Amendment") and Foothill Capital Corporation, as replacement Agent and Lender,
assumed all of the rights and obligations of the former Lenders. Under the Third
Amendment, the Revolving Credit Commitment remained at $20,000 and the Expansion
Loan Commitment was reduced to $20,000. Interest is payable monthly in arrears
at 2% above the Lender's reference rate (as defined in the Third Amendment) and
the maturity date of the Credit Agreement was extended to May 8, 2001. Certain
financial covenants under the Credit Agreement were also modified. The Company
incurred $990 in fees and expenses in connection with the Third Amendment.
During the second quarter of 1998, the Company borrowed $10,547 under
the Revolving Credit Commitment for interest payments due under the Notes, to
fund acquisition and financing costs and for working capital needs. At June 30,
1998, the Company was not in compliance with certain financial covenants set
forth in the Third Amendment and obtained a waiver regarding said non-compliance
from its Lenders. The amount available under the Credit Agreement at June 30,
1998 was $1,453, which amount was borrowed on July 3, 1998 to finance the cost
of equipment upgrades relating to the pay telephones acquired as result of the
TDS acquisition (See Note 3).
8. PREFERRED STOCK MANDATORILY REDEEMABLE
Mandatorily redeemable preferred stock consisted of the following:
December 31 June 30
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 40,068 shares at June 30, 1998 (valued at $1,064);
mandatory redemption amount of $8,879 due June 30, 2000) $ 7,716 $ 8,385
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 six months ended June 30, 1998, the carrying value
of the 14% Preferred was increased by $456 through accretions. Each share of 14%
Preferred is entitled to receive a quarterly dividend of 0.035 shares of 14%
Preferred. Each share of 14% Preferred is convertible into 10 shares of Common
Stock.
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9. 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 June 30
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
16,736,633 shares issued and outstanding at December 31, 1997 and
June 30, 1998, respectively) $ 164 $ 168
Additional paid-in capital 62,600 62,705
Accumulated deficit (66,806) (84,523)
-------- --------
($ 4,042) ($21,650)
======== ========
In January 1998, warrants for 190,678 shares of Common Stock, including
warrants to purchase 179,996 shares of common stock with an exercise price of
$0.01 per share ("Nominal Value Warrants") were exercised by their holders. The
Company received proceeds of $27 as a result of the exercise of these warrants.
In April 1998, the Company granted warrants to purchase 100,000 shares of Common
Stock to its four non-employee Directors with an aggregate value of $80 and an
exercise price of $1.875 per share, as compensation for services during the
1997-98 service year. During the second quarter of 1998, Nominal Value Warrants
for 185,126 shares of Common Stock were exercised by their holders, including
Nominal Value Warrants for 89,998 shares of Common Stock held by a Director of
the Company. The Company received proceeds of $2 as a result of the exercise of
these Nominal Value Warrants.
10. 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, are covered by insurance or will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
11. CONDENSED CONSOLIDATING FINANCIAL STATEMENT DATA
The Company's wholly-owned subsidiary, Cherokee Communications, Inc.,
which was acquired January 1, 1997, is a guarantor of the Notes. The following
are the condensed consolidating financial statements of PhoneTel and Cherokee as
of June 30, 1998, and for the six months ended June 30, 1998.
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Condensed Consolidating Financial Statements
Balance Sheet, at June 30, 1998
PhoneTel Cherokee(a) Eliminations Consolidated
------------ ------------ ------------ ------------
Current assets $ 18,963 $ 8,831 - $ 27,794
Property and equipment, net 23,834 5,358 - 29,192
Intangible assets, net 69,103 39,816 - 108,919
Other non-current assets 59,060 6,700 ($ 65,229) 531
------------ ------------ ------------ ------------
Total $ 170,960 $ 60,705 ($ 65,229) $ 166,436
============ ============ ============ ============
Current liabilities $ 5,342 $ 10,746 - $ 16,088
Inter-company debt - 65,229 ($ 65,229) -
Long-term debt and capital leases 162,799 814 - 163,613
14% Preferred stock 8,385 - - 8,385
Other equity (deficit) (5,566) (16,084) - (21,650)
------------ ------------ ------------ ------------
Total $ 170,960 $ 60,705 ($ 65,229) $ 166,436
============ ============ ============ ============
Statement of Operations, for the six months ended June 30, 1998
Total revenues $ 30,329 $ 19,122 - $ 49,451
Operating expenses 37,370 20,300 - 57,670
------------ ------------ ------------ ------------
Loss from operations (7,041) (1,178) - (8,219)
Other income (expense), net (4,817) (4,012) - (8,829)
------------ ------------ ------------ ------------
Net loss ($ 11,858) ($ 5,190) - ($ 17,048)
============ ============ ============ ============
(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.
12. FINANCIAL CONDITION
The Company's working capital, liquidity and capital resources 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 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.
As discussed in Note 2, the Company plans to merge with Davel and plans
to redeem substantially all its long-term debt and its 14% Cumulative Redeemable
Convertible Preferred Stock if the Davel Merger is consummated. In the event the
Davel Merger is not consummated, 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (IN THOUSANDS EXCEPT FOR PUBLIC PAY TELEPHONES,
PER CALL, SHARE AND PER SHARE AMOUNTS)
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Statements, other than historical facts, contained in this Form 10-Q
are "forward looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and section 21E of the Securities Exchange
Act of 1934, as amended. Although the Company believes that its forward looking
statements are based on reasonable assumptions, it cautions that such statements
are subject to a wide range of risks and uncertainties with respect to the
Company's operations in fiscal 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.
ACQUISITIONS AND MERGERS
As described in Note 3 to the consolidated financial statements, the
Company completed various acquisitions during the first and second quarters of
1997 and the second quarter of 1998. In the third quarter of 1997, the Company
also terminated 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
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUES Revenues decreased by $5,928 or 10.7%, from $55,379 for the
first six months of 1997 to $49,451 for the first six 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 average number of
installed pay telephones, excluding approximately 3,450 pay telephones acquired
in May 1998 from TDS but not yet upgraded and placed in service by the Company,
increased from 40,784 for the six months ended June 30, 1997 to 43,320 for the
six months ended June 30, 1998, an increase of 2,536 or 6.2%. These increases
were principally due to acquisitions in the second quarter of 1997.
Revenues from coin calls decreased by $1,207 or 4.3%, from $28,142 for
the six months ended June 30, 1997 to $26,935 for the six months ended June 30,
1998. The decrease is primarily due 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. There can be no assurance that coin call volumes will return to
historical levels or that coin revenue per phone will increase in excess
historical levels. To a lesser extent, coin revenues have been adversely
affected by changes in customer and geographic mix and adverse weather
conditions in the first quarter of 1998.
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Revenues from non-coin telecommunication services decreased by $4,422
or 16.4%, from $26,899 for the six months ended June 30, 1997 to $22,477 for the
six months ended June 30, 1998. Of this decrease, long distance revenues from
operator service providers decreased by $2,679 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
Communications Corporation. In addition, revenues from dial-around compensation
decreased by $1,743 compared to the six months ended June 30, 1997, due to
regulatory changes effective in October 1997 which are discussed below. 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, $1,966 related to the six months ended June 30, 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 from October 7, 1997 to October 6, 1998 at $0.35 per call (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 a default rate of $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 multiplied by $0.284). Included
in this adjustment was a net charge of $965 for dial-around compensation
relating to the first quarter of 1997 and $1,001 relating to the second quarter
of 1997. These adjustment amounts were 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 new
timetable for LEC's to implement a system for identifying dial-around calls
placed from pay telephones ("ANI Identification"). The 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 regarding 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 six
months of 1998, the Company has recorded revenues of $9,637 for dial-around
compensation based upon a rate of $37.20 per installed pay telephone per month.
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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 filed a motion requesting
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 arguments regarding the
pending appeals relating to the FCC's 1997 Payphone Order. On May 15, 1998, the
Court of Appeals issued an opinion which remanded the 1997 Payphone Order to the
FCC for further consideration in order to justify that the dial-around
compensation rate 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 established 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 six 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. On June 19, 1998,
the FCC solicited comments from interested parties on the issues remanded. The
Company believes that the FCC will issue its ruling in the current proceeding
within the six month period established by 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 June 30, 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 $299 from $338 for the six months ended June
30, 1997 to $39 for the six months ended June 30, 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 $7,162, or
14.2%, from $50,508 for the six months ended June 30, 1997 to $57,670 for the
six months ended June 30, 1998. The increase was due to increases in line and
transmission charges, selling, general and administrative expenses ("SG&A
expense"), depreciation and amortization, and other unusual charges and
contractual settlements. Such increases were due in part to increases in amounts
charged by LEC's for the provision of local telephone service, the increase in
the average number of installed pay telephones, and the increase in the number
of sales and administrative personnel added as a result of acquisitions in the
first and second quarters of 1997.
Line and transmission charges increased $2,799, or 23.7%, from $11,833
for the six months ended June 30, 1997 to $14,632 for the six months ended June
30, 1998. Line and transmission charges represented 21.4% of total revenues for
the six months ended June 30, 1997 and 29.6% of total revenues for the six
months ended June 30, 1998, an increase of 8.2%. The dollar increase was due to
the increase in the average number of installed pay telephones and the increase
in the average line and transmission charge per phone. The average line and
transmission charge per phone increased as a result of the increased charges by
LECs for end user common line charges, Preferred Interexchange Carrier charges
("PICC"), 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 which consists primarily of
processing costs relating to operator services decreased by $80, or 1.3%, from
$5,936 for the six months ended June 30, 1997 to $5,856 for the six months ended
June 30, 1998. Telecommunication and validation fees represented 10.7% of total
revenues for the six months ended June 30, 1997 and 11.8% for the six months
ended June 30, 1998, an increase of 1.1%. The dollar decrease was primarily the
result of the decrease in operator service calls compared to the first six
months of 1997. The percentage increase was mostly due to changes in long
distance call volumes processed by various operator service providers who charge
different rates for providing such services.
Location commissions increased $58, or 0.9%, from $6,501 for the six
months ended June 30, 1997 to $6,559 for the six months ended June 30, 1998.
Location commissions represented 11.7% of total revenues for the six months
ended June 30, 1997 and 13.3% for the six months ended June 30, 1998, an
increase of 1.6%. The dollar
19
20
and percentage increases are due to the reduction in revenues during the six
months ended June 30, 1998 and the increase in commission rates in response to
competitive demands for new customers as well as renewal of location contracts
with existing customers and higher commission rates relating to acquisitions
completed in the second quarter of 1997.
Field operations which consists principally of field operations
personnel costs, rents and utilities of the local service facilities, and repair
and maintenance of the Company's installed pay telephone base, decreased $294,
or 2.7%, from $10,828 for the six months ended June 30, 1997 to $10,534 for the
six months ended June 30, 1998. Field operations represented 19.6% of total
revenues for the six months ended June 30, 1997 and 21.3% of total revenues for
the six months ended June 30, 1998. The dollar decrease in 1998 compared to 1997
was primarily due to the lower field operating expenses resulting from
efficiencies achieved in integrating the operations of companies previously
acquired and lower taxes which are based on revenues, offset in part by an
increase in service vehicle costs. The percentage increase was a result of the
lower revenues during the first six months of 1998.
SG&A expenses increased $1,576, or 32.4%, from $4,857 for the six
months ended June 30, 1997 to $6,433 for the six months ended June 30, 1998.
SG&A expenses represented 8.8% of total revenues for the six months ended June
30, 1997 and 13.0% of total revenues for the six months ended June 30, 1998, an
increase of 4.2%. The dollar and percentage increases were primarily due to an
expansion of the sales force, the transfer of technical support and other
personnel from the Company's Jacksonville, Texas (former Cherokee headquarters)
local service facility to the Company's headquarters, and an increase in
telephone expense.
Depreciation and amortization increased $2,109, or 20.0%, from $10,553
for the six months ended June 30, 1997 to $12,662 for the six months ended June
30, 1998. Depreciation and amortization represented 19.1% of total revenues for
the six months ended June 30, 1997 and 25.6% of total revenues for the six
months ended June 30, 1998, an increase of 6.5%. The dollar and percentage
increases were primarily due to the acquisitions previously completed and
expansion of the Company's public pay telephone base. The percentage increase
was also due to the reduction in total revenues.
Other unusual charges and contractual settlements were $994 in the six
months ended June 30, 1998 and consisted primarily of legal and professional
fees relating to non-recurring litigation and contractual matters and certain
fees relating to amendments to the Company's Credit Agreement.
OTHER INCOME (EXPENSE). Other income (expense) is comprised principally
of interest expense incurred on debt and interest income. Total interest expense
increased $1,359, or 17.5%, from $7,780 for the six months ended June 30, 1997
to $9,139 for the six months ended June 30, 1998. Interest expense represented
14.0% of total revenues for the six months ended June 30, 1997 and 18.5% of
total revenues for the six months ended June 30, 1998, an increase of 4.5%. 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 six months
of 1998 decreased $373 due to the utilization of acquisition deposits in 1997
and the reduction in cash invested compared to the first six months of 1997.
Other income increased $226 primarily due to the sale of the Company's
Jacksonville, Texas land and building during the second quarter of 1998.
EBITDA. EBITDA (income before interest income, interest expense, taxes,
depreciation and amortization, and other unusual charges and contractual
settlements) decreased $9,987, or 64.7%, from $15,424 for the six months ended
June 30, 1997 to $5,437 for the six months ended June 30, 1998. EBITDA
represented 27.9% of total revenues for the six months ended June 30, 1997 and
11.0% of total revenues for the six months ended June 30, 1998, a decrease of
16.9%. 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.
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LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS. The Company had working capital of $11,706 at June 30,
1998, compared to $7,839 at December 31, 1997, an increase of $3,867, resulting
primarily from an increase in accounts receivable relating to dial-around
compensation. Net cash provided by (used in) operating activities during the six
months ended June 30, 1997 and 1998 were $2,130 and $(7,641), respectively. Net
cash used in operations resulted mainly from the increase in the net loss for
the six months ended June 30, 1998, offset in part by higher non-cash charges
for depreciation and amortization and a decrease in cash flow used for current
assets and liabilities, net of assets acquired.
Cash used in investing activities during the six months ended June 30,
1997 and 1998 was $63,159 and $3,478, respectively. Cash used in investing
activities in the first six months 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 six months of 1998, cash used in investing activities
consisted mainly of purchases of telephones and other property and equipment and
the pay telephones acquired as part of the TDS acquisition.
Cash flows provided by financing activities during the first six months
ended June 30, 1997 and 1998 were $19,227 and $11,628, 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 and additional
borrowings under the Credit Agreement to fund acquisitions. Cash flows provided
by financing activities during the six months ended June 30, 1998 consisted
primarily of borrowings under the Company's Credit Agreement for acquisition,
capital expenditure and working capital purposes, offset by additional debt
financing costs.
On May 8, 1998, the Company amended the Credit Agreement and Foothill
Capital Corporation, as replacement Agent and Lender, assumed all of the rights
and obligations of the former Lenders. Under the Third Amendment, the Revolving
Credit Commitment remained at $20,000 and the Expansion Loan Commitment was
reduced to $20,000. Interest is payable monthly in arrears at 2% above the
Lender's reference rate (as defined in the Third Amendment) and the maturity
date of the Credit Agreement was extended to May 8, 2001. Certain financial
covenants under the Credit agreement were also modified. The Company incurred
$990 in fees and expenses in connection with the Third Amendment.
During the second quarter of 1998, the Company borrowed $10,547 under
the Revolving Credit Commitment for interest payments under the Notes, to fund
acquisition and financing costs and for working capital needs. At June 30, 1998,
the Company was not in compliance with certain financial covenants set forth in
the Third Amendment and obtained a waiver regarding said non-compliance from its
Lenders. The amount available under the Credit Agreement at June 30, 1998 was
$1,453, which amount was borrowed on July 3, 1998 to finance the cost of
equipment upgrades relating to the pay telephones acquired as part of the TDS
acquisition.
The Company's working capital, liquidity and capital resources 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 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.
As discussed in Note 2, the Company plans to merge with Davel and plans
to redeem substantially all its long-term debt and its 14% Cumulative Redeemable
Convertible Preferred Stock if the Davel Merger is consummated. In the event the
Davel Merger is not consummated, 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.
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CAPITAL EXPENDITURES
For the six months ended June 30, 1998, the Company had capital
expenditures (exclusive of acquisitions) of $1,887, 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 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, revenues and related expenses during the first six months of the
year (particularly in the first quarter) have been lower than the remainder of
the year due to weather conditions that affect pay telephone usage.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather that the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send commissions, or engage in similar normal business activities.
The Company is currently in the process of completing a detailed
assessment of the full impact of the Year 2000 Issue. In the absence of the
completion of this detailed assessment, the Company does not have a reasonable
basis to conclude whether the Year 2000 Issue will have a material effect on the
future financial results, or cause reported financial information not to be
necessarily indicative of future operating results or future financial
condition. The Company also does not have a reasonable basis to conclude whether
the impact of the Year 2000 Issue will come to fruition. However, it is
Management's belief that the Company will be able to meet the compliance
requirements for the Year 2000 Issue.
PART II. OTHER INFORMATION
ITEM 3. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 26, 1998, the Company held its Annual Meeting of Shareholders.
Total shares of Common Stock eligible to vote as of the record date were
16,551,507 and total shares voted were 11,983,845, or 72.4%.
The following Proposal was approved by the Shareholders at the Annual
Meeting of Shareholders.
Election of Directors. The following nominees for director of the
Company, as listed in the proxy statement were elected (percentages are of
shares voted): Peter Graf - For - 11,153,488 or 93.1%, Withheld 830,357 or 6.9%;
George Henry - For 11,342,555 or 94.6%, Withheld 641,290 or 5.4%; Aron Katzman -
For 11,327,709 or 94.5%, Withheld 656,136 or 5.5%; Steven Richman - For
11,343,472 or 94.7%, Withheld 640,373 or 5.3%; and Joseph Abrams - For
11,343,472 or 94.7%, Withheld 640,373 or 5.4%
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
(27) Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K dated June 17, 1998 reporting a
transaction under Item 1, change in control of registrant.
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In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHONETEL TECHNOLOGIES, INC.
August 14, 1998 By: /s/ Peter G. Graf
--------------------------------------
Peter G. Graf
Chairman of the Board and
Chief Executive Officer
August 14, 1998 By: /s/ Richard P. Kebert
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Richard P. Kebert
Chief Financial Officer and
Treasurer
(Principal Financial Officer and
Accounting Officer)
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