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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, 2001
[ ] 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 (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
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 ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No __
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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 4, 2001,
10,189,684 shares of the registrant's Common Stock, $.01 par value, were
outstanding.
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PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
FORM 10-Q
QUARTER ENDED MARCH 31, 2001
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2000
and March 31, 2001...............................................................3
Consolidated Statements of Operations for the Three
Months Ended March 31, 2000 and 2001.............................................4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 2001.............................................5
Notes to Consolidated Financial Statements...........................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................................9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk......................................................................14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................................14
Signatures.......................................................................................................15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
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(UNAUDITED)
DECEMBER 31 MARCH 31
2000 2001
---------------- ----------------
ASSETS
Current assets:
Cash $4,425 $4,179
Accounts receivable, net of allowance for doubtful accounts
of $84 and $239, respectively 7,632 7,219
Other current assets 1,294 1,533
---------------- ----------------
Total current assets 13,351 12,931
Property and equipment, net 18,858 17,792
Intangible assets, net 48,374 45,691
Other assets 606 617
---------------- ----------------
$81,189 $77,031
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $51,647 $53,554
Accounts payable 6,792 7,493
Accrued expenses:
Location commissions 2,702 2,270
Line and transmission charges 1,865 2,568
Personal property and sales tax 2,753 1,933
Other 1,937 1,924
---------------- ----------------
Total current liabilities 67,696 69,742
Long-term debt and other liabilities 1,062 1,075
Commitments and contingencies - -
---------------- ----------------
Total liabilities 68,758 70,817
---------------- ----------------
Shareholders' equity :
Common Stock - $0.01 par value; 45,000,000 shares
authorized, 10,189,684 shares issued and outstanding 102 102
Additional paid-in capital 63,429 63,429
Accumulated deficit (51,100) (57,317)
---------------- ----------------
Total shareholders' equity 12,431 6,214
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$81,189 $77,031
================ ================
The accompanying notes are an integral part of these financial statements.
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PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
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THREE MONTHS ENDED MARCH 31
-----------------------------------
2000 2001
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REVENUES:
Coin calls $8,342 $6,716
Non-coin telecommunication services 6,101 4,499
Other 106 141
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14,549 11,356
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OPERATING EXPENSES:
Line and transmission charges 3,655 4,362
Location commissions 2,169 1,597
Field operations 4,522 3,328
Selling, general and administrative 2,693 2,052
Depreciation and amortization 4,382 3,418
Other unusual charges and contractual settlements 66 110
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17,487 14,867
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Loss from operations (2,938) (3,511)
OTHER INCOME (EXPENSE):
Interest expense (2,631) (2,744)
Interest and other income 77 38
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(2,554) (2,706)
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NET LOSS ($5,492) ($6,217)
========== ==========
NET LOSS PER COMMON SHARE, BASIC AND DILUTED ($0.54) ($0.61)
========== ==========
Weighted average number of shares, basic and diluted 10,188,630 10,189,684
========== ==========
The accompanying notes are an integral part of these financial statements.
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PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
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THREE MONTHS ENDED MARCH 31
--------------------------------------
2000 2001
---------------- ----------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss ($5,492) ($6,217)
Adjustments to reconcile net loss to net cash flow from operating activities:
Depreciation and amortization 4,382 3,418
Provision for uncollectible accounts receivable 221 155
Non-cash interest expense 1,230 2,738
Gain on disposal of assets (43) (14)
Changes in current assets (752) 19
Changes in current liabilities, excluding reclassification of long-term debt (278) 139
---------------- ----------------
(732) 238
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CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of property and equipment (260) (173)
Proceeds from sale of assets 43 14
Acquisition of intangible assets (118) (277)
Other deferred charges (18) (11)
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(353) (447)
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CASH FLOWS USED IN FINANCING ACTIVITIES:
Principal payments on borrowings (3) (2)
Debt financing costs (116) (35)
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(119) (37)
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Decrease in cash (1,204) (246)
Cash, beginning of period 5,700 4,425
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Cash, end of period $4,496 $4,179
================ ================
SUPPLEMENTAL DISCLOSURE:
Interest paid during the period $1,383 $515
================ ================
NON-CASH TRANSACTIONS:
Deferred financing costs $690 $345
================ ================
The accompanying notes are an integral part of these financial statements.
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PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE QUARTER ENDED MARCH 31, 2001
(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, 2001
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2001. 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, 2000.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The financial statements do not
include any adjustments that might result if the Company was unable to continue
as a going concern.
Certain amounts relating to 2000 have been reclassified to conform to the
current quarter presentation. The reclassifications have had no impact on total
assets, shareholders' equity or net loss as previously reported.
2. FINANCIAL CONDITION
The Company's working capital deficiency, excluding the current portion
of long-term debt, increased from $2,698 at December 31, 2000 to $3,257 at March
31, 2001, which represents a decrease in working capital of $559. Although the
Company's cash provided by (used in) operating activities increased from ($732)
for the three months ended March 31, 2000 to $238 for the three months ended
March 31, 2001, this increase was primarily due to the capitalization of certain
interest payments described below. In addition, the Company has incurred
continuing operating losses. The Company was not in compliance with certain
financial covenants under its Exit Financing Agreement at December 31, 2000 and
March 31, 2001 and presently has no additional credit available thereunder. In
addition, the Company has not made the monthly scheduled interest payments from
February 1 through May 1, 2001 nor the principal payment relating to the
deferred line fee that was originally due on November 17, 2000. As a result of
certain amendments to the Company's Exit Financing Agreement, the lenders have
waived the default relating to the Company's inability to comply with certain
financial covenants at December 31, 2000 through March 31, 2001 and have
deferred or extended the due dates of the payments described above. In the event
the Company is unable to remain in compliance with the Exit Financing Agreement
and the lenders do not waive such defaults, the outstanding balance could become
immediately due and payable.
The Company's working capital, liquidity and capital resources may be
limited by its ability to generate sufficient cash flow from its operations or
its investing or financing activities. Cash flow from operations depends on
revenues from coin and non-coin sources, including dial-around compensation, and
management's ability to control expenses. There can be no assurance that coin
revenues will not decrease, that revenues from dial-around compensation will
continue at the rates anticipated, or that operating expenses can be maintained
at present or reduced to lower levels. To the extent that cash flow from
operating activities is insufficient to meet the Company's cash requirements,
there can be no assurance that the Company's lender will grant additional
advances under the Exit Financing Agreement or that the Company can obtain
additional financing to meet its debt service and other cash requirements.
The Company has had discussions with its lenders and has requested an
additional advance under its Exit Financing Agreement. Although the Company's
lenders have been supportive, the Company has not been able to
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obtain additional advances from its lenders. The Company continues to
negotiate with its lenders and to evaluate alternate financing arrangements. The
Company has also taken additional steps to further reduce operating expenses and
to seek alternate sources of revenue. Management believes, but cannot assure,
that cash flow from operations, including any new sources of revenue, and the
additional liquidity that its current or alternate lenders may provide, will
allow the Company to sustain its operations and meet its obligations through the
remainder of 2001.
3. ACCOUNTS RECEIVABLE AND DIAL-AROUND COMPENSATION
A dial-around call occurs when a non-coin call is placed from the Company's
public pay telephone which utilizes any interexchange carrier ("IXC") other than
the presubscribed carrier (the Company's dedicated provider of long distance and
operator assisted calls). The Company receives revenues from such carriers and
records those revenues from dial-around compensation based upon the per-call
rate in effect pursuant to orders issued by the FCC under section 276 of the
Telecommunications Act of 1996 ("Section 276") and the estimated number of
dial-around calls per pay telephone per month. During the first three quarters
of 2000, the Company recorded revenue from dial-around compensation based upon
the current rate of $0.24 per call and 131 monthly calls per phone, which was
the monthly average compensable calls used by the FCC in initially determining
the amount of dial-around compensation to which payphone service providers
("PSP") were entitled. In the fourth quarter of 2000, the Company recorded a bad
debt expense of $4,429 applicable to amounts previously recognized as revenue
for the period November 1996 to September 2000. The Company also began reporting
revenues from dial-around compensation based on $0.24 per call and the Company's
current estimate of the average monthly compensable calls per phone, which more
closely reflects the Company's historical collection experience and expected
future developments.
At December 31, 2000 and March 31, 2001, accounts receivable included
$6,561 and $6,211, respectively, arising from dial-around compensation. Such
receivables are typically received on a quarterly basis at the beginning of the
second quarter following the quarter in which such revenues are recognized. For
the three months ended March 31, 2000 and 2001, revenues from non-coin
telecommunications services included $3,478 and $2,822, respectively, for
dial-around compensation.
On April 5, 2001, the FCC issued an order which requires the first
switched-based IXC to pay dial-around compensation on coinless calls transferred
to resellers that utilize the IXC's network. Previously, IXCs were not required
to pay dial-around compensation on such calls and were not required to disclose
the identity of resellers responsible for payment. The Company expects this FCC
order to improve its ability to identify and collect amounts relating to
dial-around calls that would otherwise become uncollectible.
4. LONG-TERM DEBT
Long-term debt at December 31, 2000 and March 31, 2001 consisted of the
following:
December 31 March 31
2000 2001
---------------- -------------
Exit Financing Agreement, contractually due January 1, 2002 with
interest payable monthly at 3% above
the base rate (11% at March 31, 2001) $ 51,611 $ 53,520
Note Payable-Warrant Put Obligation 1,062 1,075
Other notes payable 36 34
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52,709 54,629
Less current maturities (51,647) (53,554)
---------------- --------------
$ 1,062 $ 1,075
================ ==============
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EXIT FINANCING AGREEMENT
In connection with the Company's prepackaged plan of reorganization
(the "Prepackaged Plan"), which was consummated on November 17, 1999, the
Company emerged from its Chapter 11 proceeding and executed an agreement with
Foothill Capital Corporation ("Foothill") for post reorganization financing
("Exit Financing Agreement"). The Exit Financing Agreement provided for a
$46,000 revolving credit commitment (the "Maximum Amount"), excluding interest
and fees capitalized as part of the principal balance. The Exit Financing
Agreement is secured by substantially all of the assets of the Company and was
originally scheduled to mature on November 16, 2001.
The Exit Financing Agreement provides for various fees aggregating
$9,440 over the term of the loan, including a $1,150 deferred line fee, which
was originally payable one year from the date of closing, together with interest
thereon, and a $10 servicing fee which is payable each month. At the option of
the Company, payment of other fees, together with interest due thereon, may be
deferred and added to the then outstanding principal balance. Fees due pursuant
to the Exit Financing Agreement are subject to certain reductions for early
prepayment, providing the Company is not in default under the Exit Financing
Agreement.
The Exit Financing Agreement provides for interest on the outstanding
principal balance at 3% above the base rate (as defined in the Exit Financing
Agreement), with interest on the Maximum Amount payable monthly in arrears. The
Exit Financing Agreement, as amended on December 31, 1999, includes covenants,
which among other things, require the Company to maintain ratios as to fixed
charges, debt to earnings, current ratio, interest coverage and minimum levels
of earnings, payphones and operating cash (all as defined in the Exit Financing
Agreement). Other covenants limit the incurrence of long-term debt, the level of
capital expenditures, the payment of dividends, and the disposal of a
substantial portion of the Company's assets.
At December 31, 2000 and March 31, 2001, the Company was not in
compliance with certain financial covenants under the Exit Financing Agreement.
In addition, the Company has not paid the monthly interest payments that were
originally due on February 1 through May 1, 2001, nor the deferred line fee
that was originally due on November 17, 2000. Effective November 13, 2000 and
February 1, March 1, April 1 and May 1, 2001, the Company executed amendments
to the Exit Financing Agreement (the "Amendments") which extended the due date
of the deferred line fee and the maturity date of the Exit Financing Agreement
to January 1, 2002. The amendments also provide for the capitalization of
interest that was originally due on February 1 through May 1, 2001 as part of
the principal balance and waives the defaults as of December 31, 2000 through
March 31, 2001 resulting from the Company's inability to comply with certain
financial covenants. Although the lenders have waived the defaults by the
Company through March 31, 2001, there can be no assurances that the Company
will be able to pay the principal balance or the monthly interest as such
amounts become due or comply with all financial covenants through the remainder
of 2001. If a default occurs with respect to the Company's Exit Financing
Agreement subsequent to March 31, 2001, this obligation, at the option of the
lenders, could become immediately due and payable. Accordingly, the Company
classified the amounts due under the Exit Financing Agreement as a current
liability at December 31, 2000 and March 31, 2001.
NOTE PAYABLE-WARRANT PUT OBLIGATION
On October 18, 1999, in connection with the Prepackaged Plan, the
Company reached an agreement with a former lender to settle a claim for the
purported exercise of a put right relating to warrants to purchase shares of
Series A Special Convertible Preferred Stock ("Series A Preferred"). The Series
A Preferred was convertible into Common Stock. The claim was settled for $1,000
in the form of a note payable, subject to certain reductions for early payment,
together with deferred interest at 5% per annum, in five years. In addition, the
former lender agreed to forfeit its shares of new Common Stock and warrants to
purchase new Common Stock which were issued pursuant to the Prepackaged Plan and
immediately canceled.
The note is secured by substantially all of the assets of the Company
and is subordinate in right of payment to the Company's Exit Financing
Agreement. The note contains a cross default provision which permits the holder
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to declare the note immediately due and payable if payment of amounts due under
the Exit Financing Agreement is accelerated as a result of default.
5. SHAREHOLDERS' EQUITY
On March 9, 2000, pursuant to the 1999 Management Incentive Plan (the
"1999 Plan"), the Company granted options to purchase 193,000 shares of Common
Stock to certain management employees at an exercise price of $1.56 per share.
On April 1, 2000, options to purchase an additional 50,000 shares at an exercise
price of $1.16 per share were granted to an officer of the Company pursuant to
the 1999 Plan. No compensation expense was recognized because the exercise
prices of these options were equal to the market value of the Company's shares
on the respective dates of grant. Such options vest equally over a three-year
period beginning one year from the date of grant and expire after five years.
On May 23, 2000, the Company granted options to purchase 75,000 shares
of Common Stock to an officer of the Company pursuant to an employment
agreement. Such options vest immediately, have an exercise price of $0.01 per
share, and expire three years after the date of grant. The Company recorded $28
of compensation expense under the intrinsic value method of accounting relating
to these options.
On July 18, 2000, the shareholders approved an amendment to the Amended
and Restated Articles of Incorporation to increase the total authorized capital
stock of the Company to 45,000,000 shares of Common Stock.
6. CONTINGENCIES
The Company, in the course of its normal operations, is subject to
regulatory matters, disputes, claims and lawsuits. In management's opinion, all
such outstanding matters of which the Company has knowledge, have been reflected
in the financial statements or will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS EXCEPT FOR PUBLIC PAY TELEPHONES, PER CALL,
SHARE AND PER SHARE AMOUNTS)
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995
Statements, other than historical facts, contained in this Form 10-Q
are "forward looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and section 21E of the Securities Exchange
Act of 1934, as amended. Although the Company believes that its forward looking
statements are based on reasonable assumptions, it cautions that such statements
are subject to a wide range of risks and uncertainties with respect to the
Company's operations in fiscal 2001 as well as over the long term such as,
without limitation: (i) a downturn in the public pay telephone industry which is
dependent on consumer spending and subject to the impact of domestic economic
conditions, changes in technology, increased use of wireless communications, and
regulations and policies regarding the telecommunications industry; (ii) the
ability of the Company to accomplish its strategic objectives with respect to
external expansion through selective acquisitions and internal expansion; (iii)
impairment of the Company's liquidity arising from the possible refusal by the
Company's lenders to grant additional advances or waive potential future
defaults under the Company's debt agreement; and (iv) changes in the dial-around
compensation rate and the coin drop rate. Any or all of these risks and
uncertainties could cause actual results to differ materially from those
reflected in the forward looking statements. These forward looking statements
are based on certain assumptions and analyses made by the Company in light of
its experience and its perception of historical trends, current conditions,
expected future developments and other factors it believes are appropriate in
the circumstances. In addition, such statements are subject to a number of
assumptions, risks and uncertainties, including, without limitation, the risks
and uncertainties identified in this report, general economics and business
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conditions, the business opportunities (or lack thereof) that may be presented
to and pursued by the Company, changes in laws or regulations and other factors,
many of which are beyond the control of the Company. Investors and prospective
investors are cautioned that any such statements are not guarantees of future
performance and that actual results or developments may differ materially from
those projected in the forward looking statements.
OVERVIEW
During 2000 and 2001, the Company implemented several profit
improvement initiatives. The Company has been able to obtain lower local access
line charges through negotiations and promotional programs with certain of its
incumbent local exchange carriers ("LECs") or by utilizing competitive LECs
("CLECs"). In 2000, the Company entered into agreements with new operator
service providers ("OSPs") to obtain an improvement in rates for operator
service revenues and long distance line charges. The Company reduced the number
of field operations personnel and related costs, abandoned location contracts
relating to approximately 3,400 unprofitable phones and closed six district
operations facilities to reduce costs. The Company also reduced the number of
administrative and sales personnel and eliminated or reduced certain
non-essential expenses. The Company believes these measures have and will
continue to have a positive impact on the results of its operations.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31,
2000
Revenues
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Revenues decreased by $3,193 or 21.9%, from $14,549 for the first three
months of 2000 to $11,356 for the first three months of 2001. This decrease is
primarily due to the decrease in the average number of installed pay telephones
and a decline in call volume as discussed below. The average number of installed
pay telephones decreased from 36,851 for the three months ended March 31, 2000
to 35,062 for the three months ended March 31, 2001, a decrease of 1,789 or
4.9%, principally due to the timing of expiring location contracts, the
competition for payphone locations in the marketplace and the abandonment of
location contracts relating to approximately 3,400 pay telephones in last half
of 2000.
Revenues from coin calls decreased by $1,626 or 19.5%, from $8,342 for
the three months ended March 31, 2000 to $6,716 for the three months ended March
31, 2001. The decrease is due in part to the decrease in the average number of
installed pay telephones in the first quarter of 2001 compared to the first
quarter of 2000. In addition, long distance and local call volumes and related
coin revenues have been adversely affected by the growth of wireless
communication services, which serve as an increasingly competitive alternative
to payphone usage. To a lesser extent, coin revenue has declined due to the use
of prepaid calling cards and other types of dial-around calls.
Revenues from non-coin telecommunication services decreased by $1,602
or 26.3%, from $6,101 for the three months ended March 31, 2000 to $4,499 for
the three months ended March 31, 2001. Of this decrease, long distance revenues
from operator service providers decreased by $946 or 36.1%. This decrease is a
result of the decreases in the average number of pay telephones and the
reduction in operator service revenues caused by the continuing aggressive
dial-around advertising by long distance carriers such as AT&T and MCI Worldcom.
Long distance revenues from operator service providers have also been adversely
affected by the growth in wireless communications. In addition, revenues from
dial-around compensation decreased by $656 or 18.9%, from $3,478 in the first
quarter of 2000 to $2,822 in the first quarter of 2001, due to the reduction in
the average number of pay telephones and a reduction in the estimated number of
dial-around calls used to record revenues in the first quarter of 2001.
On April 5, 2001, the FCC issued an order which requires the first
switched-based IXC to pay dial-around compensation on coinless calls transferred
to resellers that utilize the IXC's network. Previously, IXCs were not required
to pay dial-around compensation on such calls and were not required to disclose
the identity of resellers responsible for payment. The Company expects this FCC
order to improve its ability to identify and collect amounts relating to
dial-around calls that would otherwise become uncollectible.
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Other revenues increased $35 from $106 for the three months ended March
31, 2000 to $141 for the three months ended March 31, 2001. This increase was
primarily the result of an increase in payphone service revenue relating to
services provided to third parties.
Operating Expenses.
- -------------------
Total operating expenses decreased $2,620, or 15.0%, from $17,487 for
the three months ended March 31, 2000 to $14,867 for the three months ended
March 31, 2001. The decrease was due to a reduction in substantially all expense
categories, due in part to the decrease in the average number of installed pay
telephones and a decrease in personnel and other costs in the first quarter of
2001 compared to the first quarter of 2000.
Line and transmission charges increased $707, or 19.3%, from $3,655 for
the three months ended March 31, 2000 to $4,362 for the three months ended March
31, 2001. Line and transmission charges represented 25.1% of total revenues for
the three months ended March 31, 2000 and 38.4% of total revenues for the three
months ended March 31, 2001, an increase of 13.3%. The dollar and percentage
increases were primarily due to the recovery of approximately $837 of prior
years' sales and excise taxes charged by LECs and $157 of cost-based rate
reductions ordered by a state regulator during the first quarter of 2000, offset
in part by the effect of the decrease in the average number of pay telephones in
the first quarter of 2001.
Location commissions decreased $572, or 26.4%, from $2,169 for the
three months ended March 31, 2000 to $1,597 for the three months ended March 31,
2001. Location commissions represented 14.9% of total revenues for the three
months ended March 31, 2000 and 14.1% of total revenues for the three months
ended March 31, 2001, a decrease of 0.8%. The dollar and percentage decreases
are due to the reduction in revenues in the first quarter of 2001 compared to
2000 and the use of lower commission accrual rates in the first quarter of 2001.
Field operations expenses (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 $1,194, or
26.4%, from $4,522 for the three months ended March 31, 2000 to $3,328 for the
three months ended March 31, 2001. Field operations expenses represented 31.1%
of total revenues for the three months ended March 31, 2000 and 29.3% of total
revenues for the three months ended March 31, 2001. The dollar and percentage
decreases in the first quarter of 2001 were primarily due to a credit to expense
of $802 recorded in the first quarter of 2001 relating to the settlement of a
prior year state sales tax assessment charged to expense in prior periods and to
lower salaries and wages resulting from a reduction in the number of personnel.
Selling, general and administrative ("SG&A") expenses decreased $641,
or 23.8%, from $2,693 for the three months ended March 31, 2000 to $2,052 for
the three months ended March 31, 2001. SG&A expenses represented 18.5% of total
revenues for the three months ended March 31, 2000 and 18.1% of total revenues
for the three months ended March 31, 2001. The dollar and percentage decreases
were primarily due to cost reduction efforts that resulted in decreases in the
number of personnel and personnel related expenses, as well as decreases in
professional fees, telephone and other SG&A expenses.
Depreciation and amortization decreased $964, or 22.0%, from $4,382 for
the three months ended March 31, 2000 to $3,418 for the three months ended March
31, 2001. Depreciation and amortization represented 30.1% of total revenues for
the three months ended March 31, 2000 and 2001. The dollar decrease was
primarily due to an $892 reduction in amortization expense in the first quarter
of 2001. The reduction in amortization expense was due to a $21,205 write-off of
intangible assets relating to losses on asset impairment and the abandonment of
payphone location contracts recorded in the last half of 2000.
Other unusual charges and contractual settlements were $66 in the three
months ended March 31, 2000 compared to $110 in the three months ended March 31,
2001 and consisted primarily of legal and professional fees relating to
non-routine litigation, contractual matters and employment costs.
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Other Income (Expense)
- ----------------------
Other income (expense) is comprised principally of interest expense
incurred on debt and interest income. Total interest expense increased $113, or
4.3%, from $2,631 for the three months ended March 31, 2000 to $2,744 for the
three months ended March 31, 2001. Interest expense represented 18.1% of total
revenues for the three months ended March 31, 2000 and 24.2% of total revenues
for the three months ended March 31, 2001, an increase of 6.1%. The dollar
increase was due to the increase in the Company's outstanding debt relating to
fees and interest added to loan principal pursuant to the Company's Exit
Financing Agreement. The increase in interest expense as a percentage of revenue
is primarily due to the decrease in revenues compared to the first quarter of
2000. Interest and other income decreased from $77 for the first three months of
2000 to $38 in the first quarter of 2001.
EBITDA from Recurring Operations
- --------------------------------
EBITDA from recurring operations (income before interest income,
interest expense, taxes, depreciation and amortization, and other unusual
charges and contractual settlements) decreased $1,493, from $1,510 for the three
months ended March 31, 2000 to $17 for the three months ended March 31, 2001.
EBITDA from recurring operations represented 10.4% of total revenues for the
three months ended March 31, 2000 and 0.1% of total revenues for the three
months ended March 31, 2001. The dollar and percentage decreases are primarily
due to the decreases in coin and non-coin telecommunication revenues (including
dial-around compensation) offset by in part by cost reductions. EBITDA from
recurring operations is not intended to represent an alternative to operating
income (as defined in accordance with generally accepted accounting principles)
as an indicator of the Company's operating performance, or as an alternative to
cash flows from operating activities (as determined in accordance with generally
accepted accounting principles) as a measure of liquidity. The Company believes
that EBITDA from recurring operations is a meaningful measure of performance
because it is commonly used in the public pay telephone industry to analyze
comparable public pay telephone companies on the basis of operating performance,
leverage and liquidity. See "Liquidity and Capital Resources" for a discussion
of cash flows from operating, investing and financing activities.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operating Activities
- ------------------------------------
The Company had a working capital deficiency, excluding the current
portion of long-term debt, of $3,257 at March 31, 2001 compared to $2,698 at
December 31, 2000. This decrease in working capital resulted primarily from a
decrease in cash and an increase in accounts payable and accrued expenses. Net
cash provided by (used in) operating activities during the three months ended
March 31, 2000 and 2001 was ($732) and $238, respectively. The increase in net
cash provided by operations in the first quarter 2001 was primarily due to the
deferral of certain interest payments relating to the Company's Exit Financing
Agreement as discussed below.
Cash Flows from Investing Activities
- ------------------------------------
Cash used in investing activities during the three months ended March
31, 2000 and 2001 was $353 and $447, respectively. In the first quarter of 2000
and 2001, cash used in investing activities consisted mainly of purchases of
telephones, other property and equipment and expenditures for deferred
commissions and signing bonuses relating to payphone location contracts.
Cash Flows from Financing Activities
- ------------------------------------
Cash flows used in financing activities during the three months ended
March 31, 2000 and 2001 was $119 and $37, respectively. Cash flows used in
financing activities during the three months ended March 31, 2000
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and 2001 consisted primarily of expenditures for professional fees for the
proposed refinancing of the Company's Exit Financing Agreement.
Financial Condition
- -------------------
The Company's working capital deficiency, excluding the current portion
of long-term debt increased from $2,698 at December 31, 2000 to $3,257 at March
31, 2001, which represents a decrease in working capital of $559. Although the
Company's cash provided by (used in) operating activities increased from ($732)
for the three months ended March 31, 2000 to $238 for the three months ended
March 31, 2001, this increase was primarily due to the capitalization of certain
interest payments described below. In addition, the Company has incurred
continuing operating losses. The Company was not in compliance with certain
financial covenants under its Exit Financing Agreement at December 31, 2000 and
March 31, 2001 and presently has no additional credit available thereunder. In
addition, the Company has not made the monthly scheduled interest payments from
February 1 through May 1, 2001 nor the principal payment relating to the
deferred line fee that was originally due on November 17, 2000. As a result of
certain amendments to the Company's Exit Financing Agreement, the lenders have
waived the default relating to the Company's inability to comply with certain
financial covenants at December 31, 2000 through March 31, 2001 and have
deferred or extended the due dates of the payments described above. In the event
the Company is unable to remain in compliance with the Exit Financing Agreement
and the lenders do not waive such defaults, the outstanding balance could become
immediately due and payable.
The Company's working capital, liquidity and capital resources may be
limited by its ability to generate sufficient cash flow from its operations or
its investing or financing activities. Cash flow from operations depends on
revenues from coin and non-coin sources, including dial-around compensation, and
management's ability to control expenses. There can be no assurance that coin
revenues will not decrease, that revenues from dial-around compensation will
continue at the rates anticipated, or that operating expenses can be maintained
at present or reduced to lower levels. To the extent that cash flow from
operating activities is insufficient to meet the Company's cash requirements,
there can be no assurance that the Company's lender will grant additional
advances under the Exit Financing Agreement or that the Company can obtain
additional financing to meet its debt service and other cash requirements.
The Company has had discussions with its lenders and has requested an
additional advance under its Exit Financing Agreement. Although the Company's
lenders have been supportive, the Company has not been able to obtain additional
advances from its lenders. The Company continues to negotiate with its lenders
and to evaluate alternate financing arrangements. The Company has also taken
additional steps to further reduce operating expenses and to seek alternate
sources of revenue. Management believes, but cannot assure, that cash flow from
operations, including any new sources of revenue, and the additional liquidity
that its current or alternate lenders may provide, will allow the Company to
sustain its operations and meet its obligations through the remainder of 2001.
Capital Expenditures
- --------------------
For the three months ended March 31, 2001, the Company had capital
expenditures of $173 which were financed by cash flows from operating
activities. Capital expenditures are principally for replacement or installation
of the Company's public pay telephones, related equipment, operating equipment
and computer hardware. The Company has no significant commitments for capital
expenditures at March 31, 2001.
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
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customer mix. Historically, first quarter revenues and related expenses
have been lower than other quarters due to weather conditions that affect pay
telephone usage.
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the financial position of the Company
is subject to a variety of risks. In addition to the market risk associated with
movements in interest rates on the Company's outstanding debt, the Company is
subject to a variety of other types of risk such as the collectibility of its
accounts receivable and the recoverability of the carrying values of its
long-term assets. The Company's long-term obligations primarily consist of
borrowings and deferred fees under the Company's Exit Financing Agreement
aggregating approximately $54 million.
The Company's earnings and cash flows are subject to market risk
resulting from changes in interest rates with respect to its borrowings under
its Exit Financing Agreement. The Company does not presently enter into any
transactions involving derivative financial instruments for risk management or
other purposes due to the stability in interest rates in recent times and
because management does not consider the potential impact of changes in interest
rates to be material.
The Company's available cash balances are invested on a short-term
basis (generally overnight) and, accordingly, are not subject to significant
risks associated with changes in interest rates. Substantially all of the
Company's cash flows are derived from its operations within the United States
and the Company is not subject to market risk associated with changes in foreign
currency exchange rates.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment Number Five to Loan and Security Agreement dated as of
April 1, 2001 by and among PhoneTel Technologies, Inc. and Cherokee
Communications, Inc. ("Borrowers") and the financial institutions that
are signatories thereto and Foothill Capital Corporation as agent
(together "Lenders") amending the Loan and Security Agreement dated as
of November 17, 1999, as amended, between Borrowers and Lenders.
10.2 Amendment Number Six to loan and Security Agreement dated as of May
1, 2001 by and among PhoneTel Technologies, Inc. and Cherokee
Communications, Inc. ("Borrowers") and the financial institutions that
are signatories thereto and Foothill Capital Corporation as agent
(together "Lenders") amending the Loan and Security Agreement dated as
of November 17, 1999, as amended, between Borrowers and Lenders.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the first quarter of
2001.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHONETEL TECHNOLOGIES, INC.
May 15, 2001 By: /s/ John D. Chichester
---------------------------
John D. Chichester
President and Chief Executive Officer
May 15, 2001 By: /s/ Richard P. Kebert
-------------------------
Richard P. Kebert
Chief Financial Officer,
Treasurer and Secretary
(Principal Financial Officer and
Accounting Officer)
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