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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, 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 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 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 AUGUST 8,
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 JUNE 30, 2001
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2000
and June 30, 2001................................................................3
Consolidated Statements of Operations for the Six and Three
Months Ended June 30, 2000 and 2001..............................................4
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 2001..............................................5
Notes to Consolidated Financial Statements...........................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.....................................11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.......................................................................16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................................................16
Signatures........................................................................................................17
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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)
- --------------------------------------------------------------------------------
(UNAUDITED)
DECEMBER 31 JUNE 30
2000 2001
---------------- ----------------
Assets
Current assets:
Cash $4,425 $4,534
Accounts receivable, net of allowance for doubtful accounts
of $84 and $204, respectively 7,632 6,439
Other current assets 1,294 1,293
---------------- ----------------
Total current assets 13,351 12,266
Property and equipment, net 18,858 16,736
Intangible assets, net 48,374 37,330
Other assets 606 668
---------------- ----------------
$81,189 $67,000
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $51,647 $56,204
Accounts payable 6,792 8,246
Accrued expenses:
Location commissions 2,702 3,008
Line and transmission charges 1,865 1,984
Personal property and sales tax 2,753 1,541
Other 1,937 1,500
---------------- ----------------
Total current liabilities 67,696 72,483
Long-term debt and other liabilities 1,062 1,089
Commitments and contingencies - -
---------------- ----------------
Total liabilities 68,758 73,572
---------------- ----------------
Shareholders' equity (deficit):
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) (70,103)
---------------- ----------------
Total shareholders' equity (deficit) 12,431 (6,572)
---------------- ----------------
$81,189 $67,000
================ ================
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)
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30 THREE MONTHS ENDED JUNE 30
-------------------------------- ------------------------------
2000 2001 2000 2001
------------ ------------ ------------ -----------
REVENUES:
Coin calls $16,925 $13,918 $8,583 $7,202
Non-coin telecommunication services 12,761 9,330 6,660 4,831
Other 224 388 118 247
------------ ------------ ------------ -----------
29,910 23,636 15,361 12,280
------------ ------------ ------------ -----------
OPERATING EXPENSES:
Line and transmission charges 7,826 8,699 4,171 4,337
Location commissions 4,349 3,662 2,180 2,065
Field operations 8,977 7,296 4,455 3,968
Selling, general and administrative 5,062 4,157 2,369 2,105
Depreciation and amortization 8,753 6,814 4,371 3,396
Charge relating to location contracts - 6,323 - 6,323
Other unusual charges and contractual settlements 110 292 44 182
------------ ------------ ------------ -----------
35,077 37,243 17,590 22,376
------------ ------------ ------------ -----------
Loss from operations (5,167) (13,607) (2,229) (10,096)
OTHER INCOME (EXPENSE): -
Interest expense (5,381) (5,511) (2,750) (2,767)
Interest and other income 142 115 65 77
------------ ------------ ------------ -----------
(5,239) (5,396) (2,685) (2,690)
------------ ------------ ------------ -----------
NET LOSS ($10,406) ($19,003) ($4,914) ($12,786)
============= ============ ============ ===========
NET LOSS PER COMMON SHARE, BASIC AND DILUTED ($1.02) ($1.86) ($0.48) ($1.25)
============= ============ ============ ===========
Weighted average number of shares, basic and diluted 10,188,804 10,189,684 10,188,977 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)
- --------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30
--------------------------------------
2000 2001
---------------- ----------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss ($10,406) ($19,003)
Adjustments to reconcile net loss to net cash flow from operating activities:
Depreciation and amortization 8,753 6,814
Charge relating to location contracts - 6,323
Non-cash interest expense 2,506 5,472
Provision for uncollectible accounts receivable 357 120
Gain on disposal of assets (67) (40)
Stock compensation expense 28 -
Changes in current assets (468) 1,073
Changes in current liabilities, excluding reclassification of long-term debt (96) 230
---------------- ----------------
607 989
---------------- ----------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of property and equipment (581) (381)
Proceeds from sale of assets 68 76
Acquisition of intangible assets (442) (476)
Other deferred charges (39) (63)
---------------- ----------------
(994) (844)
---------------- ----------------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Principal payments on borrowings (4) (36)
Debt financing costs (144) -
Other 11 -
---------------- ----------------
(137) (36)
---------------- ----------------
Increase (decrease) in cash (524) 109
Cash, beginning of period 5,700 4,425
---------------- ----------------
Cash, end of period $5,176 $4,534
================ ================
SUPPLEMENTAL DISCLOSURE:
Interest paid during the period $2,846 $548
================ ================
NON-CASH TRANSACTIONS:
Deferred financing costs $1,380 $1,495
================ ================
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
JUNE 30, 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 six months ended June 30, 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. PROPOSED MERGER WITH DAVEL COMMUNICATIONS, INC.
On June 13, 2001, PhoneTel Technologies, Inc. ("PhoneTel") announced that
it has signed a letter of intent to merge with Davel Communications, Inc.
("Davel') which is headquartered in Tampa, Florida and operates approximately
62,000 payphones in 44 states and the District of Columbia. The letter of intent
contemplates the execution of a definitive merger agreement (the "Davel Merger
Agreement") and a substantial debt restructuring for each company. In connection
with the expected merger, PhoneTel will become a wholly owned subsidiary of
Davel. In addition, the two companies have entered into a servicing agreement
designed to commence cost savings initiatives in advance of the closing of the
merger.
The proposed merger is subject to the execution of a definitive merger
agreement, approval by the boards of directors of PhoneTel and Davel, approval
by the shareholders and existing senior secured lenders of both companies, and
the receipt of material third party and governmental approvals and consents.
As part of the completion of the merger of the two companies, the senior
secured creditors of both Davel and PhoneTel will exchange a substantial amount
of the combined debt for equity securities of the respective companies and will
restructure the remaining debt. In connection with PhoneTel's debt exchange, its
senior secured lenders will own 87% of PhoneTel's outstanding common stock
immediately prior to the merger with the remaining senior secured debt not to
exceed $36,500 (compared to $56,204 outstanding at June 30, 2001). Existing
holders of PhoneTel common stock will own 9% of PhoneTel's outstanding shares,
and 4% will be reserved for issuance of post-closing employee options and other
stock-based incentives, on a fully diluted basis. In connection with Davel's
debt exchange, its senior secured lenders will own 93% of Davel's outstanding
common stock immediately prior to the merger, with the remaining senior secured
debt not to exceed $63,500 (compared to approximately $238,000 outstanding at
June 30, 2001). Existing shareholders of Davel common stock will own 3% of
Davel's outstanding shares and 4% of the common stock will be reserved for
issuance of post-closing employee options and other stock-based incentives, on a
fully diluted basis.
Immediately following the merger, current PhoneTel shareholders will own
approximately 3.28% of the shares of Davel common stock and current Davel
shareholders will own approximately 1.91%. Of the remaining shares, 4.00% are
intended to be reserved for issuance of post-closing employee options and other
stock-based incentives, on a fully diluted basis, and the
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companies' current lenders will own approximately 90.81%.
Effective with the merger, the then outstanding debt of both entities,
currently in the approximate amount of $294,000, will be reduced to $100,000 in
debt of the merged entity through the debt and equity restructuring outlined
above. Of this $100,000 of restructured debt, $50,000 will be amortizing term
debt with interest and principal payable from operating cash flows. Payment of
the interest and principal on the remaining $50,000 of debt will be deferred
under terms to be negotiated in connection with the definitive merger agreement.
On August 7, 2001, the Company and Davel executed an amendment to the
letter of intent and servicing agreement to extend the time for executing a
definitive merger agreement from July 31, 2001 until August 31, 2001.
3. 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 $4,013 at June 30,
2001, which represents a decrease in working capital of $1,315. Although the
Company's cash provided by operating activities increased from $607 for the six
months ended June 30, 2000 to $989 for the six months ended June 30, 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 June 30, 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 August 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 June 30, 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
and operator service 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. In the event 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 who have agreed in
principal to the proposed merger with Davel and the debt restructuring described
in Note 2. The Company is in the process of implementing the servicing agreement
with Davel to achieve the anticipated efficiencies and cost savings associated
with the consolidation of both companies' field office operations. As part of
the Company's ongoing evaluation of its payphone base, the Company expects to
remove additional payphones that have become unprofitable. In addition, the
Company is developing alternate sources of revenue. With the expected
operational efficiencies and continued support of its lenders, management
believes, but cannot assure, that cash flow from operations, including any new
sources of revenue, will allow the Company to sustain its operations and meet
its obligations through the remainder of 2001 or until the proposed merger with
Davel is completed.
4. 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
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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 to more closely reflect the Company's historical
collection experience and expected future call volume.
At December 31, 2000 and June 30, 2001, accounts receivable included $6,561
and $5,677, 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 were recognized. For
the six months ended June 30, 2000 and 2001, revenues from non-coin
telecommunications services included $6,971 and $5,722, respectively, for
dial-around compensation.
On April 5, 2001, the FCC issued an order which requires the first
switched-based IXC that carries coinless calls to pay dial-around compensation
on such 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. Subject to administrative reconsideration or judicial appeal, the FCC
order will become effective on November 27, 2001. Although 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, the amount of
the increase in revenues from dial-around compensation, if any, cannot be
determined at this time.
5. INTANGIBLE ASSETS AND RECENT ACCOUNTING PRONOUNCEMENTS
At June 30, 2001, the Company evaluated the carrying value of its payphones
and related intangible assets (location contracts) in each of the Company's
operating districts. In certain operating districts, the carrying value of the
Company's payphone assets exceeded the estimated undiscounted future cash
inflows and the Company recorded an impairment loss of $6,323 to reduce the
carrying value of such assets to the estimated fair value at June 30, 2001. Fair
value was determined based on the estimated market value of such payphone
assets. The asset impairment loss, which was recorded as a reduction in
intangible assets in accordance with Statement of Financial Accounting Standards
("SFAS") No.121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to Be Disposed Of", is included in the charge relating to
location contracts in the accompanying consolidated statements of operations.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires the use of the purchase method of accounting and
prohibits the use of the pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS No. 141 also requires that the
Company recognize acquired intangible assets separately from goodwill if the
acquired intangible assets meet certain criteria. SFAS No. 141 applies to all
business combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon adoption
of SFAS No. 142, that the Company reclassify the carrying amounts of intangible
assets and goodwill based on the criteria in SFAS No. 141.
SFAS No. 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS No. 142 requires that the Company identify reporting units for
the purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other
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existing recognized intangible assets, and cease amortization of intangible
assets with an indefinite useful life. An intangible asset with an indefinite
useful life should be tested for impairment in accordance with the guidance in
SFAS No. 142. SFAS No. 142 is required to be applied in fiscal years beginning
after December 15, 2001 to all goodwill and other intangible assets recognized
at that date, regardless of when those assets were initially recognized. SFAS
No. 142 requires the Company to complete a transitional goodwill impairment test
six months from the date of adoption. The Company is also required to reassess
the useful lives of other intangible assets within the first interim quarter
after adoption of SFAS No. 142.
As of June 30, 2001, the net carrying amount of intangible assets is
$37,330. Amortization expense during the six months ended June 30, 2001 was
$4,345. Currently, the Company is assessing but has not yet determined how the
adoption of SFAS No. 141 and SFAS No. 142 will impact its financial position and
results of operations.
6. LONG-TERM DEBT
Long-term debt at December 31, 2000 and June 30, 2001 consisted of the
following:
December 31 June 30
2000 2001
---------------- --------------
Exit Financing Agreement, contractually due January 1, 2002
with interest payable monthly at 3% above
the base rate or 10.75%, whichever
is greater (10.75% at June 30, 2001) $ 51,611 $ 56,204
Note Payable-Warrant Put Obligation 1,062 1,089
Other notes payable 36 -
---------------- --------------
52,709 57,293
Less current maturities (51,647) (56,204)
---------------- --------------
$ 1,062 $ 1,089
================ ==============
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 ($5,656 and $10,249 at December 31,
2000 and June 30, 2001, respectively). 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) or 10.75%, whichever is greater, 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
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capital expenditures, the payment of dividends, and the disposal of a
substantial portion of the Company's assets.
From December 31, 2000 through June 30, 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 August 1, 2001, nor the deferred line fee
that was originally due on November 17, 2000. Effective November 13, 2000,
February 1, March 1, April 1, May 1, and August 13, 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 August 1, 2001 as part
of the principal balance and waives the defaults resulting from the Company's
inability to comply with certain financial covenants as of December 31, 2000
through June 30, 2001. Although the lenders have waived the defaults by the
Company through June 30, 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, 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 June 30,
2001.
On June 7, 2001, the Company obtained the consent of its lenders to enter
into a letter of intent with Davel for the proposed merger and debt
restructuring and provided their consent to enter into the servicing agreement
with Davel as described in Note 2.
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 includes a cross default provision which permits the holder 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.
7. 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
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$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.
8. 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 consumate the Davel merger and debt restructuring;
(iii) the ability of the Company to accomplish its strategic objectives with
respect to external expansion through selective acquisitions and internal
expansion; (iv) 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 (v) changes in the
dial-around compensation rate and the coin drop rate. Any or all of these risks
and uncertainties could cause actual results to differ materially from those
reflected in the forward looking statements. These forward looking statements
are based on certain assumptions and analyses made by the Company in light of
its experience and its perception of historical trends, current conditions,
expected future developments and other factors it believes are appropriate in
the circumstances. In addition, such statements are subject to a number of
assumptions, risks and uncertainties, including, without limitation, the risks
and uncertainties identified in this report, general economics and business
conditions, the business opportunities (or lack thereof) that may be presented
to and pursued by the Company, changes in laws or regulations and other factors,
many of which are beyond the control of the Company. Investors and prospective
investors are cautioned that any such statements are not guarantees of future
performance and that actual results or developments may differ materially from
those projected in the forward looking statements.
OVERVIEW
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
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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.
In connection with the proposed merger with Davel and debt restructuring
discussed in Note 2, the Company is in the process of implementing the servicing
agreement entered into with Davel. Under this agreement, the two companies have
begun to combine field office operations networks to gain efficiencies resulting
from increased concentration of payphone routes. The Company expects to achieve
significant cost savings through the elimination of personnel, occupancy, and
other field operating expenses in advance of and after the proposed merger.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
REVENUES
Revenues decreased by $6,724, or 21.0%, from $29,910 for the first six
months of 2000 to $23,636 for the first six 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 36,931 for the six months ended June 30, 2000 to
34,787 for the six months ended June 30, 2001, a decrease of 2,144, or 5.8%,
principally due to the abandonment of location contracts relating to
approximately 3,400 pay telephones in last half of 2000 offset in part by the
increase in pay telephones resulting from contracts with new and existing
location providers.
Revenues from coin calls were $16,925 for the six months ended June 30,
2000 and $13,918 for the six months ended June 30, 2001. This decrease of
$3,007, or 17.8%, is due in part to the decrease in the average number of
installed pay telephones in the first half of 2001 compared to the first half 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 $3,431 or
26.9%, from $12,761 for the six months ended June 30, 2000 to $9,330 for the six
months ended June 30, 2001. Of this decrease, long distance revenues from
operator service providers decreased by $2,182 or 37.7%. 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 $1,249 or 17.9%, from $6,971 in the first
half of 2000 to $5,722 in the first half 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 half of 2001.
On April 5, 2001, the FCC issued an order which requires the first
switched-based IXC that carries coinless calls to pay dial-around compensation
on such 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. Subject to administrative reconsideration or judicial appeal, the FCC
order will become effective on November 27, 2001. Although 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, the amount of
the increase in revenues from dial-around compensation, if any, cannot be
determined at this time.
Other revenues increased $164 from $224 for the six months ended June 30,
2000 to $388 for the six months ended June 30, 2001. This increase was primarily
the result of an increase in payphone service revenue relating to services
provided to third parties.
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OPERATING EXPENSES
Total operating expenses increased $2,166, or 6.2%, from $35,077 for the
six months ended June 30, 2000 to $37,243 for the six months ended June 30,
2001. The increase was due to the $6,323 charge relating to location contracts
for asset impairment in the first half of 2000 offset by a reduction in
substantially all expense categories other than line and transmission charges.
The reductions in operating expense categories were 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 half of 2001 compared to 2000.
Line and transmission charges of $7,826 in the first half of 2000 and
$8,699 in 2001 increased by $873, or 11.2%. Line and transmission charges
represented 26.2% of total revenues for the six months ended June 30, 2000 and
36.8% of total revenues for the six months ended June 30, 2001, an increase of
10.6%. The dollar and percentage increases were primarily due to the recovery of
approximately $1,363 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
half of 2000, offset in part by the effect of the decrease in the average number
of pay telephones and lower line charges per phone in the first half of 2001.
Location commissions decreased $687, or 15.8%, from $4,349 for the six
months ended June 30, 2000 to $3,662 for the six months ended June 30, 2001.
Location commissions represented 14.5% of total revenues for the six months
ended June 30, 2000 and 15.5% of total revenues for the six months ended June
30, 2001, an increase of 1.0%. The dollar decrease is due to the reduction in
revenues subject to commissions in the first half of 2001 compared to 2000. The
increase as a percentage of total revenues reflects the increase in commission
rates on new location contracts and contract renewals.
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 $1,681, or
18.7%, from $8,977 in the first half of 2000 to $7,296 in 2001. Field operations
expenses represented 30.0% of total revenues for the six months ended June 30,
2000 and 30.9% of total revenues for the six months ended June 30, 2001. The
dollar decrease in the first half of 2001 was primarily due to a credit to
expense of $802 recorded in the first half of 2001 relating to the settlement of
a prior year state sales tax assessment charged to expense in prior periods,
lower salaries and wages resulting from a reduction in the number of field
operations personnel, and a reduction in the cost of service and repair parts
for pay telephones. The increase in field operations expense as a percentage of
total revenues was primarily due to the decrease in revenues in the first half
of 2001.
Selling, general and administrative ("SG&A") expenses declined from $5,062
for the first six months of 2000 to $4,157 for the six months ended June 30,
2001. SG&A expenses represented 16.9% of total revenues for the six months ended
June 30, 2000 and 17.6% of total revenues for the six months ended June 30,
2001. The dollar decrease was 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.
The percentage increase was due to the decline in revenues in 2001.
Depreciation and amortization decreased $1,939, or 22.2%, from $8,753 for
the six months ended June 30, 2000 to $6,814 for the six months ended June 30,
2001. Depreciation and amortization represented 29.3% of total revenues for the
six months ended June 30, 2000 and 28.8% of total revenues in 2001. The dollar
and percentage decreases were primarily due to a $1,805 reduction in
amortization expense in the first half 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.
The charge relating to location contracts was $6,323 in the first six
months of 2001, which is 26.8% of total revenues. This charge consists of an
asset impairment loss to write-down the carrying value of the Company's payphone
location contracts to their estimated fair value. There was no similar charge
relating to location contracts recorded in the first half of 2000.
Other unusual charges and contractual settlements were $110 in the six
months ended June 30, 2000 compared to $292 in the six months ended June 30,
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 $130, or
2.4%, from $5,381 for the six months ended June 30, 2000 to $5,511 for the six
months ended June 30, 2001. Interest expense represented 18.0% of total revenues
for the six months ended June 30, 2000 and 23.3% of total revenues for the six
months ended June 30, 2001, an increase of 5.3%. 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 half of 2000. Interest and other
income decreased from $142 for the first six months of 2000 to $115 in the first
half of 2001.
EBITDA FROM RECURRING OPERATIONS
EBITDA from recurring operations (income before interest income, interest
expense, taxes, depreciation and amortization, charge relating to location
contracts, and other unusual charges and contractual settlements) decreased
$3,874, from $3,696 for the six months ended June 30, 2000 to $178 loss for the
six months ended June 30, 2001. EBITDA from recurring operations represented
12.4% of total revenues for the six months ended June 30, 2000. The first half
2001 loss was 0.8% of total revenues. 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 $4,013 at June 30, 2001 compared to $2,698 at December 31,
2000. This decrease in working capital resulted primarily from a decrease in
accounts receivable. Net cash provided by operating activities during the six
months ended June 30, 2000 and 2001 was $607 and $989, respectively. The
increase in net cash provided by operations in the first half 2001 was primarily
due to the deferral of certain interest payments relating to the Company's Exit
Financing Agreement as discussed below offset by an increase in the Company's
operating loss, net of non-cash items.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash used in investing activities during the six months ended June 30, 2000
and 2001 was $944 and $844, respectively. In the first half 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 six months ended June
30, 2000 and 2001 was $137 and $36, respectively. Cash flows used in financing
activities consisted primarily of expenditures for professional fees for the
proposed refinancing of the Company's Exit Financing Agreement in 2000 and
principal payments on
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borrowings in 2001.
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 $4,013 at June 30,
2001, which represents a decrease in working capital of $1,315. Although the
Company's cash provided by operating activities increased from $607 for the six
months ended June 30, 2000 to $989 for the six months ended June 30, 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 June 30, 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 August 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 June 30, 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
and operator service 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. In the event that cash
flow from operating activities is insufficient to meet the Company's cash
requirements, there can be no assurance that the Company's lenders 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 who have agreed in
principal to the proposed merger with Davel and the debt restructuring described
in Note 2. The Company is in the process of implementing the servicing agreement
with Davel to achieve the anticipated efficiencies and cost savings associated
with the consolidation of both companies' field office operations. As part of
the Company's ongoing evaluation of its payphone base, the Company expects to
remove additional payphones that have become unprofitable. In addition, the
Company is developing alternate sources of revenue. With the expected
operational efficiencies and continued support of its lenders, management
believes, but cannot assure, that cash flow from operations, including any new
sources of revenue, will allow the Company to sustain its operations and meet
its obligations through the remainder of 2001 or until the proposed merger with
Davel is completed.
CAPITAL EXPENDITURES
For the six months ended June 30, 2001, the Company had capital
expenditures of $381 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 June 30, 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 customer mix.
Historically, first quarter revenues and related expenses have been lower than
other quarters due to
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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 $56.2 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 Seven to Loan and Security Agreement dated as of
August 13, 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 Letter Agreement, dated August 7, 2001, by an between the Company and
Davel regarding amendment to the Letter of Intent, dated June 12, 2001,
between the Company and Davel and the Servicing Agreement between the
Company and Davel.
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K dated June 12, 2001 reporting
that it had entered into a Servicing Agreement and a Letter of Intent
regarding the Merger and Debt Restructuring with Davel described in
Note 2 to the Company's consolidated financial statements under Item 5,
other events.
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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.
August 14, 2001 By: /s/ John D. CHICHESTER
---------------------------
John D. Chichester
President and Chief Executive Officer
August 14, 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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