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 SEPTEMBER 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 (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
--- ---
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 NOVEMBER 9,
2001, 10,189,684 SHARES OF THE REGISTRANT'S COMMON STOCK, $.01 PAR VALUE, WERE
OUTSTANDING.
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
FORM 10-Q
NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2001
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2000
and September 30, 2001..................................3
Consolidated Statements of Operations for the
Nine and Three Months Ended September 30, 2000
and 2001..............................................4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 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 3. Defaults Upon Senior Securities............................16
Item 6. Exhibits and Reports on Form 8-K...........................16
Signatures....................................................................17
2
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 SEPTEMBER 30
2000 2001
----------- ------------
ASSETS
Current assets:
Cash $ 4,425 $ 4,663
Accounts receivable, net of allowance for
doubtful accounts of $84 and $323,
respectively 7,632 6,783
Other current assets 1,294 1,092
-------- --------
Total current assets 13,351 12,538
Property and equipment, net 18,858 15,634
Intangible assets, net 48,374 34,083
Other assets 606 686
-------- --------
$ 81,189 $ 62,941
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ 51,647 $ 58,401
Accounts payable 6,792 7,805
Accrued expenses:
Location commissions 2,702 3,811
Line and transmission charges 1,865 2,208
Personal property and sales tax 2,753 1,458
Other 1,937 2,095
-------- --------
Total current liabilities 67,696 75,778
Long-term debt and other liabilities 1,062 1,102
Commitments and contingencies -- --
-------- --------
Total liabilities 68,758 76,880
-------- --------
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) (77,470)
-------- --------
Total shareholders' equity (deficit) 12,431 (13,939)
-------- --------
$ 81,189 $ 62,941
======== ========
The accompanying notes are an integral part of these financial statements.
3
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
- ----------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30 THREE MONTHS ENDED SEPTEMBER 30
------------------------------ -------------------------------
2000 2001 2000 2001
------------ ------------ ------------ -------------
REVENUES:
Coin calls $25,613 $20,842 $8,688 $6,924
Non-coin telecommunication services 19,923 13,876 7,162 4,546
Other 391 735 167 347
------------ ------------ ------------ ------------
45,927 35,453 16,017 11,817
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Line and transmission charges 12,475 12,362 4,649 3,663
Location commissions 6,640 5,686 2,291 2,024
Field operations 13,297 10,737 4,320 3,441
Selling, general and administrative 7,589 6,157 2,527 2,000
Depreciation and amortization 13,110 9,928 4,357 3,114
Charges relating to location contracts 2,880 8,075 2,880 1,752
Other unusual charges and contractual settlements 124 647 14 355
------------ ------------ ------------ ------------
56,115 53,592 21,038 16,349
------------ ------------ ------------ ------------
Loss from operations (10,188) (18,139) (5,021) (4,532)
OTHER INCOME (EXPENSE):
Interest expense (8,229) (8,393) (2,848) (2,882)
Interest and other income 197 162 55 47
------------ ------------ ------------ ------------
(8,032) (8,231) (2,793) (2,835)
------------ ------------ ------------ ------------
NET LOSS ($18,220) ($26,370) ($7,814) ($7,367)
============ ============ ============ ============
NET LOSS PER COMMON SHARE, BASIC AND DILUTED ($1.79) ($2.59) ($0.77) ($0.72)
============ ============ ============ ============
Weighted average number of shares, basic and diluted 10,189,099 10,189,684 10,189,684 10,189,684
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
4
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
- --------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30
--------------------
2000 2001
-------- --------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss ($18,220) ($26,370)
Adjustments to reconcile net loss to net cash flow
from operating activities:
Depreciation and amortization 13,110 9,928
Charges relating to location contracts 2,880 8,075
Non-cash interest expense 3,832 7,408
Provision for uncollectible accounts receivable 515 239
Gain on disposal of assets (83) (73)
Stock compensation expense 28 --
Changes in current assets (1,684) 812
Changes in current liabilities, excluding
reclassification of long-term debt 563 1,328
-------- --------
941 1,347
-------- --------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of property and equipment (857) (511)
Proceeds from sale of assets 99 109
Acquisition of intangible assets (738) (566)
Other deferred charges (57) (80)
-------- --------
(1,553) (1,048)
-------- --------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Principal payments on borrowings (52) (36)
Debt financing costs (144) (25)
Other 11 --
-------- --------
(185) (61)
-------- --------
Increase (decrease) in cash (797) 238
Cash, beginning of period 5,700 4,425
-------- --------
Cash, end of period $ 4,903 $ 4,663
======== ========
SUPPLEMENTAL DISCLOSURE:
Interest paid during the period $ 4,368 $ 566
======== ========
NON-CASH TRANSACTIONS:
Deferred financing costs $ 2,070 $ 2,990
Other 39 --
-------- --------
$ 2,109 $ 2,990
======== ========
The accompanying notes are an integral part of these financial statements.
5
PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 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 nine months ended September 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
60,000 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. During the third quarter of 2001, the two companies implemented the
servicing agreement by combining field service office operation networks on a
geographic basis to gain efficiencies resulting from the increased concentration
of payphone service routes.
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 $59,329 outstanding at September 30,
2001, including accrued interest). Existing holders of PhoneTel common stock
will own 9% of PhoneTel's outstanding shares immediately prior to the merger,
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 $270,000 outstanding at
September 30, 2001, including accrued interest). Existing shareholders of Davel
common stock will own 3% of Davel's outstanding shares immediately prior to the
merger, 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.
6
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 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 $329,000, will be converted 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.
The Company and Davel have executed amendments to the letter of intent
and servicing agreement to extend the time for executing a definitive merger
agreement until November 30, 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 $4,839 at
September 30, 2001, which represents a decrease in working capital of $2,141.
Although the Company's cash provided by operating activities increased from $941
for the nine months ended September 30, 2000 to $1,347 for the nine months ended
September 30, 2001, this increase was primarily due to the capitalization of
certain interest charges to the principal balance of the Company's Exit
Financing Agreement pursuant to the lenders' waivers as described in Note 7. In
addition, the Company has incurred continuing operating losses, was not in
compliance with certain financial covenants under its Exit Financing Agreement
at September 30, 2001 and has not made the monthly scheduled interest payments
from September 1 through November 1, 2001. Therefore, the Company is in default
with respect to its Exit Financing Agreement and, at the option of the Company's
lenders, the outstanding balance could become immediately due and payable. The
Company has requested and expects to obtain an amendment to the debt agreement
that would permit the Company to capitalize the past due interest and would
waive the defaults described above. However, there can be no assurance that the
lenders will grant the Company's current request or waive any further defaults
in the future.
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 can obtain additional
or alternative financing to meet its debt service and other cash requirements.
The Company has had discussions with its lenders who have agreed in
principle to the proposed merger with Davel and the debt restructuring described
in Note 2. The Company has implemented the servicing agreement with Davel and
has begun 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, in the third quarter of
2001, the Company removed approximately 2,000 additional payphones that had
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.
7
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 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 September 30, 2001, accounts receivable
included $6,561 and $5,883 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 nine months ended September 30, 2000 and 2001, revenues from non-coin
telecommunications services included $10,448 and $8,002, 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
As part of the Company's continuing program to evaluate the
profitability of its pay telephones, the Company wrote-off the carrying value of
location contracts for 1,480 and 1,960 pay telephones removed from service in
the third quarter of 2000 and 2001, respectively. The Company recorded a loss of
$2,880 and $1,752 in the third quarter of 2000 and 2001, respectively, relating
to the write-off of these abandoned location contracts. The Company also
evaluated the carrying value of its payphones and related intangible assets
(location contracts) in each of the Company's operating districts. At June 30,
2001, the carrying value of the Company's payphone assets in certain operating
districts exceeded the estimated undiscounted future cash inflows and
accordingly, the Company recorded an impairment loss of $6,323 to reduce the
carrying value of such assets to the estimated fair value at that date. Fair
value was determined based on the estimated market value of such payphone
assets. The asset impairment loss 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". The asset impairment loss and the write-off of
abandoned location contracts are included in charges relating to location
contracts in the accompanying consolidated statements of operations.
8
6. RECENT ACCOUNTING PRONOUNCEMENTS
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 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 September 30, 2001, the net carrying amount of intangible assets
is $34,083. Amortization expense during the nine months ended September 30, 2001
was $6,229. 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.
7. LONG-TERM DEBT
Long-term debt at December 31, 2000 and September 30, 2001 consisted of
the following:
December 31 September 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 September 30, 2001) $ 51,611 $ 58,401
Note Payable-Warrant Put Obligation 1,062 1,102
Other notes payable 36 --
-------- --------
52,709 59,503
Less current maturities (51,647) (58,401)
-------- --------
$ 1,062 $ 1,102
======== ========
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 amount ($5,656 and $12,446 at
December
9
31, 2000 and September 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, on the first day of the subsequent month. 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.
From December 31, 2000 through September 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 November 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 provided
for the capitalization of interest that was originally due on February 1 through
August 1, 2001 as part of the principal balance and waived the defaults
resulting from the Company's inability to comply with certain financial
covenants as of December 31, 2000 through June 30, 2001. The Company has
requested but has not yet received an amendment from its lenders that would
permit the Company to capitalize an additional $1,406 of monthly interest that
was due from September 1 through November 1, 2001 and would waive the financial
covenants with which the Company is not in compliance through September 30,
2001. Therefore, the Company is in default with respect to the Exit Financing
Agreement and 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 September 30, 2001. At December 31, 2000 and September 30, 2001, other
current liabilities includes $509 and $928 of accrued interest, respectively.
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.
10
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.
9. RELATED PARTY TRANSACTIONS
The Company's President and Chief Executive Officer is a Director,
Executive Vice President and a 49% shareholder of Urban Telecommunications, Inc.
("Urban"). During the nine months ended September 30, 2000 and 2001, the Company
earned revenue of $42 and $367, respectively, from various telecommunication
contractor services provided to Urban, principally residence and small business
facility provisioning and inside wiring. Accounts Receivable included $38 at
December 31, 2000 and $235 at September 30, 2001 due from Urban.
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 the
current or 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. During 2000 and 2001, the
Company reduced the number of field operations personnel and related costs,
abandoned location contracts relating to approximately 5,300 unprofitable phones
and, prior to the implementation of the servicing agreement with Davel, 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
11
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 has implemented the servicing
agreement entered into with Davel. Under this agreement, the two companies have
implemented mutual servicing arrangements affecting their respective field
office operations on a geographic basis. The Company has begun to achieve
significant cost savings through the elimination of personnel, occupancy, and
other field operating expenses under the servicing agreements.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2000
Revenues
- --------
Revenues decreased by $10,474, or 22.8%, from $45,927 for the first
nine months of 2000 to $35,453 for the first nine 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 36,962 for the nine months ended
September 30, 2000 to 34,492 for the nine months ended September 30, 2001. This
decrease of 2,470 pay telephones, or 6.7%, was principally due to the
abandonment of location contracts relating to approximately 5,300 pay telephones
in last half of 2000 and the third quarter of 2001, offset in part by the
increase in pay telephones resulting from contracts with new and existing
location providers.
Revenues from coin calls were $25,613 for the nine months ended
September 30, 2000 and $20,842 for the nine months ended September 30, 2001.
This decrease of $4,771, or 18.6%, is due in part to the decrease in the average
number of installed pay telephones in the first nine months of 2001 compared to
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 a 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 $6,047
or 30.4%, from $19,923 for the nine months ended September 30, 2000 to $13,876
for the nine months ended September 30, 2001. Of this decrease, long distance
revenues from operator service providers decreased by $3,601 or 38.0%. 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 $2,446 or 23.4%, from
$10,448 in the first nine months of 2000 to $8,002 in the first nine months 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 nine months 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 $344 from $391 for the nine months ended
September 30, 2000 to $735 for the nine months ended September 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 decreased by $2,523, or 4.5%, from $56,115 for
the nine months ended September 30, 2000 to $53,592 for the nine months ended
September 30, 2001. The decrease was principally due to a reduction in
substantially all expense categories, offset by an increase in charges relating
to location contracts. 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 nine months of 2001 compared
to 2000.
Line and transmission charges of $12,475 in the first nine months of
2000 and $12,362 in 2001 decreased by $113, or 0.9%. Line and transmission
charges represented 27.2% of total revenues for the nine months ended September
30, 2000 and 34.9% of total revenues for the nine months ended September 30,
2001, an increase of 7.7%. The dollar decrease was primarily due to the decrease
in the average number of pay telephones and lower line charges per phone in the
first nine months of 2001, offset by the recovery of approximately $1,733 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 nine months of 2000.
The increase as a percentage of total revenues was due to the decrease in
revenues in 2001.
Location commissions decreased $954, or 14.4%, from $6,640 for the nine
months ended September 30, 2000 to $5,686 for the nine months ended September
30, 2001. Location commissions represented 14.5% of total revenues for the nine
months ended September 30, 2000 and 16.0% of total revenues for the nine months
ended September 30, 2001, an increase of 1.5%. The dollar decrease is due to the
reduction in revenues subject to commissions in the first nine months 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 $2,560, or
19.3%, from $13,297 in the first nine months of 2000 to $10,737 in 2001. Field
operations expenses represented 29.0% of total revenues for the nine months
ended September 30, 2000 and 30.3% of total revenues for the nine months ended
September 30, 2001. The dollar decrease in the first nine months of 2001 was
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, 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. A portion of the decrease
in salaries and wages and other operating expenses is attributable to
efficiencies resulting from the servicing agreement with Davel. The increase in
field operations expense as a percentage of total revenues was primarily due to
the decrease in revenues in the first nine months of 2001.
Selling, general and administrative ("SG&A") expenses declined from
$7,589 for the first nine months of 2000 to $6,157 for the nine months ended
September 30, 2001, a decrease of $1,432, or 18.9%. SG&A expenses represented
16.5% of total revenues for the nine months ended September 30, 2000 and 17.4%
of total revenues for the nine months ended September 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 $3,182, or 24.3%, from $13,110
for the nine months ended September 30, 2000 to $9,928 for the nine months ended
September 30, 2001. Depreciation and amortization represented 28.6% of total
revenues for the nine months ended September 30, 2000 and 28.0% of total
revenues in 2001. The dollar and percentage decreases were primarily due to a
$3,004 reduction in amortization expense in the first nine months 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 and, to a lesser extent,
the $8,075 write-off of intangible assets in 2001.
Charges relating to location contracts were $2,880 in the first nine
months of 2000 compared to $8,075 in the first nine months of 2001. These
charges included $2,880 and $1,752 applicable to the write-off of abandoned
location contracts relating to 1,480 and 1,960 unprofitable pay telephones in
the third quarter of 2000 and 2001, respectively. Charges for 2001 also include
an asset impairment loss of $6,323 recorded in the second quarter to
13
write-down the carrying value of the Company's payphone location contracts to
its estimated fair value. There was no similar charge relating to location
contracts recorded in the first nine months of 2000.
Other unusual charges and contractual settlements were $124 in the nine
months ended September 30, 2000 compared to $647 in the nine months ended
September 30, 2001 and consisted primarily of legal and professional fees
relating to non-routine litigation, contractual matters and employment costs.
The amount for 2001 also includes $437 of expenses relating to the proposed
merger with Davel.
Other Income (Expense)
- ----------------------
Other income (expense) is comprised principally of interest expense
incurred on debt and interest income. Total interest expense increased $164, or
2.0%, from $8,229 for the nine months ended September 30, 2000 to $8,393 for the
nine months ended September 30, 2001. Interest expense represented 17.9% of
total revenues for the nine months ended September 30, 2000 and 23.7% of total
revenues for the nine months ended September 30, 2001, an increase of 5.8%. 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 offset in part by a decrease in the rate of interest.
The increase in interest expense as a percentage of revenue is primarily due to
the decrease in revenues compared to the first nine months of 2000. Interest and
other income decreased from $197 for the first nine months of 2000 to $162 in
the first nine months of 2001.
EBITDA from Recurring Operations
- --------------------------------
EBITDA from recurring operations (income before interest income,
interest expense, taxes, depreciation and amortization, charges relating to
location contracts, and other unusual charges and contractual settlements)
decreased $5,415, from $5,926 for the nine months ended September 30, 2000 to
$511 for the nine months ended September 30, 2001. EBITDA from recurring
operations represented 12.9% and 1.4% of total revenues for the nine months
ended September 30, 2000 and 2001, respectively. The dollar and percentage
decreases are primarily due to the decreases in coin and non-coin
telecommunication revenues (including dial-around compensation) offset 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 $4,839 at September 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 nine months ended September 30, 2000 and 2001 was $941 and $1,347,
respectively. The increase in net cash provided by operations in the first nine
months of 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 nine months ended
September 30, 2000 and 2001 was $1,553
14
and $1,048, respectively. In the first nine months 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 nine months ended
September 30, 2000 and 2001 was $185 and $61, 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 borrowings in 2000 and 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 $4,839 at
September 30, 2001, which represents a decrease in working capital of $2,141.
Although the Company's cash provided by operating activities increased from $941
for the nine months ended September 30, 2000 to $1,347 for the nine months ended
September 30, 2001, this increase was primarily due to the capitalization of
certain interest charges to the principal balance of the Company's Exit
Financing Agreement pursuant to the lenders' waivers as described in Note 7. In
addition, the Company has incurred continuing operating losses, was not in
compliance with certain financial covenants under its Exit Financing Agreement
at September 30, 2001 and has not made the monthly scheduled interest payments
from September 1 through November 1, 2001. Therefore, the Company is in default
with respect to its Exit Financing Agreement and, at the option of the Company's
lenders, the outstanding balance could become immediately due and payable. The
Company has requested and expects to obtain an amendment to the debt agreement
that would permit the Company to capitalize the past due interest and would
waive the defaults described above. However, there can be no assurance that the
lenders will grant the Company's current request or waive any further defaults
in the future.
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 can obtain additional
or alternative financing to meet its debt service and other cash requirements.
The Company has had discussions with its lenders who have agreed in
principle to the proposed merger with Davel and the debt restructuring described
in Note 2. The Company has implemented the servicing agreement with Davel and
has begun 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, in the third quarter of
2001, the Company removed approximately 2,000 additional payphones that had
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 nine months ended September 30, 2001, the Company had capital
expenditures of $511 which were
15
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 September 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 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 $58.4 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 3. DEFAULTS UPON SENIOR SECURITIES
The Registrant is in default with respect to its Exit Financing
Agreement as described in Note 7 to the consolidated financial
statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits are being filed with this report.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the third 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.
November 19, 2001 By: /s/ John D. Chichester
---------------------------
John D. Chichester
President and Chief Executive Officer
November 19, 2001 By: /s/ Richard P. Kebert
-------------------------
Richard P. Kebert
Chief Financial Officer,
Treasurer and Secretary
(Principal Financial Officer and
Accounting Officer)
17