U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE TRANSITION PERIOD FROM TO .
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COMMISSION FILE NUMBER 0-16715
PHONETEL TECHNOLOGIES, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-1462198
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
NORTH POINT TOWER, 7TH FLOOR, 1001 LAKESIDE AVENUE, CLEVELAND, OHIO 44114-1195
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(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
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of May 12, 2002,
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10,189,684 shares of the registrant's common stock, $.01 par value, were
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outstanding.
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PHONETEL TECHNOLOGIES, INC. AND SUBSIDIARY
FORM 10-Q
QUARTER ENDED MARCH 31, 2002
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 2001
and March 31, 2002...........................................3
Consolidated Statements of Operations for the Three
Months Ended March 31, 2001 and 2002.........................4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2001 and 2002.........................5
Notes to Consolidated Financial Statements.......................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk..................................................17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................17
Signatures...................................................................................19
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)
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(UNAUDITED)
DECEMBER 31 MARCH 31
2001 2002
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ASSETS
Current assets:
Cash $ 4,225 $ 5,573
Accounts receivable, net of allowance for doubtful accounts
of $412 and $506, respectively 6,769 5,716
Other current assets 992 1,290
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Total current assets 11,986 12,579
Property and equipment, net 13,983 12,844
Intangible assets, net 22,770 21,781
Other assets 689 625
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$ 49,428 $ 47,829
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 62,635 $ 69,847
Accounts payable 7,687 4,935
Accrued expenses:
Location commissions 3,810 3,573
Line and transmission charges 2,379 2,185
Personal property and sales tax 1,145 930
Other 806 948
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Total current liabilities 78,462 82,418
Long-term debt, net of current maturities 1,116 2,380
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Total liabilities 79,578 84,798
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Commitments and contingencies -- --
Shareholders' equity (deficit) :
Common Stock - $0.01 par value; 45,000,000 shares
authorized, 10,189,684 shares issued and outstanding 102 102
Additional paid-in capital 63,429 63,429
Accumulated deficit (93,681) (100,500)
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Total shareholders' equity (deficit) (30,150) (36,969)
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$ 49,428 $ 47,829
========= =========
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)
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THREE MONTHS ENDED MARCH 31
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2001 2002
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REVENUES:
Coin calls $ 6,716 $ 5,586
Non-coin telecommunication services 4,499 2,977
Other 141 189
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11,356 8,752
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OPERATING EXPENSES:
Line and transmission charges 4,362 3,199
Location commissions 1,597 1,460
Field operations 3,328 2,657
Selling, general and administrative 2,052 2,008
Depreciation and amortization 3,418 2,473
Other unusual charges and contractual settlements 110 201
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14,867 11,998
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Loss from operations (3,511) (3,246)
OTHER INCOME (EXPENSE):
Interest expense (2,744) (3,592)
Interest and other income 38 19
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(2,706) (3,573)
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NET LOSS ($6,217) ($6,819)
============ ============
NET LOSS PER COMMON SHARE, BASIC AND DILUTED ($0.61) ($0.67)
============ ============
Weighted average number of shares, basic and diluted 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)
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THREE MONTHS ENDED MARCH 31
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2001 2002
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CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss ($6,217) ($6,819)
Adjustments to reconcile net loss to net cash flow from operating activities:
Depreciation and amortization 3,418 2,473
Provision for uncollectible accounts receivable 155 94
Non-cash interest expense 2,738 3,511
Other (14) (7)
Changes in current assets 19 661
Changes in current liabilities, excluding reclassification of long-term debt 139 (3,256)
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238 (3,343)
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CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Purchases of property and equipment (173) (37)
Proceeds from sale of assets 14 9
Acquisition of intangible assets (277) (43)
Other deferred charges (11) 64
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(447) (7)
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CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from debt issuance -- 5,000
Principal payments on borrowings (2) (37)
Debt financing costs (35) (265)
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(37) 4,698
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Increase (decrease) in cash (246) 1,348
Cash, beginning of period 4,425 4,225
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Cash, end of period $ 4,179 $ 5,573
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SUPPLEMENTAL DISCLOSURE:
Interest paid during the period $ 515 $ 81
======= =======
NON-CASH TRANSACTIONS:
Deferred financing costs $ 345 --
======= =======
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 QUARTER ENDED MARCH 31, 2002
(IN THOUSANDS OF DOLLARS EXCEPT FOR PER PAY TELEPHONE, PER CALL AND PER SHARE
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AMOUNTS)
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1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three months ended March 31, 2002
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2002. 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, 2001.
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 currently operates
approximately 50,000 payphones in 44 states and the District of Columbia. On
February 19, 2002, the Company executed a definitive merger agreement with Davel
(the "Davel Merger Agreement") which was unanimously approved by the boards of
directors of both companies. In connection with the expected merger, PhoneTel
will become a wholly owned subsidiary of Davel. In addition, in June 2001 the
two companies 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.
In connection with the merger, the existing secured lenders of both
Davel and PhoneTel have agreed to exchange a substantial amount of debt for
equity securities of the respective companies and to restructure the remaining
debt. In addition, on February 19, 2002 Davel and PhoneTel have each executed
amendments to their existing credit agreements and have entered into a new
combined $10,000 senior credit facility.
In connection with PhoneTel's debt exchange, its existing secured
lenders will own 87% of PhoneTel's outstanding common stock immediately prior to
the merger with the remaining secured debt not to exceed $36,500 (compared to
$66,097 outstanding at March 31, 2002, 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 existing secured
lenders will own 93% of Davel's outstanding common stock immediately prior to
the merger, with the remaining secured debt not to exceed $63,500 (compared to
approximately $237,592 outstanding at March 31, 2002, 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.
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% will
be reserved for issuance of post-closing employee options and other stock-based
incentives, on a fully diluted basis and the companies' existing lenders will
own approximately 90.81%.
6
Effective with the merger, the then outstanding balance of the existing
secured debt of both entities, currently in the approximate amount of $303,689,
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 term debt will be payable at maturity. Under the commitment letter
issued by the existing secured lenders of both PhoneTel and Davel on February
19, 2002, interest on the term debt will be payable at a rate of 10% per annum
and the debt will mature on December 31, 2005. The commitment is contingent upon
the consummation of the merger and expires on August 31, 2002. Upon consummation
of the debt restructuring described above, the Company estimates, based on the
carrying value of its debt at March 31, 2002, that it will have a gain relating
to the restructuring of approximately $8.8 million.
The Davel Merger is subject to approval by the shareholders of both
companies and the receipt of material third party and governmental approvals and
consents. In conjunction with the transaction, PhoneTel will also seek
shareholder approval to increase the number of authorized shares of common stock
from 45,000,000 to approximately 125,000,000 shares. No dates have been set for
the stockholders' meetings.
3. FINANCIAL CONDITION
The Company's working capital, excluding the current portion of
long-term debt, increased from a deficiency of $3,841 at December 31, 2001 to $8
at March 31, 2002 primarily due to $5,000 in new borrowings in the first quarter
of 2002, the proceeds of which were used to pay accounts payable and other
current liabilities. As a result, the Company's cash provided by (used in)
operating activities decreased from $238 for the three months ended March 31,
2001 to $(3,343) for the three months ended March 31, 2002. In addition, the
Company has incurred continuing operating losses, was not in compliance with
certain financial covenants under its Exit Financing Agreement (see Note 5) from
December 31, 2000 through March 31, 2002 and has not made the monthly scheduled
interest payments that were originally due on February 1, 2001 through March 1,
2002. As a result of certain amendments to the Company's Exit Financing
Agreement, the lenders have waived all defaults relating to the Company's
failure to comply with certain financial covenants, extended the due date of the
loan, deferred all monthly interest payments to the maturity date of the loan,
and have amended or eliminated certain financial covenants. The Company's
existing lenders have also agreed to restructure this debt in connection with
the Davel Merger as described in Note 2. As further discussed in Note 5,
PhoneTel was not in compliance with a financial covenant under the Senior
Credit Agreement as a result of an uncertainty regarding the timing and amount
of certain revenues the Company expects to receive from dial-around
compensation. Effective as of February 19, 2002, this agreement was amended to
enable the Company to comply. However, if the Company is unable to complete the
Davel Merger and does not comply with the terms of its debt agreements, as
amended, such debt could become immediately due and payable.
The Company's working capital, liquidity and capital resources may be
limited by its ability to generate sufficient cash flow from its operations or
its investing or financing activities. Cash flow from operations depends on
revenues from coin and non-coin sources, including dial-around compensation, and
management's ability to control expenses. There can be no assurance that coin
revenues will not decrease, that revenues from dial-around compensation will
continue at the rates anticipated, or that operating expenses can be maintained
at present or reduced to lower levels. To the extent that cash flow from
operating activities is insufficient to meet the Company's cash requirements,
there can be no assurance that the Company's lenders will grant additional
advances or that the Company can obtain additional financing to meet its debt
service and other cash requirements.
On February 19, 2002, the Company obtained $5,000 of new financing
under the Senior Credit Agreement described in Note 5. The Company also
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, the Company plans to remove additional
payphones that have become unprofitable. In addition, the Company is developing
alternate sources of revenue. With the current operational efficiencies and
additional cost savings expected in connection with the Davel Merger and the
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
7
obligations through the remainder of 2002 or until the proposed merger with
Davel is completed.
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.
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 Federal Communications
Commission (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. Prior to 2001, the Company recorded revenue from dial-around
compensation based upon the current rate of $0.24 per call ($0.238 per call
prior to April 21, 1999) and 131 monthly calls per phone, which was the monthly
average compensable calls used by the FCC in initially determining the amount of
dial-around compensation to which payphone service providers ("PSP") were
entitled. In the fourth quarter of 2000, the Company recorded a bad debt expense
of $4,429 applicable to amounts previously recognized as revenue for the period
November 1996 to September 2000. The Company also began reporting revenues from
dial-around compensation based on $0.24 per call and the Company's current
estimate of the average monthly compensable calls per phone, which more closely
reflects the Company's historical collection experience and expected future
developments.
As a result of orders issued by the FCC regarding dial-around compensation
and the resulting litigations, the amount of revenue payphone service providers
("PSPs") were entitle to receive and the amount PSPs actually received has
varied. In general, there have been underpayments of dial-around compensation
from IXCs and other carriers from November 6, 1996 through October 7, 1997 (the
"Interim Period") and overpayments to PSPs, including the Company, from November
7, 1997 through April 20, 1999 (the "Intermediate Period"). On January 31, 2002,
the FCC released its Fourth Order on Reconsideration and Order on Remand (the
"2002 Payphone Order") that provides a partial decision on how retroactive
dial-around compensation adjustments for the Interim Period and Intermediate
Period may apply. The 2002 Payphone Order increases the flat monthly dial-around
compensation rate for true-ups between individual IXCs and PSPs during the
Interim Period from $31.178 to $33.892 (the "New Default Rate"). The New Default
Rate is based on 148 calls per month at $0.229 per call. The New Default rate
also applies to flat rate dial-around compensation during the Intermediate
Period when the actual number of dial-around calls for each payphone is not
available. The 2002 Payphone Order excludes resellers but expands the number of
IXCs required to pay dial-around compensation during the Interim and
Intermediate Periods. It also prescribes the Internal Revenue Service interest
rate for refunds as the interest rate to be used to calculate overpayments and
underpayments of dial-around compensation for the Interim Period and
Intermediate Period.
The 2002 Payphone Order kept in place the per-call compensation rate during
the Intermediate and subsequent periods. However, the FCC deferred to a later,
as yet unreleased order, the method of allocating dial-around compensation among
IXCs responsible for paying fixed rate per-phone compensation. At the present
time, the Company is unable to determine the effect of the final implementation
of the 2002 Payphone Order. However, it is possible that any retroactive
adjustments for the Interim Period and Intermediate Period could have a material
adverse effect on the Company.
At December 31, 2001 and March 31, 2002, accounts receivable included
$5,291 and $4,797, respectively, arising from dial-around compensation. Such
receivables are typically received on a quarterly basis at the beginning of the
second quarter following the quarter in which such revenues are recognized. For
the three months ended March 31, 2001 and 2002, revenues from non-coin
telecommunications services included $2,822 and $2,347, respectively, for
dial-around compensation.
8
On April 5, 2001, the FCC issued an order which makes the first
switched based interexchange carrier to which a local exchange carrier routes a
compensable coinless payphone call responsible for paying dial-around
compensation on coinless calls placed from payphones by individuals utilizing
toll-free numbers. This order was issued to address the serious difficulties
encountered by payphone service providers in identifying and collecting
dial-around compensation from telecommunications resellers. The FCC order became
effective on November 23, 2001. The Company expects this FCC order to improve
its ability to identify and collect amounts relating to dial-around calls that
would otherwise have become uncollectible. The amount of this increase in
revenues from dial-around compensation in the first quarter of 2002 will not be
determinable until at least July 2002 when remittances related to the current
quarter are expected. Any future revenues related to this order will be recorded
when collection is probable and the amount can be reasonably estimated.
5. LONG-TERM DEBT
Long-term debt at December 31, 2001 and March 31, 2002 consisted of the
following:
December 31 March 31
2001 2002
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Exit Financing Agreement, due August 31, 2002
with interest at 10.75% (or 3% above the base
rate, if greater) at March 31, 2002 $ 62,635 $ 66,097
Senior Credit Agreement, due June 30, 2003
with interest at 15% - 5,000
Note Payable-Warrant Put Obligation 1,116 1,130
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63,751 72,227
Less current maturities (62,635) (69,847)
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$ 1,116 $ 2,380
======== ========
EXIT FINANCING AGREEMENT
In connection with the Company's prepackaged plan of reorganization
(the "Prepackaged Plan"), which was consummated on November 17, 1999, the
Company emerged from its Chapter 11 proceeding and executed an agreement with
Foothill Capital Corporation ("Foothill") for post reorganization financing
("Exit Financing Agreement"). The Exit Financing Agreement provided for a
$46,000 revolving credit commitment (the "Maximum Amount"), excluding interest
and fees capitalized as part of the principal balance. The Exit Financing
Agreement is secured by substantially all of the assets of the Company and was
originally scheduled to mature on November 16, 2001.
The Exit Financing Agreement provides for various fees aggregating $9,440
over the original 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. The Exit Financing
Agreement, as amended, also provides for an additional fee of $575 per month for
each month after the original maturity date of the loan. 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 were subject to certain reductions for early
prepayment, providing the Company was not in default on 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
9
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 March 31, 2002, the Company was not in
compliance with certain financial covenants under the Exit Financing Agreement.
In addition, the Company did not pay the monthly interest payments that were
originally due on February 1, 2001 through March 1, 2002 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, and February 19 and May
14, 2002, 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 August 31, 2002. The Amendments
provide for the capitalization of monthly interest that was originally due on
February 1, 2001 through August 1, 2002 as part of the principal balance and
waives defaults through March 31, 2002 for the Company's failure to comply with
certain financial covenants. The Amendments also amended or eliminated certain
financial covenants and permits the Company to incur the debt under the Senior
Credit Agreement described below, which debt is senior in right of payment to
Company's Exit Financing Agreement. Although the lenders have waived defaults by
the Company through March 31, 2002, there can be no assurances that the Company
will be able to comply with its financial covenants through the remainder of
2002. If a default occurs with respect to the Company's Exit Financing
Agreement, this obligation, subject to the rights of the Senior Lenders, could
become immediately due and payable.
On February 19, 2002, PhoneTel's and Davel's existing secured lenders,
including Foothill, consented to the Davel Merger, agreed to exchange a
substantial amount of debt for equity securities, and committed to restructure
the remaining debt. The Company previously received consent from Foothill to
enter into the servicing agreement with Davel (see Note 2).
SENIOR CREDIT AGREEMENT
On February 19, 2002, in connection with the Davel Merger Agreement,
PhoneTel and Davel jointly entered into a new $10,000 senior secured credit
facility (the "Senior Credit Agreement") with Madeleine L.L.C. and ARK CLO
2000-1, Limited (the "Senior Lenders"). Under the Senior Credit Agreement,
PhoneTel and Davel each received $5,000 of loan proceeds and will each pay 50%
of the interest, fees and principal due thereunder. The companies have joint and
several liability for this obligation and each would be responsible for the
entire obligation in the event of default by the other party.
The Senior Credit Agreement is secured by substantially all of the assets
of PhoneTel and Davel and provides for the payment of monthly interest at 15%
per annum and, beginning July 31, 2002, monthly principal payments of $833
through the earlier of June 30, 2003, the maturity date of the loan, or the
termination of the Davel Merger Agreement (which will occur on August 31, 2002
if not extended by the Lenders). If the Davel Merger Agreement is not
consummated by August 31, 2002, all outstanding amounts will become immediately
due and payable. The Senior Credit Agreement also provides for the payment of a
1% loan fee, loan costs incurred by the Senior Lenders, and advanced payments of
principal from excess cash flow or certain types of cash receipts. The Company
incurred $235 for its share of costs and loan fees. The Senior Credit Agreement
also requires PhoneTel and Davel to maintain a minimum level of combined
earnings (as defined in the Senior Credit Agreement) and limits the incurrence
of cash expenditures and indebtedness, the payment of dividends, and certain
asset disposals.
On May 14, 2002, PhoneTel and Davel executed an amendment to the
Senior Credit Agreement that reduced the minimum level of combined earnings
that the companies are required to maintain through June 30, 2002. Although the
Senior Lenders have granted an amendment which is effective as of February 19,
2002 to reduce the level of required earnings, there can be no assurance that
PhoneTel will be able to comply with the financial covenants through the
remainder of 2002. If a default occurs with respect to the Senior Credit
Agreement, this obligation could become immediately due and payable. Further, a
default under the Senior Credit Agreement could result in a default under the
Exit Financing Agreement which could accelerate amounts due thereunder.
10
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
and the Senior Credit Agreement. The note contains 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.
6. EFFECT OF 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 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.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." SFAS No. 144 replaces SFAS No.
121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of." SFAS No. 144 retains the fundamental provisions of
SFAS No. 121 for the recognition and measurement of the impairment of long-lived
assets to be disposed of by sale. Under SFAS No. 144, long-lived assets are
measured at the lower of the carrying amount or fair value, less cost to sell.
The Company was required to adopt this statement no later than January 1, 2002.
In 2002, the Company adopted SFAS Nos. 141, 142 and 144. There was no
effect on the classification or useful lives of the Company's intangible assets
or the amount of amortization expense or impairment losses recorded by the
Company as a result of the adoption of the new standards.
In April 2002, the FASB issued SFAS No. 145 covering, among other
things, the recission of SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt". Under SFAS No. 4, all gains and losses from the
extinguishment of debt were required to be aggregated and, if material,
classified as an extraordinary item in the statement of operations. By
rescinding SFAS No. 4, SFAS No. 145 eliminates the requirement to classify debt
extinguishment as extraordinary items. The new standard is effective for
companies with fiscal years beginning after May 15, 2002. However, early
application of the standard is encouraged. As discussed in Note 2, the Company
is currently contemplating a series of transactions that will include the
extinguishment of debt. As a result of the recent
11
issuance of this standard, management of the Company has not determined the
effects, if any, that it may have on the related accounting or whether the
standard will be adopted early.
7. 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.
8. 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 three months ended March 31, 2001 and 2002, the Company
earned revenue of $64 and $107, respectively, from various telecommunication
contractor services provided to Urban, principally residence and small business
facility provisioning and inside wiring. The net amount of accounts receivable
due from Urban was $128 at December 31, 2001 and $206 at March 31, 2002.
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 2002 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 consummate the previously announced merger with Davel
and substantial debt restructuring contemplated thereby, and if consummated, the
Company's ability to successfully integrate its operations with Davel's; (iii)
impairment of the Company's liquidity arising from potential actions of lenders
with respect to defaults under the Company's debt agreements; (iv) regulatory
changes effecting the dial-around compensation rate and the coin drop rate and
(v) the ability of the Company to continue to realize efficiencies generated by
the Servicing Agreement with Davel. 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.
RESULTS OF OPERATIONS
Overview
- --------
During 2001, the Company implemented several profit improvement
initiatives. In connection with the proposed merger with Davel and debt
restructuring discussed in Note 2 to the consolidated financial statements, the
two companies entered into a servicing agreement designed to commence cost
savings initiatives in advance of the
12
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 Company and Davel were able to
close 21 district operations facilities, eliminate 104 vehicles, and reduce the
number of field service personnel by 114 in connection with the servicing
agreement. The companies estimate that this will result in an annual cost saving
of approximately $6 million, which is reflected in the combined field operations
cost that is being shared by both companies in proportion to the number of pay
telephones owned by each pursuant to the servicing agreement.
As part of the Company's ongoing program to evaluate the profitability
of its pay telephones, the Company removed and wrote-off the carrying value of
its location contracts for 1,960 pay telephones during the third quarter of
2001. At the end of 2001 and early 2002, the Company increased its local coin
call rate from $0.35 to $0.50 for a majority of the Company's payphones,
although rates are lower in some markets due its competitive conditions. The
Company also reduced the number of administrative and sales personnel and
eliminated or reduced certain non-essential expenses. The Company believes these
measures have and will continue to have a positive impact on the results of its
operations.
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
Revenues
- --------
Revenues decreased by $2,604 or 22.9%, from $11,356 for the first three
months of 2001 to $8,752 for the first three months of 2002. 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 35,062 for the three months ended March 31, 2001
to 29,766 for the three months ended March 31, 2002, a decrease of 5,296 or
15.1%, principally due to the timing of expiring location contracts, the
competition for payphone locations in the marketplace, the termination of
unprofitable location contracts relating to approximately 1,960 pay telephones
in last half of 2001, and the sale of approximately 1,080 payphones located in
Montana and Wyoming in December 2001.
Revenues from coin calls decreased by $1,130 or 16.8%, from $6,716 for
the three months ended March 31, 2001 to $5,586 for the three months ended March
31, 2002. The decrease is due in part to the decrease in the average number of
installed pay telephones in the first quarter of 2002 compared to the first
quarter of 2001. 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. These decreases
in call volume have been offset by the increase in the local coin call rate from
$0.35 to $0.50 for the majority of the Company's payphones, resulting in a net
decrease in revenues from coin calls on a per phone basis of 2.0%.
Revenues from non-coin telecommunication services decreased by $1,522,
or 33.8%, from $4,499 for the three months ended March 31, 2001 to $2,977 for
the three months ended March 31, 2002. Of this decrease, long distance revenues
from operator service providers decreased by $750 or 44.7%. 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 communication services. In addition, revenues
from dial-around compensation decreased by $772 or 27.4%, from $2,822 in the
first quarter of 2001 to $2,050 in the first quarter of 2002, primarily due to
the reduction in the average number of pay telephones and compensable calls.
Although the Company expects to receive additional revenue as a result of the
FCC's April 5, 2001 order relating to dial-around calls placed through
resellers, no additional revenue was recognized in the first quarter of 2002
because the amount is not presently determinable. (See Note 4 to the
consolidated financial statements).
Non-coin revenue from dial-around compensation during the three months
ended March 31, 2001 and 2002 does not include any adjustments that might result
from the FCC's 2002 Payphone Order. As a result of proceedings
13
by the FCC, the FCC has determined that there will be an industry-wide
reconciliation to true-up underpayments made during the Interim and Intermediate
Periods as between the payphone providers, including the Company, and the
relevant "dial-around" carriers. While the timing and amounts of such true-up
payments, if any, are not currently determinable, in management's opinion the
final implementation of this reconciliation process, and the outcome of any
related administrative or judicial review of such adjustments, could potentially
have a material adverse effect on the Company (see Note 4 to the consolidated
financial statements).
Other revenues increased $48 from $141 for the three months ended March
31, 2001 to $189 for the three months ended March 31, 2002. This increase was
primarily the result of an increase in payphone service revenue relating to
services provided to third parties.
Operating Expenses.
- -------------------
Total operating expenses decreased $2,869, or 19.3%, from $14,867 for
the three months ended March 31, 2001 to $11,998 for the three months ended
March 31, 2002. The decrease was due to a reduction in substantially all expense
categories, due in part to the decrease in the average number of installed pay
telephones and a decrease in personnel and other costs in the first quarter of
2002 compared to the first quarter of 2001.
Line and transmission charges decreased $1,163, or 26.7%, from $4,362
for the three months ended March 31, 2001 to $3,199 for the three months ended
March 31, 2002. Line and transmission charges represented 38.4% of total
revenues for the three months ended March 31, 2001 and 36.6% of total revenues
for the three months ended March 31, 2002, a decrease of 1.8%. The dollar and
percentage decreases were primarily due to the average number of pay telephones
in the first quarter of 2002 and the recovery of $499 of excess line charges
from BellSouth Telecommunications, Inc. ("BellSouth") received in February 2001.
Due to an appeal of an interim order from the Tennessee Regulatory Authority by
BellSouth that was recently dismissed, the reduction in line and transmission
expenses was recorded in the three months ended March 31, 2002.
Location commissions decreased $137, or 8.6%, from $1,597 for the three
months ended March 31, 2001 to $1,460 for the three months ended March 31, 2002.
Location commissions represented 14.1% of total revenues for the three months
ended March 31, 2001 and 16.7% of total revenues for the three months ended
March 31, 2002, an increase of 2.6%. The dollar decrease is due to the reduction
in revenues in the first quarter of 2002 compared to 2001. The increase in
location commissions as a percentage of total revenues reflects the increase in
commission rates on new location contracts and contract renewals, and the lower
commission rates on payphones removed from service under the Company's ongoing
program to evaluate the profitability of its payphones.
Field operations expenses (consisting principally of field operations
personnel and vehicle costs, rents and utilities of the local service facilities
and repair and maintenance of the installed public pay telephones) decreased
$671, or 20.2%, from $3,328 for the three months ended March 31, 2001 to $2,657
for the three months ended March 31, 2002. Field operations expenses represented
29.3% of total revenues for the three months ended March 31, 2001 and 30.4% of
total revenues for the three months ended March 31, 2002. The dollar decrease in
the first quarter of 2002 was primarily due to reductions in salaries and wages,
vehicle costs and local service facility occupancy costs resulting from the
implementation of the servicing agreement with Davel in the third quarter of
2001. The decrease in these expenses from 2001 to 2002 was offset by 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.
The increase in field operations expenses as a percentage of total revenues is a
result of the decrease in revenues in the first quarter of 2002.
Selling, general and administrative ("SG&A") expenses decreased $44, or
2.1%, from $2,052 for the three months ended March 31, 2001 to $2,008 for the
three months ended March 31, 2002. SG&A expenses represented 18.1% of total
revenues for the three months ended March 31, 2001 and 22.9% of total revenues
for the three months ended March 31, 2002. The dollar decrease was primarily due
to cost reduction efforts that resulted in decreases in the number of personnel
and personnel related expenses, offset by an increase in professional fees
relating to routine contractual and corporate matters. The increase in SG&A
expenses as a percentage of total revenues is due to lower revenues in the first
quarter of 2002.
Depreciation and amortization decreased $945, or 27.6%, from $3,418 for
the three months ended March
14
31, 2001 to $2,473 for the three months ended March 31, 2002. Depreciation and
amortization represented 30.1% and 28.3% of total revenues for the three months
ended March 31, 2001 and 2002, respectively. The dollar and percentage decreases
were primarily due to an $882 reduction in amortization expense in the first
quarter of 2002. The reduction in amortization expense was due to $17,582 of
write-offs of intangible assets relating to losses on asset impairment and the
abandonment of payphone location contracts recorded in the last three quarters
of 2001.
Other unusual charges and contractual settlements were $110 in the
three months ended March 31, 2001 compared to $201 in the three months ended
March 31, 2002 and consisted primarily of legal and professional fees relating
to non-routine litigation, contractual matters and employment costs as well as
$164 of merger related expenses incurred in 2002.
Other Income (Expense)
- ----------------------
Other income (expense) is comprised principally of interest expense
incurred on debt and interest income. Total interest expense increased $848, or
30.9%, from $2,744 for the three months ended March 31, 2001 to $3,592 for the
three months ended March 31, 2002. Interest expense represented 24.2% of total
revenues for the three months ended March 31, 2001 and 41.0% of total revenues
for the three months ended March 31, 2002, an increase of 16.8%. The dollar and
percentage increases were 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 and $5,000 of new borrowings under the Company's Senior
Credit Agreement. The increase in interest expense as a percentage of total
revenue is also due to the decrease in revenues compared to the first quarter of
2002. Interest and other income decreased from $38 for the first three months of
2001 to $19 in the first quarter of 2002.
EBITDA from Recurring Operations
- --------------------------------
EBITDA from recurring operations (income before interest income,
interest expense, taxes, depreciation and amortization, and other unusual
charges and contractual settlements) decreased $589, from $17 for the three
months ended March 31, 2001 to a loss of $572 for the three months ended March
31, 2002. EBITDA from recurring operations represented 0.1% of total revenues
for the three months ended March 31, 2001 and (6.5)% of total revenues for the
three months ended March 31, 2002. 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 working capital, excluding the current portion of
long-term debt, of $8 at March 31, 2002 compared to a working capital deficiency
of $3,841 at December 31, 2001. This increase in working capital was due to
$5,000 of new borrowings under the Company's Senior Credit Agreement, the
proceeds of which were used to reduce accounts payable and accrued expenses in
the first quarter of 2002 (See Note 5 to the consolidated financial statements).
Net cash provided by (used in) operating activities during the three months
ended March 31, 2001 and 2002 was $238 and $(3,343), respectively. The increase
in net cash (used in) operations in the first quarter 2002 reflects additional
payments of accounts payable and accrued expenses to reduce past due balances
with vendors.
15
Cash Flows from Investing Activities
- ------------------------------------
Cash used in investing activities during the three months ended March
31, 2001 and 2002 was $447 and $7, respectively. In the first quarter of 2001
and 2002, 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. The
level of such expenditures was lower in 2002 because the Company has been able
to redeploy payphones previously removed from service and has been able to
curtail the use of signing bonuses to acquire new payphone locations under
current competitive conditions.
Cash Flows from Financing Activities
- ------------------------------------
Cash flows provided by (used in) financing activities during the three
months ended March 31, 2001 and 2002 was $(37) and $4,698, respectively. Cash
flows used in financing activities during the three months ended March 31, 2001
consisted primarily of expenditures for professional fees for the proposed
refinancing of the Company's debt. In the first quarter of 2002, cash flows
provided by financing activities primarily consist of $5,000 of proceeds from
the Company's Senior Credit agreement less financing and debt restructuring
costs.
Financial Condition
- -------------------
The Company's working capital, excluding the current portion of
long-term debt, increased from a deficiency of $3,841 at December 31, 2001 to $8
at March 31, 2002 primarily due to $5,000 in new borrowings in the first quarter
of 2002, the proceeds of which were used to pay accounts payable and other
current liabilities. As a result, the Company's cash provided by (used in)
operating activities decreased from $238 for the three months ended March 31,
2001 to $(3,343) for the three months ended March 31, 2002. In addition, the
Company has incurred continuing operating losses, was not in compliance with
certain financial covenants under its Exit Financing Agreement (see Note 5 to
the consolidated financial statements) from December 31, 2000 through March 31,
2002 and has not made the monthly scheduled interest payments that were
originally due on February 1, 2001 through March 1, 2002. As a result of certain
amendments to the Company's Exit Financing Agreement, the lenders have waived
all defaults relating to the Company's failure to comply with certain financial
covenants, extended the due date of the loan, deferred all monthly interest
payments to the maturity date of the loan, and have amended or eliminated
certain financial covenants. The Company's existing lenders have also agreed to
restructure this debt in connection with the Davel Merger as described in Note 2
to the consolidated financial statements. As further discussed in Note 5,
PhoneTel was not in compliance with a financial covenant under the Senior
Credit Agreement as a result of an uncertainty regarding the timing and amount
of certain revenues the Company expects to receive from dial-around
compensation. Effective as of February 19, 2002, this agreement was amended to
enable the Company to comply. However, if the Company is unable to complete the
Davel Merger and does not comply with the terms of its debt agreements, as
amended, such debt could become immediately due and payable.
The Company's working capital, liquidity and capital resources may be
limited by its ability to generate sufficient cash flow from its operations or
its investing or financing activities. Cash flow from operations depends on
revenues from coin and non-coin sources, including dial-around compensation, and
management's ability to control expenses. There can be no assurance that coin
revenues will not decrease, that revenues from dial-around compensation will
continue at the rates anticipated, or that operating expenses can be maintained
at present or reduced to lower levels. To the extent that cash flow from
operating activities is insufficient to meet the Company's cash requirements,
there can be no assurance that the Company's lenders will grant additional
advances or that the Company can obtain additional financing to meet its debt
service and other cash requirements.
On February 19, 2002, the Company obtained $5,000 of new financing
under the Senior Credit Agreement described in Note 5 to the consolidated
financial statements. The Company also 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, the Company plans
to remove additional payphones that have become unprofitable. In addition, the
16
Company is developing alternate sources of revenue. With the current operational
efficiencies and additional cost savings expected in connection with the Davel
Merger and the 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 2002 or until the proposed merger with Davel is
completed.
Capital Expenditures
- --------------------
For the three months ended March 31, 2002, the Company had capital
expenditures of $37 which were financed by cash flows from operating activities.
Capital expenditures are principally for replacement or installation of the
Company's public pay telephones, related equipment, operating equipment and
computer hardware. The Company has no significant commitments for capital
expenditures at March 31, 2002.
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 variable-rate 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 $66 million and approximately $6 million of other
fixed-rate debt.
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
2.1 Amendment Number 1 to Agreement and Plan of Reorganization Merger dated
as of May 7, 2002 by and among PhoneTel Technologies, Inc. and Davel
Communications, Inc., Davel Financing, L.L.C., DF Merger Corp., and PT
Merger Corp.
10.1 Amendment Number Nine to Loan and Security Agreement dated as of May
14, 2002 by and among PhoneTel Technologies, Inc. and Cherokee
Communications, Inc. ("Borrowers") and the financial
17
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 First Amendment to the Credit Agreement dated as of May 14, 2002, by
and among Davel Financing Company, L.L.C., PhoneTel Technologies, Inc.,
Cherokee Communications, Inc.; Davel Communications, Inc. and the
domestic subsidiaries of Davel Financing Company, L.L.C. and Davel
Communications, Inc. (together "Borrowers"); and Madeleine L.L.C. and
ARK CLO 2000-1 Limited (the "Lenders") amending the Credit Agreement
dated as of February 19, 2002 between Borrowers and Lenders.
(b) Reports on Form 8-K
During the first quarter of 2002, the Company filed a report on Form
8-K under Item 5 dated February 27, 2002 reporting that the Company had
entered into an Agreement and Plan of Reorganization and Merger with
Davel Communications, Inc., that the existing secured lenders of the
Company and Davel agreed to exchange a substantial amount of debt for
equity securities and restructure the remaining debt, and that the
Company and Davel entered into a new combined $10 million senior credit
facility.
18
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PHONETEL TECHNOLOGIES, INC.
May 16, 2002 By: /s/ John D. Chichester
---------------------------
John D. Chichester
President and Chief Executive Officer
May 16, 2002 By: /s/ Richard P. Kebert
-------------------------
Richard P. Kebert
Chief Financial Officer,
Treasurer and Secretary
(Principal Financial Officer and
Accounting Officer)
19
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.1 Amendment Number 1 to Agreement and Plan of Reorganization
Merger dated as of May 7, 2002 by and among PhoneTel
Technologies, Inc. and Davel Communications, Inc., Davel
Financing, L.L.C., DF Merger Corp., and PT Merger Corp.
10.1 Amendment Number Nine to Loan and Security Agreement dated as
of May 14, 2002 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 First Amendment to the Credit Agreement dated as of May 14,
2002, by and among Davel Financing Company, L.L.C., PhoneTel
Technologies, Inc., Cherokee Communications, Inc.; Davel
Communications, Inc. and the domestic subsidiaries of Davel
Financing Company, L.L.C. and Davel Communications, Inc.
(together "Borrowers"); and Madeleine L.L.C. and ARK CLO
2000-1 Limited (the "Lenders") amending the Credit Agreement
dated as of February 19, 2002 between Borrowers and Lenders.
20