-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T/9RFJXgWV/mboabB9IfTna06oeKMt8PvlRSgUtiaGOI3dQhyjj1TJXNb0cSSwOn 1YF2uikcRFu8TvWi3xxZbA== 0001016843-00-000260.txt : 20000329 0001016843-00-000260.hdr.sgml : 20000329 ACCESSION NUMBER: 0001016843-00-000260 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAVEL COMMUNICATIONS INC CENTRAL INDEX KEY: 0001072881 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 593538257 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25207 FILM NUMBER: 580135 BUSINESS ADDRESS: STREET 1: 10120 WINDHORST ROAD CITY: TAMPA STATE: FL ZIP: 33619 BUSINESS PHONE: 8136233545 MAIL ADDRESS: STREET 1: 1429 MASSARO BOULEVARD CITY: TAMPA STATE: FL ZIP: 33619 FORMER COMPANY: FORMER CONFORMED NAME: DAVEL HOLDINGS INC DATE OF NAME CHANGE: 19981103 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark one) (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR ( ) 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 0-22610 DAVEL COMMUNICATIONS, INC. ------------------------------------------------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 59-3538257 - -------------------------------- ------------------------------------ (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 10120 WINDHORST ROAD TAMPA, FLORIDA 33619 - ---------------------------------------- ------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (813) 628-8000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ---------------------------------------- ------------------------------------- NONE SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: COMMON STOCK, $0.01 PAR VALUE PER SHARE (TITLE OF CLASS) 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 ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. [ ] As of March 15, 2000 the aggregate market value of the voting and nonvoting common equity held by non-affiliates of the registrant was approximately $21,599,768 based upon the closing price on March 15, 2000 of $4.00 and using beneficial ownership rules adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude voting shares owned by directors and officers, some of whom may not be held to be affiliates upon judicial determination. As of March 15, 2000, there were 11,033,628 shares of the registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE None DAVEL COMMUNICATIONS, INC. FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Part I Item 1 Business 2 Item 2 Properties 18 Item 3 Legal Proceedings 18 Item 4 Submission of Matters to a Vote of Security Holders 19 Part II Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters 20 Item 6 Selected Consolidated Financial Data 21 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Item 7A Quantitative and Qualitative Disclosures About Market Risk 36 Item 8 Financial Statements and Supplementary Data 38 Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 63 Part III Item 10 Directors and Executive Officers 63 Item 11 Executive Compensation 68 Item 12 Security Ownership of Certain Beneficial Owners and Management 71 Item 13 Certain Transactions 72 Part IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 74 1 PART I SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934: Certain of the statements contained in the body of this Report are forward-looking statements (rather than historical facts) that are subject to risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. In the preparation of this Report, where such forward-looking statements appear, the Company has sought to accompany such statements with meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those described in the forward-looking statements. An additional statement summarizing the principal risks and uncertainties inherent in the Company's business is included herein under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations-Regulatory Impact on Revenue." Readers of this Report are encouraged to read these cautionary statements carefully. ITEM 1. BUSINESS GENERAL OVERVIEW Davel Communications, Inc. (the "Company" or "Davel") was incorporated on June 9, 1998 under the laws of the State of Delaware to effect the merger (the "Peoples Merger"), on December 23, 1998, of Davel Communications Group, Inc. ("Old Davel"), with Peoples Telephone Company, Inc. ("Peoples Telephone"). The merger was accounted for as a pooling-of-interests transaction and accordingly the results of both companies have been restated as if they had been combined for all periods presented. As a result of the Peoples Merger and the prior acquisition of Communications Central Inc. in February, 1998 (the "CCI Acquisition"), the Company is the largest domestic independent payphone service provider ("IPP") in the United States, with approximately twice the number of payphones as the second largest domestic independent payphone service provider. The Company's principal executive offices are located at 10120 Windhorst Road, Tampa, Florida 33619, and its telephone number is (813) 628-8000. As of December 31, 1999, the Company owned and operated a network of 74,869 payphones in 44 states and the District of Columbia, providing it with one of the broadest geographic coverages of any payphone service provider ("PSP") in the country. The Company's installed payphone base generates revenue through both coin calls (local and long-distance), non-coin calls (calling card, credit card, prepaid calling card, collect, toll-free and third-party billed calls) and dial-around calls (utilizing a 1-800, 1010XXX or similar dialing method to select a carrier other than the Company's pre-selected carrier). The Company also facilitates the provision of operator assisted services at its payphones through contractual relationships with various interexchange carriers ("IXCs"), including Sprint and AT&T. A significant portion of the Company's payphones are located in high-traffic areas such as convenience stores, shopping centers, truck stops, service stations, grocery stores, restaurants and airports. As part of the Telecommunications Act of 1996 ("1996 Telecom Act"), Congress directed the Federal Communications Commission ("FCC") to ensure widespread access to payphones for the general public. Industry reports estimate that there are approximately 2.0 million payphones 2 currently operating in the United States, of which approximately 1.6 million are operated by the Regional Bell Operating Companies ("RBOCs"), AT&T, Sprint and GTE. The remaining approximately 400,000 payphones are owned by more than 1,000 IPPs and smaller local exchange carriers ("LECs"). The Company believes that its scale, geographic reach and proven integration expertise position it to play a leading role in the ongoing consolidation of the fragmented payphone industry. The Company's strategy is to increase its nationwide presence through internal growth primarily focusing on regional and national accounts and through targeted strategic acquisitions, generally in existing markets or contiguous markets. Additionally, the Company is developing new revenue streams associated with the presence afforded by its large and geographically dispersed payphone location base. INDUSTRY OVERVIEW Today's telecommunications marketplace was principally shaped by the 1984 court-approved divestiture by AT&T of its local telephone operations (the "AT&T Divestiture") and the many regulatory changes adopted by the FCC and state regulatory authorities in response to the AT&T Divestiture, including the authorization of the connection of competitive or independently owned payphones to the public switched network. The "public switched network" is the traditional domestic landline public telecommunications network used to carry, switch and connect telephone calls. The connection of independently owned payphones to the public switched network has resulted in the creation of additional business segments in the telecommunications industry. Prior to these developments, only the consolidated Bell system or independent LECs were permitted to own and operate payphones. Following the AT&T Divestiture, the independent payphone sector developed as a competitive alternative to the consolidated Bell system and other LECs by providing more responsive customer service, lower cost of operations and higher commissions to the owners or operators of the premises at which a payphone is located ("Location Owners"). Prior to the AT&T Divestiture, the LECs could refuse to provide payphone service to a business operator or, if service was installed, would typically pay no or relatively small commissions for the right to place a payphone on the business premises. Following the AT&T Divestiture and the FCC's authorization of payphone competition, IPPs began to offer Location Owners higher commissions on coin calls made from the payphones in order to obtain the contractual right to install the equipment on the Location Owners' premises. Initially, coin revenue was the only source of revenue for the payphone operators because they were unable to participate in revenues from non-coin calls. However, the operator service provider ("OSP") industry emerged and enabled the competitive payphone operators to compete more effectively with the regulated telephone companies by paying commissions to payphone owners for non-coin calls. For the first time, IPPs were able to receive non-coin call revenue from their payphones. With this incremental source of revenue from non-coin calls, IPPs were able to compete more vigorously on a financial basis with RBOCs and other LECs for site location agreements, as a complement to the improved customer service and more efficient operations provided by the IPPs. As part of the AT&T Divestiture, the United States was divided into Local Access Transport Areas ("LATAs"). RBOCs were authorized to provide telephone service that both originates and terminates within the same LATA ("intraLATA") pursuant to tariffs filed with and approved by state regulatory authorities. RBOCs provide payphone service primarily in their own respective territories, and are now authorized to share payphone revenues from telecommunications services between LATAs ("interLATA"). Long-distance companies, such as Sprint, AT&T, MCI and Worldcom, provide interLATA services, and in some circumstances, may also provide local or long-distance service within LATAs. An interLATA long-distance telephone call generally begins with an originating LEC transmitting the call from the originating payphone to a point of connection with a long- 3 distance carrier. The long-distance carrier, through its owned or leased switching and transmission facilities, transmits the call across its long-distance network to the LEC servicing the local area in which the recipient of the call is located. The terminating LEC then delivers the call to the recipient. BUSINESS STRATEGY The Company's objective is to increase revenues and profitability through strategic acquisitions, internal sales growth, development of new revenue streams and continued reductions in its overall cost structure. The Company has implemented the following strategy to meet its objective. UTILIZE ADVANCED PAYPHONE TECHNOLOGY. The Company's payphones utilize "smart" technology which provide voice synthesized calling instructions, detect and count coins deposited during each call, inform the caller at certain intervals of the time remaining on each call, identify the need for and the amount of an additional deposit in order to continue the call, and other functions associated with the completion of calls. Through the use of a non-volatile, electronically erasable, programmable read-only memory chip, the payphones can also be programmed and reprogrammed from the Company's central computer facilities to update rate information or to direct different kinds of calls to particular carriers. The Company's payphones can also distinguish coins by size and weight, report to a remote location the total amount of coin in the coin box, perform self-diagnosis and automatically report problems to a pre-programmed service number. APPLY SOPHISTICATED MONITORING AND MANAGEMENT INFORMATION SYSTEMS. The Company utilizes proprietary and non-proprietary software that continuously tracks coin and non-coin revenues from each payphone, as well as expenses relating to that payphone, including commissions payable to the Location Owners. The software allows the Company to generate detailed financial information by customer, by location and by payphone, which allows it to monitor the profitability and operating condition of each location and payphone. PROVIDE OUTSTANDING CUSTOMER SERVICE. The technology used by the Company enables it to (i) respond quickly to equipment malfunctions and (ii) maintain accurate records of payphone activity which can be verified by customers. The Company strives to minimize "downtime" on its payphones by identifying service problems as quickly as possible. The Company believes its ability to service payphones promptly allows it to retain existing customers and attract new ones. The Company employs both advanced telecommunications technology and trained field technicians as part of its commitment to provide superior customer service. The records generated through the Company's technology also allow for the more timely and accurate payment of commissions to Location Owners. DEVELOP STRONG RELATIONSHIPS WITH SERVICE PROVIDERS AND SUPPLIERS. As part of its strategy to continue to reduce operating costs, the Company has formed strategic alliances with a number of service and equipment providers. The Company has formed alliances with certain LECs and competitive local exchange carriers to purchase local line access services, and has agreements with a number of IXCs to provide transmission and operator services to its payphones at a discount. In addition, the Company's volume of new payphone installations has allowed it to negotiate favorable purchasing arrangements with payphone equipment providers. FACILITATE GROWTH THROUGH INTERNAL SALES AND MARKETING. The Company actively seeks to install new payphones through its sales and marketing efforts to obtain additional payphone 4 locations with new and existing accounts. The Company conducts site surveys to examine various factors, including population density, traffic patterns and historical usage information. The Company intends to install approximately 4,200 payphones in 2000, compared with 5,985 payphones installed in 1999 and 7,233 payphones installed in 1998, exclusive of acquisitions. RATIONALIZATION OF LOW-REVENUE PHONES. In 1999, the Company experienced revenue declines as a result of increased competition from cellular and other telecommunications products. As a result of declining revenues, the Company has begun implementing a strategy to remove low revenue phones that do not meet the Company's minimum criteria of profitabilty. During 1999, the Company removed 16,841 phones. The Company has an ongoing program to identify additional phones to be removed in 2000 based upon low revenue performance. PURSUE STRATEGIC ACQUISITIONS. The Company is currently restricted from making acquistions by the Second Amendment to the Credit Agreement (see "Liquidity and Capital Resource-Second Amendment"). However the, the Company will continue to seek key opportunities, as strategic acquisitions have enabled the Company to expand its market presence and further its strategy of concentrating its payphones more rapidly than with internal sales growth alone. Any acquistion would require appoval from the lenders. Concentrating its payphones in close proximity allows the Company to plot more efficient collection routes. The Company believes that route density contributes to cost savings. Because smaller companies typically are not able to achieve the economies of scale that may be realized by the Company, the integration of acquired payphones into the Company's network of payphones often results in lower operating costs than the seller of such payphones had been able to realize. By clustering its payphones around its regional offices, the Company is able to leverage its existing infrastructure through more efficient service and collection routes which leads to a lower overall cost structure. For example, since integrating the Peoples Merger, Davel has been able to increase the number of payphones per technician to an average of 222 in 1999 from 186 in 1998 as a result of greater payphone density, workforce rationalizations and computerized route design. ACQUISITIONS The Company has historically generated growth by pursuing the acquisition of payphone companies or assets within its existing market areas and in areas in which the Company desires to establish a new market presence. With the Peoples Merger, the Company added approximately 43,000 payphones to its network. With the CCI Acquisition, the Company added 19,543 payphones to its network. The Company added an additional 1,341 and 4,019 payphones to its network through other acquisitions during 1999 and 1998, respectively. 5 Listed below is a summary of acquisitions completed by Old Davel and Peoples Telephone during 1999, 1998 and 1997.
NUMBER OF PURCHASE PRICE COMPANY DATE PAYPHONES (IN THOUSANDS) - ---------------------------------------- -------------------- ----------- -------------- Reliable Payphones, Inc March 3, 1999 560 $ 2,350 Vend-Lease Company, Inc. January 20, 1999 652 2,673 Eat N' Park Restaurants December 1998 136 286 Call Communications, Inc. August 1998 1,251 2,948 Communications Central Inc. February 1998 19,543 109,117 Indiana Telecom January 1998 2,632 11,317 Tele/Data Pay Telephone August 1997 183 511 Blair Telephone June 1997 1,255 3,868 Quarter Call June 1997 954 2,160 Mid-Eastern April 1997 117 233 All others (fewer than 70 phones each) 610 462 ----------- -------------- Totals 27,893 $ 135,925 =========== ==============
OPERATIONS As of December 31, 1999 and December 31, 1998, the Company owned and operated 74,869 and 84,384 payphones, respectively. COIN CALLS The Company's payphones generate coin revenues primarily from local calls. Historically, the maximum rate that LECs and independent payphone companies could charge for local calls was generally set by state regulatory authorities and in most cases was $0.25 through October 6, 1997. In ensuring "fair compensation" for all calls, the FCC previously determined that local coin rates from payphones should be generally deregulated by October 7, 1997, but provided for possible modifications or exemptions from deregulation upon a detailed demonstration by an individual state that there are market failures within the state that would not allow market-based rates to develop. On July 1, 1997, a federal court issued an order which upheld the FCC's authority to deregulate local coin call rates. In accordance with the FCC's ruling and the court order, certain LECs and IPPs, including the Company, began to increase rates for local coin calls from $0.25 to $0.35 after October 7, 1997. The Company is also testing, in limited areas, a $0.50 per call rate for local calls. See "--Business-Effect of Federal Regulation of Local Calls and Dial-Around Calls." InterLATA long distance coin calls are carried by long distance carriers that have contracted to provide service to the Company's payphones. The Company pays a charge to the long-distance carrier each time that carrier transports a long-distance call for which the Company receives coin revenue. The Company's payphones also generate coin revenue from intraLATA long-distance calls which are transported by either IXC or LEC facilities. 6 NON-COIN CALLS The Company also receives revenues from non-coin calls made from its payphones. Non-coin calls include credit card, calling card, prepaid calling card, collect and third-party billed calls. The services needed to complete a non-coin call include providing an automated or live operator to answer the call, verifying billing information, validating calling cards and credit cards, routing and transmitting the call to its destination, monitoring the call's duration and determining the charge for the call, and billing and collecting the applicable charge. The Company has contracted with IXC operator service providers to handle calls that require operator services and to perform all associated functions while paying the Company a commission on the revenues generated thereby. The Company realizes additional non-coin revenue from certain long distance companies pursuant to the 1996 Telecom Act and FCC regulations thereunder as compensation for "dial-around" non-coin calls made from its payphones. A dial-around call is made by dialing an access code for the purpose of reaching a long distance company other than the one designated by the payphone operator, using a "toll free" number, generally by dialing a 1-800/888/877 number, a 950-number or a seven-digit "1010XXX" code before dialing "0" for operator service. "Regulation." PAYPHONE BASE In addition to payphones acquired by the Company (see "Business-Acquisitions"), the Company's payphone base includes payphones installed by the Company. The following table sets forth, for the last three fiscal years, the number of Company payphones acquired, installed and removed during the year as well as the net increase (decrease) in Company payphones in operation. 1999 1998 1997 -------- --------- --------- Acquired 1,341 23,691 2,861 Installed 5,985 7,233 6,311 Removed (16,841) (5,549) (3,953) ------- ------ ------ Net Increase/(Decrease) (9,515) 25,375 5,219 Most of the Company's payphones are located in proximity to one of the Company's division offices, from which Company employees operate and service the payphones and conduct ales and marketing efforts. The following table sets forth the number of payphones operated by the 7 Company (Davel, Old Davel and Peoples Telephone) in each state and the District of Columbia as of December 31, 1999, 1998 and 1997: DECEMBER 31, ---------------------------------------- STATE 1999 1998 1997 - ----------------------------- -------- -------- -------- Alabama 1,932 2,357 692 Arizona 637 779 745 Arkansas 505 528 45 California 2,572 3,760 3,830 Colorado 452 447 33 Connecticut 69 -- -- Delaware 138 119 97 District of Columbia 460 511 460 Florida 12,799 15,708 12,851 Georgia 4,672 5,357 2,838 Illinois 2,233 2,626 1,713 Indiana 2,635 2,947 895 Iowa 546 747 784 Kansas 172 13 9 Kentucky 1,423 1,436 913 Louisiana 2,363 2,580 1,676 Maine 52 52 39 Maryland 3,383 3,464 3,258 Massachusetts 488 534 410 Michigan 504 504 406 Minnesota 811 471 -- Mississippi 1,657 2,201 1,205 Missouri 519 366 170 Nebraska 23 32 36 Nevada 355 388 404 New Hampshire 68 80 57 New Jersey 566 611 588 New Mexico 2 -- -- New York 5,684 6,022 6,022 North Carolina 3,957 4,586 3,578 North Dakota 8 10 -- Ohio 2,646 2,719 1,583 Oklahoma 149 102 10 Oregon 1 11 12 Pennsylvania 3,404 3,472 2,691 Rhode Island 75 76 42 South Carolina 2,495 2,892 2,219 South Dakota 8 1 3 Tennessee 4,177 4,763 2,632 Texas 4,367 4,237 2,015 Utah 131 272 248 Vermont 30 18 17 Virginia 5,127 5,917 3,372 Washington -- -- 1 West Virginia 332 402 261 Wisconsin 242 266 149 ------ ------ ------ Totals 74,869 84,384 59,009 ====== ====== ====== 8 The Company selects locations for its payphones where there is typically high demand for payphone service, such as convenience stores, truck stops, service stations, grocery stores, shopping centers, restaurants, hotels and airports. For many locations, historical information regarding an installed payphone is available because payphone operators are often obligated pursuant to agreements to provide this information to Location Owners for their payphones. In locations where historical revenue information is not available, the Company relies on its site survey to examine geographic factors, population density, traffic patterns and other factors in determining whether to install a payphone. The Company's marketing staff attempts to obtain agreements to install the Company's payphones ("Location Agreements") at locations with favorable historical data regarding payphone revenues. Location Agreements generally provide for revenue sharing with the applicable Location Owner. The Company's Location Agreements generally provide commissions based on fixed percentages of revenues and have three-to five-year terms. The Company can generally terminate a Location Agreement on 30 days notice to the Location Owner if the payphone does not generate sufficient revenue. During 1999, the Company became more aggressive in monitoring its payphone base and removing underperforming payphones, which it often relocates to locations with more potential for profitability. SERVICE AND MAINTENANCE The Company employs field service technicians, each of whom collects coin boxes from, cleans and maintains an average of approximately 222 payphones. The technicians also respond to trouble calls made by Location Owners, by users of payphones or by the telephone itself as part of its internal diagnostic procedures. Some technicians are also responsible for the installation of new payphones. Due to the proximity of most of the Company's payphones to the Company's division offices, the concentration of the Company's payphone base and the ability of the field service technicians to perform on-site service and maintenance functions, the Company is able to limit the frequency of trips to the payphone as well as the number of employees needed to service the payphones. CUSTOMERS, SALES AND MARKETING The Company employs marketing personnel for its payphone operations in each of its regions of operation. Regional marketing personnel are responsible for finding desirable locations for payphones and obtaining Location Agreements with Location Owners within their geographic areas. The Company believes that using regional marketing personnel provides better market penetration because of their familiarity with and proximity to their regions. To date, IPPs have had a competitive advantage over LECs due to their ability to offer commissions to Location Owners for both local and long-distance calls. Historically, LECs were generally unable to derive revenues from interstate calls and non-coin, interLATA calls, and consequently, were unable to offer commissions on such calls. FCC rules adopted pursuant to the 1996 Telecom Act granted LECs the ability to select the long-distance carrier for interLATA long-distance calls in conjunction with the Location Owner. As a result, LECs may now derive revenues from and pay commissions on these calls. See "--Regulation." The Location Owners with whom the Company contracts are a diverse group of small, medium-sized and large businesses which are frequented by individuals needing payphone access. The majority of the Company's payphones are located at convenience stores, truck stops, service 9 stations, grocery stores, shopping centers, hotels and airports. As of December 31, 1999, corporate payphone accounts of 50 or more payphones represented approximately 48% of the Company's installed payphone base. SERVICE AND EQUIPMENT SUPPLIERS The Company's primary suppliers provide payphone components, local line access, and long-distance services. In order to promote acceptance by end users accustomed to using LEC-owned payphone equipment, the Company utilizes payphones designed to be similar in appearance and operation to payphones owned by LECs. The Company purchases circuit boards from various manufacturers for repair and installation of payphones. The Company primarily obtains local line access from various LECs, including BellSouth, Bell Atlantic, GTE, SBC Communications, US West and various other incumbent and competitive suppliers of local line access. New sources of local line access are expected to emerge as competition continues to develop in local service markets. Long-distance services are provided to the Company by various long-distance and operator service providers, including Sprint, AT&T, MCI Worldcom, Qwest and others. The Company expects the basic availability of such products and services to continue in the future, although the continuing availability of alternative sources cannot be assured. Transition from the Company's existing suppliers, if necessary, could have a disruptive influence on the Company's operations and could give rise to unforeseen delays and/or expenses. The Company is not aware of any current circumstances that would require the Company to seek alternative suppliers for any of the products or services used in the operation of its business. ASSEMBLY AND REPAIR OF PAYPHONES The Company assembles and repairs payphone equipment for its own use. The assembly of payphone equipment provides the Company with technical expertise used in the operation, service, maintenance and repair of its payphones. The Company assembles payphones from standard payphone components purchased from component manufacturers. These components include a metal case, an integrated circuit board incorporating a microprocessor, a handset and cord, and a coin box and lock. All of the components purchased by the Company are available from several suppliers, and Davel does not believe that the loss of any supplier would have a material adverse effect on its assembly operations. The Company's payphones comply with all material regulatory requirements regarding the performance and quality of payphone equipment and have all of the operating characteristics required by the state regulatory authorities, including: free access to local emergency ("911") telephone numbers; dial-around access to all locally available long-distance companies; the capability of receiving incoming calls at no charge; and automatic coin return capability for incomplete calls. TECHNOLOGY The payphone equipment installed by the Company makes use of microprocessors to provide voice synthesized calling instructions, detect and count coin deposits during each call, inform the caller at certain intervals of the time remaining on each call, identify the need for and the amount of an additional deposit and other functions associated with completion of calls. Through the use of non-volatile, electronically erasable, programmable read-only memory chips, 10 the payphones can also be programmed and reprogrammed from the Company's central computer facilities to update rate information or to direct different kinds of calls to particular carriers. The Company's payphones can distinguish coins by size and weight, report to a remote location the total coin in the coin box, perform self-diagnosis and automatically report problems to a pre-programmed service number, and immediately report attempts at vandalism or theft. Many of the payphones operate on power available from the telephone lines, thereby avoiding the need for and reliance upon an additional power source at the installation location. The Company utilizes proprietary and non-proprietary software that tracks the coin and non-coin revenues from each payphone as well as expenses relating to that payphone, including commissions payable to the Location Owners. The software allows the Company to generate detailed financial information by Location Owner, location and payphone, which allows the Company to monitor the profitability and operating condition of each location and payphone. The Company provides all technical support required to operate the payphones, such as computers and software and hardware specialists, at its headquarters in Tampa, Florida. The Company's manufacturing support operations provide materials, equipment, spare parts and accessories to the field. Each of the Company's division offices maintains inventories for immediate access by field service technicians. REGULATION The FCC and state regulatory authorities have traditionally regulated payphone and long-distance services, with regulatory jurisdiction being determined by the interstate or intrastate character of the service and the degree of regulatory oversight varying among jurisdictions. On September 20 and November 8, 1996, the FCC adopted initial rules and policies to implement Section 276 of the 1996 Telecom Act. The 1996 Telecom Act substantially restructured the telecommunications industry, included specific provisions related to the payphone industry and required the FCC to develop rules necessary to implement and administer the provisions of the 1996 Telecom Act on both an interstate and intrastate basis. Among other provisions, the 1996 Telecom Act granted the FCC the power to preempt state payphone regulations to the extent that any state requirements are inconsistent with the FCC's implementation of Section 276. FEDERAL REGULATION OF LOCAL COIN AND DIAL-AROUND CALLS The Telephone Operator Consumer Services Improvement Act of 1990 ("TOCSIA") established various requirements for companies that provide operator services and for call aggregators, including PSPs, who send calls to those OSPs. The requirements of TOCSIA as implemented by the FCC included call branding, information posting, rate quotations, the filing of informational tariffs and the right of payphone users to access any OSP to make non-coin calls. TOCSIA also required the FCC to take action to limit the exposure of payphone companies to undue risk of fraud upon providing this "open access" to carriers. TOCSIA further directed the FCC to consider the need to provide compensation for IPPs for dial-around calls. Accordingly, the FCC ruled in May 1992 that IPPs were entitled to dial-around compensation. Because of the complexity of establishing an accounting system for determining per call compensation for these calls, and for other reasons, the FCC temporarily set this compensation at $6.00 per payphone per month based on an assumed average of 15 interstate carrier access code dial-around calls per month and a rate of $0.40 per call. The failure by the FCC to provide compensation for 800 "toll free" dial-around calls was challenged by the IPPs, and 11 a federal court subsequently ruled that the FCC should have provided compensation for these toll free calls. In 1996, recognizing that independent payphone providers had been at a severe competitive disadvantage under the existing system of regulation and had experienced substantial increases in dial-around calls without a corresponding adjustment in compensation, Congress enacted Section 276 to promote both competition among payphone service providers and the widespread deployment of payphones throughout the nation. Section 276 directed the FCC to implement rules by November 1996 that would: o create a standard regulatory scheme for all public payphone service providers o establish a per call compensation plan to ensure that all payphone service providers are fairly compensated for each and every completed intrastate and interstate call, except for 911 emergency and telecommunications relay service calls; o terminate subsidies for LEC payphones from LEC regulated rate-base operations; o prescribe, at a minimum, nonstructural safeguards to eliminate discrimination between LEC and independent payphone service providers and remove the LEC payphones from the LEC's regulated asset base; o provide for the RBOCs to have the same rights that independent payphone service providers have to negotiate with Location Owners over the selection of interLATA carrier services, subject to the FCC's determination that the selection right is in the public interest and subject to existing contracts between the Location Owners and interLATA carriers; o provide for the right of all payphone service providers to choose the local, intraLATA and interLATA carriers subject to the requirements of, and contractual rights negotiated with, Location Owners and other valid state regulatory requirements; o evaluate the requirement for payphones which would not normally be installed under competitive conditions but which might be desirable as a matter of public policy, and establish how to provide for and maintain such payphones if it is determined they are required; and o preempt any state requirements which are inconsistent with the FCC's regulations implementing Section 276. In September and November 1996, the FCC issued its rulings implementing Section 276 (the "1996 Payphone Order"). In the 1996 Payphone Order, the FCC determined that the best way to ensure fair compensation to independent and LEC PSPs for each and every call was to deregulate, to the maximum extent possible, the price of all calls originating from payphones. For local coin calls, the FCC mandated that deregulation of the local coin rate would not occur until October 1997 in order to provide a period of orderly transition from the previous system of state regulation. To achieve fair compensation for dial-around calls through deregulation and competition, the FCC in the 1996 Payphone Order directed a two-phase transition from a regulated market. In the first phase, November 1996 to October 1997, the FCC prescribed flat-rate compensation payable to the PSPs by the IXCs in the amount of $45.85 per month per payphone. This rate was arrived at by determining that the deregulated local coin rate was a valid market-based surrogate 12 for dial-around calls. The FCC applied a market-based, deregulated coin rate of $0.35 per call to a finding from the record that there was a monthly average of 131 compensable dial-around calls per payphone. This total included both carrier access code calls dialed for the purpose of reaching a long distance company other than the one designated by the PSP as well as 800 "toll free" calls. The monthly, per phone flat-rate compensation of $45.85 was to be assessed only against IXCs with annual toll-call revenues in excess of $100 million and allocated among such IXCs in proportion to their gross long-distance revenues. During the second phase of the transition to deregulation and market-based compensation (initially from October 1997 to October 1998, but subsequently extended in a later order by one year to October 1999), the FCC directed the IXCs to pay the PSPs on a per-call basis for dial-around calls at the assumed deregulated coin rate of $0.35 per call. At the conclusion of the second phase, the FCC set the market-based local coin rate, determined on a payphone-by-payphone basis, as the default per-call compensation rate in the absence of a negotiated agreement between the PSP and the IXC. To facilitate per-call compensation, the FCC required the PSPs to transmit payphone-specific coding digits which would identify each call as originating from a payphone and required the LECs to make such coding available to the PSPs as a tariffed item included in the local access line service. In July 1997, a federal court responded to an appeal of the 1996 Payphone Order, finding that the FCC erred in (1) setting the default per-call rate at $0.35 without considering the differences in underlying costs between dial-around calls and local coin calls, (2) assessing the flat-rate compensation against only the carriers with annual toll-call revenues in excess of $100 million, and (3) allocating the assessment of the flat-rate compensation based on gross revenues rather than on a factor more directly related to the number of dial-around calls processed by the carrier. The Court also assigned error to other aspects of the 1996 Payphone Order concerning inmate payphones and the accounting treatment of payphones transferred by an RBOC to a separate affiliate. In response to the Court's remand, the FCC issued its modified ruling implementing Section 276 (the "1997 Payphone Order") in October of 1997. The FCC determined that distinct and severable costs of $0.066 were attributable to coin calls that did not apply to the costs incurred by the PSPs in providing access for dial-around calls. Accordingly, the FCC adjusted the per call rate during the second phase of interim compensation to $0.284 (which is $0.35 less $0.066). While the FCC tentatively concluded that the $0.284 default rate should be utilized in determining compensation during the first phase and reiterated that PSPs were entitled to compensation for each and every call during the first phase, it deferred a decision on the precise method of allocating the initial interim period (November 1996 through October 1997) flat-rate payment obligation among the IXCs and the number of calls to be used in determining the total amount of the payment obligation. On March 9, 1998, the FCC issued a Memorandum Opinion and Order, FCC 98-481, which extended and waived certain requirements concerning the provision by the LECs of payphone-specific coding digits which identify a call as originating from a payphone. Without the transmission of payphone-specific coding digits, some of the IXCs have claimed they are unable to identify a call as a payphone call eligible for dial-around compensation. With the stated purpose of ensuring the continued payment of dial-around compensation the FCC, a Memorandum and Order issued on April 3, 1998 left in place the requirement for payment of per-call compensation for payphones on lines that do not transmit the requisite payphone-specific coding digits but gave the IXCs a choice for computing the amount of compensation for payphones on LEC lines not transmitting the payphone-specific coding digits of either accurately computing per-call compensation from their databases or paying per-phone, flat-rate compensation computed by 13 multiplying the $0.284 per call rate by the nationwide average number of 800 subscriber and access code calls placed from RBOC payphones for corresponding payment periods. Accurate payments made at the flat rate are not subject to subsequent adjustment for actual call counts from the applicable payphone. On May 15, 1998, the Court again remanded the per-call compensation rate to the FCC for further explanation without vacating the $0.284 per call rate. The Court opined that the FCC had failed to explain adequately its derivation of the $0.284 default rate. The Court stated that any resulting overpayment would be subject to refund and directed the FCC to conclude its proceedings within a six-month period from the effective date of the Court's decision. In response to the Court's second remand, the FCC conducted further proceedings and sought additional comment from interested parties to address the relevant issues posed by the Court. On February 4, 1999, the FCC released the Third Report and Order and Order on Reconsideration of the Second Report and Order (the "1999 Payphone Order"), in which the FCC abandoned its efforts to derive a "market-based" default dial-around compensation rate and instead adopted a "cost-based" rate of $0.24 per dial-around call. Both PSPs and IXCs petitioned the Court for review of the 1999 Payphone Order's determination of the dial-around compensation rate. In addition, PSPs requested the FCC to reconsider aspects of the 1999 Payphone Order. These petitions are awaiting decision by the Court and the FCC, respectively. The new rate became effective on April 21, 1999, and will serve as the default rate through January 31, 2002, absent modification by the Court or the FCC. The new rate was applied retroactively to the period beginning on October 7, 1997, less a $0.002 amount to account for FLEX ANI payphone tracking costs, for a net compensation rate of $0.238 applicable during this retroactive period. It also appears from the 1999 Payphone Order that this new rate will be applied to the initial "interim" period, running from November 8, 1996 through October 7, 1997; however, the 1999 Payphone Order deferred a final ruling on the interim period treatment to a later, as yet unreleased, order. The FCC has further ruled that an adjustment will be made for all payments or credits (with applicable interest at 11.25%) due and owing between the IXCs and the PSPs, including Davel. It is possible that the final implementation of the 1999 Payphone Order, including resolution of this retroactive adjustment and the outcome of any related administrative or judicial review, could have a material adverse effect on the Company. See "--EFFECT OF FEDERAL REGULATION OF LOCAL COIN AND DIAL-AROUND CALLS." EFFECT OF FEDERAL REGULATION OF LOCAL COIN AND DIAL-AROUND CALLS DIAL-AROUND CALLS. Based on the FCC's tentative conclusion in the 1997 Payphone Order, the Company adjusted the amounts of dial-around compensation previously recorded for the period November 7, 1996 to June 30, 1997 from the initial $45.85 per-phone, per-month rate to $37.20 ($0.284 per call multiplied by 131 calls). Based on this adjustment, the Company recorded a provision in the three-month period ended September 30, 1997 to reflect reduced dial-around compensation. In addition, beginning with the third quarter of 1997, the Company recorded dial-around compensation at the same rate of $37.20 per payphone per month. Based on the reduction in the per-call compensation rate in the 1999 Payphone Order, the Company further reduced, through an adjustment to non-coin revenues totaling $9.0 million, the amounts of dial-around compensation previously recorded for the period from November 7, 1996 to December 31, 1998. The adjustment included approximately $6.0 million to adjust revenue recorded during the period 14 November 7, 1996 to October 6, 1997 from $37.20 per-phone, per-month to $31.18 per phone, per month ($0.238 per call multiplied by 131 calls). The remaining $3.0 million of the adjustment was to adjust revenues recorded during the period October 7, 1997 through December 31, 1998 to reflect actual dial-around call volumes for the period multiplied by $0.238 per call. The Company believes that it is legally entitled to fair compensation under the 1996 Telecom Act for dial-around calls which were delivered to any carrier during the period from November 7, 1996 to December 31, 1998, and to date. While the amount of $0.24 per call ($0.238 for retroactive periods) constitutes the Company's assessment of the minimum level of fair compensation, certain IXCs have asserted in the past, are asserting and are expected to assert in the future, that the appropriate level of fair compensation should be lower than $0.24 per call or should be determined by requiring the user to deposit coins at the time of making a dial-around call. The payments for dial-around calls prescribed in the 1997 Payphone Order significantly increased dial-around compensation revenues to the Company over the levels received prior to implementation of the 1996 Telecom Act (although the 1999 Payphone Order has now moderated those increases). However, market forces and factors outside the Company's control could significantly affect the resulting revenue impact. These factors include the following: (1) the final resolution of court and administrative review of the $0.24 rate ordered by the FCC; (2) resolution by the FCC of the method of allocating the initial interim period flat-rate assessment among the IXCs and the number of calls to be used in determining the amount of the assessment; and (3) ongoing technical or other difficulties in the responsible carriers' ability and willingness to properly track or pay for dial-around calls actually delivered to them. LOCAL COIN CALL RATES. As a result of the 1996 Telecom Act and in accordance with the FCC's initial rulings implementing Section 276 of the 1996 Telecom Act (which were upheld on appeal by the U.S. Supreme Court), rates for local coin calls placed from payphones have been effectively deregulated. The Company and other PSPs have utilized this new deregulatory environment as an opportunity to adjust prices in an effort to maximize revenues from this call category. In deciding to deregulate local coin rates for payphones; however, the FCC did provide for possible modifications or exemptions from deregulation, either upon its own motion in response to consumer complaints or where an individual state regulatory body makes a detailed showing that there are market failures within the state that would not allow market-based rates to develop. While no such action has been taken to date by the FCC or state regulators, no assurances can be given as to the future regulatory treatment of local coin call rates, including the potential re-regulation of those rates or other modifications. Initial experience with local coin call rate increases indicates that price sensitivity of consumers for the service does exist and has resulted and will result in a potentially material reduction in the number of local coin calls made. The Company is unable to predict the ultimate impact on its operations of local coin call rate deregulation. OTHER PROVISIONS OF THE 1996 TELECOM ACT AND FCC RULES As a whole, the 1996 Telecom Act and FCC Rules significantly alter the competitive framework of the payphone industry. The Company believes that implementation of the 1996 Telecom Act has addressed certain historical inequities in the payphone marketplace and has, in part, led to a more equitable and competitive environment for all payphone providers. However, 15 there are numerous uncertainties in the implementation and interpretation of the 1996 Telecom Act which make it impossible for the Company to provide assurance that the 1996 Telecom Act will result in a long-term positive impact. The Company has identified the following such uncertainties: o Various matters pending in several federal courts and raised before the Congress which, while not directly challenging Section 276, relate to the validity and constitutionality of the 1996 Telecom Act, as well as other uncertainties related to the impact, timing and implementation of the 1996 Telecom Act. o The 1996 Payphone Order required that LEC payphone operations be removed from the regulated rate base on April 15, 1997. The LECs were also required to make the access lines that are provided for their own payphones equally available to IPPs and to ensure that the cost to payphone providers for obtaining local lines and services met the FCC's new services test guidelines, which require that LECs price payphone access lines at the direct cost to the LEC plus a reasonable allocation of overhead. Proceedings are now pending in various stages and formats before the FCC and numerous state regulatory bodies across the nation to resolve these issues. In the past, RBOCs were allegedly impaired in their ability to compete with the IPPs because they were not permitted to select the interLATA carrier to serve their payphones. Recent changes to the FCC Rules remove this restriction. Under the new rules, the RBOCs are now permitted to participate with the Location Owner in selecting the carrier of interLATA services to their payphones, effective upon FCC approval of each RBOC's Comparably Efficient Interconnection plans. Existing contracts between Location Owners and payphone or long-distance providers which were in effect as of February 8, 1996 are grandfathered and will remain in effect pursuant to their terms. o The 1996 Payphone Order preempts state regulations that may require IPPs to route intraLATA calls to the LEC by containing provisions that allow all payphone providers to select the intraLATA carrier of their choice. Outstanding questions exist with respect to 0+ local and 0- call routing, whose classification will await the outcome of various state regulatory proceedings or initiatives and potential FCC action. o The 1996 Payphone Order determined that the administration of programs for maintaining public interest payphones should be left to the states within certain guidelines. Various state proceedings have been undertaken in reviewing this issue, and the matter can be readdressed as circumstances change. BILLED PARTY PREFERENCE AND RATE DISCLOSURE The FCC previously issued a Second Notice of Proposed Rulemaking regarding Billed Party Preference and associated call rating issues, including potential rate benchmarks and caller notification requirements for 0+ and interstate long-distance calls. On January 29, 1998, the FCC released its Second Report and Order on Reconsideration entitled In the Matter of Billed Party Preference for InterLATA 0+ Calls, Docket No. 92-77. Effective July 1, 1998, all carriers providing operator services were required to give consumers using payphones the option of receiving a rate quote before a call is connected when making a 0+ interstate call. 16 STATE AND LOCAL REGULATION State regulatory authorities have primarily been responsible for regulating the rates, terms, and conditions for intrastate payphone services. Regulatory approval to operate payphones in a state typically involves submission of a certification application and an agreement by the Company to comply with applicable rules, regulations and reporting requirements. The states and the District of Columbia have adopted a variety of state-specific regulations that govern rates charged for coin and non-coin calls, as well as a broad range of technical and operational requirements. The 1996 Telecom Act contains provisions that require all states to allow payphone competition on fair terms for both LECs and IPPs. State authorities also in most cases regulate LEC tariffs for interconnection of independent payphones, as well as the LECs' own payphone operations and practices. The Company is also affected by state regulation of operator services. Most states have capped the rates that consumers can be charged for coin toll calls and non-coin local and intrastate toll calls made from payphones. In addition, the Company must comply with regulations designed to afford consumers notice at the payphone location of the long-distance company or companies servicing the payphone and the ability to access alternate carriers. The Company believes that it is currently in material compliance with all such regulatory requirements. In accordance with requirements under the 1996 Telecom Act, state regulatory authorities are currently reviewing the rates that LECs charge IPPs for local line access and associated services. Local line access charges have been reduced in certain states and the Company believes that selected states' continuing review of local line access charges, coupled with competition for local line access service resulting from implementation of the 1996 Telecom Act, may lead to more options available to the Company for local line access at competitive rates. The Company cannot provide assurance, however, that such options or local line access rates will become available. The Company believes that an increasing number of municipalities and other units of local government have begun to impose taxes, license fees and operating rules on the operations and revenues of payphones. The Company believes that some of these fees and restrictions may be in violation of provisions of the 1996 Telecom Act prohibiting barriers to entry into the business of operating payphones and the policy of the Act to encourage wide deployment of payphones. However, in at least one instance, involving a challenge to a payphone ordinance adopted by the Village of Huntington Park, California, the FCC declined to overturn a total ban on payphones in a downtown area. The proliferation of local government licensing, restriction, taxation and regulation of payphone services could have an adverse affect on the Company and other PSPs unless the industry is successful in resisting or moderating this trend. MAJOR CUSTOMERS No individual customer accounted for more than 10% of the Company's consolidated revenues in 1999, 1998 or 1997. COMPETITION The Company competes for payphone locations directly with LECs and IPPs. The Company also competes, indirectly, with long-distance companies, which can offer Location Owners commissions on long-distance calls made from LEC-owned payphones. Most LECs and long-distance companies against which the Company competes and some IPPs may have substantially greater financial, marketing and other resources than the Company. In addition, many 17 LECs, faced with competition from the Company and other IPPs, have increased their compensation arrangements with Location Owners to offer more favorable commission schedules. The Company believes the principal competitive factors in the payphone business are (1) the commission payments to a Location Owner and the opportunity for a Location Owner to obtain commissions on both local and long-distance calls from the same provider, (2) the ability to serve accounts with locations in several LATAs or states, (3) the quality of service and the availability of specialized services provided to a Location Owner and payphone users, and (4) responsiveness to customer service needs. The Company believes it is currently competitive in each of these areas. The Company competes with long-distance carriers that provide dial-around services which can be accessed through the Company's payphones. Certain national long-distance operator service providers and prepaid calling card providers have implemented extensive advertising promotions and distribution schemes which have increased dial-around activity on payphones owned by LECs and IPPs, including the Company, thereby reducing traffic to the Company's primary providers of long-distance service. The Company does, however, receive compensation for dial-around calls placed from its payphones. See "--Regulation." The Company also competes with providers of wireless communications services for both local and long distance traffic. Certain providers of wireless communication services have introduced rate plans that are competitively priced with certain of the products offered by the Company and appear to be negatively impacting the usage of payphones throughout the nation. EMPLOYEES As of December 31, 1999, the Company had 718 full-time employees, none of whom is the subject of a collective bargaining agreement. The Company believes that its relationship with its employees is good. ITEM 2. PROPERTIES The Company leases approximately 48,500 square feet of space in Tampa, Florida that includes two locations for executive office space, a divisional office for payphone operations and facilities for the assembly and repair of payphones. The Company also leases approximately 30 division offices for payphone operations in various geographic locations. In addition, the Company operates a regional distribution and assembly center in approximately 10,000 square feet of space in Jacksonville, Illinois, which the Company leases pursuant to an arm's-length agreement with David Hill, who is a Davel director and major shareholder. The Company also leases from Mr. Hill 18,000 square feet of warehouse space used for the storage and distribution of inventory and filing materials in Jacksonville, Illinois pursuant to an arms-length agreement. ITEM 3. LEGAL PROCEEDINGS In December 1995, Cellular World, Inc. filed suit in Dade County Circuit Court against the Company's affiliates, Peoples Telephone Company, Inc. and PTC Cellular, Inc., alleging tortious interference with Cellular World's advantageous business relationship with Alamo Rent-A-Car and misappropriation of Cellular World's trade secrets involving a credit card cellular car phone system. The trial court previously entered partial summary judgment in favor of the Company as to the Plaintiff's trade secrets claim, leaving the tortious interference claim for trial. 18 Trial on the tortious interference claim commenced on February 29, 2000. The Company had several meritorious legal and factual defenses to Plaintiff's claims. Although the Company believes that it had a reasonable possibility of prevailing at trial or through an appeal, if necessary, the case presented significant risks to the Company because Plaintiff intended to ask the jury to award damages of up to $18 million. Following three days of trial, the Company and Cellular World agreed to settle and resolve the dispute in its entirety. Pursuant to the settlement, the Company agreed to pay Cellular World a total of $1.5 million on extended payment terms: $500,000 by March 8, 2000, $250,000 by January 5, 2001 and the remaining $750,000 in 15 equal monthly installments of $50,000 beginning in January 2001. On September 29, 1998, the Company announced that it was exercising its contractual rights to terminate a merger agreement (the "Davel/PhoneTel Merger Agreement") with PhoneTel Technologies, Inc. ("PhoneTel"), based on breaches of representations, warranties and covenants by PhoneTel. On October 1, 1998, the Company filed a lawsuit in Delaware Chancery Court seeking damages, rescission of the Davel/PhoneTel Merger Agreement and a declaratory judgment that such breaches occurred. On October 27, 1998, PhoneTel answered the complaint and filed a counterclaim against the Company alleging that the Davel/PhoneTel Merger Agreement had been wrongfully terminated. At the same time, PhoneTel also filed a third party claim against Peoples Telephone Company, Inc. (acquired by the Company on December 23, 1998) alleging that Peoples wrongfully caused the termination of the Davel/PhoneTel Merger Agreement. The counterclaim and third party claim seek specific performance by the Company of the transactions contemplated by the Davel/PhoneTel Merger Agreement and damages and other equitable relief from the Company and Peoples. The Company believes that it has meritorious claims against PhoneTel and intends to defend vigorously against the counterclaim against Davel and the third party claim against Peoples initiated by PhoneTel. The Company, at this time, cannot predict the outcome of this litigation. The Company is involved in other litigation arising in the normal course of its business which it believes will not materially affect its financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS PART II [THERE WERE NO SUCH MATTERS DURING THE FOURTH QUARTER OF 1999] 19 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. MARKET INFORMATION. Davel Common Stock trades on the NASDAQ National Market System. The following table sets forth, for the periods indicated, the high and low closing prices of Davel Common Stock on the NASDAQ National Market System from January 1, 1997 through December 31, 1999. 1997 HIGH LOW - ---- ---- --- First Quarter $ 18.25 $ 14.75 Second Quarter 18.00 12.00 Third Quarter 23.25 15.25 Fourth Quarter 29.00 21.25 1998 - ---- First Quarter $ 28.50 $ 24.38 Second Quarter 29.25 21.25 Third Quarter 25.25 10.88 Fourth Quarter 19.75 9.00 1999 - ---- First Quarter $ 18.13 $ 7.00 Second Quarter 8.50 5.25 Third Quarter 6.50 3.94 Fourth Quarter 5.38 3.00 As of March 15, 2000, there were approximately 201 holders of record of the Common Stock, not including stockholders whose shares were held in "nominee" or "street" name. The closing sale price of the Company's Common Stock on March 15, 2000 was $4.00 per share. DIVIDENDS. The Company did not pay any dividends on its Common Stock during 1999 and does not intend to pay any Common Stock dividends in the foreseeable future. It is the current policy of the Company's Board of Directors to retain earnings to finance the growth and development of the Company's business. The payment of dividends is effectively prohibited by the Company's Senior Credit Facility. Payment of cash dividends, if made in the future, will be determined by the Company's Board of Directors based on the conditions then existing, including the Company's financial condition, capital requirements, cash flow, profitability, business outlook and other factors. RECENT SALES OF UNREGISTERED SECURITIES. On June 29, 1998, Old Davel sold to EGI-Davel Investors, L.L.C. 1,000,000 shares of its common stock, no par value, and warrants for 218,750 shares of common stock at $32.00 per share. The aggregate consideration for the shares and warrants was $28 million, which was used by Old Davel for working capital and payment of the merger consideration for the Peoples Merger. The sale to EGI-Davel investors, L.L.C. was made pursuant to an exemption from registration under the Securities Act, pursuant to Section 4(2) of the Securities Act. In addition, as part of the Peoples Merger, the Company issued warrants for $229,124 shares of Common Stock exerciseable at $22.34 per share, to Bank Austria Creditanstalt American Corporation and to former partners of Appian Capital Partners, L.L.C., each of whom had held warrants of Peoples Telephone prior to the Peoples Merger. The warrants were issued in 20 exchange for the warrants of Peoples Telephone and no additional consideration was paid to the Company. The issuance of the warrants was made pursuant to Section 4(2) of the Securities Act. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected financial data presented below under the captions "Operating Data" and "Balance Sheet Data" are derived from the audited consolidated financial statements of the Company. The selected financial data should be read in conjunction with the financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K and with "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Year ended December 31, (1) ----------------------------------------------------------------- (In thousands, except per share data) ----------------------------------------------------------------- 1999 1998 (2) 1997 1996 1995 --------- ---------- --------- --------- --------- OPERATING DATA: Revenue $ 175,846 $ 194,818 $ 158,411 $ 143,979 $ 144,192 Expenses 232,435 220,600 152,368 140,665 146,516 --------- --------- --------- --------- --------- (56,589) (25,782) 6,043 3,314 (2,324) Operating Income (loss) Other expense (23,412) (23,881) (13,084) (12,519) (10,844) Income taxes (1,755) -- 2,459 1,868 2,186 --------- --------- --------- --------- --------- Loss from continuing operations before Extraordinary item (78,246) (49,663) (9,500) (11,073) (15,354) Gain (loss) from discontinued operations -- 607 2,092 (1,114) (17,867) Extraordinary loss from extinguishment of debt -- (17,856) -- -- (3,327) --------- --------- --------- --------- --------- Net loss $ (78,246) $ (66,912) $ (7,408) $ (12,187) $ (36,548) ========= ========= ========= ========= ========= Basic and diluted loss per share: Continuing operations before extraordinary item $ (7.34) $ (5.68) $ (1.27) $ (1.47) $ (1.92) Gain (loss) from discontinued operations -- 0.07 0.25 (0.13) (2.18) Extraordinary loss from extinguishment of debt -- (1.98) -- -- (0.40) Net loss $ (7.34) $ (7.59) $ (1.02) $ (1.60) $ (4.50) Weighted average common shares outstanding 10,660 9,029 8,407 8,317 8,236 BALANCE SHEET DATA: Total assets $ 180,761 $ 273,018 $ 180,786 $ 184,732 $ 193,399 Long-term debt and obligations under capital leases, Less current maturities 206,509 225,451 107,076 106,956 102,782 Manditorily redeemable preferred stock -- -- 16,284 15,079 13,886 Shareholders' equity (deficit) (75,079) 1,649 20,290 28,641 42,278
(1) On December 23, 1998, the Company consummated its merger with Peoples Telephone, which was accounted for as a pooling-of-interests. Accordingly, all financial data has been restated to reflect the combined operations of Old Davel and Peoples for all periods presented. (2) The year ended December 31, 1998 includes the results of CCI from the date of the CCI Acquisition, February 3, 1998. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto appearing elsewhere herein. Certain of the statements contained below are forward-looking statements (rather than historical facts) that are subject to risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. GENERAL On December 23, 1998, Old Davel and Peoples Telephone merged together in a transaction accounted for as a pooling-of-interests. As such, the results of both companies have been restated as if they had been combined for all periods presented. During 1999, the Company derived its revenues from two principal sources: coin calls and non-coin calls. Coin calls represent calls paid for by callers with coins deposited in the payphone. Coin call revenues are recorded in the amount of coins collected from the payphones. Non-coin calls made from the Company's payphones generate revenues in an amount that depends upon whether the Company or a long distance company handles the call. If the non-coin call is handled through an "unbundled" services arrangement, the Company recognizes non-coin revenues equal to the total amount charged for the call. If the non-coin call is handled by a long- distance company, the Company generally recognizes revenues in an amount equal to the commission on that call paid to the Company by the long distance company. Under an unbundled services arrangement, the Company performs certain functions necessary to service non-coin calls, uses the long distance company's switching equipment and its other services on an as-needed basis, and pays the long distance company on an unbundled basis for the operator services actually used to complete these calls. Prior to November 1999, the Company also serviced long-distance calls through its switch. The Company also recognizes non-coin revenues from calls that are dialed from its payphones to gain access to a long distance company other than the one pre-programmed into the telephone; this is commonly referred to as "dial-around" access. See "Business--Regulation." The Company also derives revenue from certain LECs for intraLATA non-coin calls. See "Business-Operations." The principal costs related to the ongoing operation of the Company's payphones include telephone charges, commissions, and service, maintenance and network costs. Telephone charges consist of payments made by the Company to LECs and long distance carriers for access charges and use of their networks. Commission expense represents payments to Location Owners. Service, maintenance and network costs represent the cost of servicing and maintaining the payphones on an ongoing basis, costs related to the operation of the Company's switch (which was inactivated as of November 1999) and, in connection with unbundled services arrangements, the fees paid for those services. 22 REGULATORY IMPACT ON REVENUE LOCAL COIN RATES In ensuring "fair compensation" for all calls, the FCC previously determined that local coin rates from payphones should be generally deregulated by October 7, 1997, but provided for possible modifications or exemptions from deregulation upon a detailed showing by an individual state that there are market failures within the state that would not allow market-based rates to develop. On July 1, 1997, a federal court issued an order which upheld the FCC's authority to deregulate local coin call rates. In accordance with the FCC's ruling and the court order, certain LECs and independent payphone service providers, including the Company, increased rates for local coin calls from $0.25 to $0.35. Given the lack of direction on the part of the FCC on specific requirements for obtaining a state exemption, the Company's inability to predict the responses of individual states or the market, and the Company's inability to provide assurance that deregulation, if and where implemented, will lead to higher local coin call rates, the Company is unable to predict the ultimate impact on its operations of local coin rate deregulation. In 1999, the Company experienced lower coin call volumes on its payphones resulting from the increased rates, growth in wireless communication services and changes in call traffic and the geographic mix of the Company's payphones. DIAL-AROUND COMPENSATION On September 20, 1996, the Federal Communications Commission ("FCC") adopted rules which became effective November 7, 1996 (the "1996 Payphone Order"), initially mandating dial-around compensation for both access code calls and 800 subscriber calls at a flat rate of $45.85 per payphone per month (131 calls multiplied by $0.35 per call). Commencing October 7, 1997 and ending October 6, 1999 the $45.85 per payphone per month rate was to transition to a per-call system at the rate of $0.35 per call. Several parties challenged certain of the FCC regulations including the dial-around compensation rate. On July 1, 1997, a federal court vacated certain portions of the FCC's 1996 Payphone Order, including the dial-around compensation rate. In accordance with the court's mandate, on October 9, 1997, the FCC adopted a second order (the "1997 Payphone Order"), establishing a rate of $0.284 per call for the first two years of per-call compensation (October 7, 1997 through October 6, 1999). The IXCs were required to pay this per-call amount to payphone service providers, including the Company, beginning October 7, 1997. On May 15, 1998, the court again remanded the per-call compensation rate to the FCC for further explanation without vacating the $0.284 default rate. In accordance with the court's second mandate, on February 4, 1999, the FCC released a third order (the "1999 Payphone Order"), in which the FCC abandoned its efforts to derive a "market based" default dial-around compensation rate and instead adopted a "cost based" rate of $0.24 per dial-around call. This rate became effective on April 21, 1999 and will serve as a default rate through January 31, 2002. The new rate will also be applied retroactively to the period beginning on October 7, 1997, less a $0.002 amount to account for FLEX ANI payphone tracking costs, for a net compensation rate of $0.238 applicable during this retroative period. It also appears from the 1999 Payphone Order that this new rate will be applied to the initial "interim" period, running from November 7, 1996 through October 7, 1997; however, the 1999 Payphone Order deferred a final ruling on the interim period treatment to a later, as yet unreleased, order. Upon establishment of the interim period, the FCC has further ruled that a true-up will be made for all payments or credits (with applicable interest at 11.25%) due and 23 owing between the IXCs and the PSPs, including the Company, for the payment period commencing on November 7, 1996 through the effective date of the new $.24 per call rate. Based on the FCC's conclusion in the 1997 Payphone Order, the Company adjusted the amounts of dial-around compensation previously recorded for the period November 7, 1996 to June 30, 1997 from the initial $45.85 rate to $37.20 ($0.284 per call multiplied by 131 calls). As a result of this adjustment, the provision recorded in the year ended December 31, 1997 for reduced dial-around compensation is approximately $3.3 million. For periods beginning November 7, 1996 but prior to the release of the 1999 Payphone Order, the Company has recorded dial-around compensation at the rate of $37.20 per payphone per month. The Company believes that it is legally entitled to fair compensation under the 1996 Telecom Act for dial-around calls which the Company delivered to any carrier during the period November 7, 1996 to October 6, 1997. Based on the information available, the Company believes that the minimum amount it is entitled to as fair compensation under the 1996 Telecom Act for the period November 7, 1996 to October 6, 1997 is $31.18 per payphone per month (131 calls multiplied by $0.238 per call) and the Company, based on the information available to it, does not believe that it is reasonably possible that the amount will be materially less than $31.18 per payphone per month. While the amount of $0.24 per call constitutes the Company's assessment of the minimum level of fair compensation following the April 21, 1999 effective date, certain IXCs have asserted in the past, are asserting and are expected to assert in the future that the appropriate level of fair compensation should be lower than $0.24 per call. The payment levels for dial-around calls prescribed in the 1996 and 1997 Payphone Orders significantly increase dial-around compensation revenues to the Company over the levels received prior to implementation of the 1996 Telecom Act (although the 1999 Payphone Order has now moderated those increases). However, market forces and factors outside the Company's control could significantly affect these revenue increases. These factors include the following: (i) the final resolution of the $0.24 rate recently ordered by the FCC and the possibility of subsequent appeals to the courts, (ii) the resolution by the FCC of the method of allocating the initial interim period flat-rate assessment among the IXCs and the number of calls to be used in determining the amount of the assessment, (iii) the possibility of other litigation seeking to modify or overturn the 1999 Payphone Order or portions therof, (iv) the IXCs' reaction to the FCC's recognition that existing regulations do not prohibit an IXC from blocking 800 subscriber numbers from payphones in order to avoid paying per-call compensation on such calls, and (v) ongoing technical or other difficulties in the responsible carriers' ability and willingness to properly track or pay for dial-around calls actually delivered to them. 24 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain information from the Company's Consolidated Statements of Operations, included elsewhere in this Annual Report on Form 10-K, expressed as a percentage of total revenues.
YEAR ENDED DECEMBER 31, -------------------------------------- 1999 1998 1997 ---------- --------- -------- REVENUES: Coin calls 63.0% 68.0% 64.2% Non-coin calls, net of dial-around compensation adjustments 37.0 32.0 35.8 ----- ----- ----- Total revenues 100.0 100.0 100.0 ----- ----- ----- COSTS AND EXPENSES: Telephone charges 20.9 23.4 24.5 Commissions 23.3 24.1 22.6 Service, maintenance and network costs 23.9 27.1 24.9 Depreciation and amortization 22.3 19.8 16.2 Selling, general and administrative 11.7 11.0 7.9 Non-recurring items 29.1 5.6 -- Restructuring charge 0.9 2.2 -- ----- ----- ----- Total operating costs and expenses 132.1 113.2 96.1 ----- ----- ----- Operating income (loss) 32.1% (13.2)% 3.9% ===== ===== ====
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 For the year ended December 31, 1999, total revenues from continuing operations decreased approximately $19.0 million or 9.7%, compared to the year ended December 31, 1998, from $194.8 million in the year ended December 31, 1998 to $175.8 million in the year ended December 31, 1999. This decline was primarily attributable to an 11.3% decrease in installed payphones (84,384 payphones on December 31, 1998 to 74,869 payphones on December 31, 1999), erosion of coin revenue due to increased competition from wireless communication services and a reduction in the federally established dial-around rate. Coin call revenues decreased approximately $21.7 million, or 16.4%, from $132.5 million in 1998 to $110.8 million in 1999, primarily attributable to lower call volumes on the Company's payphones resulting from higher coin call rates, increased competition from wireless communication services, changes in call traffic and the geographic mix of the Company's payphones. Non-coin call revenues increased approximately $2.7 million, or 4.4%, from $62.3 million in the year ended December 31, 1998 to $65.1 million in the year ended December 31, 1999. The increase was primarily attributable to an increase in dial-around call traffic from the Company's payphones. Dial-around call revenue increased approximately $9.5 million, or 35.9%, from $26.4 million in 1998 to $35.9 million in 1999. Other non-coin call revenues, consisting primarily of operator service calls, decreased approximately $9.5 million, or 26.8%, from approximately $35.5 million in 1998 to approximately $26.0 million 1999. This decrease was primarily due to the fact that when the Company operated its long-distance switching equipment, revenues associated with the calls, were recorded based on the price charged for the call . The Company then remitted the 25 access cost associated with the call to other parties. With the decommissioning of the switch, the Company now collects the net revenue (price charged less cost of access) from the outside long-distance providers who handle the routing of the call. Telephone charges decreased $8.8 million, or 19.3%, from $45.6 million in the year ended December 31, 1998 to $36.8 million in 1999. The decrease in telephone charges was primarily attributable to the decrease in the number of installed payphones, the effects of the FCC's "new services test" (pursuant to the 1996 Telecom Act that reduced phone bills in 10 states), more favorable contracts with LECs and utilization of competitive local exchange carriers for local line access services. The Company is currently negotiating contracts that it believes will further reduce local access charges on a per-phone basis but is unable to estimate the impact of further telephone charge reductions at this time. Telephone charges for 1999 decreased to 20.9% of total revenues compared to 23.4% in the prior year as a result of these reductions. Commissions decreased $6.0 million, or 12.7%, from $47.0 million in the year ended December 31, 1998 to $41.0 million in the year ended December 31, 1999. The decrease was primarily attributable to lower revenues from the Company's payphones. Commissions decreased to 23.3% of total revenues compared to 24.1% in the prior year. The decrease in commissions as a percentage of total revenues was primarily attributable to increases in certain types of revenues that are excluded from commission calculations on a portion of the Company's location agreements. Service, maintenance and network costs decreased $10.7 million, or 20.2%, from $52.8 million in the year ended December 31, 1998 to $42.1 million in the year ended December 31, 1999. The decrease was primarily attributable to the closing of duplicate offices after the Peoples Merger and CCI Acquisition. Service, maintenance and network decreased to 23.9% of total revenues in 1999 compared to 27.1% in 1998. The decrease in service, maintenance and network as a percentage of total revenues was primarily attributable to cost saving generated from increased geographic density of the phones and the Company's ability to improve efficiency in servicing the Company's payphones. Depreciation and amortization expense in 1999 increased $0.6 million, or 1.5%, from $38.6 million in 1998 to $39.2 million in 1999. The increase was primarily due to an increase in amortization expense. The increased amortization expense resulted from an acceleration of the amortization of location contracts on removed payphones. An acceleration of amortization expense should continue as the Company continues to remove unprofitable phones. Selling, general and administrative expenses decreased approximately $1.0 million, or 4.5% from $21.5 million in the year ended December 31, 1998 to $20.6 million in the year ended December 31, 1998. The decrease was primarily attributable to the fact that selling, general and administrative expenses related to the separate operation of payphones and administrative facilities acquired in the CCI Acquisition and the Peoples Merger are included in the prior year. The integration of CCI and Peoples was completed during 1999, and included closing the separate corporate offices and duplicate field offices, thereby eliminating duplicative costs. The Company recognized a non-recurring charge of approximately $51.2 million in 1999 primarily related to a $37.8 million write-down of goodwill and $7.8 million write-down of location contracts related to deinstallation of phones acquired in the CCI Acquisition and $3.1 million related to the removal of other nonprofitable phones. In addition, the Company recognized restructuring and other merger-related charges during the year ended December 31, 1999 of approximately $1.6 million related to integration and restructuring of the Peoples acquisition. The 26 restructuring and other merger-related charges were primarily related to severance pay for terminated employees, relocation costs and costs related to the closing of redundant facilities. Other expense decreased approximately $0.5 million, or 2.0%, from $23.9 million in the year ended December 31, 1998 of $23.4 million in the year ended December 31, 1999. This decrease resulted primarily from the recognition in 1998 of a $2.8 million impairment loss on an investment held by Peoples Telephone for which there was no corresponding loss during 1999. This decrease was partially offset by a $2.2 million increase in interest expense during 1999. The increase in interest expense is related to higher borrowings under the credit facilities. Loss from continuing operations before extraordinary items increased approximately $28.6 million, or 57.6%, from approximately $49.7 million in 1998 to approximately $76.5 million in 1999. Loss before extraordinary item increased approximately $29.2 million from approximately $49.1 million in 1998 to approximately $78.2 million in 1999. Net loss increased approximately $11.3 million, or 16.9%, from the prior year, from a net loss of approximately $66.9 million in 1998 to a net loss of approximately $78.2 million in 1999. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Total revenues from continuing operations increased approximately $36.4 million, or 23.0%, from $158.4 million in the year ended December 31, 1997 to $194.8 million in the year ended December 31, 1998. This growth was primarily attributable to an increase from 59,009 (treating the Peoples Telephone payphones as pooled together with the Old Davel payphones) payphones on December 31, 1997 to 84,384 payphones on December 31, 1998. The growth in the number of payphones was primarily due to the CCI Acquisition, consisting of 19,543 installed payphones, and the acquisition of Indiana Telcom by Peoples Telephone in January 1998, consisting of 2,632 installed payphones. Coin call revenues increased approximately $30.8 million, or 30.3%, rising from $101.7 million in 1997 to $132.5 million in 1998, driven primarily by the increase in the number of installed payphones. While coin call revenues increased during the period on an aggregate basis, coin call revenues on a per-phone, per-month basis decreased due to lower coin call volumes resulting from the growth in wireless communication services and changes in call traffic and the geographic mix of the Company's payphones. Non-coin call revenues increased approximately $5.6 million, or 9.8%, from $56.8 million in the year ended December 31, 1997 to $62.3 million in the year ended December 31, 1998. The increase in non-coin call revenues was primarily attributable to the growth in the number of installed payphones. While non-coin call revenues increased during the period on an aggregate basis, non-coin call revenues on a per-phone, per-month basis decreased due to lower call volumes resulting primarily from the growth in wireless communication services. Non-coin call revenues were further reduced, through an adjustment totaling $9.0 million resulting from the adjustment to the dial-around compensation rate prescribed in the 1999 Payphone Order. The adjustment included approximately $6.0 million to adjust revenue recorded during the period November 7, 1996 to October 6, 1997 from $37.20 per-phone per-month to $31.18 per phone per month ($0.238 per call multiplied by 131 calls). The remaining $3.0 million of the adjustment was to adjust revenues recorded during the period October 7, 1997 to December 31, 1998 to actual dial-around call volumes for the period multiplied by $0.238 per call. Telephone charges increased $6.7 million, or 17.2%, from $38.9 million in the year ended December 31, 1997 to $45.6 million in the year ended December 31, 1998. The increase in telephone charges was primarily attributable to the growth in the number of installed payphones. 27 Telephone charges for 1998 decreased to 23.4% of total revenues compared to 24.5% in the prior year. The decrease in telephone charges as a percentage of revenues was due to reductions in line access charges on a per-phone, per-month basis as a result of implementation of the FCC's "new services test" pursuant to the 1996 Telecom Act and rate reductions received from certain LECs with which the Company has negotiated agreements for the provision of local access services. Commissions increased $11.1 million, or 31.0%, from $35.9 million in the year ended December 31, 1997 to $47.0 million in the year ended December 31, 1998. The increase in commissions was primarily attributable to the growth in the number of installed payphones. Commissions increased to 24.1% of total revenues compared to 22.6% in the prior year. The increase in commissions as a percentage of total revenues was primarily attributable to the CCI Acquisition which included a higher proportion of national accounts than those previously serviced by the Company. National accounts typically receive higher commission rates than local and regional accounts due primarily to their higher revenues. Service, maintenance and network costs rose $13.3 million, or 33.7%, from $39.5 million in the year ended December 31, 1997 to $52.8 million in the year ended December 31, 1998. The increase was primarily attributable to the growth in the number of installed payphones. Service, maintenance and network costs increased to 27.1% of total revenues compared to 24.9% in the prior year. The increase in service, maintenance and network costs as a percentage of total revenues was primarily attributable to the CCI Acquisition. Service, maintenance and network costs in 1998 include the network costs related to the CCI payphones which primarily direct long distance call traffic to an unbundled services agreement. In 1997, the Company had a higher mix of long distance call traffic directed to commission plans which do not include a cost component in service, maintenance and network costs. Depreciation and amortization expense in 1999 increased $13.0 million, or 50.7%, from $25.6 million in 1997 to $38.6 million in 1998. The increase was primarily driven by the increase in the number of installed payphones. Approximately $10.0 million of the increase in depreciation and amortization expense was related to the CCI Acquisition. Selling, general and administrative expenses increased approximately $9.0 million, or 71.5%, from $12.6 million in the year ended December 31, 1997 to $21.5 million in the year ended December 31, 1998. The increase was primarily attributable to selling, general and administrative expenses related to the CCI Acquisition. The Company continued to operate the former corporate office of CCI through August 1998, when CCI's administrative functions were combined into the Company's facilities in other locations. In addition, the Company eliminated nine duplicative field offices during the year in the integration of CCI's operations with Old Davel's operations. Other expense decreased approximately $10.9 million, from expense of $13.1 million in the year ended December 31, 1997 to expense of $23.9 million in the year ended December 31, 1998. This decrease resulted primarily from the recognition of a $2.8 million impairment loss on an investment held by Peoples Telephone prior to the merger with Old Davel. The remaining decrease was primarily due to a reduction in interest income as a result of lower cash balances available for investment. Interest expense in 1998 increased approximately $7.4 million, or 54.3%, from $13.6 million in 1997 to $21.0 million in 1998. This increase resulted primarily from the incurrence of $120.0 million in indebtedness in connection with the CCI Acquisition and refinancing of Old Davel's credit facility. 28 Loss from continuing operations before extraordinary items increased approximately $40.2 million, from approximately $9.5 million in 1997 to approximately $49.7 million in 1998. Loss before extraordinary items increased approximately $41.6 million from approximately $7.4 million in 1997 to approximately $49.1 million in 1998. The Company's gain on discontinued operations included $0.6 million of a gain realized on the sale of the Peoples Telephone investment in Shared Technologies Cellular, Inc. (STC) Common Stock which was received in 1995 as proceeds from the sale of Peoples Telephone cellular telephone operations, which were treated as discontinued operations in 1995. The Company's loss from discontinued operations in 1997 represents a $2.4 million loss on the sale of the inmate phone division and a $0.3 million gain related to its previously discontinued cellular telephone operations. In the year ended December 31, 1998, the Company recorded an extraordinary loss of $17.9 million, consisting of approximately $12.9 million in premiums and fees related to the repurchase of $100.0 million principal amount of Peoples Telephone's outstanding 12 1/4% Senior Notes due 2002 in connection with the refinancing of the combined companies' credit facilities as part of the Peoples Merger. The Company also recorded approximately $5.0 million in extraordinary losses related to the write-off of unamortized debt issuance costs related to the refinancing of the existing credit facilities of Old Davel and Peoples Telephone. Net loss increased approximately $59.5 million from approximately $7.4 million in 1997 to approximately $66.9 million in 1998. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Total revenues from continuing operations increased approximately $15.3 million or 10.6%, from $144.0 million in the year ended December 31, 1996 to $159.2 million in the year ended December 31, 1997. This growth was primarily attributable to an increase from 53,790 (treating the Peoples Telephone payphones as pooled together with the Old Davel payphones) payphones on December 31, 1996 to 59,009 payphones on December 31, 1997. Coin call revenues increased approximately $5.7 million, or 6.0%, rising from $95.9 million in the year ended December 31, 1996 to $101.7 million in the year ended December 31, 1997, driven primarily by the increase in the number of installed payphones. Non-coin call revenues increased approximately $9.6 million, or 19.9%, from $48.0 million in the year ended December 31, 1996 to $57.6 million in the year ended December 31, 1997. The increase in non-coin call revenues was primarily attributable to approximately $6.1 million in additional revenues resulting from an increase in the rate of dial-around call compensation associated with the implementation of the 1996 Telecom Act, which became effective in November 1996, and approximately $3.5 million in additional non-coin call revenues resulting from the growth in the number of installed payphones. Telephone charges increased approximately $1.3 million, or 3.4%, from $37.6 million in the year ended December 31, 1996 to $38.9 million in the year ended December 31, 1997. The increase in telephone charges was primarily attributable to the growth in the number of installed payphones. Telephone charges for the year 1997 decreased to 24.4% of total revenues compared to 26.1% in the prior year. The decrease in telephone charges as a percentage of revenues was due to reductions in line access charges on a per-phone, per-month basis as a result of implementation of the FCC's "new service test" pursuant to the 1996 Telecom Act and rate 29 reductions received from certain LECs with which the Company has agreements for the provision of local access services. Commissions increased approximately $1.3 million, or 3.8%, from $34.5 million in the year ended December 31, 1996 to $35.8 million in the year ended December 31, 1997. The increase in commissions was primarily attributable to the growth in the number of installed payphones. Commissions for 1997 decreased to 22.5% of total revenues compared to 24.0% in the prior year. The decrease in commissions as a percentage of total revenues was primarily attributable to higher payphone revenues. A portion of the Company's Location Agreements exclude certain types of call traffic from commission calculations, and some others are based on flat monthly rates set by the agreements, resulting in a disproportionate increase in payphone revenues over commissions. Service, maintenance and network costs increased $2.6 million, or 9.4%, from $27.7 million in the year ended December 31, 1996 to $30.3 million in the year ended December 31, 1997. The increase was primarily attributable to the growth in the number of installed payphones. Service, maintenance and network costs in 1998 decreased to 19.0% of total revenues compared to 19.2% in the prior year. The decrease in service, maintenance and network costs as a percentage of total revenues was primarily attributable to higher payphone revenues during the year and increasing operating efficiencies achieved through increasing density in the Company's payphone routes resulting from expansion of its installed base of payphones. Depreciation and amortization expense increased approximately $2.2 million, or 9.2%, from $23.5 million in 1996 to $25.6 million in 1997, driven by the increase in the number of installed payphones. Selling, general and administrative expenses increased approximately $3.7 million, or 19.2%, from $18.9 million in the year ended December 31, 1996 to $22.6 million in the year ended December 31, 1997. The increase was primarily attributable to additional costs associated with the opening and operation of three new divisional sales and service offices and the hiring of support personnel needed to service the Company's expanding base of installed payphones. Other income and income expense decreased approximately $0.1 million, or 22.9%, in 1997 compared to 1996, decreasing to $0.5 million in 1997 from $0.6 million in 1996. The decrease was primarily due to a reduction in interest income as a result of lower cash balances available for investment. Interest expense increased approximately $0.4 million, or 3.2%, from $13.2 million in the year ended December 31, 1996 to approximately $13.6 million in the year ended December 31, 1997. This increase resulted primarily from an increase in long-term debt in the last two quarters of 1996 and during 1997 for the acquisition of payphone companies and payphone assets. In the year ended December 31, 1996, the Company recognized income of approximately $1.5 million in connection with settlements of loans and employment contracts with former officers of Peoples Telephone, Peoples Telephone's former equity interest in the operating results of an unconsolidated affiliate and amounts related to the resolution of outstanding litigation involving Peoples Telephone. 30 Losses from continuing operations improved approximately $1.6 million, or 14.2%, from the prior year period, decreasing from a loss of $11.1 million in the year ended December 31, 1996 to a loss of $9.5 million in the year ended December 31, 1997. The Company's loss from discontinued operations in 1996 represents a $1.8 million loss on the operations of the Company's inmate phone division. The Company also recorded a gain of $0.7 million, net of income taxes of $0.4 million from the sale of its hospitality division, and a loss of $0.1 million, net of income taxes of $0.1 million from the sale of its remanufacturing division. The Company's earnings on discontinued operations in 1997 included income of approximately $0.3 million related to a payment on a promissory note that had been fully reserved resulting from the sale of Peoples Telephone's cellular telephone operations in 1995. On December 19, 1997, the Company sold the remaining operating assets of its inmate phone division to Talton Holdings, Inc. for approximately $10.6 million in cash, plus additional contingent consideration based on a formula which shares incremental profits from certain existing contracts and from Talton's closing on certain pending bids. This transaction resulted in a gain on sale of approximately $4.2 million. The gain, combined with an operating loss of approximately $2.4 million, resulted in earnings of approximately $1.8 million from the discontinued inmate division in 1997. Net loss decreased approximately $4.8 million from a loss of approximately $12.2 million in 1996 to a loss of approximately $7.4 million in 1997. LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS Historically, the Company's primary sources of liquidity have been cash from operations, borrowings under various credit facilities, and periodically, proceeds from the issuances of common stock and proceeds from the issuance of preferred stock. For 1999, quarterly revenue as a percentage of total revenue was approximately 25%, 27%, 26%, and 22%, respectively, for the first through fourth quarters of the year. In addition, for fiscal 1999 quarterly income (loss) from operations as a percentage of total (loss) from operations was approximately (9)%, 1%, (86)%, and (6)%, respectively, for the first through fourth quarters of the year. The Company's revenues and net income from its payphone operating regions are affected by seasonal variations, geographic distribution of payphones, removal of unprofitable phones and type of location. Because many of the payphones are located outdoors, weather patterns have differing effects on the Company's results depending on the region of the country where the payphones are located. Phones located in the southern United States produce substantially higher call volume in the first and second quarters that at other times during the years, while the Company's payphones throughout the Midwestern and eastern United States produce their highest call volumes during the second and third quarters. In 1999, operating activities generated $10.0 million of net cash, compared to a usage of $14.1 million in 1998. In 1997, the Company's operating activities generated $10.6 million of cash flow. The 1999 increase in cash from operating activities is a result of improved operating performance prior to the inclusion of the non-cash expenses related to depreciation, amortization, write-off of goodwill, write-off of location contracts, write-off of certain fixed assets, expenses associated with the issuance of stock in payment for services, and extraordinary losses on the early extinguishment of debt. In addition to the $24.1 million improvement in cash generated from earnings, lower working capital erosion contributed $2.3 million to the improvement in cash flow. 31 Capital expenditures for 1999 were $7.4 million compared to $11.9 for 1998. These capital expenditures were primarily used to purchase payphone and computer equipment. Additionally, $5.1 million were used in 1999 for acquisition activities compared to $116.2 million in 1998. The Company's principal sources of liquidity will come from cash flow generated from operating activities and borrowings under the Company's $45 million revolving credit facility. The Company's principal uses of liquidity will be to provide working capital, meet debt service requirements and finance the Company's strategic plans. At December 31, 1998, the Company had an available borrowing capacity of $27.5 million under the revolving credit facility. The Company has required amortization of Term Loans in calendar 2000 totaling approximately $21.0 million. Financing activities used approximately $9.0 million in cash to repay approximately $11.4 million of long-term debt and capital lease obligations. Net proceeds on the revolving line of credit provided $2.5 million in cash. The Company's ability to fund its operations, make capital expenditure and make scheduled payments or to refinance its indebtedness will depend upon it future financial and operating performance, which will be affected by prevailing economic conditions and financial and business and other factors, some of which are beyond its control. There can be no assurance that the Company's result of operations, cash flow and capital resources will be sufficient to fund it operations, capital expenditures, or its debt service obligations. In the absence of improved operating results, the Company may face liquidity problems and might be required to dispose of material assets or operations to fund its operations and capital expenditures and to meet its debt service requirements and other obligations, and there can be no assurances as to the timing of such sales or the proceeds that the Company could realize therfrom. CREDIT AGREEMENT In connection with the Peoples Merger the Company entered into a senior credit facility ("Senior Credit Facility") with Bank of America, formerly known as NationsBank, N.A. (the "Administrative Agent"), and the other lenders named therein. The Senior Credit Facility provides for borrowings by Davel from time to time of up to $280.0 million for working capital and other corporate purposes. Indebtedness of the Company under the Senior Credit Facility is secured by substantially all of its and its subsidiaries' assets, including but not limited to their equipment, inventory, receivables and related contracts, investment property, computer hardware and software, bank accounts and all other goods and rights of every kind and description and is guaranteed by Davel and all its subsidiaries. The Company's borrowings under the Senior Credit Facility bear interest at a floating rate and may be maintained as Base Rate Loans (as defined in the Senior Credit Facility) or, at the Company's option, as Eurodollar Loans (as defined in the Senior Credit Facility). Base Rate Loans shall bear interest at the Base Rate (defined as the higher of (i) the applicable prime lending rate of Bank of America or (ii) the Federal Reserve reported certificate of deposit rate plus 1%). Eurodollar Loans shall bear interest at the Eurodollar Rate (as defined in the Senior Credit Facility, as amended). The Company is required to pay the lenders under the Senior Credit Facility a commitment fee, payable in arrears on a quarterly basis, on the average unused portion of the Senior Credit 32 Facility during the term of the facility. The Company is also required to pay an annual agency fee to the Agent. In addition, the Company was also required to pay an arrangement fee for the account of each bank in accordance with the banks' respective pro rata share of the Senior Credit Facility. The Administrative Agent and the other lenders will receive such other fees as have been separately agreed upon with the Administrative Agent. The Senior Credit Facility requires the Company to meet certain financial tests, including, without limitation, maximum levels of debt as a ratio of EBITDA (as defined in the Senior Credit Facility and subsequent amendments), minimum interest and fixed charge ratios and maximum amount of capital expenditures. The Senior Credit Facility also contains certain covenants that, among other things, will limit the incurrence of additional indebtedness, prepayments of other indebtedness (including the Notes), liens and encumbrances and other matters customarily restricted in such agreements. FIRST AMENDMENT In the first quarter of 1999, the Company gave notice to the Administrative Agent that lower than expected performance in the first quarter of 1999 would result in the Company's inability to meet certain financial covenants contained in the Senior Credit Facility. On April 8, 1999, the Company and the Lenders agreed to the First Amendment to Credit Agreement and Consent and Waiver (the "First Amendment") which waived compliance, for the fiscal quarter ending March 31, 1999, with the financial covenants set forth in the Senior Credit Facility. In addition, the First Amendment waived any event of default related to two acquisitions made by the Company in the first quarter of 1999, and waived the requirement that the Company deliver annual financial statements to the Lenders within 90 days of December 31, 1998, provided that such financial statements be delivered no later than April 15, 1999. The First Amendment contained amendments that provided for the following: o Amendment of the applicable percentages for Eurodollar Loans for the period between April 1, 1999 and June 30, 2000 at each pricing level to 0.25% highter than those in the previous pricing grid o Prepayment of debt from receipt of dial-around compensation accounts receivable related to the period November 1996 through October 1997 o Further limitations on permitted acquisitions as defined in the Credit Agreement through June 30, 2000 o During the period April 1, 1999 to June 30, 2000, required lenders' consent for the making of loans or the issuance of letters of credit if the sum of revolving loans outstanding plus letter of credit obligaions outstanding exceeds $50.0 million o The introduction of a new covenant to provide certain operating data to the Lenders on a monthly basis o Increases in the maximum allowable ratio of funded debt to EBITDA through the quarter ended June 30, 2000 o Decreases in the minimum allowable interest coverage ratio through the quarter ended June 30, 2000 33 o Decreases in the minimum allowable fixed charge coverage ratio through the quarter ended June 30, 2000 The First Amendment also places limits on capital expenditures and required the payment of an amendment fee equal to the product of the Lender's commitment multiplied by 0.35%. The Senior Credit Facility contains customary events of default, including without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other indebtedness, certain events of bankruptcy and insolvency, judgment defaults, failure of any guaranty or security document supporting the Senior Credit Facility to be in full force and effect, and a change of control of the Company. SECOND AMENDMENT In the first quarter of 2000, the Company gave notice to the Administrative Agent that lower than expected performance in the first quarter of 2000 would result in the Company's inability to meet certain financial covenants contained in the Senior Credit Facility. Effective March 9, 2000, the Company and the Lenders agreed to the Second Amendment to Credit Agreement and Consent and Waiver (the "Second Amendment"), which waived certain covenants through January 15, 2001. In exchange for the covenant relief, the Company agreed to a lowering of the available credit facility to $245 million (through a permanent reduction of the revolving line of credit to $45 million), placement of a block on the final $10 million of revolver borrowing, a fee of 35 basis points and a moritorium on acquisitions. The Second Amendment contained amendments that provided for the following: o Reduces the maximum available credit available on the revolving facility to $45 million o Amendment of the applicable percentages for Eurodollar Loans to: (a) 3.50% for all Revolving Loans which are Eurodollar Loans, all Tranche A Term Loans which are Eurodollar Loans, and all Letter of Credit Fees, (b) 4.25% for all Tranche B Tem Loans which are Eurodollar Loans, (c) 2.00% for all Revolving Loans which are Base Rate Loans and all Tranche A Term Loans which are Base Rate Loans, (d) 2.75% for all Tranche B Term Loans which are Base Rate Loans, and (e) 0.75% for all Commitment Fees o After March 9, 2000, required lenders' consent for the making of loans or the issuance of letters of credit if the sum of revolving loans outstanding plus letter of credit obligaions outstanding exceeds $35.0 million o The introduction of a new covenant to provide financial statements to the Lenders on a monthly basis o Increases in the maximum allowable ratio of funded debt to EBITDA through the maturity date of the loan o Decreases in the minimum allowable interest coverage ratio through the maturity date of the loan 34 o Decreases in the minimum allowable fixed charge coverage ratio through the maturity date of the loan o Decreases in permitted capital expenditures to $10 million annually o Reduction of the maximum interest period to 30 days The Company believes that it is probable that it will comply with the loan covenants for the next twelve months and, as such, has not classified the obligations under the Senior Credit Facility as current liabilities. The Senior Credit Facility contains customary events of default, including without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other indebtedness, certain events of bankruptcy and insolvency, judgment defaults, failure of any guaranty or security document supporting the Senior Credit Facility to be in full force and effect, and a change of control of the Company. The Company believes that cash generated from operations and available borrowings under the Senior Credit Facility will be sufficient to fund the Company's forseeable cash requirements, including capital expenditures through December 31, 2000. There can be no assurance, however, that the Company will continue to expand at its current rate or that additional financing will be available when needed or, if available, will be available on terms acceptable to the Company. 35 IMPACT OF INFLATION Inflation is not a material factor affecting the Company's business. General operating expenses such as salaries, employee benefits and occupancy costs are, however, subject to normal inflationary pressures. SEASONALITY The Company's revenues from its payphone operating regions are affected by seasonal variations, geographic distribution of payphones and type of location. Because many of the Company's payphones are located outdoors, weather patterns have differing effects on the Company's results depending on the region of the country where the payphones are located. Most of the Company's payphones in Florida produce substantially higher call volume in the first and second quarters than at other times during the year, while the Company's payphones throughout the midwestern and eastern United States produce their highest call volumes during the second and third quarters. While the aggregate effect of the variations in different geographical regions tend to counteract the effect of one another, the Company has historically experienced higher revenue and income in the second and third quarters than in the first and fourth quarters. Changes in the geographical distribution of its payphones may in the future result in different seasonal variations in the Company's results. YEAR 2000 ISSUE The Company did not experience any significant problems as a result of the Year 2000. At January 1, 2000, the Company's computerized information systems recognized the 2000 date and processed information related to the operation of the payphones, as well as its internal accounting and information systems, correctly. The Company also has not experienced any problems related to its suppliers or other parties on whom it relies in providing payphone and operator services. NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, which requires that all derivatives be recognized as either assets or liabilities in the statement of financial position at fair value unless specific hedge criteria are met. The Company is required to adopt the provisions of SFAS No. 133 in 2000. Adoption of this statement is not expected to significantly impact the Company's consolidated financial position, results of operations or cash flows. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to certain market risks inherent in the Company's financial instruments that arise from transactions entered into in the normal course of business. The Company is subject to variable interest rate risk on its existing Senior Credit Facility and any future financing requirements. See "--Liquidity and Capital Resources" In connection with the provisions of its Senior Credit Facility and the Company's overall interest rate management objectives, the Company utilizes derivative financial instruments to reduce its exposure to market risks from significant increases in interest rates. The Company's strategy is to purchase interest rate swaps, collars and caps from large financial institutions that in the aggregate maintain notional amounts exceeding 40% of the Company's outstanding long-term 36 debt balance to limit the impact of increases in interest rates on the Company's variable rate long-term debt. As of December 31, 1999, the Company has interest rate cap agreements with an aggregate notional amount of $40 million that terminate in March 2000. The interest rate cap agreements require premium payments to the counterparty based on the notional amount of the contracts that are capitalized and amortized to interest expense over the life of the contract. These agreements entitle the Company to receive quarterly payments from the counterparties for amounts, if any, by which the U.S. three month LIBOR rate exceeds 7%. In addition, the Company entered into an interest rate collar agreement with a large financial institution that terminates in February 2002. The notional amount of the interest rate collar is $25 million and the agreement has a cap rate of 7% and a floor rate of 4.8% based on the U.S. one month LIBOR rate. Based upon the Company's variable rate indebtedness and weighed average interest rates at December 31, 1999, a ten percent increase in market rates of interest would decrease future earnings and cash flows by approximately $12.0 million and would decrease the fair market value of debt by approximately $47.7 million. A ten percent decrease in market rates of interest would increase future earnings and cash flows by approximately $5.0 million and would increase the fair market value of debt by approximately $242.8 million. These amounts were determined by considering the impact of hypothetical interest rates and equity prices on the Company's financial instruments. These analyses do not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of specific actions that would be taken and their possible effects, this analysis assumes no changes in the Company's financial structure. 37 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Financial Statements and Supplementary Data PAGE NUMBERS ------------ Independent Public Accountants Report of Arthur Andersen LLP for the years ended December 31, 1999, 1998 and 1997 39 Consolidated Balance Sheets for December 31, 1999 and 1998 40 Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997 41 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1999, 1998 and 1997 42 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 43 Notes to Consolidated Financial Statements 44 38 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Davel Communications, Inc.: We have audited the accompanying consolidated balance sheets of Davel Communications, Inc. (a Delaware corporation) and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Davel Communications, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Tampa, Florida March 16, 2000 39 DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1999 AND 1998 (In thousands, except per share and share data)
ASSETS 1999 1998 --------- --------- CURRENT ASSETS: Cash and cash equivalents $ 7,950 $ 17,162 Restricted cash -- 790 Trade accounts receivable, net of allowance for doubtful accounts of $10,880 and $5,383, respectively 22,983 30,838 Other current assets 1,048 3,694 --------- --------- 31,981 52,484 Total current assets PROPERTY AND EQUIPMENT 115,558 130,099 LOCATION CONTRACTS 20,852 34,252 GOODWILL 6,290 47,458 OTHER ASSETS 6,080 8,725 --------- --------- Total assets $ 180,761 $ 273,018 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current maturities of long-term debt and obligations under capital leases $ 21,535 $ 11,525 Accounts payable and accrued expenses 27,484 34,393 --------- --------- Total current liabilities 49,019 45,918 --------- --------- LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES 206,509 225,451 --------- --------- DEFERRED LONG TERM REVENUE 312 -- --------- --------- SHAREHOLDERS' EQUITY: Preferred stock - $.01 par value, 900,000 shares authorized, none issues and outstanding -- -- Preferred stock, series A - $.01 par value, 100,000 shares authorized, none issues and outstanding -- -- Common stock - $.01 par value, 50,000,000 shares authorized, 11,033,628 and 10,536,155 shares issued and outstanding, respectively 109 105 Additional paid-in capital 127,839 126,325 Accumulated deficit (203,027) (124,781) --------- --------- Total shareholders' equity (deficit) (75,079) 1,649 --------- --------- Total liabilities and shareholders' equity (deficit) $ 180,761 $ 273,018 ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. 40 DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (In thousands, except per share and share data)
1999 1998 1997 ------------- ------------ ------------- REVENUES: Coin calls $ 110,790 $ 132,483 $ 101,660 Non-coin calls, net of dial-around compensation adjustments--Note 17 65,056 62,335 56,751 ------------ ------------ ------------ Total revenues 175,846 195,594 158,411 ------------ ------------ ------------ COSTS AND EXPENSES: Telephone charges 36,783 45,582 38,886 Commissions 42,077 52,751 39,451 Service, maintenance and network costs 46,956 53,527 40,283 Depreciation and amortization 39,204 38,617 25,620 Selling, general and administrative 20,563 21,525 12,553 Non-recurring items 51,224 10,814 -- Restructuring charge and merger-related expenses 1,570 4,325 -- ------------ ------------ ------------ Total operating costs and expenses 232,435 220,600 152,368 ------------ ------------ ------------ Operating income (loss) (56,589) (25,782) 6,043 OTHER INCOME (EXPENSE): Interest expense, net (23,183) (20,955) (13,581) Loss on investment (350) (2,772) -- Other 121 (154) 497 ------------ ------------ ------------ Total other expense (23,412) (23,881) (13,084) ------------ ------------ ------------ Loss from continuing operations before income taxes (80,001) (49,663) (7,041) INCOME TAX (BENEFIT)/PROVISION (1,755) -- 2,459 ------------ ------------ ------------ Loss from continuing operations before extraordinary item (78,246) (49,663) (9,500) ------------ ------------ ------------ DISCONTINUED OPERATIONS: Loss from operations -- -- (2,418) Gain on sale of discontinued operations -- 607 4,510 ------------ ------------ ------------ Gain (loss) on discontinued operations -- 607 2,092 ------------ ------------ ------------ Loss before extraordinary item (78,246) (49,056) (7,408) EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT -- (17,856) -- ------------ ------------ ------------ Net loss $ (78,246) $ (66,912) $ (7,408) ============ ============ ============ BASIC AND DILUTED EARNINGS PER SHARE: Note 14 Loss from continuing operations before extraordinary item $ (7.34) $ (5.68) $ (1.27) ------------ ------------ ------------ Gain (loss) from discontinued operations -- .07 .25 ------------ ------------ ------------ Extraordinary loss -- (1.98) -- ------------ ------------ ------------ Net loss per share $ (7.34) $ (7.59) $ (1.02) ============ ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING 10,659,594 9,029,285 8,407,255 ============ ============ ============
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. 41 DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (In thousands, except share data)
COMMON STOCK ADDITIONAL UNREALIZED TOTAL ------------------ PAID-IN ACCUMULATED LOSS ON SHAREHOLDERS' COMPREHENSIVE SHARES AMOUNT CAPITAL DEFICIT INVESTMENT EQUITY LOSS -------- ------ ------------- ----------- ---------- --------------- ------------ BALANCE, December 31, 1996 8,387,094 $ 84 $ 80,489 $ (50,461) $ (1,471) $ 28,641 $ (13,658) Stock options exercised and grants of common stock 51,438 -- 817 -- -- 817 -- Series C preferred stock dividends accrued -- -- (1,050) -- -- (1,050) -- Preferred stock issuance cost accretion -- -- (156) -- -- (156) -- Unrealized loss on investment -- -- -- -- (554) (554) (554) Net loss for the year ended December 31, 1997 -- -- -- (7,408) -- (7408) (7,408) ---------- ------ ----------- ----------- ---------- ----------- ----------- BALANCE, December 31, 1997 8,438,532 84 80,100 (57,869) (2,025) 20,290 $ (7,962) Stock options exercised and grants of common stock 160,146 2 2,225 -- -- 2,227 -- Series C preferred stock dividends accrued -- -- (1,464) -- -- (1,464) -- Preferred stock issuance cost accretion -- -- (158) -- -- (158) -- Sale of stock 1,000,000 10 26,529 -- -- 26,539 -- Stock issued as payment for services provided 44,659 -- 751 -- -- 751 -- Stock issued for retirement of preferred stock 892,977 9 17,897 -- -- 17,906 -- Option repricing -- -- 445 -- -- 445 -- Unrealized loss on investment -- -- -- -- (747) (747) (747) Reclassification of investment to a trading security -- -- -- -- 2,772 2,772 2,772 Fractional shares retired upon completion of merger (159) -- -- -- -- -- Net loss for the year ended December 31, 1998 -- -- -- (66,912) -- (66,912) (66,912) ---------- ------ ----------- ----------- ---------- ----------- ----------- BALANCE, December 31, 1998 10,536,155 105 126,325 (124,781) -- 1,649 $ (64,887) Stock options exercised and grants of common stock 497,473 4 1,609 -- -- 1,613 Series C preferred stock dividends accrued -- -- (95) -- -- (95) Net loss for the year ended December 31, 1999 -- -- -- (78,246) -- (78,246) $ (78,246) ---------- ------ ----------- ----------- ---------- ----------- ----------- BALANCE, December 31, 1999 11,033,628 $ 109 $ 127,839 $ (203,027 $ -- $ (75,079) $ 78,246) ========== ====== =========== =========== ========== =========== ===========
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 42 DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (In thousands)
1999 1998 1997 ----------- ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(78,246) $ (66,912) $ (7,408) Adjustments to reconcile net loss to cash flows from operating activities: Gain on sale of discontinued operations -- (607) (4,510) Losses from discontinued operations -- -- 2,418 Depreciation and amortization 39,204 38,617 25,620 Increase in allowance for bad debts 5,497 262 606 (Gain)/loss on sale of property and equipment 992 (36) (156) Amortization of deferred financing charges 992 -- -- Deferred taxes -- -- 1,021 Nonrecurring items -- 3,769 -- Restructuring charge and merger-related expenses 51,224 2,969 -- Option repricing -- 445 -- Recognition of unrealized loss on investment -- 2,772 -- Stock based compensation 1,609 751 -- Extraordinary loss from the early extinguishment of debt -- 17,856 -- Payment for certain contracts (7,859) (6,248) (3,163) Changes in assets and liabilities, net of effects from acquisition: Accounts receivable 2,358 3,374 (10,538) Other assets 1,970 3,984 750 Accounts payable and accrued expenses (8,019) (15,246) 5,946 312 -- -- -------- --------- -------- Net cash provided by (used in) operating activities 10,034 (14,250) 10,586 Net cash provided by (used in) discontinued operations -- -- (337) -------- --------- -------- Net cash before investing activities 10,034 (14,250) 10,249 -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (7,441) (11,920) (7,024) Proceeds from sale of discontinued operations -- -- 10,625 Purchase of payphone assets, net of cash acquired (5,123) (3,216) (7,131) Purchase of Communications Central, Inc., net of cash acquired -- (101,644) -- Purchase of Indiana Telecom, net of cash acquired -- (11,317) -- Write-off of fixed assets 1,551 -- -- Other -- 181 407 -------- --------- -------- Net cash used in investing activities (11,013) (127,916) (3,123) -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt -- 366,500 13,660 Payments on long-term debt (10,950) (240,436) (10,400) Net proceed (payments) on revolving line of credit 2,500 (1,176) Bond tender premium paid on early extinguishment of debt -- (12,929) -- Principal payments under capital lease agreements (482) (769) (1,594) Debt issuance costs -- (7,335) (218) Repurchase of preferred stock rights (95) -- -- Sale of common stock -- 26,539 -- Issuance of common stock through stock options and warrants 4 2,227 817 -------- --------- -------- Net cash provided by (used in) financing activities (9,023) 133,797 1,089 -------- --------- -------- Net increase (decrease) in cash and cash equivalents (10,002) (8,369) 8,215 CASH AND CASH EQUIVALENTS, beginning of period 17,952 25,401 17,186 -------- --------- -------- CASH AND CASH EQUIVALENTS, end of period $ 7,950 $ 17,162 $ 25,401 ======== ========= ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. 43 DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except share data) 1. DESCRIPTION OF BUSINESS AND THE PEOPLES MERGER: Davel Communications, Inc. (the "Company" or "Davel") was incorporated on June 9, 1998 under the laws of the State of Delaware to effect the merger, on December 23, 1998 of Davel Communications Group, Inc. ("Old Davel"), with Peoples Telephone Company, Inc. (the "Peoples Merger"). As a result of the Peoples Merger (defined in the following paragraph), the Company is the largest domestic independent payphone service provider in the United States, with approximately twice the number of payphones as the second largest domestic independent payphone service provider. The Company operates in a single business segment within the telecommunications industry, operating, servicing and maintaining a system of approximately 76,500 payphones in 44 states and the District of Columbia. The Company's headquarters is located in Tampa, Florida, with divisional and administrative facilities in 31 dispersed geographic locations. Pursuant to an Agreement and Plan of Merger dated July 5, 1998 as amended and restated on October 22, 1998, the Peoples Merger was consummated between the Company and Peoples Telephone, Inc ("Peoples") on December 23, 1998. The stock-for-stock transaction was approved by the shareholders of the two companies, with the Company continuing as the surviving corporation in the merger. Under the merger agreement, each outstanding share of Peoples common stock was converted into the right to receive 0.235 of a common share of the Company and resulted in the issuance of approximately 3,812,810 shares of common stock to the common shareholders of Peoples Telephone. In addition, the outstanding shares of Peoples Telephone Series C Preferred Stock and accrued Preferred Stock dividends were converted into approximately 892,977 shares of common stock. This transaction has been accounted for as a pooling of interests, and accordingly, the financial statements of the Company have been restated to reflect the combined financial position and operating results as if the companies had operated as one entity since inception. For periods preceding the merger, there were no intercompany transactions which required elimination from the combined consolidated results of operations. Selected financial information for the combining entities included in the consolidated statements of operations for the years ended December 31, 1998 and 1997 are as follows: 1998 1997 --------- --------- Total revenues Davel $ 84,663 $ 47,008 Peoples 110,931 112,235 --------- --------- Combined $ 195,594 $ 159,243 ========= ========= Net income (loss) Davel $ (13,952) $ 4,262 Peoples (19,965) (11,670) Non-recurring items (10,814) -- Restructuring charges (4,325) -- Extraordinary item (17,856) -- --------- --------- Combined $ (66,912) $ (7,408) ========= ========= 44 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION The accompanying financial statements include the accounts of the Company and its wholly owned subsidiaries. Financial data for all periods presented reflect the retroactive effect of the merger, accounted for as a pooling of interest, with Peoples consummated in December 1998. All significant intercompany accounts and transactions are eliminated in consolidation. The divestitures of the Company's hospitality, remanufacturing, cellular and inmate telephone operations have been classified as discontinued operations. Accordingly, operating results and cash flows for these businesses have been segregated and reported as discontinued operations in the accompanying consolidated financial statements. RESTRICTED CASH Approximately $0 and $790 of cash on the accompanying consolidated balance sheets at December 31, 1999 and 1998, respectively, was restricted and served as collateral for the Company's performance under a letter of credit. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. CONCENTRATIONS OF CREDIT RISK Receivables have a significant concentration of credit risk in the telecommunications industry. In addition, a significant amount of receivables are generated by approximately 17% of the Company's payphones located in the state of Florida. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of the Company's financial instruments approximate their carrying amounts. Fair value for all financial instruments other than long-term debt, for which no quoted market prices exist, were based on appropriate estimates. The value of the Company's long-term debt is estimated based on market prices for similar issues or on the current rates offered to the Company for debt of the same remaining maturities. PROPERTY AND EQUIPMENT Property and equipment is stated at cost and depreciation is provided over the estimated useful lives using the straight-line method. Installed payphones and related equipment includes installation costs which are capitalized and amortized over the estimated useful lives of the equipment. The costs associated with normal maintenance, repair and refurbishment of telephone equipment are charged to expense as incurred. The capitalized cost of equipment and vehicles under capital leases is amortized over the lesser of the lease term or the asset's estimated useful life, and is included in depreciation and amortization expense in the consolidated statements of operations. LOCATION CONTRACTS Location contracts include acquisition costs allocated to location owner contracts and other costs associated with obtaining written and signed location contracts. These assets are amortized on a straight-line basis over their estimated useful lives based on contract terms (3 to 5 years). Accumulated amortization as of December 31, 1999 and 1998 was approximately $28,689 and $30,665, respectively. During 1999, the Company determined that a permant impairment had occurred to certain of the location contracts associated with the CCI Acquisition (see Note 4). In the third quarter of 1999 the Company wrote off $7,753 of location contracts associated with this transaction. 45 GOODWILL Goodwill is amortized on a straight-line basis over periods estimated to be benefited, generally 15 years. Accumulated amortization as of December 31, 1999 and 1998 was approximately $6,833 and $7,911, respectively. During 1999, the Company determined that a permanent impairment had occurred to the goodwill associated with the CCI transaction of 1998. In the third quarter of 1999 the Company wrote off $37,865 million of goodwill associated with this transaction. LONG-LIVED ASSETS The Company accounts for long-lived assets pursuant to SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, which requires impairment losses to be recorded on long-lived assets used in operations when events or changes in circumstances indicate that the carrying amount on an asset may not be recoverable. Management reviews long-lived assets and the related intangible assets for impairment whenever events or changes in circumstances indicate the asset may be impaired. The Company does not believe that any long-lived assets are impaired at December 31, 1999 based on the estimated future cash flows of the Company. (See Goodwill). RECOGNITION OF REVENUE Revenues from coin calls and non-coin calls are recognized based on estimates of calls made. When revenue on a telephone call is recorded, an expense is also recorded for fees associated with the call. INCOME TAXES The Company has accounted for income taxes under SFAS No. 109, an asset and liability approach to accounting and reporting for income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on management's knowledge of current events and actions it may undertake in the future, they may ultimately differ from actual results. RECLASSIFICATION Certain reclassifications have been made to prior year balances to conform to the current year presentation. 3. DISCONTINUED OPERATIONS: INMATE TELEPHONE OPERATIONS On December 19, 1997, the Company sold the remaining assets of the Company's inmate phone division to Talton Holdings, Inc. ("Talton") for $10,625 in cash plus additional contingent consideration. This transaction resulted in a gain of approximately $4,242. The contingent consideration is payable within 18 months after the closing based upon a formula which generally provides for the sharing of (a) incremental profits from revenue increases on certain contracts sold to Talton and (b) profits resulting from Talton closing on pending bids initiated by the Company which result in new contracts. For financial accounting purposes, the contingent consideration will be recognized as received. The Company recorded a loss in discontinued operations of $2,418 for the year ended December 31, 1997. The inmate phone division had revenues of $11,931 in 1997. 46 CELLULAR OPERATIONS During the year ended December 31, 1998, the Company sold its investment in Shared Technologies Cellular, Inc. (STC) Common Stock resulting in a gain of $607. Accordingly, the gain from the sale of the investment is recorded in discontinued operations in the 1998 statement of operations. 4. ACQUISITIONS: On February 3, 1998, the Company completed its acquisition of Communications Central Inc. (the "CCI Acquisition") at a price of $10.50 per share in cash, or approximately $70.2 million in the aggregate, assumed CCI's outstanding debt of $36.7 million and incurred $2.2 million in transaction costs. The CCI Acquisition has been accounted for by the purchase method, and accordingly the results of operations are included in the Company's consolidated statement of operations from the date of acquisition. Goodwill associated with the acquisition was to be amortized over fifteen years using straight-line amortization (See Note 2). The following summarizes unaudited pro forma consolidated results of operations for the year ended December 31, 1997 assuming the CCI Acquisition occurred at the beginning of 1997. These pro forma results are provided for comparative purposes only and do not purport to be indicative of the results which would have been obtained if this acquisition had been effected on the dates indicated or which may be obtained in the future. Year Ended December 31, 1997: Total revenues $ 214,395 ========= Loss from continuing operations $ (14,031) ========= Basic and diluted loss from continuing operations per share $ (1.81) ========= The allocation of the purchase price of the CCI Acquisition is summarized as follows: Working capital $ 8,892 Property and equipment 46,119 Goodwill 42,541 Identifiable intangible assets 11,565 -------- $109,117 ======== During 1999 the Company wrote off $37,865 of goodwill related to the CCI Acquisition. (See Goodwill, Note 2 and Note 5). In January 1998, the Company acquired the operating assets of Indiana Telcom Corporation including 2,632 payphones for $11,317 in a cash transaction accounted for as a purchase. Accordingly, $5.4 million of the purchase price was allocated to installed payphones and related equipment and $0.3 million was allocated to location contracts. The excess of the purchase price over the fair value of the assets acquired of $5.6 million was recorded as goodwill and is being amortized over five years. Pro forma results of operations have not been presented because the effect of this acquisition was not significant. During the years ended December 31, 1999, 1998 and 1997, the Company made additional acquisitions, which have been accounted for as purchases. The consolidated financial statements include the operating results of each business from the date of acquisition. Pro forma results of operations have not been presented because the effects of each of these acquisitions were not significant. For all transactions, the purchase price was allocated to payphones and associated assets and, in some instances, noncompete agreements and goodwill. These acquisitions included a total of 1,341, 1,516 and 2,861 payphones in 1999, 1998 and 1997, respectively, for purchase prices totaling $5,123, $3,216 and $7,131, respectively. 47 5. NON-RECURRING ITEMS AND RESTRUCTURING CHARGE: In connection with the Peoples Merger, the Company recognized non-recurring costs of $10,814 in 1998. These costs include legal fees, investment banking fees, accounting fees and change of control payments. In addition, the Company recognized restructuring costs of $4,325 related to the Peoples Merger and other restructurings. These costs were composed of payments incurred in connection with early lease terminations, facility closing costs, a writedown of the value of the former Peoples headquarters and employee termination benefits for 143 excess field operations and administrative personnel. The following table summarizes the restructuring charge and the amounts incurred during the year ended December 31, 1999.
MERGER FACILITY EMPLOYEE WRITEDOWN OF CLOSING CLOSING COSTS TERMINATION COSTS ASSETS OTHER COSTS TOTAL -------------- ------------------ --------------- ------------ ------------- ----------- Remaining reserve at December 31, 1998 $ 889 $ 1,293 $ -- $ 787 $ 3,769 $ 6,738 Adjustments to certain reserves (647) 1,311 -- -- (664) 0 Utilized in 1999 (170) (2,604) -- (787) (3,105) (6,666) -------- ------- ------- ------- ------- ------- Remaining reserve at December 31, 1999 $ 72 $ 0 $ 0 $ 0 $ 0 $ 72 ======== ======= ======= ======= ======= =======
During the year ended December 31, 1998, the Company over-estimated restructing charges related to facilities closing costs and merger-related closing costs. The Company underestimated restucturing charges related to employee terminations. Accordingly during 1999, the Company reversed approximately $647 of the restructing reserve related to facility closing costs and $664 of the reserve related to merger closing costs. Additionally during 1999, the Company incurred an additional $1,311 of restructuring charges related to employee termination costs. Also during 1999, the Company recognized restructuring charges and other merger-related expense related to the Peoples Merger of approximately $1,570 related to integration and restructuring activities. The restructuring charges and other merger-related expense were primarily related to severance pay for terminated employees, relocation costs and costs related to the closing of redundant facilities. In 1999 the Company recorded a non-recurring charge of approximately $51,224 which primarily related to impaired goodwill and certain other identifiable intangibles related to the CCI Acquisition. The charge was based on a review of long-lived assets and intangibles under the provisions of Statement of Financial Accounting Standards No. 121. The Company considered continued operating losses and lower cash flow than expected related to the payphones acquired in the CCI Acquisition to be the primary indicators of potential impairment. Based on the Company's estimate of discounted future cash flows, the carrying values of the assets were written down to the Company's estimate of fair value. Considerable management judgement is necessary to estimate discounted future cash flows. 6. INVESTMENTS AND OTHER COMPREHENSIVE LOSS: Investments in debt and equity securities are accounted for in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. During 1999, the Company wrote off its investment in Global Telecommunications Solutions, Inc. ("GTS"). Accordingly, the Company recognized a realized loss of $350 during 1999 and an unrealized loss on the investment of $2,772 during 1998 in the accompanying statement of operations. The Company's investment in GTS common stock at December 31, 1999 and 1998, respectively, was approximately $13 and $363 and is included in other assets in the accompanying consolidated balance sheets. 48 As of January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of SFAS No. 130 had no impact on the Company's net loss or shareholders' equity. SFAS No. 130 requires unrealized gains or losses on the Company's available-for-sale securities, which, prior to adoption, were reported separately in shareholders' equity, to be included in other comprehensive loss. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. 7. ALLOWANCE FOR DOUBTFUL ACCOUNTS: Activity in the allowance for doubtful accounts is summarized as follows for the years ended December 31:
1999 1998 1997 -------- -------- ------- Balance, at beginning of period $ 5,383 $ 5,121 $ 4,515 Charged to expense 7,709 1,299 4,590 Uncollected balances written off, net of recoveries (2,212) (1,037) (3,984) -------- ------- ------- Balance, at end of period $ 10,880 $ 5,383 $ 5,121 ======== ======= =======
8. PROPERTY AND EQUIPMENT: Property and equipment is summarized as follows at December 31:
ESTIMATED USEFUL LIFE 1999 1998 IN YEARS ----------- ----------- ------------ Installed payphones and related equipment $212,441 $ 209,177 10 Furniture, fixtures and office equipment 9,224 8,638 5-7 Vehicles, equipment under capital leases and other equipment 4,521 6,432 4-10 Building and improvements 1,190 4,027 25 -------- --------- 227,376 228,274 Less- Accumulated depreciation (132,606) (110,871) -------- ----------- 94,770 117,403 Uninstalled payphone equipment 20,788 11,746 Land - 950 -------- ----------- $115,558 $130,099 ======== ===========
49 9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following at December 31: 1999 1998 -------- --------- Accounts payable $ 12,791 $ 5,498 Taxes payable 2,361 5,472 Accrued commissions 4,972 7,551 Accrued merger and restructuring costs 72 6,738 Accrued telephone bills 612 3,259 Deferred revenue 1,767 1,725 Interest payable 170 491 Accrued compensation 929 1,210 Other 3,810 2,449 -------- --------- $ 27,484 $ 34,393 ======== ======== 10. LONG-TERM DEBT: Following is a summary of long-term debt as of December 31:
1999 1998 -------- -------- SENIOR CREDIT FACILITY Term A note payable to banks at an adjusted LIBOR rate (8.9% at December 31, 1999), interest payments due quarterly beginning March 31, 1999 and monthly beginning April 30, 2000. Principal payments due quarterly beginning June 30, 1999, collateralized by the Company's assets $115,000 $125,000 Term B note payable to the banks at an adjusted LIBOR rate (9.5% at December 31, 1999), interest payments due quarterly beginning March 31, 1999 and monthly beginning April 30, 2000. Principal payments due quarterly beginning June 30, 1999, collateralized by the Company's assets 94,050 95,000 Revolving Advance on bank's line of credit at the bank's adjusted LIBOR rate (8.8% at December 31, 1999), interest due quarterly during 1999, and monthly beginning April 30, 2000. Principal due December 23, 2003, collateralized by the Company's assets 17,500 15,000 Capital lease obligations and other notes with various interest rates and various maturity dates through 2002 1,494 1,976 --------- -------- 228,044 236,976 Less- Current maturities 21,535 11,525 --------- -------- $ 206,509 $225,451 ========= ========
In connection with the Peoples Merger on December 23, 1998, the Company entered into a senior credit facility ("Senior Credit Facility") with Bank of America, formerly NationsBank, N.A., (the "Administrative Agent") and the other lenders named therein. The Senior Credit Facility provided for borrowings by the Company from time to 50 time of up to $280 million for working capital and other corporate purposes. Upon consummation of the Peoples Merger, the Company redeemed $100,000 in Senior Notes that were scheduled to mature in 2002 and retired approximately $96,660 in notes payable prior to maturity. In connection with this early extinguishment of debt, the Company recognized an extraordinary loss of $17,856. The Senior Credit Facility was amended on April 8, 1999 (the "First Amendment"). This amendment waived compliance, for the first quarter of 1999, with the financial covenants set forth in the Senior Credit Facility. In addition, the First Amendment waived any event of default related to two acquisitions made by the Company in the first quarter of 1999, and waived the requirement that the Company deliver annual financial statement to the Lenders within 90 days of December 31, 1998, provided that such financial statement be delivered no later than April 15, 1999. Effective March 9, 2000, the Company and the Lenders agreed to the Second Amendment to Credit Agreement and Consent and Waiver (the "Second Amendment") which amended certain covenants through January 15, 2001. In exchange for the covenant relief, the Company agreed to a lowering of the available credit facility to $245,000 (through a permanent reduction of the revolving line of credit) and placement of a block on the final $10,000 of revolver borrowing. The Second Amendment also placed a moritorium on acquisitions and changed the calculation of interest rates for the Senior Credit Facility. Indebtedness of the Company under the Senior Credit Facility is secured by substantially all of its and its subsidiaries' assets, including but not limited to their equipment, inventory, receivables and related contracts, investment property, computer hardware and software, bank accounts and all other goods and rights of every kind and description and is guaranteed by the Company. The Company's borrowings under the Senior Credit Facility bear interest at a floating rate and may be maintained as Base Rate Loans (as defined in the Senior Credit Facility, as amended) or, at the Company's option, as Eurodollar Loans (as defined in the Senior Credit Facility, as amended). Base Rate Loans shall bear interest at the Base Rate (defined as the higher of (i) the applicable prime lending rate of NationsBank, N.A. or (ii) the Federal Reserve reported certificate of deposit rate plus 1%). Eurodollar Loans shall bear interest at the Eurodollar Rate (as defined in the Senior Credit Facility, as amended). The Company is required to pay the lenders under the Senior Credit Facility a commitment fee of 0.5%, payable in arrears on a quarterly basis, on the average unused portion of the Senior Credit Facility during the term of the facility. The Company is also required to pay an annual agency fee to the Agent. In addition, the Company was also required to pay an arrangement fee for the account of each bank in accordance with the banks' respective pro rata share of the Senior Credit Facility. The Agent and the lenders will receive such other fees as have been separately agreed upon with the Agent. The Senior Credit Facility requires the Company to meet certain financial tests, including, without limitation, maximum levels of Senior Secured Debt as a ratio of EBITDA (as defined in the Senior Credit Facility, as amended), minimum interest coverage, minimum fixed charge coverage and maximum amount of capital expenditures. The Senior Credit Facility also contains certain covenants which, among other things, will limit the incurrence of additional indebtedness, prepayments of other indebtedness (including the Notes), liens and encumbrances and other matters customarily restricted in such agreements. The Senior Credit Facility contains customary events of default, including without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other indebtedness, certain events 51 of bankruptcy and insolvency, judgement defaults, failure of any guaranty or security document supporting the Senior Credit Facility to be in full force and effect, and a change of control of the Company. Annual maturities of long-term debt are as follows: Year ended December 31: 2000 $20,950 2001 30,950 2002 30,950 2003 35,950 2004 60,167 Thereafter 30,083 ------ Total $209,050 ======== In connection with the provisions of its Senior Credit Facility and the Company's overall interest rate management objectives, the Company utilizes derivative financial instruments to reduce its exposure to market risks from significant increases in interest rates. The Company's strategy is to purchase interest rate swaps, collars and caps from large financial institutions that in the aggregate maintain notional amounts exceeding 40% of the Company's outstanding long-term debt balance to limit the impact of increases in interest rates on the Company's variable rate long-term debt. As of December 31, 1999, the Company has interest rate cap agreements with an aggregate notional amount of $40 million that terminate in March 2000. The interest rate cap agreements require premium payments to the counterparty based on the notional amount of the contracts that are capitalized and amortized to interest expense over the life of the contract. These agreements entitle the Company to receive quarterly payments from the counterparties for amounts, if any, by which the U.S. three month LIBOR rate exceeds 7%. In addition, the Company entered into an interest rate collar agreement with a large financial institution that terminates in February 2002. The notional amount of the interest rate collar is $25 million and the agreement has a cap rate of 7% and a floor rate of 4.8% based on the U.S. one month LIBOR rate. The Company does not hold or issue derivative financial instruments for trading purposes. The Company is exposed to credit risk in the event of nonperformance by the counterparties; however, the Company does not anticipate nonperformance by any of its counterparties. The carrying amount and fair value of these contracts are not significant. 11. LEASE COMMITMENTS: The Company conducts a portion of its operations in leased facilities under noncancellable operating leases expiring at various dates through 2004. Some of the operating leases provide the Company pay taxes, maintenance, insurance and other occupancy expenses applicable to leased premises. The Company also maintains certain equipment under noncancellable capital leases expiring at various dates through 2002. The annual minimum rental commitments under operating and capital leases are as follows: OPERATING CAPITAL TOTAL --------- ------- ------- Year ended December 31: 2000 $ 2,505 $ 585 $ 3,091 2001 4,498 556 5,054 2002 3,142 352 3,494 2003 2,066 2 2,068 2004 ------- ------- ------- $12,211 $ 1,495 $13,707 ======= ======= ======= 52 Rent expense for operating leases from continuing operations for the year ended December 31, 1999, 1998, and 1997 was $2,566, $1,060, and $864, respectively. 12. INCOME TAXES: Deferred income taxes arise from temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets or liabilities at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Income tax provisions will increase or decrease in the same period in which a change in tax rates is enacted. The components of the provision for income taxes are as follows:
1999 1998 1997 -------- -------- -------- Current provision: Federal $ (1,755) $ -- $ 1,323 State -- 108 115 Deferred provision -- (108) 1,021 -------- -------- -------- Income tax expense from continuing operations (1,755) -- 2,459 Income tax expense from discontinued operations -- -- -- -------- -------- -------- Total income tax expense $ (1,755) $ -- $ 2,459 ======== ======== ========
A reconciliation of federal statutory income taxes to the Company's effective tax provision is as follows:
1999 1998 1997 -------- -------- -------- Provision for federal income tax at the statutory rate (34%) $(26,604) $(16,885) $ (2,394) State income taxes net of federal benefit (1,770) (1,902) (270) Change in valuation allowance 16,595 17,808 5,167 Goodwill amortization 10,380 927 -- Other, net (356) 52 (44) -------- -------- -------- Income taxes from continuing operations (1,755) -- $ 2,459 Expected income tax expense (benefit) from discontinued and extraordinary items -- (6,525) 792 Change in valuation allowance -- 6,525 (792) -------- -------- -------- Total income tax expense $ (1,755) $ -- $ 2,459 ======== ======== ========
53 The tax effects of significant temporary differences representing deferred tax assets and liabilities are as follows:
1999 1998 ------------- ------------- Deferred Tax Assets: Net operating loss carryforward $ 69,412 $ 62,772 Capital loss carryforward 687 574 Amortization 14,618 12,989 Alternative minimum tax credit carryforward 862 1,200 Other 17,884 10,259 --------- --------- Total deferred tax assets 103,463 87,794 Valuation allowance (71,392) (54,797) --------- --------- Net deferred tax assets 32,071 32,997 --------- --------- Deferred Tax Liabilities: Depreciation (32,071) (32,061) Other -- (936) --------- --------- Total deferred tax liabilities (32,071) (32,997) --------- --------- Net Deferred Tax Liability $ -- $ -- --------- ---------
As of December 31, 1999, the deferred tax asset valuation allowance increased to approximately $71,392 from $54,797 as of December 31, 1998. The increase is recorded as a component of the Company's 1999 tax provision. Realization of deferred tax assets is dependent upon sufficient future taxable income during the periods that temporary differences and carryforwards are expected to be available to reduce taxable income. As such, the Company has recorded a valuation allowance to reflect the estimated amount of deferred tax assets which may not be realized due to the expiration of its operating loss and capital loss carryforwards. At December 31, 1999, the Company had tax net operating loss carryforwards of approximately $184,459 and capital losses of $1,826, which expire in various amounts in the years 2001 to 2019. Approximately $134,353 of the net operating loss carryforwards plus $700 of the capital loss carryforwards relate to multiple business acquisitions for which annual utilization will be limited. The net operating losses and capital losses will be subject to limitations if future ownership changes occur. In addition, these loss carryforwards can only be utilized against future taxable income, if any, generated by these acquired companies as if these companies continued to file separate income tax returns. 13. CAPITAL STOCK TRANSACTIONS: PREFERRED STOCK The Company's certificate of incorporation authorize 1,000,000 shares of preferred stock, par value $.01 per share. The Company does not have any immediate plans to issue any shares of preferred stock. Peoples' articles of incorporation authorized 5,000,000 shares of preferred stock, of which 600,000 shares were designated as Series B Preferred Stock and 160,000 shares were designated as Series C Preferred Stock. During 1995, Peoples issued 150,000 shares of Series C Cumulative Convertible Preferred Stock to UBS Capital II LLC, a wholly owned subsidiary of Union Bank of Switzerland, for proceeds of $15.0 million. The Preferred Stock accumulated dividends at an annual rate of 7%. The dividends were payable in cash or may accumulate. In connection with the Peoples Merger, the Company issued 892,977 shares of common stock for the outstanding Series C Preferred Stock and cumulative dividends and cancelled the 5,000,000 authorized shares of Peoples Preferred Stock. 54 COMMON STOCK On June 30, 1998, the Company announced the closing of an investment by an affiliate of Equity Group Capital Investments ("EGCI"), a privately-held investment company controlled by Sam Zell. In the transaction, the EGCI affiliate invested $28,000 in the Company as payment for 1,000,000 shares of newly issued common stock and warrants to purchase an additional 215,531 shares, which are exercisable at a price of $32.00 per share. Proceeds of the sale were used for working capital and payment of the merger consideration for the Peoples Merger. In December 1998, the shareholders of the Company approved an increase in the number of shares of authorized common stock from 10,000,000 to 50,000,000 in order to accommodate issuance of stock in connection with the Peoples Merger. STOCK OPTIONS AND WARRANTS The Company has several stock option plans under which options to acquire up to 2,234,525 shares may be granted to directors, officers and certain employees of the Company including the stock option plans acquired in the Peoples Merger. Vesting periods for options issued under these plans range from immediate vesting up to 10 years and generally expire after 5 to 10 years. The plans also provide for the outright grant of common stock. For the years ended December 31, 1999 and 1998, respectively, 28,222 and 7,286 outright stock grants were issued. During 1998, 45,000 warrants with an exercise price of $15.60 issued in connection with the Company's initial public offering in 1993 expired. The exercise price of each option generally equals the market price of the Company's stock on the date of grant. Accordingly, no compensation cost has been recognized for options granted under the plans. Had compensation cost for the plans been determined based on the fair value of the options at the grant dates consistent with the method of SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
1999 1998 1997 --------- ---------- --------- Net loss As reported $ (78,246) $ (66,912) $ (7,408) Pro forma $ (80,708) $ (71,766) $ (8,921) Basic and diluted loss per common share As reported $ (7.34) $ (7.59) $ (1.02) Pro forma $ (7.57) $ (8.13) $ (1.20)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes options-pricing method with the following weighted-average assumptions used for grants in 1999, 1998 and 1997: dividend yield of 0% for all years; expected volatility of 84.7%, 48.8% and 54.0%, respectively, risk-free interest rates of 5.0%, 5.4% and 5.7%, respectively, and expected life of approximately five years. 55 A summary of the status of the Company's stock option plans as of December 31 and changes during the years ending on those dates is presented below (Shares in thousands):
1999 1998 1997 ------------------------- ---------------------------- ------------------ WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------- -------- ------ -------- ------ --------- Outstanding at beginning of year 1,291 $ 20.88 1,136 $ 20.34 903 $ 19.26 Granted 524 5.85 407 23.98 317 23.04 Exercised -- -- (153) 13.35 (27) 13.35 Expired (50) 10.33 (99) 15.60 (23) 23.95 Cancelled (400) 21.90 -- -- (34) 22.85 ------- ------ ------ Outstanding at end of year 1,365 $ 14.77 1,291 $ 20.88 1,136 $ 20.34 ------- -------- ------ -------- ------ ------- Options exercisable at end of year 1,051 $ 13.68 1,065 $ 20.03 1,946 $ 21.29 ======= ====== ====== Weighted-average fair value of options granted during the year $ 5.79 $ 11.92 $ 6.04
The following information applies to options outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ------------------------------------------------------------- ------------------------------------------------------- WEIGHTED NUMBER AVERAGE NUMBER OUTSTANDING AT REMAINING WEIGHTED EXERCISABLE AT RANGE OF EXERCISE DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, WEIGHTED AVERAGE PRICE 1999 LIFE (YEARS) EXERCISE PRICE 1999 EXERCISE PRICE - ----------------- ----------------- ---------------- ---------------- ----------------- ------------------ $3.50 to $4.94 102,500 4.9 $ 4.26 62,500 $ 4.23 $5.38 to $6.50 408,250 5.2 $ 6.23 237,349 $ 6.05 $9.25 to $13.83 103,477 3.3 $ 11.57 104,950 $ 11.49 $14.13 to $19.13 350,671 2.7 $ 15.49 350,671 $ 16.06 $21.53 to $30.85 399,870 4.9 $ 25.86 295,917 $ 25.14 --------- --------- 1,364,768 $14.50 1,051,387 $ 13.68 --------- ---------
As a result of a change of control provision included in Peoples' option agreement with Mr. Jeffery Hanft (former Peoples Chairman and Chief Executive Officer), the exercise price on 250,000 options was modified from $8.50 per share to $2.80 per share which represents Peoples' average closing stock price for the 30 days prior to the 56 announcement of the merger. A charge of $445 is included in non-recurring items in the accompanying 1998 statement of operations related to the option repricing. Upon completion of the Peoples Merger the options were converted to options for Davel Common Stock. Mr. Hanft's options are collateral for a security agreement between Mr. Hanft and the Company related to a loan which is due in September 2001. At December 31, 1999, approximately 1,400,000 shares of Common Stock were reserved pursuant to stock option plans. 14. EARNINGS PER SHARE: The treasury stock method was used to determine the dilutive effect of the options and warrants on earnings per share data. The following table summarizes the restated net loss from continuing operations per share and the weighted average number of shares outstanding used in the computations in accordance with SFAS No. 128. In accordance with SFAS No. 128, the following table reconciles net income and weighted average shares outstanding to the amounts used to calculate the basic and diluted earnings per share (in thousands, except per share and share data):
1999 1998 1997 ------------ ------------- ------------- Loss from continuing operations $ (78,246) $ (49,663) $ (9,500) Deduct: Cumulative preferred stock dividend requirement 95 1,464 1,050 Preferred stock issuance cost accretion -- 158 156 ------------ ----------- ----------- Loss applicable to common shareholders $ (78,341) $ (51,285) $ (10,706) ============ =========== =========== Weighted average common shares outstanding 10,659,594 9,029,285 8,407,255 ============ =========== =========== Basic and diluted loss per share $ (7.34) $ (5.68) $ (1.27) ============ =========== ===========
Diluted earnings per share is equal to basic earnings per share since the exercise of outstanding options and warrants would be anti-dilutive for all periods presented. 15. 401(K) PROFIT SHARING PLAN: Certain subsidiaries maintain 401(k) profit sharing plans (the "Plans"). The Plans provide for matching contributions from the subsidiaries that are limited to certain percentages of employee contributions. Additional discretionary amounts may be contributed by the subsidiaries. The subsidiaries contributed approximately $456, $397 and $153 for 1999, 1998 and 1997, respectively. During 1999, these plans were merged into the Davel plan. 57 16. STATEMENT OF CASH FLOWS: Cash paid for interest and income taxes and non-cash activities during the years ended December 31 was as follows:
1999 1998 1997 ------- ------- -------- Supplemental disclosures of cash flow information: Cash paid for : Interest $22,619 $26,445 $13,737 ------- ------- ------- Income taxes $ -- $ 143 $ 447 ------- ------- ------- Non-cash activities: Fixed assets acquired under capital lease obligations $ -- $ 1,934 $ 224 ------- ------- ------- Common stock issued for retirement of preferred stock $ -- $17,906 $ -- ------- ------- ------- Series C preferred stock dividends accrued $ -- $ 1,464 $ 1,050 ------- ------- ------- Preferred stock issuance accretion $ -- $ 158 $ 156 ------- ------- ------- Sale of certain fixed assets and a life insurance policy to the Chairman of the Board in exchange for phone switching equipment and the assumption of two corporate loans $ -- $ -- $ 148 ------- ------- ------- Note received in exchange for Hospitality Division $ -- $ -- $ -- ------- ------- -------
17. PROVISION FOR DIAL-AROUND COMPENSATION: On September 20, 1996, the Federal Communications Commission (FCC) adopted rules in a docket entitled IN THE MATTER OF IMPLEMENTATION OF THE PAYPHONE RECLASSIFICATION AND COMPENSATION PROVISIONS OF THE TELECOMMUNICATIONS ACT OF 1996, FCC 96-388 (the "1996 Payphone Order"), implementing the payphone provisions of Section 276 of the Telecommunications Act of 1996 (the "Telcom Act"). The 1996 Payphone Order, which became effective November 7, 1996, initially mandated dial-around compensation for both access code calls and 800 subscriber calls at a flat rate of $45.85 per payphone per month (131 calls multiplied by $0.35 per call). Commencing October 7, 1997, and ending October 6, 1998, the $45.85 per payphone per month rate was to transition to a per-call system at the rate of $0.35 per call. Several parties filed petitions for judicial review of certain of the FCC regulations including the dial-around compensation rate. On July 1, 1997, the U.S. Court of Appeals for the District of Columbia Circuit (the "Court") responded to appeals related to the 1996 Payphone Order by remanding certain issues to the FCC for reconsideration. These issues included, among other things, the manner in which the FCC established the dial-around compensation for 800 subscriber and access code calls, the manner in which the FCC established the interim dial-around compensation plan and the basis upon which interexchange carriers (IXCs) would be required to compensate payphone service providers ("PSP"s). The Court remanded the issue to the FCC for further consideration, and clarified on September 16, 1997, that it had vacated certain portions of the FCC's 1996 Payphone Order, including the dial-around compensation rate. Specifically, the Court determined that the FCC did not adequately justify (i) the per-call compensation rate for 800 subscriber and access code calls at the deregulated local coin rate of $0.35, because it did not sufficiently justify its conclusion that the costs of local coin calls are similar to those of 800 subscriber and access code calls; and (ii) the allocation of the payment obligation among the IXCs for the period from November 7, 1996, through October 6, 1997. 58 In accordance with the Court's mandate, on October 9, 1997, the FCC adopted and released its SECOND REPORT AND ORDER in the same docket, FCC 97-371 (the "1997 Payphone Order"). This order addressed the per-call compensation rate for 800 subscriber and access code calls that originate from payphones in light of the decision of the Court which vacated and remanded certain portions of the FCC's 1996 Payphone Order. The FCC concluded that the rate for per-call compensation for 800 subscriber and access code calls from payphones is the deregulation local coin rate adjusted for certain cost differences. Accordingly, the FCC established a rate of $0.284 ($0.35 - $0.066) per call for the first two years of per-call compensation (October 7, 1997, through October 6, 1999). The IXCs were required to pay this per-call amount to PSPs, including the Company, beginning October 7, 1997. On March 9, 1998, the FCC issued a Memorandum Opinion and Order, FCC 98-481, which extended and waived certain requirements concerning the provision by the LECs of payphone-specific coding digits which identify a call as originating from a payphone. Without the transmission of payphone-specific coding digits some of the IXCs have claimed they are unable to identify a call as a payphone call eligible for dial-around compensation. With the stated purpose of ensuring the continued payment of dial-around compensation the FCC, by Memorandum and Order issued on April 3, 1998, left in place the requirement for payment of per-call compensation for payphones on lines that do not transmit the requisite payphone-specific coding digits, but gave the IXCs a choice for computing the amount of compensation for payphones on LEC lines not transmitting the payphone-specific coding digits of either accurately computing per-call compensation from their databases or paying per-phone, flat-rate compensation computed by multiplying the $0.284 per call rate by the nationwide average number of 800 subscriber and access code calls placed from RBOC payphones for corresponding payment periods. Accurate payments made at the flat rate are not subject to subsequent adjustment for actual call counts from the applicable payphone. On May 15, 1998, the Court again remanded the per-call compensation rate to the FCC for further explanation without vacating the $0.284 per call rate. The Court opined that the FCC had failed to explain adequately its derivation of the $0.284 default rate. The Court stated that any resulting overpayment would be subject to refund and directed the FCC to conclude its proceedings within a six-month period from the effective date of the Court's decision. In response to the Court's second remand, the FCC conducted further proceedings and sought additional comment from interested parties to address the relevant issues posed by the Court. On February 4, 1999, the FCC released its Third Report and Order, and Order on Reconsideration of the Second Report and Order (the "1999 Payphone Order"), in which the FCC abandoned its efforts to derive a "market-based" default dial-around compensation rate and instead adopted a "cost-based" rate of $0.24 per dial-around call. Both PSPs and IXCs petitioned the Court for review of the 1999 Payphone Order, and PSPs petitioned the FCC for reconsideration of the Order. All of these petitions are currently pending. The new rate became effective April 21, 1999, and will serve as the default rate through January 31, 2002. The new rate will also be applied retroactively to the period beginning on October 7, 1997, less a $0.002 amount to account for FLEX ANI payphone tracking costs, for a net compensation rate of $0.238. The 1999 Payphone Order deferred a final ruling on the interim period (November 7, 1996 to Octoer 6, 1997) treatment to a later, as yet unreleased, order, however, it appears from the 1999 Payphone Order that the $0.238 per call rate will also be applied to the initial interim period from November 7, 1996 to October 6, 1997. Upon establishment of the interim period rate, the FCC has further ruled that a true-up will be made for all payments or credits (with applicable interest) due and owing between the IXCs and the PSPs, including Davel, for the payment period commencing on November 7, 1996 through the effective date of the new $0.24 per call rate. Based on the FCC's tentative conclusion in the 1997 Payphone Order, the Company during 1997 adjusted the amounts of dial-around compensation previously recorded related to the period from November 7, 1996, through June 30, 1997, from the initial $45.85 rate to $37.20 ($0.284 per call multiplied by 131 calls). As a result of this adjustment, the provision recorded for the year ended December 31, 1997, related to reduced dial-around compensation is approximately $3.3 million. Based on the reduction in the per-call compensation rate in the 1999 Payphone Order, the Company further reduced non-coin revenues by $9.0 million during 1998. The adjustment included approximately $6.0 million to adjust revenue reorded during the period November 7, 1996 to October 6, 1997 from $37.20 per-phone per-month to $31.18 per phone per month ($0.238 per call multiplied by 131 calls). The remaining $3.0 million of the adjustment was to adjust revenues recorded during the period October 7, 1997 through December 31, 1998 to actual dial-around call volumes for the period multiplied by $0.238 per call. 59 The Company recorded dial-around compensation revenue, net of adjustments, of approximately $4.4 million for the period from November 7, 1996 through December 31, 1996, approximately $24.9 million for the period from January 1, 1997 through December 31, 1997 and approximately $27.2 million for the period from January 1, 1998 through December 31, 1998. The Company's counsel,Dickstein, Shaprio, Morin & Oshensky, is of the opinion that the Company is legally entitled to fair compensation under the Telcom Act for dial-around calls the Company delivered to any carrier during the period from November 7, 1996, through October 6, 1997. Based on the information available, the Company believes that the minimum amount it is entitled to as fair compensation under the Telcom Act for the period from November 7, 1996, through October 6, 1997, is $31.18 per payphone per month and the Company, based on the information available to it, does not believe that it is reasonably possible that the amount will be materially less than $31.18 per payphone per month. While the amount of $0.24 per call ($0.238 for retroactive periods) constitutes the Company's position of the appropriate level of fair compensation, certain IXCs have asserted in the past, are asserting and are expected to assert in the future that the appropriate level of fair compensation should be lower than $0.24 per call. If the level of fair compensation is ultimately determined to be an amount less than $0.24 per call, such determination could result in a material adverse impact on the Company's results of operations and financial position. 18. RELATED-PARTY NOTES AND TRANSACTIONS: TRANSACTIONS WITH MAJOR SHAREHOLDER AND DIRECTOR The Company engaged in the following transactions with the Company's largest shareholder (a Director) and former Chairman of the Board during the years ended December 31:
1999 1998 1997 ---- ---- ---- Payments made for rent of commercial real estate $119 $ 68 $116 ==== ==== ==== Payments received for providing administrative services $ 46 $100 $107 ==== ==== ====
During 1997, the Company sold a life insurance policy, a house and an airplane to Mr. David Hill (former Chairman of the Board) who owned approximately 18% of the Company's outstanding common stock as of December 31, 1999. The sale price was at the estimated fair value of the assets as determined based upon independent appraisals and the sale resulted in a gain of $273. The house and the airplane were subsequently leased back to the Company and the gain was deferred and was being recognized ratably over the term of the lease. During 1999, 1998 and 1997, the Company recognized $48, $72 and $128, respectively, of the deferred gain. Both leases were terminated in July 1999. Through September 1997, the Company leased long distance switching equipment from Mr. Hill for $80. In September 1997, the Company purchased this equipment for $378 which was the estimated fair market value of the equipment based upon independent appraisals. The Company received management advisory services from Equity Group Corporate Investments, Inc. (EGCI), an affiliate of the Company. In exchange for these services, during 1998 the Company issued to affiliates of EGCI 44,659 shares of common stock with a fair value of $751 at the date of grant. In 1999, the Company agreed to pay a fee, payable in the Company's common stock, equal to 0.35% of the enterprise value of the merger with PTC and any other merger, payable upon consummation of such merger. In connection with the advisory agreement the Company also agreed to grant stock options for ongoing consulting services. Each month EGI receives as a management fee 12,500 options at a strike price based on the closing price of the Company's common stock on the last day of the prior month. Also during 1999, the Company sold to Mr. David Hill a building located in Miami, Florida for $2,250. The Company believes that the terms of the sale approximate fair value for the property. 60 19. COMMITMENTS AND CONTINGENCIES: On September 29, 1998, the Company announced that it was exercising its contractual rights to terminate a merger agreement (the "Davel/PhoneTel Merger Agreement") with PhoneTel Technologies, Inc. ("PhoneTel"), based on breaches of representations, warranties and covenants by PhoneTel. On October 1, 1998, the Company filed a lawsuit in Delaware Chancery Court seeking damages, rescission of the Davel/PhoneTel Merger Agreement and a declaratory judgment that such breaches occurred. On October 27, 1998, PhoneTel answered the complaint and filed a counterclaim against the Company alleging that the Davel/PhoneTel Merger Agreement had been wrongfully terminated. At the same time, PhoneTel also filed a third party claim against Peoples Telephone Company, Inc. (acquired by the Company on December 23, 1998) alleging that Peoples wrongfully caused the termination of the Davel/PhoneTel Merger Agreement. The counterclaim and third party claim seek specific performance by the Company of the transactions contemplated by the Davel/PhoneTel Merger Agreement and damages and other equitable relief from the Company and Peoples. The Company believes that it has meritorious claims against PhoneTel and intends to defend vigorously against the counterclaim against Davel and the third party claim against Peoples initiated by PhoneTel. The Company, at this time, cannot predict the outcome of this litigation. In December 1995, Cellular World, Inc. filed a complaint in Dade County Circuit Court against Peoples and its subsidiary, PTC Cellular, Inc., alleging wrongful interference with Cellular World's advantageous business relationship with Alamo Rent-A-Car, and alleged misappropriation of Cellular World's trade secrets concerning Cellular World's proprietary cellular car phone rental system equipment. Cellular World was seeking damages alleged to exceed $10 million. In March 2000, the Company settled this complaint for an amount which approximated the Company's anticipated cost to defend the case. The Company is involved in other litigation arising in the normal course of its business which it believes will not materially affect its financial position or results of operations. 20. SUBSEQUENT EVENTS: On February 28, 2000, the Company issued a press release announcing the appointment of Raymond A. Gross as Chief Executive Officer as well as the appointment of new officers positions for certain management employees. Effective March 9, 2000, the Company and the Lenders agreed to the Second Amendment to Credit Agreement and Consent and Waiver (the "Second Amendment") which amended certain covenants through January 15, 2001. In exchange for the covenant relief, the Company agreed to a lowering of the available credit facility to $245,000 (through a permanent reduction of the revolving line of credit) and placement of a block on the final $10,000 of revolver borrowing. The Second Amendment also placed a moritorium on acquisitions and changed the calculation of interest rate for the Senior Credit Facility. In March 2000, the Company settled litigation involving a suit filed in 1995 by Cellular World, Inc. (See Note 19) 21. NEW ACCOUNTING PRONOUNCEMENTS: The Financial Accounting Standards Board issued SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, which requires that all derivatives be recognized as either assets or liabilities in the statement of financial position at fair value unless specific hedge criteria are met. The Company is required to adopt the provisions of SFAS No. 133 in 2000. Adoption of this statement is not expected to significantly impact the Company's consolidated financial position, results of operations or cash flows. 61 22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED): Certain unaudited quarterly financial information for the year ended December 31, 1999 and 1998, is as follows:
QUARTER ENDED ----------------------------------------------------- FULL 1999 MARCH JUNE SEPTEMBER DECEMBER YEAR ---- -------- -------- --------- -------- ---- Total revenues $ 45,337 $ 48,183 $ 46,547 $ 35,779 $ 180,725 Operating income (loss) (5,110) 428 (48,289) (3,618) (56,589) Net loss (10,400) (5,488) (54,467) (7,891) (78,246) Net loss per share: Basic and diluted $ (.99) $ (.53) $ (5.11) $ (0.72) $ (7.34) 1998 ---- Total revenues $ 47,197 $ 54,061 $ 54,190 $ 40,146 $ 195,594 Operating income (loss) (1,633) 1,154 1,583 (26,886) (25,782) Net loss (5,354) (4,030) (3,903) (53,625) (66,912) Net loss per share: Basic and diluted $ (.67) $ (.55) $ (.44) $ (5.57) $ (7.59)
62 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no reported disagreements on any matter of accounting principles or practice or financial statement disclosure at any time during the twenty-four months prior to December 31, 1999. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The Company has eight directors. Each member of the Board of Directors will serve until the next annual meeting of the Company's stockholders or until his successor has been elected and qualified. The following table sets forth certain information for each director. DIRECTOR CONTINUOUSLY NAME SINCE AGE - ---- ------------ ------- Samuel Zell June 1998 58 David R. Hill April 1979 68 Robert D. Hill August 1993 48 Michael E. Hayes December 1994 41 F. Philip Handy June 1998 55 Justin S. Maccarone December 1998 40 Thomas M. Vitale July 1994 43 A. Jones Yorke, IV August 1993 68 - ------------------------------------------------------------------------------ Samuel Zell, Chairman of the Board of Directors, became a director in June 1998. Mr. Zell was the founder, and serves as Chairman of Equity Group Investments, L.L.C. ("EGI") and President of EGI-DM Investments, L.L.C. ("EGI-DM") (a principal shareholder of the Company). The managing member of EGI-DM, with sole power to direct the vote and disposition of securities held by EGI-DM, is Samstock/SIT, L.L.C., which is indirectly owned by a trust formed for the benefit of Samuel Zell and members of his family. Mr. Zell is a Board designee of EGI-DM pursuant to the Investment Agreement dated April 19, 1999 among the Company, EGI-DM and David Hill (the "Investment Agreement") which amends and restates a prior agreement among Davel Communications Group, Inc., David Hill and Samstock, L.L.C. Mr. Zell is also a member of the Board of Directors and serves as the Chairman of the Board of Anixter International Inc., a value-added provider of integrated networking and cabling solutions; American Classic Voyages, Co., a 63 passenger cruise line; Chart House Enterprises, Inc., an owner and operator of restaurants; Manufactured Home Communities, Inc., a real estate investment trust that owns and operates manufactured home communities; Capital Trust, Inc. a specialized real estate finance company; and Danielson Holding Corporation, a financial services and investment company. Mr. Zell is a member of the board of trustees and serves as Chairman of the Board of Equity Residential Properties Trust, an apartment real estate investment trust, and Equity Office Properties Trust, an office real estate investment trust. Mr. Zell is also a non-executive director of RAMCO Energy plc. David R. Hill founded the Company's predecessor, Davel Communications Group, Inc., and its subsidiaries. He served as the Chief Executive Officer of the Company from October 1993 through December 1994 and as Chairman of the Board until July 1999. Mr. Hill is a self-appointed Board designee pursuant to the Investment Agreement. Mr. Hill is the father of Robert D. Hill. Robert D. Hill joined the Company in 1981 as the general manager of its largest telephone remanufacturing facility. Between January 1990 and December 1994, he served as the Company's President. From January 1995 until November 1999, he served as the Company's President and Chief Executive Officer. Mr. Hill is a Board designee of David Hill pursuant to the Investment Agreement. Michael E. Hayes joined the Company in September 1992 as its Controller and Treasurer. Mr. Hayes became Vice President and Chief Financial Officer in August 1993, a Senior Vice President in January 1996 and Chief Operating Officer in August 1999. In March 2000, Mr. Hayes was promoted to Chief Operating Officer and President. Mr. Hayes is a Board designee of David Hill pursuant to the Investment Agreement. F. Philip Handy was appointed to the Board of Directors in June 1998. Mr. Handy is a Board designee of EGI-DM pursuant to the Investment Agreement. Mr. Handy is a private investor. He was a managing director of Equity Group Corporate Investments, a division of EGI, from September 1997 through December 1999. Mr. Handy is Chairman and President of Winter Park Capital Company, a private investment firm he founded in 1980. He also serves as a director of Anixter International, Inc., Banca Quadrum, S.A., Inc., Chart House Enterprises, Inc., Transmedia Network Inc. and Wink Communications, Inc. Justin S. Maccarone was appointed to the Board of Directors following the Company's merger with Peoples Telephone Company, Inc. ("PTC") in December 1998. Mr. Maccarone is a partner in UBS Capital II LLC, a private investment firm, and its affiliate UBS Capital LLC. Prior to joining UBS Capital in 1993, he was a Senior Vice President with GE Capital Corporation Thomas M. Vitale was appointed to the Board of Director in August 1995. Mr. Vitale has been a partner of Mayer Brown & Platt, a national law firm, since 1991. A. Jones Yorke has been the Chairman of the Board of Auerbach Financial Group, a financial holding company, since August 1998. From March 1997 to June 1998, Mr. Yorke was the Chairman of Weatherly Securities Corp., a registered securities dealer. From September 1995 to March 1997 he was President of Coleman & Company Securities Corp., a registered securities dealer. Mr. Yorke was Chairman of Auerbach, Pollack & Richardson, Inc., a registered securities dealer, from September 1994 to September 1995. Mr. Yorke also serves as Chairman of 42nd Street Development Corporation, a not-for-profit corporation, and a director of Austins Steaks & Saloon Inc. 64 EXECUTIVE OFFICERS The following table sets forth the names and ages of the Company's executive officers and their positions with the Company: NAME AGE POSITION - ---- --- -------- Raymond A. Gross 50 Chief Executive Officer Michael E. Hayes 41 President and Chief Operating Officer William K. Breaden 40 Chief Financial Officer Senior Vice President and Treasurer Bruce W. Renard 46 Senior Vice President of Regulatory Affairs, General Counsel and Secretary Lawrence T. Ellman 47 Senior Vice President of National Accounts Bruce Forsyth 44 Senior Vice President of Marketing - ------------------------------------------------------------------------------- Raymond A. Gross was appointed as CEO by the Board of Directors on February 28, 2000. Mr. Gross was formerly Chief Operating Officer of BHI Holdings, now Carlisle Holdings LTD and President of Carlisle's U.S. subsidiary, One Source. Prior to 1998, Mr. Gross was Senior Vice President of ADT Security Services responsible for directing the residential business unit, corporate marketing and negotiating strategic business alliances. From 1993 to 1996, Mr. Gross was President and CEO of Alert Centre, Inc., a publicly traded alarm company. Prior to 1993, Mr. Gross held various executive positions in the telecommunications and computer services industries. William K. Breaden has been Senior Vice President and Chief Financial Officer since November 1999 when he joined the Company. In March 2000, Mr. Breaden was also named Treasurer. Between 1990 to 1999, Mr. Breaden served as Corporate Controller, International Controller and North American Controller with Spalding Holding Corporation, a manufacturer and marketer of sporting goods. From 1981 to 1990 he served on the audit staff of Deloitte & Touche L.L.P. Bruce W. Renard joined the Company as Senior Vice President of Regulatory and External Affairs and Associate General Counsel in December 1998, subsequent to the Peoples Merger. He has served as General Counsel since July 1999. At Peoples, Mr. Renard served in the positions of General Counsel and Executive Vice President of Regulatory Affairs from February 1996 to December 1998 and General Counsel and Vice President of Regulatory Affairs from January 1992 to February 1996. From September 1991 to December 1991, Mr. Renard was a sole practitioner specializing in legal and regulatory consulting services to the telecommunications and utility industries. From August 1984 to September 1991, Mr. Renard was a partner with the Florida law firm of Messer Vickers, Caparello, French & Madsen, managing the utility and telecommunications law sections of the firm. Mr. Renard also serves as a director and Chairman of the Legal Committee for the American Public 65 Communications Council, the national public communication trade organization, and as a director of several state public communication trade organizations. Lawrence T. Ellman has been Senior Vice President of National Accounts since December 1998 when he joined the Company following the Peoples Merger. Mr. Ellman was at Peoples from 1994 through 1998 and held several sales related positions including Executive Vice President/President National Accounts. Prior to joining Peoples, Mr. Ellman was President of Atlantic Telco, Inc., an independent pay telephone provider operating in the Northeastern United States. Mr. Ellman has served as Treasurer and a member of the board of directors for the American Public Communications Council as well as President and Chairman of the Board for the Mid-Atlantic Payphone Association. Bruce Forsyth, Senior Vice President of Marketing, joined the Company in July 1999. Prior to that time, Mr. Forsyth was a Vice President with Intermedia Communications from 1996 to 1999 in its sales, marketing and planning departments. From 1987 to 1996 he was with Frontier Communications in their Marketing and Consumer Account Divisions. From 1986 to 1987 he was with MCI and was with Rochester Telephone from 1979 to 1986. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 and related regulation require the Company's directors, certain officers, and any persons holding more than 10% of the Company's common stock ("reporting persons") to report their initial ownership of the Company's common stock and any subsequent changes in that ownership to the Securities and Exchange Commision. Specific due dates have been established, and the Company is required to disclose in this Item 10 any failure to file by these dates during 1999. All reporting persons of the Company satisfied these filing requirements, except the following: The forms 5 for the year ended December 31, 1999 for each of Messrs. Breaden, Ellman, Forsyth, Hayes, David Hill, and Renard were filed four days later; and forms 3 have not been filed for Messrs, Breaden, Forsyth and Gross. In making these disclosures the Company has relied on written representations of reporting persons and copies filed with the Commission. COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS The business of the Company is under the general management of the Board of Directors as provided by the laws of Delaware, the Company's state of incorporation. The Board of Directors held eight meetings during 1999. Between Board meetings, Board responsibilities are delegated to the Executive Committee, comprised of Messrs. Zell and Robert Hill. The Executive Committee was formed in 1999 and has held no meetings. Compensation for all senior employees, including officers of the Company, is determined by the Compensation Committee. The Compensation Committee also administers the Company's Stock Option Plan. The Compensation Committee met once in 1999. Messrs. Handy, Yorke and Vitale constitute the Compensation Committee. The Audit Committee consists of Messrs. Vitale and Yorke. The Audit Committee held one meeting during 1999. The Audit Committee performs the following principal functions: (i) review of the quarterly and year-end financial statements with the Company's outside auditors, internal accounting staff and management; (ii) review of the scope of the external audit and internal reports 66 with the outside auditors, internal accounting staff and management; (iii) review of the outside auditor's management letter; (iv) recommendation of the selection of outside auditors; (v) review of the quality and depth of the Company's internal audit, accounting and financial staffs; and (vi) review and approval of the rendering of audit and nonaudit services by the outside auditors. The Board has not established a nominating committee or a committee serving a similar function. Nominations are made by the full Board of Directors. There are at present no mandatory retirement ages stipulated either for officers or members of the Board of Directors. COMPENSATION OF DIRECTORS Through December 31, 1995, the Company did not pay cash compensation for service as directors. In 1996, the Company began paying cash compensation to directors who are not employees of the Company in the amount of $2,500 per meeting of the Board of Directors or of any committee thereof. In April 1998, the Board approved a resolution to eliminate the per-meeting payment and to begin paying (effective as of the date of the 1998 Annual Meeting) an annual cash retainer to directors who are not employees in the amount of $20,000. In July 1999, the Board approved a resolution to eliminate the cash retainer and to begin granting, on the date of each annual meeting (effective as of the 1999 Annual Meeting), to each non-employee director 18,000 options to purchase Common Stock of the Company at a strike price equal to the market price of the Common Stock as of the close of business immediately preceding the date of grant. Directors of the Company who are not employees of the Company are also reimbursed for their out-of-pocket expenses associated with attending meetings of the Board of Directors and committees and are eligible to receive options granted pursuant to the Company's Directors' Stock Option Plan. The Company provides Mr. Yorke with individual health insurance coverage. 67 ITEM 11. EXECUTIVE COMPENSATION The following tables and notes set forth the compensation of the Company's Chief Operating Officer and the four highest paid executive officers whose salary and bonuses exceeded $100,000 in the fiscal year ended December 31, 1999. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION -------------------- ---------------------- SECURITIES NAME AND PRINCIPAL OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER POSITION YEAR SALARY BONUS COMPENSATION(2) STOCK AWARDS OPTIONS COMPENSATION (3) - --------- ---- ------ -------- --------------- ------------ ---------- ---------------- Michael E. Hayes 1999 $ 56,000 (1) -- $ 50,998(7) 129,170 $ -- President and Chief 1998 170,000 25,500 -- -- 88,920 3,138(3) Operating Officer (4) 1997 120,000 49,200 -- 30,000 10,613 1,693(3) William K. Breaden 1999 $ 20,000 (1) -- $ 3,284(7) 35,000 $ -- Senior Vice-President 1998 -- -- -- -- -- -- and Chief Financial 1997 -- -- -- -- -- -- Officer (5) Bruce W. Renard 1999 $ 158,000 (1) -- $ 38,249(7) 47,750 $ 192,500(8) Senior Vice-President 1998 346,000 -- -- -- -- -- of Regulatory and 1997 192,500 140,425 -- 37,500 -- -- External Affairs Secretary and General Counsel Lawrence T. Ellman 1999 $ 158,000 (1) -- $ 38,249(7) 47,750 $ 223,800(8) Senior Vice President 1998 284,000 -- -- -- -- -- of National Accounts 1997 170,000 42,850 -- 37,500 -- -- Bruce Forsyth 1999 $ 71,000 (1) -- $ 20,914(7) 40,000 $ -- Senior Vice President 1998 -- -- -- -- -- -- of Marketing (6) 1997 -- -- -- -- -- --
- ------------------- (1) Bonuses in 1999 were paid in the form of restricted common stock grants. (2) Other Annual Compensation was paid in the form of perquisites and was less than the level required for reporting. (3) All Other Compensation represents the Company's contributions, both vested and not vested, to the Company's defined contribution plan. (4) Mr. Hayes served as Acting Chief Executive Officer during November and December of 1999. Raymond A. Gross was appointed Chief Executive Officer in February 2000 at an annual salary of $325,000. (5) Mr. Breaden was hired in November 1999 at an annual salary of $175,000. (6) Mr. Forsyth was hired in July 1999 at an annual salary of $155,000. (7) Granted pursuant to the Restricted Stock Option Plan dated January 25, 2000, which states that each grant of shares shall specify the applicable restrictions on such shares, the duration. No shares have yet been issued under this plan. (8) All other compensation represents severance payments from Peoples. 68 OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ----------------- NUMBER OF SECURITIES PERCENT OF TOTAL EXERCISE POTENTIAL REALIZABLE UNDERLYING OPTIONS GRANTED OR BASE PRICE EXPIRATION VALUE (1) NAME OPTIONS GRANTS TO EMPLOYEES ($/SHARE) DATE 0% 5% 10% - ---- -------------- ---------------- ------------- ---------- -------------------- Michael E. Hayes (4) 41,420 (2) 7% $6.50 4/21/04 $269,230/$327,251/$394,180 12,750 (3) 2% $5.38 6/30/04 $68,531/ $83,300/$100,337 William K Breaden (5) 35,000 (4) 6% $4.25 11/05/04 $148,750/ $180,807/$217,785 Bruce W. Renard 30,000 (5) 5% $6.50 4/22/09 $68,531/ $83,300/$100,337 12,750 (3) 2% $5.38 6/30/04 $195,000/ $237,024/$285,500 Lawrence T. Ellman 30,000 (5) 5% $6.50 4/22/09 $68,531/ $83,300/$100,337 12,750 (3) 2% $5.38 6/30/04 $195,000/ $237,024/$285,500 Bruce Forsyth 25,000 (6) 4% $6.31 7/13/04 $157,813/ $191,822/$231,053
- ----------------- (1) The values shown are purely hypothetical and have been calculated on the assumption that the value of the Common Stock underlying an option appreciates at the specified rate (0%, 5% or 10% per annum) from the date of the grant of the option until its expiration. In fact, the options cannot be valued without prediction of the future movement of the price of the Common Stock. The amount realized from the options disclosed in this table will depend upon, among other things, the continued employment of the recipient of the option and the actual performance of the Common Stock during the applicable period. (2) Granted on April 21, 1999 13,807 options exercisable on October 21, 1999, 13,807 options exercisable on April 21, 2000, 13,806 options exercisable on April 21, 2001. (3) Granted on June 30, 1999. Exercisable on December 30, 1999. (4) Granted on November 15, 1999. Options become exercisable as follows: 11,667 options on May 15, 2000; 11,667 options on November 15, 2000, and 11,666 options on November 15, 2001. (5) Granted on April 22, 1999. Exercisable on October 22, 1999. (6) Granted on July 13, 1999. Exercisable on January 13, 2000. 69 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
VALUE OF VALUE OF UNEXERCISED UNEXERCISED IN-THE-MONEY IN-THE-MONEY NUMBER OF OPTIONS AT OPTIONS AT SHARES NUMBER OF SHARES UNDERLYING YEAR-END DECEMBER 31, 1999 ACQUIRED VALUE UNEXERCISED OPTIONS AT YEAR END EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE REALIZED (1) EXERCISABLE/UNEXERCISABLE (2) UNEXERCISABLE (2) UNEXERCISABLE (3) - ---- ----------- ------------ ------------------------------- ----------------- ------------------ Michael E. Hayes -- -- -- -- -- William K Breaden -- -- -- -- -- Bruce W. Renard -- -- -- -- -- Lawrence T. Ellman -- -- -- -- -- Bruce Forsyth -- -- -- -- --
- ------------------ [THERE WERE NO OPTION EXERCISES IN THE LAST FISCAL YEAR] 70 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OWNERSHIP OF COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information as of December 31, 1999, with respect to the beneficial ownership of the Company's Common Stock by (i) each person who is known by the Company to own beneficially more than 5% of the Common Stock, (ii) each of the Company's directors and executive officers and (iii) by all executive officers and directors as a group. Unless otherwise indicated, each person has sole voting power and investment power with respect to the shares attributed to him and such person's address is c/o Davel Communications, Inc., 10120 Windhorst Road, Tampa, Florida 33619.
NUMBER OF SHARES NAME (1) BENEFICIALLY OWNED PERCENTAGE OF CLASS - -------- ------------------ ------------------- Samuel Zell (3) (13) 1,807,800 16.3% David R. Hill (3) (4) 2,153,945 19.4% Robert D. Hill (3) (5) 185,086 1.7% Michael E. Hayes (2) (3) (6) 156,105 1.4% Lawrence T. Ellman (2) (7) 90,347 * Bruce W. Renard (2) (8) 106,797 1.0% F. Philip Handy (3) (9) 73,010 * Justin S. Maccarone (3) (10) 927,427 8.4% William K. Breaden (2) 12,278 * Bruce Forsyth (2) 33,891 * Thomas M. Vitale (3) (11) 46,000 * A. Jones Yorke (3) (12) 41,000 * EGI-DM Investments, L.L.C. (14) 1,773,800 16.1% Goldman, Sachs & Co. (15) 1,045,566 9.5% UBS Capital II LLC (16) 927,427 8.4% Heartland Advisors, Inc. (17) 879,054 8.0% Ann Lurie (18) 737,059 6.7% All current directors and executive 5,633,686 51.1% directors as a group (12 persons) (19)
- --------------------- *Less than 1% (1) For purposes of calculating the beneficial ownership of each stockholder, it was assumed (in accordance with the Securities and Exchange Commission's definition of "beneficial ownership") that such stockholder had exercised all options, conversion rights or warrants by which such stockholder had the right, within 60 days, to acquire shares of such class of stock. (2) Such person is an employee of the Company. (3) Such person is a director of the Company. (4) Includes 284,412 shares that could be acquired within 60 days upon the exercise of options granted pursuant to the Stock Option Plan. (5) Includes 91,250 shares that could be acquired within 60 days upon the exercise of options granted pursuant to the Stock Option Plan. 71 (6) Includes 57,488 shares that could be acquired within 60 days upon the exercise of options granted pursuant to the Stock Option Plan. (7) Includes 83,231 shares that could be acquired within 60 days upon the exercise of options granted pursuant to the Stock Option Plan. (8) Includes 99,681 shares that could be acquired within 60 days upon the exercise of options granted pursuant to the Stock Option Plan. (9) Includes 20,000 shares that are owned by Blaine Trust, a trust for which Mr. Handy acts as co-trustee. (10) Includes 34,450 shares that could be acquired within 60 days upon the exercise of options granted pursuant to the Directors' Stock Option Plan, and 892,977 shares beneficially owned by UBS Capital II LLC that Mr. Maccarone could be deemed to beneficially own as a result of being a principal of UBS Capital II LLC. Mr. Maccarone disclaims beneficial ownership of such shares. (11) Includes 46,000 shares that could be acquired within 60 days upon the exercise of options granted pursuant to the Directors' Stock Option Plan. (12) Includes 41,000 shares that could be acquired within 60 days upon the exercise of options granted pursuant to the Directors' Stock Option Plan. (13) Includes 34,000 shares that could be acquired within 60 days upon the exercise of options granted pursuant to the Directors' Stock Option Plan and 1,773,800 shares beneficially owned by EGI-DM Investments, L.L.C. (including warrants to acquire 299,513 shares) that Mr. Zell could be deemed to beneficially own as a result of his relationship to EGI-DM. Mr. Zell disclaims beneficial ownership of such shares. The managing member of EGI-DM, with the sole power to direct the vote and disposition of securities held by EGI-DM, is Samstock/SIT, L.L.C. ("Samstock/SIT"). The sole member of Samstock/SIT is a trust formed for the benefit of Mr. Zell and members of his family. Mr. Zell is the President of both EGI-DM and Samstock/SIT. The principal business address for each of EGI-DM, Samstock/SIT and Samuel Zell is c/o Equity Group Investments, L.L.C., Two North Riverside Plaza, Chicago, Illinois 60606. (14) Includes warrants to purchase 299,513 shares with an exercise price of $32.00 per share from the Company and certain individual stockholders. Mr. Zell disclaims beneficial ownership of such shares and warrants. (15) Based on a Schedule 13G filed on February 12, 1999. The address of Goldman, Sachs & Co. is 85 Broad Street, New York, NY 10004. (16) Based on a Schedule 13D/A filed on January 14, 1999. Includes 16,450 shares that could be acquired within 60 days upon the exercise of options granted pursuant to the Directors' Stock Option Plan. The address of UBS Capital II LLC is 299 Park Avenue, New York, NY 10171. (17) Based on a Schedule 13G filed January 19, 1999. The address of Heartland Advisors, Inc. is 790 North Milwaukee Street, Milwaukee, Wisconsin 53202. (18) Based on a Schedule 13G filed on November 29, 1999. Includes shares owned by the Ann Lurie Revocable Trust, of which Ms. Lurie is the sole trustee, and the Robert H. and Ann Lurie Trust, of which Ms. Lurie is a co-trustee. Ms. Lurie's address is Two North Riverside Plaza, Suite 1500, Chicago, IL 60606. (19) Includes 967,641 shares that could be acquired within 60 days upon the exercise of options and 299,513 shares that could be acquired within 60 days upon the exercise of warrants. ITEM 13. CERTAIN TRANSACTIONS The Company has entered into certain transactions with Mr. David R. Hill, who is a director. The Company leased an aircraft and residential real estate from Mr. David Hill, for which the Company paid Mr. Hill $82,300 and $13,000 in 1999 and 1998, respectively. Both leases were terminated in July 1999. The Company also leased office space in Jacksonville, Illinois from Mr. Hill, which it paid aggregate amounts of $118,600, $68,000 and $116,000 and in 1999, 1998 and 72 1997, respectively. Until September 1997, the Company also leased long distance switching equipment from Mr. Hill for which it paid $80,000. In September 1997, Davel purchased the equipment from Mr. Hill for $378,000 which was its estimated fair market value equipment based upon independent appraisals. During 1999 the Company sold to Mr. David Hill a building located in Miami, Florida for $2,250,000. The Company believes that the terms of the sale are at least as favorable to the Company as those that could have been obtained from unrelated parties at the time it was entered into. In addition, the Company received payments from Mr. Hill for administrative services provided to him by certain employees of the Company in the aggregate amounts of $45,900 and $100,000 and $107,000 in 1999, 1998 and 1997, respectively. In connection with advisory services provided by EGI, an affiliate of EGI-DM, to the Company, the Company has paid EGI a fee, payable in the Company's Common Stock, equal to 0.35% of the enterprise value of the Peoples Merger and any other merger, payable upon consummation of such merger. In connection with the advisory agreement the Company also agreed to grant stock options to EGI for ongoing consulting services. Each month EGI receives 12,500 options at a strike price based on the closing price of the Company's Common Stock on the last day of the prior month. To date, options have been accrued but not issued. Any future transactions between the Company and its officers, directors, employees and affiliates that are outside the scope of the Company's employment relationship with such persons will be subject to the approval of a majority of the disinterested members of the Board of Directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No member of the Compensation Committee was, at any time during 1999 or previously, an officer or employee of the Company or any subsidiary of the Company, nor has any member of the Compensation Committee had any relationship with the Company requiring disclosure under Item 404 of Regulation S-K under the Securities Act of 1933, as amended. 73 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed with, and as part of, this Annual Report on Form 10-K. 1. FINANCIAL STATEMENTS See Part II. 2. FINANCIAL STATEMENT SCHEDULES None 3. EXHIBITS See Exhibit Index on the following page. Reports on Form 8-K. On March 1, 2000 the Company filed a Current Report on Form 8-K, dated February 28, 2000, with the Securities and Exchange Commission, reporting the appointment of Raymond A. Gross as Chief Executive Officer, as well as appointing other officers. 74 EXHIBIT INDEX 2.1 Agreement and Plan of Merger and Reorganization, dated June 11, 1998, by and among Davel Communications Group, Inc., Davel Holdings, Inc., D Subsidiary, Inc., PT Merger Corp. and PhoneTel Technologies, Inc. (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed with the Commission on June 23, 1998). 2.2 Agreement and Plan of Merger and Reorganization, dated as of July 5, 1998, by and among Davel Communications Group, Inc., Davel Holdings, Inc. and Peoples Telephone Company, Inc. (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K filed with the Commission on July 22, 1998). 3.1 Restated Certificate of Incorporation of Davel Communications, Inc. (incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-4 (Registration No. 333-67617) dated November 20, 1998). 3.2 Restated By-laws of Davel Communications, Inc. (incorporated by reference to Exhibit 3.2 to Registration Statement on Form S-4 (Registration No. 333- 67617) dated November 20, 1998.4.1 Rights Agreement, dated as of December 15, 1998, between Davel Communications, Inc. and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, including the form of Certificate of Designation, Preferences and Rights of Junior Participating Preferred Stock, Series A attached thereto as Exhibit A, the form of Rights Certificate attached thereto as Exhibit B and the Summary of Rights attached thereto as Exhibit C (incorporated by reference to the Company's Registration Statement on Form 8-A, filed with the Commission on December 23, 1998). 10.1 Credit Agreement, dated as of February 3, 1998, by and among Davel Communications Group, Inc., NationsBank, N.A., as Administrative Agent, SunTrust Bank, Tampa Bay, as Documentation Agent, LaSalle National Bank, as Co-Agent, and the other Lenders party thereto (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed with the Commission on February 18, 1998). 10.2 Form of Revolving Note, dated February 3, 1998, made by Davel Communications Group, Inc. in favor of NationsBank, N.A., in the principal amount of $6,300,000 (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed with the Commission on February 18, 1998). 10.3 Form of Revolving Note, dated February 3, 1998, made by Davel Communications Group, Inc. in favor of SunTrust Bank, Tampa Bay, in the principal amount of $6,300,000 (incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed with the Commission on February 18, 1998). 10.4 Form of Revolving Note, dated February 3, 1998, made by Davel Communications Group, Inc. in favor of LaSalle National Bank, in the principal amount of $2,400,000 (incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K filed with the Commission on February 18, 1998). 10.5 Form of Term Note, dated February 3, 1998, made by Davel Communications Group, Inc. in favor of NationsBank, N.A., in the principal amount of $46,200,000 (incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K filed with the Commission on February 18, 1998). 10.6 Form of Term Note, dated February 3, 1998, made by Davel Communications Group, Inc. in favor of SunTrust Bank, Tampa Bay, in the principal amount of $46,200,000 (incorporated by reference to Exhibit 10.6 to Current Report on Form 8-K filed with the Commission on February 18, 1998). 10.7 Form of Term Note, dated February 3, 1998, made by Davel Communications Group, Inc. in favor of LaSalle National Bank, in the principal amount of $17,600,000 (incorporated by reference to Exhibit 10.7 to Current Report on Form 8-K filed with the Commission on February 18, 1998). 10.8 Voting Agreement, dated June 11, 1998, between Davel Communications Group, Inc. and ING (U.S.) Investment Corporation (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed with the Commission on June 23, 1998). 10.9 Stock Purchase Agreement, dated May 14, 1998, by and between Davel Communications Group, Inc. and Samstock, L.L.C. (incorporated by reference to Exhibit 10.1 to current report on Form 8K filed with the commission on June 23, 1998). 75 10.10 Voting Agreement, dated June 11, 1998, between Davel Communications Group, Inc. and Cerberus Partners, L.P. (incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed with the Commission on June 23, 1998). 10.11 Voting Agreement, dated June 11, 1998, between Davel Communications Group, Inc. and Mr. Peter Graf (incorporated by reference to Exhibit 10.4 to Current Report on Form 8-K filed with the Commission on June 23, 1998). 10.12 Voting Agreement, dated June 11, 1998, between Davel Communications Group, Inc. and Mr. George Henry (incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K filed with the Commission on June 23, 1998). 10.13 Voting Agreement, dated June 11, 1998, between Davel Communications Group, Inc. and Mr. Steven Richman (incorporated by reference to Exhibit 10.6 to Current Report on Form 8-K filed with the Commission on June 23, 1998). 10.14 Voting Agreement, dated June 11, 1998, between Davel Communications Group, Inc. and Mr. Aron Katzman (incorporated by reference to Exhibit 10.7 to Current Report on Form 8-K filed with the Commission on June 23, 1998). 10.15 Voting Agreement, dated June 11, 1998, between Davel Communications Group, Inc. and Mr. Joseph Abrams (incorporated by reference to Exhibit 10.8 to Current Report on Form 8-K filed with the Commission on June 23, 1998). 10.16 Corporate Governance, Liquidity and Voting Agreement, dated as of July 5, 1998, by and among UBS Capital II LLC, Davel Communications Group, Inc., Davel Holdings, Inc. and Peoples Telephone Company, Inc. (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed with the Commission on July 22, 1998). 10.17 Termination Option Agreement, dated as of July 5, 1998, by and among Davel Communications Group, Inc. and Peoples Telephone Company, Inc. (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed with the Commission on July 22, 1998). 10.18 Credit Agreement, dated as of December 23, 1998, among Davel Financing Company, L.L.C., as Borrower, Davel Communications, Inc., the Domestic Subsidiaries of the Borrower and Davel Communications, Inc., as Guarantors, the Lenders identified therein, NationsBank, N.A., as Administrative Agent, BancBoston Robertson Stephens Inc., as Syndication Agent, The Chase Manhattan Bank, as Documentation Agent, and NationsBanc Montgomery Securities, LLC, as Lead Arranger (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed with the Commission on January 6, 1999). 10.19 First Amendment to Credit Agreement and Consent and Waiver, dated as of April 8, 1999, among Davel Financing Company, L.L.C., Davel Communications, Inc., NationsBank, N.A., as Administrative Agent, and the other Lenders party thereto (incorporated by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q filed with the Commission on August 16, 1999). 10.20 Second Amendment to Credit Agreement and Consent and Waiver, dated as of March 9, 2000, among Davel Financing Company, L.L.C., Davel Communications, Inc., NationsBank, N.A., as Administrative Agent, and the other Lenders party thereto (filed herewith). 10.21 Employment and Non-Competition Agreement, dated as of December 23, 1998, by and between Davel Communications, Inc. and Scott C. Ambler (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed with the Commission on January 6, 1999). 10.22 Employment and Non-Competition Agreement, dated as of December 23, 1998, by and between Davel Communications, Inc. and David A. Arvizu (incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed with the Commission on January 6, 1999). 10.23 Employment and Non-Competition Agreement, dated as of December 23, 1998, by and between Davel Communications, Inc. and William A. Baum (incorporated by reference to Exhibit 10.4 to Current Report on 76 Form 8-K filed with the Commission on January 6, 1999). 10.24 Employment and Non-Competition Agreement, dated as of December 23, 1998, by and between Davel Communications, Inc. and Neil N. Snyder (incorporated by reference to Exhibit 10.5 to Current Report on Form 8-K filed with the Commission on January 6, 1999). 10.25 Employment and Non-Competition Agreement, dated as of December 23, 1998, by and between Davel Communications, Inc. and E. Craig Sanders (incorporated by reference to Exhibit 10.6 to Current Report on Form 8-K filed with the Commission on January 6, 1999). 10.26 Employment and Non-Competition Agreement, dated as of December 23, 1998, by and between Davel Communications, Inc. and C. Keith Pressley (incorporated by reference to Exhibit 10.7 to Current Report on Form 8-K filed with the Commission on January 6, 1999). 10.27 Employment and Non-Competition Agreement, dated as of December 23, 1998, by and between Davel Communications, Inc. and Robert E. Lund (incorporated by reference to Exhibit 10.8 to Current Report on Form 8-K filed with the Commission on January 6, 1999). 10.28 Employment and Non-Competition Agreement, dated as of December 23, 1998, by and between Davel Communications, Inc. and Alan C. MacFarland (incorporated by reference to Exhibit 10.9 to Current Report on Form 8-K filed with the Commission on January 6, 1999). 10.29 Employment and Non-Competition Agreement, dated as of December 23, 1998, by and between Davel Communications, Inc. and Bruce W. Renard (incorporated by reference to Exhibit 10.10 to Current Report on Form 8-K filed with the Commission on January 6, 1999). 10.30 Employment and Non-Competition Agreement, dated as of December 23, 1998, by and between Davel Communications, Inc. and Lawrence T. Ellman (incorporated by reference to Exhibit 10.11 to Current Report on Form 8-K filed with the Commission on January 6, 1999). 10.31 Employment and Non-Competition Agreement, dated as of February 28, 2000, by and between Davel Communications, Inc. and Raymond A. Gross (filed herewith). 10.32 Investment Agreement dated April 19, 1999 among Davel Communications, Inc., Samstock L.L.C. and EGI-Davel Investors, L.L.C. (filed herewith). 21.1 Subsidiaries of Davel Communications, Inc. 23.1 Consent of Arthur Andersen LLP 27.1 Financial Data Schedule 77 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. DAVEL COMMUNICATIONS, INC. Date: March 30, 2000 /s/ RAYMOND A. GROSS WILLIAM K. BREADEN --------------------- ------------------ Raymond A. Gross William K. Breaden Chief Executive Officer Senior Vice President, Treasurer and Chief Financial Officer POWER OF ATTORNEY Know all men by these presents, that each person whose signature appears below constitutes and appoints Raymond A. Gross and Michael E. Hayes, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10K with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE /s/ SAMUEL ZELL Chairman of the Board of Directors March 30, 2000 - ---------------- Samuel Zell /s/ RAYMOND A. GROSS President, Chief Executive Officer March 30, 2000 - ------------------------- Raymond A. Gross /s/ MICHAEL E. HAYES President and Chief Operating Officer March 30, 2000 - ------------------------- and Director Michael E. Hayes /s/ DAVID R. HILL Director March 30, 2000 - ------------------------- David R. Hill /s/ ROBERT D. HILL Director March 30, 2000 - ------------------------- Samuel Zell /s/ F. PHILIP HANDY Director March 30, 2000 - ------------------------- F. Philip Handy
78 /s/ JUSTIN S. MACCARONE Director March 30, 2000 - ------------------------- Justin S. Maccarone /s/ THOMAS M. VITALE Director March 30, 2000 - ------------------------- Thomas M. Vitale /s/ A. JONES YORKE Director March 30, 2000 - ------------------------- A. Jones Yorke
79 EX-10.20 2 Exhibit 10.20 SECOND AMENDMENT TO CREDIT AGREEMENT This SECOND AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is entered into as of March 9, 2000 among DAVEL FINANCING COMPANY, L.L.C., a Delaware limited liability company (the "Borrower"); DAVEL COMMUNICATIONS, INC., a Delaware corporation (the "Parent"); the Parent and the Domestic Subsidiaries of the Borrower, as Guarantors; the Lenders party to the "Credit Agreement" (referred to and defined below); and BANK OF AMERICA, N.A. (formerly known as NationsBank, N.A.), as Administrative Agent for the Lenders (the "Administrative Agent"). Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Credit Agreement. RECITALS WHEREAS, the Borrower, the Guarantors, the Lenders, the Administrative Agent, BancBoston Robertson Stephens, Inc., as Syndication Agent and The Chase Manhattan Bank, as Documentation Agent, entered into that certain Credit Agreement, dated as of December 23, 1998 (as amended and modified by that certain First Amendment to Credit Agreement and Consent and Waiver dated as of April 8, 1999 among the Borrower, the Parent, the Domestic Subsidiaries of the Borrower, the Lenders and the Administrative Agent, and as may be further amended or modified from time to time, the "Credit Agreement"); WHEREAS, the Borrower has informed the Lenders that it anticipates being unable to meet certain financial covenants in the future; WHEREAS, the Borrower has requested that the Lenders amend certain terms and provisions of the Credit Agreement, including, without limitation, the financial covenants with respect to certain periods; WHEREAS, the Lenders have agreed to do so, on the terms and subject to the conditions set forth below. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: AGREEMENT 1. AMENDMENTS. Effective as of the date hereof, upon satisfaction of each of the conditions set forth in PARAGRAPH 2 hereof, the Credit Agreement is hereby amended as follows (unless otherwise specified, section references used below refer to sections of the Credit Agreement): (a) APPLICABLE PERCENTAGE. SECTION 1.1 is amended to delete the definition of "Applicable Percentage" in its entirety and to replace such definition with the following definition: "APPLICABLE PERCENTAGE" means, (a) 3.50% for all Revolving Loans which are Eurodollar Loans, all Tranche A Term Loans which are Eurodollar Loans, and all Letter of Credit Fees, (b) 4.25% for all Tranche B Term Loans which are Eurodollar Loans, (c) 2.00% for all Revolving Loans which are Base Rate Loans and all Tranche A Term Loans which are Base Rate Loans, (d) 2.75% for all Tranche B Term Loans which are Base Rate Loans, and (e) 0.75% for all Commitment Fees. (b) FIXED CHARGE COVERAGE RATIO. SECTION 1.1 is further amended to delete the definition of "Fixed Charge Coverage Ratio" in its entirety and to replace such definition with the following definition: "FIXED CHARGE COVERAGE RATIO" means, with respect to the Credit Parties and their Subsidiaries determined on a consolidated basis in accordance with GAAP, for any twelve month period, the ratio of (in each case for such period) (a) EBITDA less Capital Expenditures less cash income taxes to (b) cash Interest Expense plus Scheduled Funded Debt Payments. (c) INTEREST COVERAGE RATIO. SECTION 1.1 is further amended to delete the definition of "Interest Coverage Ratio" in its entirety and to replace such definition with the following definition: "INTEREST COVERAGE RATIO" means, with respect to the Credit Parties and their Subsidiaries determined on a consolidated basis in accordance with GAAP, for any twelve month period, the ratio of (in each case for such period) (a) EBITDA to (b) cash Interest Expense. (d) LEVERAGE RATIO. SECTION 1.1 is further amended to delete the definition of "Leverage Ratio" in its entirety and to replace such definition with the following definition: "LEVERAGE RATIO" means, with respect to the Credit Parties and their Subsidiaries determined on a consolidated basis and in accordance with GAAP, for any twelve month period, the ratio of (a) total Funded Debt less cash in excess of $7,000,000, in each case as of the last day of such period to (b) EBITDA for such period. (e) PERMITTED ACQUISITIONS. SECTION 1.1 is further amended to add the following phrase to the definition of "Permitted Acquisition" immediately after the 2 existing phrase "an Acquisition by the Borrower or any Subsidiary of the Borrower" and prior to the semicolon following such existing phrase and to delete clause (h) thereof in its entirety: "which is completed prior to March 9, 2000" (f) REVOLVING COMMITTED AMOUNT. SECTION 1.1 is further amended to delete the definition of "Revolving Committed Amount" in its entirety and to replace such definition with the following definition: "REVOLVING COMMITTED AMOUNT" means FORTY-FIVE MILLION DOLLARS ($45,000,000), as such amount may be reduced pursuant to Section 2.1(d) or 3.3(c). (g) MAXIMUM INTEREST PERIOD; NEW LOANS. CLAUSE (C) of SECTION 2.1(B) is deleted in its entirety and replaced with the following provision: (C) with respect to Revolving Loans that will be Eurodollar Loans, the Interest Period applicable thereto (which shall not exceed one month in duration in the case of any Eurodollar Loan made on or after March 9, 2000) (h) MAXIMUM INTEREST PERIOD; EXISTING LOANS. CLAUSE (Y) of SECTION 2.5 is deleted in its entirety and replaced with the following provision: (y) if the request is to continue a Eurodollar Loan or convert a Base Rate Loan to a Eurodollar Loan, the Interest Period applicable thereto (which shall not exceed one month in duration in the case of any Eurodollar Loan continued or converted on or after March 9, 2000). (i) CONDITIONS TO BORROWING. CLAUSE (E) of SECTION 5.2 is deleted in its entirety and replaced with the following provision: (e) REQUIRED LENDERS' CONSENT. From and after March 9, 2000, if after giving effect to the making of any requested Loan (and the application of the proceeds thereof) or to the issuance of any requested Letter of Credit, as the case may be, the sum of the Revolving Loans outstanding plus LOC Obligations outstanding would exceed $35,000,000, the Lenders shall not be obligated to make such Loan nor shall the Issuing Lender be required to issue such Letter of Credit, as applicable, unless the Required Lenders shall have consented in writing to the making of such Loan or the issuance of such Letter of Credit, as applicable. 3 (j) INTERIM REPORTING. SECTION 7.1(B) is deleted in its entirety and replaced with the following provisions: (b) INTERIM FINANCIAL STATEMENTS. As soon as available, and in any event within 45 days after the closing of each fiscal quarter of the Borrower and within 30 days after the end of each calendar month, a consolidated balance sheet and income statement of the Credit Parties and their Subsidiaries as of the end of such fiscal quarter or calendar month, as the case may be, together with related consolidated statements of cash flows for such fiscal quarter or calendar month, as applicable, in the case of the income statement and statement of cash flow setting forth in comparative form, if practical, consolidated figures for the corresponding period of the preceding fiscal year and in the case of the balance sheet setting forth in comparative form, if practical, consolidated figures for the corresponding date of the prior fiscal year, all such financial information described above to be in reasonable form and detail and reasonably acceptable to the Administrative Agent, and accompanied by a certificate of the chief financial officer of the Borrower to the effect that such quarterly financial statements fairly present in all material respects the financial condition of the Credit Parties and their Subsidiaries and have been prepared in accordance with GAAP (subject to normal year-end adjustments and the absence of footnotes). (k) OFFICER'S CERTIFICATE. SECTION 7.1(C) is amended to add the following parenthetical to such section at the end of CLAUSE (I) of such section: (except in the case of certificates accompanying monthly financial statements required to be delivered pursuant to Section 7.1(b) with respect to months ending on or before November 30, 2000) (l) FINANCIAL COVENANTS. SECTION 7.2 is deleted in its entirety and replaced with the following provisions: (a) LEVERAGE RATIO. The Leverage Ratio, for the twelve month period ending as of each date set forth below, shall be less than or equal to the applicable ratio set forth below opposite such date: TWELVE MONTHS ENDING RATIO -------------- ----- March 31, 2000 6.00 to 1.00 June 30, 2000 6.00 to 1.00 September 30, 2000 6.50 to 1.00 4 December 31, 2000 6.75 to 1.00 January 31, 2001 and Each Twelve Month Period Ending Thereafter 3.50 to 1.00. (b) INTEREST COVERAGE RATIO. The Interest Coverage Ratio, for the twelve month period ending as of each date set forth below, shall be greater than or equal to the applicable ratio set forth below opposite such date: TWELVE MONTHS ENDING RATIO -------------- ----- March 31, 2000 1.50 to 1.00 June 30, 2000 1.50 to 1.00 September 30, 2000 1.25 to 1.00 December 31, 2000 1.25 to 1.00 January 31, 2001 and Each Twelve Month Period Ending Thereafter 3.75 to 1.00. (c) FIXED CHARGE COVERAGE RATIO. The Fixed Charge Coverage Ratio, for the twelve month period ending as of each date set forth below, shall be greater than or equal to the applicable ratio set forth below opposite such date: TWELVE MONTHS ENDING RATIO -------------- ----- March 31, 2000 .50 to 1.00 June 30, 2000 .50 to 1.00 September 30, 2000 .40 to 1.00 December 31, 2000 .40 to 1.00 January 31, 2001 and Each Twelve Month Period Ending Thereafter 1.10 to 1.00. (m) CAPITAL EXPENDITURES. CLAUSE (B) of SECTION 8.14 is amended to delete the figure "$13,000,000" which appears in such clause and to replace such figure with the figure "$10,000,000". 2. CONDITIONS PRECEDENT. The effectiveness of this Amendment is subject to receipt by the Administrative Agent of each of the following: (a) counterparts to this Amendment duly executed by each of the Credit Parties and the Required Lenders; 5 (b) certified copies of resolutions or similar authorizations of each Credit Party approving and adopting this Amendment, the transactions contemplated herein and authorizing such Credit Party's execution and delivery hereof; (c) an opinion or opinions from counsel to the Credit Parties with respect to this Amendment, in form and substance satisfactory to the Administrative Agent, addressed to the Administrative Agent on behalf of the Lenders and dated as of the date hereof; and (d) the "Amendment Fee" referred to and described in PARAGRAPH 3 hereof, for the benefit of each Lender. 3. AMENDMENT FEE. The Borrower agrees to pay in cash or other immediately available funds, on or before March 22, 2000, to the Administrative Agent for the account of each Lender that executes this Amendment on or before such date, a fee equal to the product of each such Lender's Commitment (determined after giving effect to this Amendment) multiplied by .35%; provided, however, the Borrower shall have no obligation to pay any such fee until this Amendment has been executed and delivered by the Required Lenders (which fees shall be thereupon fully-earned and non-refundable). 4. GOOD STANDING CERTIFICATES. Within 30 days after the date hereof, the Borrower shall deliver to the Administrative Agent copies of certificates of good standing, existence or their equivalent with respect to each Credit Party, certified as of a recent date by the appropriate Governmental Authorities of the state or other jurisdiction of such Credit Party's formation. 5. RATIFICATION OF CREDIT AGREEMENT. The term "Credit Agreement" as used in each of the Credit Documents shall hereafter mean the Credit Agreement as amended and modified by this Amendment. Except as herein specifically agreed, the Credit Agreement, as amended by this Amendment, is hereby ratified and confirmed and shall remain in full force and effect according to its terms, including, without limitation, the liens granted pursuant to the Collateral Documents. 6. AUTHORITY/ENFORCEABILITY. Each of the Credit Parties, the Administrative Agent and the Lenders represents and warrants as follows: (a) It has taken all necessary action to authorize the execution, delivery and performance of this Amendment. (b) This Amendment has been duly executed and delivered by such Person and constitutes such Person's legal, valid and binding obligations, enforceable in accordance with its terms, except as such enforceability may be subject to (i) bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity). (c) No consent, approval, authorization or order of, or filing, registration or qualification with, any court or governmental authority or third party is required in connection with the execution, delivery or performance by such Person of this Amendment (other than that which may have been previously obtained). 6 7. NO DEFAULT. The Credit Parties represent and warrant to the Lenders that (a) the representations and warranties of the Credit Parties set forth in SECTION 6 of the Credit Agreement (as amended by this Amendment) are true and correct in all material respects as of the date hereof, (b) no event has occurred and is continuing which constitutes a Default or an Event of Default and (c) they have no claims, counterclaims, offsets, credits (other than any credit for overpayment of interest or fees under the Credit Documents of which the Credit Parties have no knowledge as of the date hereof (each an "Overpayment Credit")) or defenses to their obligations under the Credit Documents or to the extent they have any (other than any Overpayment Credit) they are hereby released in consideration of the Lenders entering into this Amendment. 8. COUNTERPARTS/TELECOPY. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be an original, but all of which shall constitute one and the same instrument. Delivery of executed counterparts of this Amendment by telecopy shall be effective as an original and shall constitute a representation that an original shall be delivered. 9. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. * * * * 7 IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered and this Amendment shall be effective as of the date first above written. BORROWER: DAVEL FINANCING COMPANY, L.L.C., a Delaware limited liability company By: DAVEL COMMUNICATIONS, INC., its sole managing member By: _________________________________ Name: ___________________________ Title: __________________________ PARENT GUARANTOR: DAVEL COMMUNICATIONS, INC., a Delaware corporation By: _________________________________ Name: ___________________________ Title: __________________________ SUBSIDIARY GUARANTORS: DAVEL COMMUNICATIONS GROUP, INC., an Illinois corporation PEOPLES TELEPHONE COMPANY, INC., a New York corporation PEOPLES TELEPHONE COMPANY, INC., a New Hampshire corporation PEOPLES COLLECTORS, INC., a Delaware corporation PTC CELLULAR, INC., a Delaware corporation PTC SECURITY SYSTEMS, INC., a Florida corporation TELELINK TELEPHONE SYSTEMS, INC., a Georgia corporation SILVERADO COMMUNICATIONS CORP., a Colorado corporation Signature Page to Second Amendment to Credit Agreement PEOPLES ACQUISITION CORP., a Pennsylvania corporation TELALEASING ENTERPRISES, INC., an Illinois corporation ADTEC COMMUNICATIONS, INC., a Florida corporation INTERSTATE COMMUNICATIONS, INC., a Georgia corporation T.R.C.A., INC., an Illinois corporation DAVELTEL, INC., an Illinois corporation DAVEL MEXICO, LTD., an Illinois corporation COMMUNICATIONS CENTRAL INC., a Georgia corporation CENTRAL PAYPHONE SERVICES, INC., a Georgia corporation COMMUNICATIONS CENTRAL OF GEORGIA, INC., a Georgia corporation INVISION TELECOM, INC., a Georgia corporation By: _________________________________ Name: ___________________________ Title: __________________________ Signature Page to Second Amendment to Credit Agreement AGENT: - ----- BANK OF AMERICA, N.A. (FORMERLY, NATIONSBANK, N.A.), in its capacities as the Administrative Agent and Collateral Agent By: _______________________________ Name: _________________________ Title: ________________________ Signature Page to Second Amendment to Credit Agreement LENDERS: - ------- BANK OF AMERICA, N.A. (FORMERLY, NATIONSBANK, N.A.), individually in its capacity as a Lender, and in its capacity as the Issuing Lender By: _______________________________ Name: _________________________ Title: ________________________ Signature Page to Second Amendment to Credit Agreement THE CHASE MANHATTAN BANK By: _________________________________ Name: ___________________________ Title: __________________________ Signature Page to Second Amendment to Credit Agreement THE BANK OF NEW YORK By: _________________________________ Name: ___________________________ Title: __________________________ Signature Page to Second Amendment to Credit Agreement FLEET BANK, N.A. By: _________________________________ Name: ___________________________ Title: __________________________ Signature Page to Second Amendment to Credit Agreement LASALLE BANK, NATIONAL ASSOCIATION (AS SUCCESSOR TO LASALLE NATIONAL BANK) By: _________________________________ Name: ___________________________ Title: __________________________ Signature Page to Second Amendment to Credit Agreement U.S. BANK NATIONAL ASSOCIATION By: _________________________________ Name: ___________________________ Title: __________________________ Signature Page to Second Amendment to Credit Agreement CREDIT AGRICOLE INDOSUEZ By: _________________________________ Name: ___________________________ Title: __________________________ By: _________________________________ Name: ___________________________ Title: __________________________ Signature Page to Second Amendment to Credit Agreement BANK ONE N.A. (AS SUCCESSOR TO THE FIRST NATIONAL BANK OF CHICAGO) By: _________________________________ Name: ___________________________ Title: __________________________ Signature Page to Second Amendment to Credit Agreement PNC BANK, NATIONAL ASSOCIATION By: _________________________________ Name: ___________________________ Title: __________________________ Signature Page to Second Amendment to Credit Agreement ALLSTATE LIFE INSURANCE COMPANY By: _________________________________ Name: ___________________________ Title: __________________________ By: _________________________________ Name: ___________________________ Title: __________________________ Signature Page to Second Amendment to Credit Agreement HELLER FINANCIAL, INC. By: _________________________________ Name: ___________________________ Title: __________________________ Signature Page to Second Amendment to Credit Agreement PARIBAS By: _________________________________ Name: ___________________________ Title: __________________________ By: _________________________________ Name: ___________________________ Title: __________________________ Signature Page to Second Amendment to Credit Agreement EATON VANCE SENIOR INCOME TRUST By: EATON VANCE MANAGEMENT, as Investment Advisor By: _________________________________ Name: ___________________________ Title: __________________________ Signature Page to Second Amendment to Credit Agreement SENIOR DEBT PORTFOLIO By: BOSTON MANAGEMENT AND RESEARCH, as Investment Advisor By: _________________________________ Name: ___________________________ Title: ____________________________ Signature Page to Second Amendment to Credit Agreement OXFORD STRATEGIC INCOME FUND By: EATON VANCE MANAGEMENT, as Investment Advisor By: _________________________________ Name: ___________________________ Title: __________________________ Signature Page to Second Amendment to Credit Agreement VAN KAMPEN SENIOR FLOATING RATE FUND By: _________________________________ Name: ___________________________ Title: __________________________ Signature Page to Second Amendment to Credit Agreement KZH CYPRESSTREE-1 LLC By: _________________________________ Name: ___________________________ Title: __________________________ Signature Page to Second Amendment to Credit Agreement CYPRESSTREE INVESTMENT FUND, LLC By: CYPRESSTREE INVESTMENT MANAGEMENT COMPANY, INC., its Managing Member By: _________________________________ Name: ___________________________ Title: __________________________ CYPRESSTREE INSTITUTIONAL FUND, LLC By: CYPRESSTREE INVESTMENT MANAGEMENT COMPANY, INC., its Managing Member By: _________________________________ Name: ___________________________ Title: __________________________ NORTH AMERICAN SENIOR FLOATING RATE FUND By: CYPRESSTREE INVESTMENT MANAGEMENT COMPANY, INC., as Portfolio Manager By: _________________________________ Name: ___________________________ Title: __________________________ Signature Page to Second Amendment to Credit Agreement MORGAN STANLEY DEAN WITTER PRIME INCOME TRUST By: _________________________________ Name: ___________________________ Title: __________________________ Signature Page to Second Amendment to Credit Agreement DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES By: _________________________________ Name: ___________________________ Title: __________________________ By: _________________________________ Name: ___________________________ Title: __________________________ Signature Page to Second Amendment to Credit Agreement EQUITY GROUP INVESTMENTS LLC By: _________________________________ Name: ___________________________ Title: __________________________ Signature Page to Second Amendment to Credit Agreement EX-10.31 3 EXHIBIT 10.31 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of this 28TH DAY OF FEBRUARY, 2000, by and between Davel Communications, Inc. ("Davel") and RAYMOND A. GROSS (the "Executive"). Capitalized terms used and not otherwise defined herein shall have the meanings ascribed to them in Part Five hereof. RECITALS WHEREAS, Davel desires to employ the Executive as the Chief Executive Officer of Davel; and WHEREAS, the Executive desires to be employed by Davel PURSUANT TO the salary and benefits provided for herein; and WHEREAS, the Executive acknowledges and understands that during the course of his employment, the Executive will develop certain strategic business relationships and become familiar with certain confidential information of Davel which are exceptionally valuable to Davel and vital to the success of Davel's business; and WHEREAS, Davel and the Executive desire to protect such business relationships and such confidential information from use to the detriment of Davel or UNAUTHORIZED disclosure to third parties. NOW THEREFORE, in consideration of the premises and of the mutual covenants and agreements hereinafter set forth, the parties hereto acknowledge and agree as follows: TERMS PART ONE NATURE AND TERM OF EMPLOYMENT 1.01 EMPLOYMENT. Davel hereby agrees to employ the Executive, and the Executive hereby accepts such employment, as the Chief Executive Officer of Davel. 1.02 TERM OF EMPLOYMENT. The term of the Executive's employment hereunder shall be for a period of two (2) years beginning on the date of this Agreement (the "Original Term"). 1.03 TERM EXTENSION. Immediately as of the expiration of the Original Term and each Renewal Period, this Agreement will automatically renew and extend for successive one year periods (the "Renewal Periods"), unless Davel or Executive shall have delivered to the other written notice of non-renewal at least ninety (90) days prior to the expiration of the Original Term or the applicable Renewal Period, in which case the Original Term or the applicable Renewal Period shall expire effective as of the last day of the Original Term or the applicable Renewal Period, as the case may be. The period during which Executive shall be employed by Davel hereunder shall be referred to herein as the "Employment Period." Notwithstanding anything to the contrary contained herein, the Original Term and the Renewal Periods are each subject to termination pursuant to Part Four below. 1.04 DUTIES. The duties of the Executive shall be as determined by the Board of Directors of Davel (the "Board") consistent with the Executive's title and position with Davel, and the Executive shall report to the Board and shall be subject to the Board's direction and control. Without limiting the generality of the foregoing, the Executive shall manage the business of Davel on a day-to-day basis and shall report to and advise the Board regarding the management and operation of Davel's business. The Executive agrees to devote his full business time attention and energies to the diligent performance of his duties hereunder and will not, during the Employment Period, engage in, accept employment from or provide services to any other person, firm, corporation, governmental agency or other entity; provided, however, that subject to Section 3.04 hereof, Executive may (a) devote a reasonable amount of time to civic activities, and (b) maintain not more than two outside board positions with companies which do not compete with Davel, in each case subject to the prior consent of the Board, which consent shall not be unreasonably withheld, and (c) manage his own investments, provided that such activities do not conflict with or detract from the Executive's diligent performance of Executive's duties hereunder. 1.05 BOARD SEAT. The Company will propose executive's nomination to the Board of Directors, subject to the nomination by the Board and approval by the stockholders. PART TWO COMPENSATION AND BENEFITS 2.01 SALARY. During the Employment Period, the Executive shall receive a base salary at the rate of $325,000 dollars per annum (the "Base Salary"), payable in semi-monthly installments in accordance with Davel's general payroll practices for salaried employees. During the Employment Period, the Base Salary shall be subject to annual review at the discretion of the Board. 2.02 BONUS. In addition to his Base Salary, Executive may receive during the Employment Period, as determined annually at the discretion of the Board, an incentive cash bonus based upon Executive's performance in an amount per annum up to 100% of Base Salary, based on achievement of mutually agreed personal goals and the profitability of Davel during such period, such bonus to be payable within ninety (90) days following the end of Davel's fiscal year. With respect to the first two DAVEL fiscal quarters DURING the term, such bonus shall equal A TOTAL OF 25% of Executive's Base salary, payable within forty-five (45) days of each such quarter-end. Any bonus for subsequent periods shall be payable at such times and based on such performance targets as shall be mutually agreed by Executive and Davel. 2.03 BENEFITS. During the Term of this Agreement, Davel agrees to provide to Executive such benefits as are provided to other executive employees of Davel from time to time, including but not limited to, any health, disability, life, deferred compensation, profit-sharing, 401(k) savings, pension, or other similar employee benefit policies, programs or plans which Davel provides to its employees (collectively, the "Employee Benefits"), all at levels determined by the Board and commensurate with the Executive's position. 2.04 EXPENSES. During the Term of this Agreement, the Executive shall be reimbursed by Davel for all ordinary and necessary out-of-pocket expenses for travel, lodging, meals, entertainment expenses, or any other similar reasonable expenses incurred by the Executive in performing services for Davel in accordance with the policies established by the Board. 2.05 VACATIONS. The Executive shall be entitled to a paid vacation of four (4) weeks during each twelve month period during the Employment Period, provided, however, that the Executive's vacation shall be in accordance with policies established by the Board. 2.06 WITHHOLDING. Any amounts payable to the Executive hereunder shall be paid to the Executive subject to all applicable taxes required to be withheld by the Company pursuant to federal, state or local law. The Executive or his beneficiary, if applicable, shall be solely responsible for all taxes imposed on the Executive or his beneficiary by reason of his receipt of any amount of compensation or benefits payable to the Executive hereunder. 2.07 OPTIONS. Subject to and only upon receipt of all necessary approvals from shareholders of Davel (which matter will be submitted for a shareholder vote at Davel's next annual meeting), Executive will be granted a total of 650,000 non-qualified stock options (the "Options") at a purchase price of $_______ (day before announcement) per share, each Option to have a term of ten years and 272,654 of the Options shall be granted immediately UPON EXECUTION HEREOF. The vesting schedule for the Options is set forth below. Executive may elect to exercise the Options, subject to the further limitations contained in the Share Plan, to the extent vested, at any 2 time or from time to time on or after the vesting dates or events set forth below and until and subject to termination of the Option. NUMBER OF OPTIONS VESTED AS OF SPECIFIED DATE DATE OR OR EVENT EVENT --------------------------- -------- 275,000 55,000 on each anniversary of the date hereof FOR 5 YEARS or, 275,000 upon a Change of Control 75,000 $10.00* 75,000 $15.00* 75,000 $20.00* 75,000 $25.00* 75,000 $30.00* * These Options shall vest on the earlier to occur of (A) ten (10) years from the date hereof, or (B) the date upon which the Davel Trading Price average for the preceding thirty (30) day period shall exceed the specified price. PART THREE CONFIDENTIAL INFORMATION AND COMPETITION 3.01 DEFINITION OF CONFIDENTIAL INFORMATION. For the purposes of this Agreement, the term "Confidential Information" shall mean all information and all documents and other tangible items which record information THAT is non-public, confidential or proprietary in nature with respect to Davel or its customers, clients or investors and shall include, but shall not be limited to: (a) all information, which at the time or times concerned is protectible as a trade secret under applicable law; (b) business and investment plans and strategies; (c) marketing plans and strategies (INCLUDING SPECIFICALLY CUSTOMER LISTS AND CONTRACT TERMS); and (d) proprietary software and business records. Davel and the Executive acknowledge and agree that the Confidential Information is extremely valuable to Davel and the information referred to in subparagraphs (b) through (d) inclusive of this Section 3.01 is especially sensitive and valuable. 3.02 NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. The Executive will not during, or after termination of the Executive's employment for any or no reason, in any form or manner, directly or indirectly, divulge, disclose or communicate to any person, entity, firm, corporation or any other third party, or utilize for the Employee's personal benefit of for the benefit of any person, entity, firm or corporation (other than Davel), any Confidential Information. 3.03 DELIVERY UPON TERMINATION. Upon termination of the Executive's employment with Davel for any or no reason, the Executive will promptly deliver to Davel all correspondence, manuals, letters, notes, notebooks, reports, programs, plans, proposals, financial documents, or any other documents or media concerning Davel and/or which contains Confidential Information. 3.04 COVENANT-NOT-TO-COMPETE. The Executive will not during the Employment Period, and, in the event the Executive's employment is terminated by Davel for Cause or by Executive voluntarily other than for Good Reason, for a period of one (1) year following termination of the Executive's employment, in any form or manner, directly or indirectly, on his own behalf or in combination with others, engage in or become interested in (as an individual, partner, member, stockholder, director, officer, principal, agent, independent contractor, employee, trustee, or in any other relation or capacity whatsoever, except as a holder of securities of a corporation whose securities are publicly traded and which is subject to the reporting requirements of the Securities Exchange Act of 1934, and then only to the extent of owning not more than five percent (5%) of the issued and outstanding securities of such corporation) any business which is competitive with the business of Davel or any Davel Affiliate, as conducted or proposed to be conducted as of the date of termination of Executive's employment. 3 3.05 RESTRICTION AGAINST EMPLOYING DAVEL EMPLOYEES. The Executive will not, for a period of (1) one year after termination of Executive's employment, directly or indirectly, whether individually, as a director, stockholder, partner, member, owner, employee or agent of any business, or in any other capacity, employ or solicit for employment or engagement, any person who is employed or otherwise engaged by Davel on, or within 180 days prior to, such termination of Executive. 3.06 CONTINUING OBLIGATION. The obligations, duties and liabilities of the Executive pursuant to Part Three of this Agreement are continuing, absolute and unconditional and shall remain in full force and effect as provided therein despite any termination of the Executive's employment with Davel for any or no reason, including, but not limited to, the expiration of the Employment Period. 3.07 EXECUTIVE ACKNOWLEDGMENT/INJUNCTIVE RELIEF. Executive acknowledges and agrees that the covenants set forth in Part Three hereof are reasonable and necessary for the protection of Davel's business interests, that such covenants will not result in undue economic hardship to Executive, that irreparable injury will result to Davel if Executive breaches any of the terms of said covenants, and that in the event of Executive's actual or threatened breach of any such covenants, Davel will have no adequate remedy at law. Executive accordingly agrees that in the event of any actual or threatened breach by him of any of said covenants, Davel shall be entitled to immediate injunctive and other equitable relief, without bond and without the necessity of showing any actual monetary damages. If, in any action by Davel against the Executive to enforce the provisions of this Part Three, there shall be a final judicial finding that the Executive has committed a material breach of this Part Three, the Executive shall reimburse Davel for its reasonable costs and expenses in such action (including court costs and reasonable attorney's fees). If, in any action by Davel against the Executive to enforce the provisions of this Part Three, there shall be a final judicial finding that the Executive has not committed a material breach of this Part Three, Davel shall reimburse the Executive for his reasonable costs and expenses in defending such action (including court costs and reasonable attorney's fees). If in any such action there is no judicial finding on the issue of a material breach by the Executive of this Part Three, neither party shall be obligated to reimburse the other for costs and expenses relating to the action. Nothing herein shall be construed as prohibiting Davel from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of any damages which it is able to prove. PART FOUR TERMINATION 4.01 TERMINATION UPON WRITTEN NOTICE. Either Davel or the Executive may terminate the Executive's employment as provided in Subparagraph (a) and (b) below during the Employment Period by delivering to the other party a written notice (the "Termination Notice") indicating the date on which Executive's employment is to be terminated (the "Termination Date"). (a) If Davel terminates the Executive's employment other than for Cause or Disability or if Executive terminates his employment with Davel for Good Reason and such termination takes place within 90 days of the later of (i) the latest occurrence of events or omissions comprising Good Reason and (ii) the discovery by Executive of the grounds for Good Reason, Davel and Executive shall have the rights and obligations provided in this Section 4.01(a). Davel shall be required to pay to the Executive: (i) the Executive's Base Salary accrued up to the Termination Date, and (ii) upon execution and delivery by Executive of the form of Release attached hereto as EXHIBIT A, and the expiration of the seven day revocation period provided in said Release without revocation of said Release by Executive, a severance payment equal to the sum of (A) the amount of the Base Salary as of the Termination Date for one (1) full calendar year, plus (B) the targeted amount of bonus for such year (the "Severance"). Subject to Executive's compliance with his covenants set forth in Part Three hereof, the Severance shall be payable over a period of one (1) year, beginning on the Termination Date and in regular installments in accordance with Davel's general payroll practices for salaried employees. Furthermore, Davel shall be required to maintain for the Executive and his spouse and children under the age of 21, medical insurance coverage to which the Executive and his spouse and children under the age of 21 were entitled immediately preceding 4 the date of the Executive's termination until the earlier of (x) the one (1) year period expiring on the first anniversary of the Termination Date or (y) such time as Executive shall obtain employment or other engagement offering comparable or better medical insurance coverage. Notwithstanding anything to the contrary in the Share Plan, the 275,000 Options referred to in Section 2.07 hereof, will automatically vest and become immediately exercisable for the total number of shares purchasable thereunder. Notwithstanding anything to the contrary in the Share Plan, such 275,000 Options, together with any other Options which shall then be vested in accordance with their respective terms, will expire on the earlier of (i) the expiration date of such Options under the Share Plan and (ii) one year from the Termination Date. Except as set forth in this Section 4.01(a), Executive shall not be entitled to receive any other severance, benefits or compensation of any kind whatsoever. (b) If the Executive terminates his employment voluntarily other than for Good Reason, Davel and Executive shall have the rights and obligations provided in this Section 4.01(b). Executive shall be entitled to receive only his Base Salary accrued through the Termination Date as set forth in the Termination Notice, and except as set forth in this Section 4.01(b), Executive shall not be entitled to receive any other severance, benefits or compensation of any kind whatsoever. In addition, notwithstanding anything to the contrary in the Share Plan, all unvested Options granted to the Executive under the Share Plan will be forfeited as of the Termination Date. Notwithstanding anything to the contrary in the Share Plan, vested Options granted to the Executive under the Share Plan will expire on the earlier of (i) the expiration date of such Options and (ii) the date ninety (90) days following the Termination Date. 4.02 TERMINATION UPON DEATH. Upon the Executive's death during the Employment Period, Davel and Executive shall have the rights and obligations provided in this Section 4.02. This Agreement shall terminate, except that the Executive's legal heirs or representatives shall be entitled to receive (a) the Executive's Base Salary, accrued up to the date of the Executive's death, and (b) any death benefits payable under any life insurance policy maintained for the Executive's benefit referred to in Section 2.03 hereof. Davel shall continue the medical insurance coverage for the benefit of Executive's spouse and children under the age of 21 to which they were entitled immediately preceding the date of the Executive's death for one year from the date of Executive's death. Upon Executive's death, all unvested Options granted to the Executive under the Share Plan will be forfeited. Notwithstanding anything to the contrary in the Share Plan, vested options granted to the Executive under the Share Plan will expire on the earlier of (i) the expiration date of such Options and (ii) the first anniversary of termination of employment. Except as set forth in this Section 4.02, Executive shall not be entitled to receive any other severance, benefits or compensation of any kind whatsoever. 4.03 TERMINATION UPON DISABILITY. If, during the Employment Period, in the reasonable opinion of the Board, the Executive becomes physically or mentally disabled, whether totally or partially, so that the Executive is unable substantially to perform his duties hereunder (a) for a period of ninety (90) consecutive days or (b) for shorter periods aggregating one hundred and eighty (180) days during any three hundred and sixty (360) day period, Davel may at any time thereafter terminate the Executive's employment under this Agreement. In the event of such termination, Davel and Executive shall have the rights and obligations provided in this Section 4.03. Executive shall be entitled to continue to receive his Base Salary until commencement of payments under Executive's disability insurance policy, if any shall be maintained by Davel for Executive's benefit pursuant to Section 2.03 hereof. Davel shall continue the medical insurance coverage for the benefit of Executive and his spouse and children under the age of 21 for a period of one year following such termination. Notwithstanding anything to the contrary in the Share Plan, all unvested options under the Share Plan will be forfeited without any payment or other consideration to the Executive. Notwithstanding anything to the contrary in the Share Plan, vested Options under the Share Plan will expire on (i) the earlier of the expiration date of such Options and (ii) the first anniversary of the termination of employment. Except as set forth in this Section 4.03, Executive shall not be entitled to receive any other severance, benefits or compensation of any kind whatsoever. 4.04 TERMINATION FOR CAUSE. Davel has the right, at any time during the Employment Period, exercisable by serving notice, effective in accordance with its terms, to terminate the Executive's employment under this Agreement for "Cause". If such right is exercised, Davel and Executive shall have the rights and obligations provided in this Section 4.04. Davel's obligation to the Executive shall be limited to the payment and/or satisfaction 5 of unpaid Base Salary accrued up to the effective date specified in Davel's notice of termination. Notwithstanding anything to the contrary in the Share Plan, all unvested Options under the Share Plan will be forfeited without any payment or other consideration to the Executive. Notwithstanding anything to the contrary in the Share Plan, vested Options under the Share Plan will expire on the earlier of (a) the expiration date of such Options and (b) the date 90 days following the date of termination of employment. Except as set forth in this Section 4.04, Executive shall not be entitled to receive any other severance, benefits or compensation of any kind whatsoever. 4.05 SOLE REMEDY. The amounts payable to the Executive, if any, under the applicable provisions of this Part Four in connection with the termination of the Executive's employment, voluntarily or involuntarily, for any or no reason, shall be the only remedy, legal or equitable, available to the Executive in connection with such termination (but not for claims or causes of action not directly related to such termination, even if arising at the time of termination), and such amounts shall constitute liquidated damages. PART FIVE CERTAIN DEFINITIONS 5.01 CERTAIN DEFINITIONS. As used in this Agreement, the following terms have the following meanings unless the context otherwise requires: (a) "Affiliate" shall mean, with respect to any Person, any Person that directly or indirectly controls, is controlled by, or is under common control with such Person. For purposes of this definition, "control" shall mean the power to direct, or cause the direction of, the management of policies of a Person, whether through the ownership of voting securities, by contract or otherwise. (b) "Cause" shall mean: (i) fraud, embezzlement or conviction of a felony; (ii) misappropriation of any money, proprietary information or other assets or properties of Davel or any affiliate of Davel other than (A) an isolated, insubstantial and unintentional misappropriation which is promptly remedied by the Executive after receipt of notice thereof given by Davel or (B) any good faith dispute regarding reimbursement of expenses or other similar good faith dispute ; (iii) willful and material breach by the Executive of the terms of this Agreement; (iv) sustained inability to perform the duties assigned to Executive at the level expected of a chief executive officer, other than by reason of death or disability; or (v) any other verifiable misconduct of Executive materially and adversely affecting the reputation of Davel. (c) "Change in Control" shall mean: (i) a merger or acquisition involving Davel in which 50% or more of the surviving company's voting stock outstanding after the merger or acquisition is held by holders different from those who held Davel's voting stock immediately prior to such merger or acquisition; (ii) the sale, transfer or other disposition of all or substantially all of the assets of Davel, including in liquidation or dissolution of Davel; 6 (iii) a transfer of all or substantially all of Davel's assets pursuant to a partnership or joint venture agreement or similar arrangement where Davel's resulting interest is or becomes less than 50%; or (iv) on or after the date hereof, a change in ownership of Davel through an action or series of transactions, such that any person (other than Samuel Zell, David Hill or their respective affiliates or family members or trusts for the benefit of the foregoing) is or becomes the beneficial owner, directly or indirectly, of 50% or more of Davel's voting stock. (d) "Davel Trading Price" shall be the closing price of Davel common stock as quoted on the NASDAQ National Market if such stock is then so quoted or, if such stock is not so quoted, then the mean between the "bid" and the "ask" price for Davel common stock, on any trading day. (e) "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 1.04 or any other action by Davel which results in a material diminution of such position, authority, duties or responsibilities, but excluding for this purpose an isolated, insubstantial or inadvertent action not taken in bad faith and which is remedied by Davel promptly after receipt of notice thereof given by the Executive; (ii) a willful and material breach of this Agreement by Davel; or (iii) a Change in Control of Davel following which the acquirer is for any reason not bound by any material term of this Agreement to the same extent as Davel immediately prior to such Change in Control. (f) "Person" means any individual, corporation, association, partnership. limited liability company, estate, trust and any other entity or organization, governmental or otherwise. (g) "Share Plan" means the Option plans and related agreements pursuant to which the Options shall be issued, and any successor plan thereto. PART SIX MISCELLANEOUS 6.01 ASSIGNMENT. The Executive and Davel acknowledge and agree that the covenants, terms and provisions contained in this Agreement constitute a personal employment contract and the rights of the parties thereunder cannot be transferred, sold, assigned, pledged or hypothecated, excepting that (a) the Executive's rights pursuant to Section 4.02 or 4.03 may be transferred by will or operation of law and the Executive's Employee Benefits may be assigned or transferred in accordance with such policies, programs, plans or Davel practices; and (b) the rights and obligations of Davel under this Agreement may be assigned or transferred by operation of law pursuant to a merger, consolidation, share exchange, sale of all or substantially all of Davel's assets, or other reorganization described in Section 368 of the Code, or through liquidation, dissolution or otherwise, whether or not Davel is the continuing entity, provided that the assignee or transferee is the successor to all or substantially all of the assets of Davel and such assignee or transferee assumes the rights and duties of Davel, if any, as contained in this Agreement, either contractually or as a matter of law. 6.02 CAPACITY. The Executive hereby represents and warrants that, in entering into this Agreement, he is not in violation of any contract or agreement, whether written or oral, with any other person , firm, partnership, 7 corporation, or other entity to which he is a party or by which he is bound and will not violate or interfere with the rights of any other person, firm, partnership, corporation or other entity. In the event that such a violation or interference does occur, or is alleged to occur, notwithstanding the representation and warranty made hereunder, the Executive shall indemnify Davel from and against any and all manner of expenses and liabilities incurred by Davel or any affiliated company of Davel in connection with such violation or interference or alleged violation or interference. 6.03 SEVERABILITY. If any phrase, clause or provision of this Agreement is declared invalid or unenforceable by a court of competent jurisdiction, such phrase, clause or provision shall be deemed severed from this Agreement, but will not affect any other provisions of this Agreement, which shall otherwise remain in full force and effect. If any restriction or limitation in this Agreement is deemed to be unreasonable, onerous and unduly restrictive by a court of competent jurisdiction, it shall not be stricken in its entirety and held totally void and unenforceable, but shall remain effective to the maximum extent permissible within reasonable bounds. 6.04 NOTICES. Any notice, request or other communication required to be given pursuant to the provisions hereof shall be in writing and shall be deemed to have been given when delivered in person or five (5) days after being deposited in the United States mail, certified or registered, postage pre-paid, return receipt requested and addressed to the party at its or his last known addresses. The address of any party may be changed by notice in writing to the other parties duly served in accordance herewith. 6.05 WAIVER. The waiver by Davel or the Executive of any breach of any term or condition of this Agreement shall not be deemed to constitute the waiver of any other breach of the same or any other term or condition hereof. 6.06 GOVERNING LAW. This Agreement and the enforcement thereof shall be governed and controlled in all respects by the laws of the State of Delaware. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first hereinabove written. DAVEL COMMUNICATIONS, INC. By:______________________________________ Title:___________________________________ EXECUTIVE:_______________________________ RAY GROSS 8 EXHIBIT A RELEASE 1. Pursuant to the terms of the Employment Agreement made as of ___ , 2000, between Davel Communications, Inc. ("Davel") and the undersigned (the "Agreement"), and in consideration of the payments made to me and other benefits to be received by me pursuant thereto, I, Ray Gross, being of lawful age, do hereby release, and forever discharge, Davel and its trustees, directors, officers, shareholders, subsidiaries, agents, and employees, from any and all actions, causes of action, claims, or demands for general, special or punitive damages, attorney's fees, expenses, or other compensation, which in any way relate to or arise out of my employment with Davel or any of its subsidiaries or the termination of such employment (but not for actions, causes of action, claims or demands not directly related to such employment or termination of employment, even if arising at the time of termination), which I may now or hereafter have under any federal, state or local law, regulation or order, including without limitation, under the Age Discrimination in Employment Act, as amended, through and including the date of this Release; PROVIDED, HOWEVER, that this Release shall not release Davel's obligations with respect to (a) payment of the severance payments and compliance with the other provisions of Section 4.01(a) of the Agreement, (b) Executive's rights under the Share Plan and any grants to Executive thereunder (as the terms of such grants have been modified by the provisions of section 4.01(a) of the Agreement) and (c) paragraph 2 of this Release. 2. Davel agrees that, from and after the date hereof, if asked about the undersigned's separation from Davel, except as otherwise required by applicable law, Davel will not make any public statement regarding such separation other than that the undersigned has left Davel to pursue other interests. From and after the date hereof, Davel will not intentionally make any defamatory or disparaging statements about the undersigned or the undersigned's performance for Davel. For purposes of this paragraph 2 only, Davel shall mean only any persons then holding the position of executive officer or director of Davel. 3. I agree that, from and after the date hereof, if asked about my separation from Davel, except as otherwise required by applicable law, I will not make any public statement regarding such separation other than that I have left Davel to pursue other interests. From and after the date hereof, I will not intentionally make any defamatory or disparaging statements about Davel, its subsidiaries or their products, services, trustees, directors, officers, shareholders, employees, agents, customers or business relationships. 4. I further state that I have read this Release and the Agreement referred to herein, that I know the contents of both and that I have executed the same as my own free act. WITNESS my hand this ___ day of ___________________________, ____. _________________________ Ray Gross AGREED AND ACKNOWLEDGED THIS ______ DAY OF ___________ , ______ DAVEL COMMUNICATIONS, INC. By: _________________________ 9 EX-21.1 4 EXHIBIT 21.1 SUBSIDIARIES JURISDICTION OF ENTITY INCORPORATION OWNER - ------ ------------- ----- Adtec Communications, Inc. Florida Call Communications, Inc. Virginia Campus Telephone Texas Peoples Telephone Company, Inc. Central Payphone Services, Inc. Georgia Communications Central Inc. Communications Central Inc. Georgia Davel Communications Group, Inc. Communications Central of Georgia, Inc. Georgia Communications Central Inc. ComTel Computer Corporation Nevada Davel Communications Group, Inc. Illinois Davel Financing Co., L.L.C. Davel Financing Co., L.L.C. Delaware Davel Communications Group, Inc. Davel Mexico, Ltd. Illinois Davel Communications Group, Inc. DavelTel, Inc. Illinois Davel Communications Group, Inc. Interstate Communications, Inc. Georgia Telaleasing Enterprises, Inc. InVision Telecom, Inc. Georgia Communications Central Inc. Jax Pay Phones, Inc. Florida Peoples Acquisition Corp. Pennsylvania Peoples Telephone Company, Inc. Peoples Collectors, Inc. Delaware Peoples Telephone Company, Inc. Peoples Telephone Company, Inc. New York Davel Financing Co., L.L.C. Peoples Telephone Company, Inc. of New New Hampshire Peoples Telephone Company, Inc. Hampshire Peoples Telephone Company, Inc. of South South Carolina Peoples Telephone Company, Inc. Carolina PT Merger Corp. Ohio PTC Cellular, Inc. Florida Peoples Telephone Company, Inc. PTC Global Link, Inc. Florida Peoples Telephone Company, Inc. PTC Security Systems, Inc. Florida Peoples Telephone Company, Inc. Silverado Communications, Inc. Colorado Peoples Telephone Company, Inc. Southwest Inmate Pay Telephone Systems, Texas Peoples Telephone Company, Inc. Inc. T.R.C.A., Inc. Illinois Davel Communications Group, Inc. Telaleasing Enterprises, Inc. Illinois Davel Communications Group, Inc. Telink, Inc. Texas Peoples Telephone Company, Inc. Telink Telephone Systems, Inc. Georgia Peoples Telephone Company, Inc. Davel de Mexico, S.de R.L.de C.V. Mexico Telefonos Publicos de Mexico, S.de R.L. Mexico de C.V.
EX-23.1 5 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in Davel Communications, Inc.'s 1999 Form 10-K, into the Company's previously filed Registration Statement on Form S-8 No. 333-6717. ARTHUR ANDERSEN LLP Tampa, Florida March 30, 2000 EX-27.1 6
5 YEAR DEC-31-1999 DEC-31-1999 7,950 0 22,983 10,880 0 31,981 115,558 22,753 180,761 49,019 0 0 0 109 (75,079) 180,761 180,725 180,725 237,314 237,314 0 1,229 23,183 (80,001) (1,755) (78,246) 0 0 0 (78,246) (7.34) (7.34)
-----END PRIVACY-ENHANCED MESSAGE-----