<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
DAVEL HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4899 59-3538257
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
ROBERT D. HILL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
DAVEL HOLDINGS, INC.
1429 MASSARO BOULEVARD
TAMPA, FL 33619
(813) 623-3545
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
REGISTRANT'S PRINCIPAL OFFICES)
--------------
COPIES TO:
THEODORE C. BRUCE W. RENARD R. SCOTT FALK IRA N. ROSNER, JOHN J.
RAMMELKAMP, JR. PEOPLES TELEPHONE KIRKLAND & P.A. MADDEN
DAVEL COMPANY, INC. ELLIS STEEL HECTOR & SHEARMAN &
COMMUNICATIONS 2300 N.W. 89TH 200 E. RANDOLPH DAVIS LLP STERLING
GROUP, INC. PLACE DRIVE 200 SOUTH 599
1429 MASSARO MIAMI, FL 33172 CHICAGO, IL BISCAYNE LEXINGTON
BOULEVARD 60601 BOULEVARD AVENUE
TAMPA, FL 33619 MIAMI, FL 33131NEW YORK, NY
10022
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement, but not
earlier than the date of the meetings of the shareholders of Davel
Communications Group, Inc., an Illinois corporation ("Old Davel"), and Peoples
Telephone Company, Inc., a New York corporation ("Peoples"), referred to
herein.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
--------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE(3)
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share ("New
Davel Common Stock")
and associated
preferred stock
purchase rights of
Davel Holdings, Inc.
("New Davel")........ 11,193,972 shares N.A. $181,942,318 $50,580
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</TABLE>
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(1) Based upon the maximum number of shares of New Davel Common Stock issuable
to holders of the common stocks of Old Davel and Peoples in connection with
the proposed mergers of Old Davel and New Davel and of Peoples and New
Davel.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(f)(1) and Rule 0-11, based on the sum of (A) the
product of (i) $3.6875 (the average of the high and low prices of Peoples
common stock on November 19, 1998 on the American Stock Exchange) times
(ii) 19,987,886 (the number of shares of Peoples common stock outstanding
on November 17, 1998 or issuable upon exercise of currently outstanding
options) and (B) the product of (i) $16.66 (the average of the high and low
prices of Old Davel common stock on November 18, 1998 on the Nasdaq
National Market) times (ii) 6,496,818 (the number of shares of Old Davel
common stock outstanding on November 17, 1998 or issuable upon exercise of
currently outstanding options).
(3) A registration fee of $23,907 was previously paid in connection with the
filing by Old Davel (CIK #0000911016) and Peoples of a Schedule 14A (File
No. 0-22610) on August 14, 1998. Accordingly, pursuant to Rule 457(b), an
additional fee of $26,673 is being paid in connection with the filing of
this Registration Statement.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
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<PAGE>
DAVEL COMMUNICATIONS GROUP, INC.
NOTICE OF 1998 ANNUAL MEETING OF SHAREHOLDERS
DATE: DECEMBER 22, 1998
TIME: 9:00 A.M., LOCAL TIME
PLACE: ONE NORTH FRANKLIN STREET
THIRD FLOOR
CHICAGO, ILLINOIS 60606
To Our Shareholders:
We invite you to attend our 1998 Annual Meeting of Shareholders to consider
and vote on the following:
PROPOSAL 1: To approve and adopt a merger agreement under which each of
Davel and Peoples Telephone Company, Inc. will become an indirect, wholly
owned subsidiary of a newly formed holding company (which we refer to as
"New Davel"), with each share of Davel Common Stock being converted into
the right to receive one share of New Davel Common Stock and each share of
Peoples Common Stock being converted into the right to receive 0.235 of a
share of New Davel Common Stock;
PROPOSAL 2: To elect seven members of the Board of Directors of Davel;
and
To transact any other proper business.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO APPROVE
EACH OF THESE PROPOSALS.
If you were a shareholder of record at the close of business on November 11,
1998, you may vote at the Annual Meeting. Approval of PROPOSAL 1 requires the
affirmative vote of at least two-thirds of the outstanding shares of Davel
Common Stock. Under PROPOSAL 2, the seven nominees receiving the highest
number of votes in their favor will be elected directors of Davel. We urge you
to read carefully the accompanying Joint Proxy Statement/Prospectus, which
contains detailed information concerning each of the proposals. A copy of the
merger agreement related to the transaction is attached as Appendix III to the
accompanying Joint Proxy Statement/Prospectus.
You have the right under Illinois law to dissent from the merger transaction
and to have the "fair value" of your shares paid to you in cash. For more
information regarding these dissenters' rights and the procedures to be
followed in exercising such rights, please read carefully the accompanying
Joint Proxy Statement/Prospectus.
Whether or not you plan to attend the Annual Meeting in person, and
regardless of the number of shares you own, please complete, sign, date and
return the enclosed proxy card promptly in the enclosed envelope. This will
ensure that your shares are voted as you wish and that a quorum will be
present.
By order of the Board of Directors,
/s/ Theodore C. Rammelkamp, Jr.
Theodore C. Rammelkamp, Jr.
Secretary
November 20, 1998
Tampa, Florida
YOUR VOTE IS IMPORTANT!
TO VOTE YOUR SHARES, PLEASE COMPLETE, SIGN, DATE
AND MAIL THE ENCLOSED PROXY CARD.
PLEASE DO NOT SEND IN ANY STOCK
CERTIFICATES AT THIS TIME.
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
DATE:DECEMBER 22, 1998
TIME:10:00 A.M., LOCAL TIME
PLACE:PEOPLES TELEPHONE COMPANY,
INC.
2300 N.W. 89TH PLACE
MIAMI, FL 33172
To Our Shareholders:
We invite you to attend a Special Meeting of Shareholders of Peoples
Telephone Company, Inc. to consider and vote on a proposal to approve a merger
agreement with Davel Communications Group, Inc. and a newly formed subsidiary
of Davel, which we refer to as "New Davel." Under that agreement, each share
of Peoples Common Stock will be converted into the right to receive 0.235 of a
share of New Davel Common Stock, each share of Davel Common Stock will be
converted into the right to receive one share of New Davel Common Stock and
each of Peoples and Davel will become an indirect, wholly owned subsidiary of
New Davel. THE BOARD OF DIRECTORS OF PEOPLES HAS UNANIMOUSLY APPROVED THE
MERGER AGREEMENT AND RECOMMENDS THAT YOU VOTE FOR THE APPROVAL OF THE MERGER
AGREEMENT.
If you were a shareholder of record at the close of business on November 11,
1998, you may vote at the Special Meeting. For further information regarding
the transaction, we urge that you read carefully the accompanying Joint Proxy
Statement/Prospectus. A copy of the merger agreement is attached as Appendix
III to the accompanying Joint Proxy Statement/Prospectus.
The transaction between Peoples and Davel cannot be completed without:
. the approval of the holders of at least two-thirds of the voting power of
the outstanding shares of Peoples Common Stock and Series C Cumulative
Preferred Stock, voting together as a single class, and
. the approval of the holders of a majority of the outstanding shares of
the Series C Cumulative Convertible Preferred Stock, voting as a separate
class.
UBS Capital II LLC, the holder of all the shares of the Series C Cumulative
Convertible Preferred Stock, has agreed to vote such shares FOR approval of
the merger agreement.
Please take the time to vote by completing and signing the enclosed proxy
card and mailing it to us in the enclosed postage-prepaid envelope. If you
attend the Special Meeting, you may vote your shares in person even if you
have previously submitted a proxy card. If your shares are held in "street
name," you must instruct your broker in order to vote. YOUR VOTE IS VERY
IMPORTANT. If you fail to vote or to instruct your broker to vote your shares,
the effect will be the same as a vote against the merger agreement.
By order of the Board of Directors,
/s/ Bruce W. Renard
Bruce W. Renard
Secretary
November 20, 1998
Miami, Florida
YOUR VOTE IS IMPORTANT!
TO VOTE YOUR SHARES, PLEASE COMPLETE, SIGN, DATE
AND MAIL THE ENCLOSED PROXY CARD.
PLEASE DO NOT SEND IN ANY STOCK
CERTIFICATES AT THIS TIME.
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS
PROPOSED MERGERS--YOUR VOTE IS VERY IMPORTANT
The Board of Directors of Davel Communications Group, Inc. (which we refer
to as "Old Davel") has approved a merger agreement that would have the effect
of causing Old Davel and Peoples Telephone Company, Inc. to become indirect,
wholly owned subsidiaries of a new company which we refer to as "New Davel."
The Board of Directors of Peoples has likewise approved the merger agreement.
BE SURE TO READ THE "RISK FACTORS" BEGINNING ON PAGE 12.
Here is what you should expect to receive if the transaction is completed:
OLD DAVEL SHAREHOLDERS:
. One share of New Davel Common Stock for each share of Old Davel Common Stock
that you own.
PEOPLES SHAREHOLDERS:
. 0.235 of a share of New Davel Common Stock for each share of Peoples Common
Stock that you own.
We expect the New Davel Common Stock to trade on the Nasdaq National Market
under the symbol "DAVL." Assuming that this transaction is completed, here is
what the stock ownership percentages of New Davel would be:
<TABLE>
<CAPTION>
OLD DAVEL PEOPLES
SHAREHOLDERS SHAREHOLDERS
------------ ------------
<S> <C> <C>
Following completion of the transaction............... 55.7% 44.3%
</TABLE>
We based these percentages on the number of shares of each company
outstanding on November 17, 1998.
WE ARE ASKING OLD DAVEL SHAREHOLDERS TO APPROVE:
. The merger agreement, approval of which is necessary to permit the
transaction to occur.
. The election of seven nominees to the Old Davel Board of Directors.
WE ARE ASKING PEOPLES SHAREHOLDERS TO APPROVE:
. The merger agreement, approval of which is necessary to permit the
transaction to occur.
YOUR VOTE IS IMPORTANT. Please vote on these proposals by completing and
mailing the enclosed proxy card, even if you plan to attend a shareholders
meeting. Also, you should read this document carefully before you vote. It
provides detailed information about the proposed mergers and the other matters
needing your approval. You may obtain more information about Old Davel and
Peoples from documents that we have filed with the Securities and Exchange
Commission.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATORS HAVE APPROVED THE NEW DAVEL COMMON STOCK TO BE ISSUED IN CONNECTION
WITH THIS DOCUMENT OR DETERMINED IF THIS DOCUMENT IS ACCURATE OR ADEQUATE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
November 20, 1998
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE TRANSACTION
Q: WHAT ARE THE BENEFITS OF THE TRANSACTION?
A: We believe that this transaction will allow New Davel to realize important
benefits. Combining Old Davel and Peoples should enable us to achieve
significant operating synergies and cost savings, including route
efficiencies and reductions in overhead and carrier costs. In addition, we
expect New Davel to be able to take advantage of enhanced marketing
opportunities and capabilities due to its broader geographic presence and
ability to better serve national accounts. As a result, we believe that
this transaction should increase shareholder value for you.
Q: WHAT DO I NEED TO DO NOW?
A: After you read and consider carefully the information contained in this
document, please fill out and sign your proxy card. Then mail your signed
proxy card in the enclosed return envelope as soon as possible so that your
shares may be represented at the Davel annual meeting or the Peoples
special meeting, as applicable.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on how
to vote. You should follow the directions provided by your broker regarding
how to instruct your broker to vote your shares.
Q: CAN I CHANGE MY VOTE OR REVOKE MY PROXY AFTER I HAVE MAILED MY SIGNED PROXY
CARD?
A: You can change your vote at any time before your proxy is voted at the
Davel annual meeting or the Peoples special meeting. You can do this in one
of three ways. First, you can send a written notice stating that you would
like to revoke your proxy. Second, you can complete and submit a new proxy
card. If you choose either of these methods, you must timely submit your
notice of revocation or your new proxy card to the appropriate company at
the address shown below. Third, you can attend the Davel annual meeting or
the Peoples or PhoneTel special meeting and vote in person. Simply
attending a meeting, however, will not revoke your proxy. If you have
instructed a broker to vote your shares, you must follow directions
received from your broker to change your vote.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After we have completed the transaction, we will send you written
instructions informing you how to exchange your stock certificates.
Q: WHEN DO YOU EXPECT THE TRANSACTION TO BE COMPLETED?
A: We are working towards completing the transaction as soon as possible. For
the transaction to occur, it must be approved by the shareholders of both
companies. If the shareholders of Peoples and Old Davel approve the
transaction, we expect to complete the transaction on or about December 22,
1998.
Q: WHAT ARE THE TAX CONSIDERATIONS OF THE TRANSACTION?
A: The transaction generally will be tax-free to you for federal income tax
purposes (other than with respect to cash you may receive instead of
fractional shares). To review the tax considerations of the transaction in
greater detail, see pages 43 to 45.
WHO CAN HELP ANSWER MY OTHER QUESTIONS
IF YOU HAVE MORE QUESTIONS ABOUT THE TRANSACTION, YOU SHOULD CONTACT THE
SOLICITATION AGENT:
MACKENZIE PARTNERS, INC.
156 FIFTH AVENUE
NEW YORK, NEW YORK 10010
TELEPHONE NO.: (800) 322-2885
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE TRANSACTION
WHO CAN HELP ANSWER MY OTHER QUESTIONS
SUMMARY................................................................... 1
SELECTED HISTORICAL AND PRO FORMA DATA.................................... 5
Davel Communications Selected Historical Financial Data................. 5
Peoples Selected Historical Financial Data.............................. 6
Selected Unaudited Pro Forma Financial Data............................. 8
Comparative Per Share Data.............................................. 9
Comparative Market Prices and Dividends................................. 10
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE........................... 11
RISK FACTORS.............................................................. 12
RISK FACTORS RELATING TO THE TRANSACTION.................................. 12
RISK FACTORS ASSOCIATED WITH THE PAYPHONE BUSINESS........................ 17
MEETINGS, VOTING AND PROXIES.............................................. 21
Davel Annual Meeting of Shareholders.................................... 21
Peoples Special Meeting of Shareholders................................. 22
THE TRANSACTION........................................................... 24
Background.............................................................. 24
Recommendation of the Old Davel Board of Directors; Reasons of Old Davel
for the Transaction.................................................... 29
Recommendation of the Peoples Board of Directors; Reasons of Peoples for
the Transaction........................................................ 31
Fairness Opinion of Old Davel Financial Advisor......................... 33
Fairness Opinion of Peoples Financial Advisor........................... 38
Interests of Certain Persons............................................ 42
Federal Income Tax Considerations....................................... 43
Accounting Treatment.................................................... 45
Dissenters' Rights...................................................... 45
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Stock Exchange Listing of New Davel Common Stock......................... 45
Federal Securities Law Consequences...................................... 45
THE MERGER AGREEMENT....................................................... 46
Conversion of Shares..................................................... 46
Fractional Shares........................................................ 47
Exchange of Stock Certificates........................................... 47
Representations and Warranties........................................... 48
Certain Covenants........................................................ 49
No Solicitation of Acquisition Proposals................................. 51
Indemnification.......................................................... 51
Conditions to Obligations to Effect the Transaction...................... 51
Benefit Plans............................................................ 52
Termination.............................................................. 53
Termination Fees......................................................... 53
Amendment and Waiver..................................................... 53
Termination Option Agreement............................................. 54
Voting Agreements........................................................ 54
REGULATORY MATTERS......................................................... 56
Federal Regulation of Local Coin and Dial-Around Calls................... 56
Effect of Federal Regulation of Local Coin and Dial-Around Calls......... 58
Other Provisions of the Telecommunications Act and FCC Rules............. 59
Billed Party Preference and Rate Disclosure.............................. 60
Universal Services Fund.................................................. 60
Presubscribed IXC Charge................................................. 61
State and Local Regulation............................................... 61
Regulatory Approvals..................................................... 62
OPERATION, MANAGEMENT AND BUSINESS OF NEW DAVEL AFTER THE TRANSACTION...... 63
Business of New Davel.................................................... 63
The Financing............................................................ 64
Management of New Davel.................................................. 64
New Davel Principal Shareholders......................................... 64
Listing of New Davel Common Stock........................................ 64
Transfer Agent........................................................... 65
Dividends................................................................ 65
NEW DAVEL UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS...... 66
DESCRIPTION OF NEW DAVEL CAPITAL STOCK..................................... 80
</TABLE>
i
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS TABLE OF CONTENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General................................................................. 80
New Davel Common Stock.................................................. 80
New Davel Preferred Stock............................................... 80
Rights Plan............................................................. 80
Transfer Agent.......................................................... 81
BUSINESS OF OLD DAVEL..................................................... 82
General Overview........................................................ 82
Industry Overview....................................................... 82
Business Strategy....................................................... 83
Acquisitions............................................................ 84
Operations.............................................................. 85
Customers, Sales and Marketing.......................................... 86
Service and Equipment Suppliers......................................... 87
Assembly and Repair of Payphones........................................ 87
Technology.............................................................. 88
Competition............................................................. 88
Employees............................................................... 89
Properties.............................................................. 89
Legal Proceedings....................................................... 89
OLD DAVEL MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 90
MANAGEMENT OF OLD DAVEL................................................... 101
OLD DAVEL EXECUTIVE OFFICER COMPENSATION AND BENEFITS..................... 102
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION................... 106
PERFORMANCE GRAPH......................................................... 108
CERTAIN TRANSACTIONS INVOLVING OLD DAVEL.................................. 109
PRINCIPAL SHAREHOLDERS OF OLD DAVEL....................................... 109
DESCRIPTION OF CAPITAL STOCK OF OLD DAVEL................................. 110
Old Davel Common Stock.................................................. 110
Old Davel Preferred Stock............................................... 111
Rights Plan............................................................. 111
Transfer Agent.......................................................... 112
BUSINESS OF PEOPLES....................................................... 113
General and Recent Developments......................................... 113
Payphone Industry Overview.............................................. 113
Payphones............................................................... 114
Long-Distance Operator Services Aggregator.............................. 118
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prepaid Calling Card/International Telephone Centers/Cellular/Inmate
Telecommunications Operations.......................................... 118
Peoples Employees....................................................... 118
Legal Proceedings....................................................... 118
PEOPLES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................... 119
PEOPLES PRINCIPAL SHAREHOLDERS............................................ 131
DESCRIPTION OF CAPITAL STOCK OF PEOPLES................................... 133
Peoples Common Stock.................................................... 133
Series B Preferred Stock................................................ 133
Peoples Series C Preferred Stock........................................ 134
Transfer Agent.......................................................... 135
COMPARISON OF SHAREHOLDERS' RIGHTS........................................ 136
Amendment of Charter Documents.......................................... 136
Amendment and Repeal of Bylaws and Regulations.......................... 136
Size of the Board of Directors.......................................... 137
Removal of Directors.................................................... 137
Vacancies on the Board.................................................. 138
Right to Call Special Meetings of Shareholders.......................... 138
Shareholder Action Without a Meeting.................................... 139
Class Voting............................................................ 139
Cumulative Voting....................................................... 140
Provisions Affecting Control Share Acquisitions and Business
Combinations........................................................... 140
Mergers, Acquisitions and Certain Other Transactions.................... 141
Rights of Dissenting Shareholders....................................... 142
Dividends............................................................... 142
Preemptive Rights of Shareholders....................................... 143
Duties of Directors..................................................... 143
Limitation on Directors' Liability...................................... 144
Indemnification of Officers and Directors............................... 144
DISSENTERS' RIGHTS........................................................ 146
Dissenters' Rights of Old Davel Shareholders............................ 146
No Dissenters' Rights for Peoples Shareholders.......................... 148
</TABLE>
ii
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS TABLE OF CONTENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ELECTION OF DIRECTORS.................................................... 149
Executive Officers..................................................... 150
Committees and Meetings of the Old Davel Board of Directors............ 150
Compensation of Directors.............................................. 150
SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING............................ 151
Old Davel.............................................................. 151
Peoples................................................................ 151
LEGAL MATTERS............................................................ 152
EXPERTS.................................................................. 152
WHERE YOU CAN FIND INFORMATION........................................... 153
GLOSSARY................................................................. 154
INDEX TO FINANCIAL STATEMENTS............................................ F-1
APPENDIX I
Fairness Opinion of ABN AMRO with respect to the Transaction............ I-1
APPENDIX II
Fairness Opinion of Goldman Sachs with respect to the Transaction....... II-1
APPENDIX III
Merger Agreement........................................................ III-1
APPENDIX IV
New Davel's Certificate of Incorporation................................ IV-1
APPENDIX V
New Davel's Bylaws...................................................... V-1
APPENDIX VI
Statutory Provisions under the Illinois Law with Respect to Dissenters'
Rights................................................................. VI-1
</TABLE>
iii
<PAGE>
SUMMARY
This summary highlights selected information from this Joint Proxy
Statement/Prospectus and may not contain all of the information that is
important to you. To understand the transaction and the shareholder proposals
fully, you should read carefully this entire Joint Proxy Statement/Prospectus
and the documents to which we have referred you. See "Where You Can Find
Information" on page 153. You will find definitions for many of the capitalized
terms used in this Joint Proxy Statement/Prospectus in the Glossary beginning
on page 154.
GENERAL
Davel and Peoples are parties to a merger agreement that would result in
their businesses being combined. The merger agreement must be approved by
shareholders of each of Davel and Peoples in order for the combination to be
completed. If the merger agreement is approved and the other conditions to
completion of the transaction are satisfied, then the businesses will be
combined. This Joint Proxy Statement/Prospectus is being sent to shareholders
of both companies. It contains information about what you would receive in the
proposed transaction and other information that you should consider in
determining how you wish to vote at the shareholder meetings that Davel and
Peoples will hold to consider and vote upon the transaction.
THE COMPANIES
Davel Communications Group, Inc.
1429 Massaro Boulevard
Tampa, Florida 33619
Davel Communications Group (which we refer to as "Old Davel") is one of the
leading independent payphone service providers in the United States. Old Davel
owns and operates a network of approximately 40,000 payphones in 36 states and
the District of Columbia.
Peoples Telephone Company, Inc.
2300 Northwest 89th Place
Miami, Florida 33172
Peoples Telephone Company is one of the largest independent operators of
public payphones in the United States with an installed base of approximately
43,000 payphones in service in 39 states and the District of Columbia.
Davel Holdings, Inc.
1429 Massaro Boulevard
Tampa, Florida 33619
Old Davel recently formed Davel Holdings (which we refer to as "New Davel")
in connection with the transaction described in this Joint Proxy
Statement/Prospectus.
Following completion of the transaction, the business of New Davel will
consist of the businesses of Old Davel and Peoples. New Davel will be the
largest independent payphone provider in the United States, with an installed
base of approximately 83,000 payphones. The management of New Davel will
consist of the management of Old Davel. Upon completion of the transaction, the
board of directors of New Davel will consist of those directors elected
pursuant to Proposal No. 2 as well as Mr. Justin S. Maccarone, currently a
director of Peoples, who will be appointed to the board of New Davel as of the
completion of the transaction. FOLLOWING COMPLETION OF THE TRANSACTION, NEW
DAVEL WILL CHANGE ITS NAME TO "DAVEL COMMUNICATIONS, INC."
REASONS FOR THE TRANSACTION (PAGES 29 TO 33)
Completion of the transaction should enable New Davel--which will be the
largest independent payphone provider in the United States--to compete more
effectively in the U.S. payphone industry, where significant consolidation has
been occurring. We believe that New Davel should be able to achieve various
synergies, cost savings and other benefits, such as the following:
. enhanced marketing opportunities due to New Davel's broader geographic
presence and ability to better serve national accounts;
1
<PAGE>
. reductions in overhead costs from the elimination of duplicative
administrative and operational facilities;
. greater bargaining power to negotiate lower line and transmission costs;
and
. increased route efficiencies due to higher concentrations of payphones in
certain areas.
THE SHAREHOLDER MEETINGS
Old Davel (pages 21 to 22)
The Davel annual meeting of shareholders is scheduled to be held on Tuesday,
December 22, 1998, at 9:00 a.m., local time, at One North Franklin Street,
Third Floor, Chicago, Illinois. Shareholders of Old Davel will be asked to
consider and vote upon the following proposals at the Davel annual meeting:
. the merger involving Old Davel and New Davel and the related merger
agreement; and
. the election of directors.
Peoples (pages 22 to 23)
At the Peoples special meeting of shareholders, which is scheduled to be held
at the principal executive offices of Peoples at 2300 Northwest 89th Place,
Miami, Florida on Tuesday, December 22, 1998, at 10:00 a.m., local time,
Peoples' shareholders will be asked to consider and vote upon a proposal to
approve the merger involving Peoples and Old Davel and the related merger
agreement.
TERMS OF THE TRANSACTION (PAGES 24 TO 46)
The Boards of Directors of Old Davel and Peoples have approved a merger
agreement under which each of Old Davel and Peoples will merge with separate,
newly formed indirect subsidiaries of New Davel. As a result of these mergers,
Old Davel and Peoples will each become indirect, wholly owned subsidiaries of
New Davel. We refer to these mergers and the other transactions contemplated by
the merger agreement as the "transaction."
What Old Davel Shareholders Will Receive (pages 46 to 47)
If you are a shareholder of Old Davel, you will receive one share of New
Davel common stock for each share of Old Davel common stock that you own at the
time of completion of the transaction.
What Peoples Shareholders Will Receive (pages 46 to 47)
If you are a Peoples shareholder, you will receive 0.235 of a share of New
Davel common stock for each share of Peoples common stock that you own at the
time of completion of the transaction.
The following table sets forth the stock ownership percentages for
shareholders who are affiliates and for shareholders who are not affiliates of
each of Old Davel and Peoples both before and immediately after completion of
the transaction:
<TABLE>
<CAPTION>
OWNERSHIP
OF OLD OWNERSHIP OF OWNERSHIP OF
DAVEL PRIOR PEOPLES PRIOR COMBINED COMPANY
TO THE TO THE AFTER THE
TRANSACTION TRANSACTION(1) TRANSACTION(1)(2)
----------- -------------- -----------------
<S> <C> <C> <C>
Old Davel
Affiliates......................... 62.3% -- 34.7%
Other Shareholders................. 37.7% -- 21.0%
Peoples
Affiliates......................... -- 17.3% 9.1%
Other Shareholders................. -- 82.7% 35.2%
</TABLE>
- --------
(1) Assumes the conversion of all shares of Peoples Series C Preferred Stock
into shares of Peoples common stock prior to the completion of the
transaction and the conversion of these shares into New Davel common stock
upon completion of the transaction. Also assumes the exercise of all
currently exercisable options or warrants to acquire Old Davel common stock
or Peoples common stock, the exercise prices of which are less than or
equal to the closing sales price of Old Davel common stock or Peoples
common stock, as the case may be, as of November 17, 1998.
(2) Assumes the receipt by the holder of the Peoples Series C Cumulative
Convertible Preferred Stock of shares of New Davel common stock in
consideration of accrued but unpaid dividends through the date of
completion of the transaction and the estimated future fair value of such
preferred stock had it not been converted.
2
<PAGE>
BOARD RECOMMENDATIONS TO SHAREHOLDERS
Old Davel (pages 29 to 31)
The Old Davel Board of Directors has reviewed carefully the transaction. It
has received an opinion from ABN AMRO Incorporated as to the fairness, from a
financial point of view, of the merger consideration to be paid to Peoples'
shareholders. THE OLD DAVEL BOARD OF DIRECTORS HAS DETERMINED THAT THE
TRANSACTION IS IN THE BEST INTERESTS OF OLD DAVEL AND ITS SHAREHOLDERS. THE OLD
DAVEL BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE TRANSACTION AND
RECOMMENDS THAT OLD DAVEL'S SHAREHOLDERS APPROVE THE TRANSACTION.
Peoples (pages 31 to 33)
The Peoples Board of Directors has reviewed carefully the transaction. It has
received an opinion from Goldman, Sachs & Co. as to the fairness, from a
financial point of view, of the merger consideration in the transaction to the
holders of Peoples common stock. THE PEOPLES BOARD OF DIRECTORS HAS DETERMINED
THAT THE TRANSACTION IS IN THE BEST INTERESTS OF PEOPLES AND ITS SHAREHOLDERS.
IT HAS UNANIMOUSLY APPROVED THE TRANSACTION AND RECOMMENDS THAT PEOPLES'
SHAREHOLDERS APPROVE THE TRANSACTION.)
Copies of the fairness opinions of ABN AMRO and Goldman Sachs are attached to
this Joint Proxy Statement/Prospectus as Appendices I and II, respectively. WE
URGE YOU TO READ THESE OPINIONS CAREFULLY.
Required Votes
To complete the transaction, the following shareholder approvals are
required:
Old Davel Shareholders (page 21)
. the approval of the merger agreement by the holders of at least two-
thirds of the outstanding shares of Old Davel common stock.
Peoples Shareholders (pages 22 to 23)
. the approval of the merger agreement by the holders of at least two-
thirds of the outstanding shares of Peoples common stock and Peoples
Series C Preferred Stock, voting together as a single class, and by the
holders of a majority of the Peoples Series C Preferred Stock voting as a
separate class.
Voting agreements have been entered into with holders of 3,467,433 shares of
Old Davel's outstanding common stock (representing about 60% of all outstanding
shares) who have agreed to vote in favor of the proposed transaction. A voting
agreement has been entered into with the holder of all of the shares of Peoples
outstanding Series C Preferred Stock (representing about 15% of all Peoples
common stock on a combined, as converted basis) who has agreed to vote in favor
of the proposed transaction.
Dissenters' Rights
Old Davel (pages 146 to 148)
All Old Davel shareholders have the opportunity under Illinois law to
exercise dissenters' rights for the merger and have the "fair value" of their
shares paid to them in cash.
The full text of the relevant sections of the Illinois law governing
dissenters' rights are attached as Appendix VI to this document.
Peoples (page 148)
Dissenters' rights are not available to Peoples' shareholders.
EXCHANGE OF STOCK CERTIFICATES (PAGES 47 TO 48)
YOU SHOULD NOT SEND YOUR STOCK CERTIFICATES WITH THE PROXY CARD ENCLOSED WITH
THIS DOCUMENT. YOU WILL RECEIVE FURTHER INSTRUCTIONS AFTER THE TRANSACTION IS
COMPLETED.
After completion of the transaction, you will be asked to submit your stock
certificates representing your shares and will receive in exchange new stock
certificates representing shares in New Davel.
CONDITIONS TO THE TRANSACTION (PAGES 51 TO 52)
We are working towards completing the proposed transaction as soon as
possible. We currently expect to complete the transaction on or about December
23, 1998. However, there are several conditions to the transaction that must be
satisfied (or waived) before the transaction can be completed. In the event
that any of these conditions is not satisfied, the transaction may not occur.
In particular, we will not waive the condition that the transaction receive,
and will not complete the transaction without having obtained, the necessary
approvals of the shareholders of Old Davel and Peoples.
3
<PAGE>
Completion of the transaction is also conditioned upon satisfaction or waiver
of the other conditions to closing. These conditions include, among others, the
following:
. the Securities and Exchange Commission having declared the registration
statement effective for the shares to be issued as merger consideration
and Nasdaq approving the listing of the shares on the Nasdaq National
Market;
. Old Davel and Peoples receiving satisfactory letters regarding pooling-
of-interests accounting treatment for the transaction;
. New Davel obtaining the financing necessary to complete the transaction;
. Peoples having successfully completed a tender offer for its 12 1/4%
Senior Notes due 2002; and
. Old Davel and Peoples receiving satisfactory opinions of counsel about
the tax-free nature of the transaction.
If either Old Davel or Peoples waives a material condition to the
transaction, it will then consider resoliciting your approval of the
transaction. Whether the boards of directors of Old Davel and Peoples decide to
resolicit proxies from you will depend upon whether a shareholder could
reasonably be expected to want to know, before signing a proxy, that the
condition has been waived.
On August 27, 1998, early termination of the specified pre-merger waiting
period under applicable antitrust law was obtained. In addition, Old Davel and
Peoples are making certain filings and notifications in certain states and
municipalities where New Davel will operate.
CONFLICTS OF INTEREST OF BOARDS AND MANAGEMENT (PAGES 42 TO 43)
Certain members of Peoples Board of Directors and Peoples management have
interests in the transaction in addition to their interests as Peoples
shareholders. In particular, certain Peoples executives will receive a total of
about $2.6 million under change of control provisions in their employment
agreements, a number of employees wlll receive management bonuses or retention
payments and previously unvested options held by certain Peoples executives
will vest, as a result of the transaction.
FEDERAL INCOME TAX CONSIDERATIONS (PAGES 43 TO 45)
Subject to the limitations and qualifications discussed under the heading
"The Transaction--Federal Income Tax Considerations," (i) Shearman & Sterling,
special counsel to Peoples, has rendered its tax opinion that the Peoples
merger will be treated as a tax-free reorganization for U.S. Federal income tax
purposes and (ii) Kirkland & Ellis, special counsel to Old Davel, has rendered
its tax opinion that the Davel merger will be treated as a tax-free
reorganization for U.S. federal income tax purposes. Accordingly, subject to
such qualifications, you will not recognize gain or loss as a result of the
exchange of your shares for shares in New Davel, except to the extent that you
receive cash instead of a fractional share, and your tax basis in the new
shares received in the merger will be the same as the total tax basis for the
shares that you exchanged.
WE URGE YOU TO CONSULT WITH A TAX ADVISOR FOR A FULL UNDERSTANDING OF THE TAX
CONSEQUENCES TO YOU OF THE PROPOSED TRANSACTION. CERTAIN SHAREHOLDERS MAY BE
SUBJECT TO SPECIAL TREATMENT UNDER FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS
THAT IS NOT EXPLAINED IN THIS JOINT PROXY STATEMENT/ PROSPECTUS.
ACCOUNTING TREATMENT (PAGE 45)
It is expected that, for accounting and financial reporting purposes, the
transaction will be accounted for as a pooling-of-interests transaction, which
means that the companies will be treated as though they had always been
combined.
COMPARISON OF SHAREHOLDERS' RIGHTS (PAGES 136 TO 145)
New Davel, Old Davel and Peoples are incorporated in different states having
differing corporation laws. In addition, the governing documents of each
company vary. As a result, the rights, protections and duties that you have as
a shareholder of the company in which you currently hold shares are different
from those that
you will have after you receive shares of New Davel.
LISTING OF COMMON STOCK RECEIVED
Shares of New Davel common stock will be listed on the Nasdaq National
Market.
4
<PAGE>
SUMMARY SELECTED FINANCIAL DATA
We are providing the following historical financial information to aid you in
your analysis of the financial aspects of the proposed transaction. We derived
this information from audited financial statements for 1993 through 1997 and
unaudited financial statements for the nine months ended September 30, 1997 and
1998.
The information is only a summary and you should read it in conjunction with
the historical financial statements and related notes on pages F-1 through F-81
of this Joint Proxy Statement/Prospectus and other information that has been
filed with the Securities and Exchange Commission. See "Where You Can Find
Information" on page 153.
DAVEL COMMUNICATIONS GROUP, INC.
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
YEAR ENDED DECEMBER 31 30
--------------------------------------- ----------------
1993 1994 1995 1996 1997 1997 1998(1)
------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Operating revenues...... $15,264 $22,598 $31,830 $36,973 $47,008 $34,457 $ 69,183
Expenses................ 11,792 17,754 25,684 31,721 40,309 29,747 67,219
Operating income........ 3,472 4,844 6,146 5,252 6,699 4,710 1,964
Income (loss) from
continuing operations.. 1,989 3,113 3,820 3,195 4,262 2,980 (2,724)
Net income (loss)....... 1,858 3,753 1,312 3,805 4,262 2,980 (2,724)
Basic earnings (loss)
per share:
Income (loss) from
continuing
operations........... $ .64 $ .70 $ .85 $ .70 $ .93 $ .65 $ (.54)
Net income (loss)..... .60 .84 .29 .84 .93 .65 (.54)
Diluted earnings (loss)
per share:
Income (loss) from
continuing
operations........... $ .64 $ .70 $ .85 $ .70 $ .90 $ .63 $ (.54)
Net income (loss)..... .60 .84 .29 .83 .90 .63 (.54)
Weighted Average Common
Shares (2)............. 3,117 4,455 4,455 4,513 4,601 4,592 5,032
BALANCE SHEET DATA (END
OF PERIOD):
Total assets............ $26,169 $33,035 $33,328 $43,862 $52,958 $51,125 $183,238
Long-term debt.......... 266 85 209 5,726 6,801 7,180 74,927
Stockholders' equity.... 22,918 26,678 27,990 32,935 37,970 36,597 63,955(3)
</TABLE>
- --------
(1) The nine months ended September 30, 1998, includes results of CCI from the
date of the acquisition of CCI, February 3, 1998.
(2) Diluted weighted average common shares for the years ended December 31,
1997 and 1996, and for the nine months ended September 30, 1997, were
4,727, 4,564 and 4,718, respectively.
(3) Stockholders' equity at September 30, 1998, includes the investment of
$28,000 in Old Davel by EGI.
5
<PAGE>
PEOPLES TELEPHONE COMPANY
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
-------------------------------------------------- ------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Operating revenues...... $ 81,717 $116,573 $112,362 $107,006 $112,235 $ 83,953 $ 86,265
Expenses................ 70,619 117,270 120,832 108,944 112,891 83,874 87,125
Operating income
(loss)................. 11,098 (697) (8,470) (1,938) (656) 79 (860)
Income (loss) from
continuing operations.. 3,929 (8,474) (19,174) (14,268) (13,762) (9,741) (10,563)
Net income (loss)....... 5,342 (18,393) (37,860) (15,992) (11,670) (11,759) (10,563)
Basic earnings (loss)
per share:
Income (loss) from
continuing
operations............ $ .31 $ (.54) $ (1.23) $ (.96) $ (.92) $ (.66) $ (.73)
Net income (loss)...... .42 (1.17) (2.38) (1.06) (.79) (.78) (.73)
Diluted earnings (loss)
per share:
Income (loss) from
continuing
operations............ $ .27 $ (.54) $ (1.23) $ (.96) $ (.92) $ (.66) $ (.73)
Net income (loss)...... .37 (1.17) (2.38) (1.06) (.79) (.78) (.73)
Weighted Average Common
Shares................. 12,700(1) 15,713 16,091 16,188 16,198 16,195 16,212
BALANCE SHEET DATA (END
OF PERIOD):
Total assets............ $173,342 $190,591 $160,071 $140,870 $131,317 $124,000 $116,435
Long-term debt.......... 75,262 98,301 102,577 101,230 100,275 100,376 101,488
Mandatorily redeemable
preferred stock........ -- -- 13,886 15,079 16,284 15,982 17,579
Stockholders' equity
(deficit).............. 65,333 48,715 14,288 (4,294) (17,680) (17,189) (30,394)
</TABLE>
- --------
(1) Diluted weighted average common shares for the year ended December 31, 1993
are 14,517.
6
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
We expect that the transaction will be accounted for as a pooling-of-
interests, which means that for accounting and financial reporting purposes we
will treat Old Davel and Peoples as if they had always been combined.
The following pages present selected unaudited pro forma financial
information of New Davel that reflects the pooling-of-interests method of
accounting and is intended to give you a better picture of what our businesses
might have looked like had they always been combined.
We prepared the pro forma income statement and balance sheet by adding or
combining the historical amounts of each company. We then adjusted the combined
amounts for differences in accounting methods used by the companies.
Additionally, for the year ended December 31, 1997, and the interim period
dated September 30, 1998, the pro forma financial information gives effect to
the anticipated refinancing of each of the companies' debt, the investment of
$28 million in Old Davel by EGI and the acquisition of CCI previously completed
by Old Davel.
We have calculated Weighted Average Common Shares using an exchange ratio of
0.235 of a share of New Davel common stock for each issued and outstanding
share of Peoples common stock.
The companies may have performed differently if they had actually been
combined during the periods presented. You should not rely on the pro forma
information as being indicative of either the historical results that we would
have had or the future results that we will experience after the transaction is
completed. It is also important that you read the "New Davel Unaudited Pro
Forma Condensed Combined Financial Statements" that we have included in this
Joint Proxy Statement/Prospectus beginning on page 66.
7
<PAGE>
SELECTED UNAUDITED PRO FORMA FINANCIAL DATA
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
NINE
MONTHS
YEAR ENDED DECEMBER 31 ENDED
---------------------------- SEPTEMBER 30,
1995 1996 1997(1) 1998(1)
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
OPERATING DATA:
Operating revenues........ $143,761 $143,422 $214,395 $158,237
Expenses.................. 146,085 140,108 210,437 157,413
Operating income (loss)... (2,324) 3,314 3,958 824
Loss from continuing
operations............... (15,354) (11,073) (11,906) (13,615)
Basic and diluted loss per
share:
Loss from continuing
operations............. $ (1.93) $ (1.47) $ (1.34) $ (1.40)
Weighted Average Common
Shares................... 8,236 8,317 10,269 9,703
BALANCE SHEET DATA (END OF
PERIOD):
Total assets.............. $306,585
Long-term debt............ 203,088
Stockholders' equity...... 34,552
</TABLE>
- --------
(1) Pro forma operating data includes results of CCI, which was acquired by Old
Davel on February 3, 1998, for the period January 1, 1997 to February 2,
1998, and the effects of the anticipated refinancing of certain debt and
preferred stock of Old Davel and Peoples and the investment of $28,000 in
Old Davel by EGI.
8
<PAGE>
COMPARATIVE PER SHARE DATA
We have summarized below the per share information for our respective
companies on a historical, pro forma combined and equivalent basis. The Peoples
per share equivalents are calculated by multiplying the New Davel amounts by
the exchange ratio of 0.235.
<TABLE>
<CAPTION>
NINE
YEAR ENDED MONTHS
DECEMBER 31 ENDED
------------------- SEPTEMBER 30,
1995 1996 1997 1998
----- ----- ----- -------------
<S> <C> <C> <C> <C>
OLD DAVEL:
Historical per common share--
Income (loss) from continuing operations
(1).................................... $0.85 $0.70 $0.93 $(0.54)
Dividends paid.......................... -- -- -- --
Book value (2).......................... 8.20 11.06
Pro forma combined per New Davel common
share--
Loss from continuing operations......... (1.93) (1.47) (1.34) (1.40)
Dividends paid.......................... -- -- -- --
Book value (2).......................... 1.97 3.30
PEOPLES:
Historical per common share--
Loss from continuing operations......... (1.23) (0.96) (0.92) (0.73)
Dividends paid.......................... -- -- -- --
Book value (2).......................... (1.09) (1.87)
Pro forma combined per equivalent Peoples
common share (3)--
Loss from continuing operations......... (0.45) (0.35) (0.31) (0.33)
Dividends paid.......................... -- -- -- --
Book value (2).......................... 0.46 0.78
</TABLE>
- --------
(1) Historical diluted earnings per share of Old Davel were $0.90 for the year
ended December 31, 1997.
(2) Calculated by dividing stockholders' equity by total shares outstanding at
period end.
(3) Calculated by multiplying New Davel pro forma combined amounts by the
exchange ratio of 0.235.
9
<PAGE>
COMPARATIVE MARKET PRICES AND DIVIDENDS
MARKET PRICES AND DIVIDENDS
Old Davel common stock is traded on the Nasdaq National Market under the
symbol "DAVL." Peoples common stock is traded on the American Stock Exchange
under the symbol "PHO." The following table sets forth the high and low closing
sales prices per share of such securities as reported on the Nasdaq National
Market and the American Stock Exchange, as applicable, based on published
financial sources, for the periods indicated. No cash dividends have been paid
on the Old Davel common stock or the Peoples common stock. The per share
information presented below and elsewhere in this Joint Proxy
Statement/Prospectus has been adjusted to reflect all stock splits of Old Davel
and Peoples.
<TABLE>
<CAPTION>
PEOPLES
OLD DAVEL COMMON
COMMON STOCK STOCK
------------- -----------
HIGH LOW HIGH LOW
------ ------ ----- -----
<S> <C> <C> <C> <C>
1996:
First Quarter....................................... $13.75 $12.50 $2.81 $1.69
Second Quarter...................................... 20.00 12.75 4.25 2.31
Third Quarter....................................... 20.75 15.00 4.13 2.38
Fourth Quarter...................................... 19.00 15.25 4.50 2.75
1997:
First Quarter....................................... 18.25 14.75 4.00 2.88
Second Quarter...................................... 18.00 12.00 3.75 3.00
Third Quarter....................................... 23.25 15.25 3.50 2.56
Fourth Quarter...................................... 29.00 21.25 4.50 3.00
1998:
First Quarter....................................... 28.50 24.38 3.75 2.50
Second Quarter...................................... 29.25 21.25 3.44 2.13
Third Quarter....................................... 25.25 10.88 5.25 2.25
Fourth Quarter (through November 17, 1998).......... 19.13 9.00 4.06 1.44
</TABLE>
Set forth below are the last reported sale prices of Old Davel common stock
and Peoples common stock on July 2, 1998, the last trading day prior to the
execution of the Merger Agreement, and on November 17, 1998, as well as the
equivalent pro forma sale prices of Peoples common stock on such dates, as
determined by multiplying the Old Davel common stock price by 0.235.
<TABLE>
<CAPTION>
OLD
DAVEL PEOPLES
COMMON COMMON PEOPLES
STOCK STOCK EQUIVALENT
------ ------- ----------
<S> <C> <C> <C>
July 2, 1998.......................................... $24.94 $3.13 $5.86
November 17, 1998..................................... $16.63 $3.63 $3.91
</TABLE>
OLD DAVEL AND PEOPLES SHAREHOLDERS ARE URGED TO OBTAIN CURRENT MARKET
INFORMATION FOR OLD DAVEL COMMON STOCK AND PEOPLES COMMON STOCK. NO ASSURANCE
CAN BE GIVEN AS TO THE MARKET PRICES OF OLD DAVEL COMMON STOCK OR PEOPLES
COMMON STOCK AT THE MERGER DATE. THERE IS NO MINIMUM OR MAXIMUM INITIAL VALUE
FOR THE CONSIDERATION TO BE RECEIVED BY PEOPLES SHAREHOLDERS. SEE "RISK
FACTORS--RISK FACTORS RELATING TO THE TRANSACTION--FLUCTUATION IN THE VALUE OF
THE PEOPLES MERGER CONSIDERATION" AND "--POTENTIAL VOLATILITY OF NEW DAVEL'S
COMMON STOCK PRICE."
10
<PAGE>
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE
This document (including information we have incorporated into this document
by reference) contains forward-looking statements that are subject to risks
and uncertainties. You should not place undue reliance on those statements
because they only speak as of the date of this document. Forward-looking
statements include information concerning possible or assumed future results
of operations of Old Davel, Peoples and New Davel, including forecasts,
projections and descriptions of expected cost savings or other anticipated
synergies related to the mergers. These statements often include words such as
"believe," "expect," "anticipate," "intend," "plan," "estimate," or similar
expressions. These statements are based on certain assumptions that the
companies have made in light of their experience in the industry as well as
their perceptions of historical trends, current conditions, expected future
developments and other factors they believe are appropriate in the
circumstances. As you read and consider this document, you should understand
that these statements are not guarantees of performance or results. They
involve risks, uncertainties and assumptions. Although each of the companies
believes that its forward-looking statements are based on reasonable
assumptions, you should be aware that many factors could affect the actual
financial results or results of operations of Old Davel, Peoples and New Davel
and could cause actual results to differ materially from those in the forward-
looking statements. These factors include:
. the transaction not being completed;
. implementation of or changes in the laws, regulations or policies
governing the telecommunications industry that could negatively affect
the payphone business, particularly in the area of dial-around
compensation;
. expected synergies, economies of scale and cost savings from the
transaction not being fully realized or realized within the expected time
frames;
. unanticipated difficulties servicing the substantially higher level of
indebtedness of New Davel after the transactions are completed;
. combined revenues after completion of the transaction being lower than
expected;
. costs or operational difficulties related to integrating the businesses
of the companies into one combined company being greater than expected;
. excessive or unanticipated demands placed on management by the
substantial increase in New Davel's size;
. unanticipated increases in financing and financing-related costs;
. general economic or business conditions affecting the payphone industry
(which is dependent on consumer spending), either nationally or
regionally, being less favorable than expected;
. the inability of New Davel to accomplish its strategic objectives for
external expansion, including through selective acquisitions and internal
expansion, as well as through sales and marketing activities; and
. regulatory authorities making adverse determinations regarding the
transaction.
All future written and oral forward-looking statements by the companies or
persons acting on their behalf are expressly qualified in their entirety by
the cautionary statements contained or referred to above. Except for their
ongoing obligations to disclose material information as required by the
federal securities laws, none of the companies has any obligation or intention
to release publicly any revisions to any forward-looking statements to reflect
events or circumstances in the future or to reflect the occurrence of
unanticipated events. YOU SHOULD ALSO READ CAREFULLY THE FACTORS DESCRIBED IN
THE "RISK FACTORS" SECTION OF THIS DOCUMENT.
11
<PAGE>
YOU WILL FIND DEFINITIONS FOR MANY OF THE CAPITALIZED TERMS USED IN THIS JOINT
PROXY STATEMENT/PROSPECTUS IN THE GLOSSARY BEGINNING ON PAGE 154.
RISK FACTORS
YOU SHOULD READ AND CONSIDER CAREFULLY EACH OF THE FOLLOWING FACTORS, AS
WELL AS THE OTHER INFORMATION CONTAINED IN, ATTACHED TO OR INCORPORATED BY
REFERENCE IN THIS DOCUMENT, BEFORE YOU VOTE ON THE TRANSACTION. CERTAIN OF THE
FOLLOWING FACTORS RELATE SPECIFICALLY TO THE TRANSACTION THAT WE ARE PROPOSING
FOR YOUR CONSIDERATION. OTHERS ARE FACTORS MORE GENERALLY ASSOCIATED WITH THE
BUSINESSES OF THE COMPANIES.
RISK FACTORS RELATING TO THE TRANSACTION
FLUCTUATION IN THE VALUE OF THE PEOPLES MERGER CONSIDERATION
Peoples shareholders are not assured of receiving consideration in the
transaction having a set market value or a minimum market value. If the
transaction is completed, each share of Peoples common stock will be converted
into 0.235 of a share of New Davel common stock. No adjustment will be made to
the number of shares of New Davel common stock to be received by Peoples
shareholders in the event of any increase or decrease in the market price of
Peoples common stock or Old Davel common stock. The market prices of Peoples
common stock and Old Davel common stock when the transaction takes place may
vary from their prices at the date of this Joint Proxy Statement/Prospectus
and from their prices at the time their respective shareholders vote on the
proposals relating to the transaction. On July 2, 1998 (the last trading day
prior to the execution of the Merger Agreement), the closing market prices of
Old Davel common stock and Peoples common stock were $24.9375 and $3.125,
respectively; on November 17, 1998, the closing market prices of Old Davel
common stock and Peoples common stock were $16.625 and $3.625, respectively.
During the twelve month period ending on November 17, 1998 (the most recent
practicable date prior to the printing of this Joint Proxy
Statement/Prospectus), the closing market price of Old Davel common stock
varied from a low of $9.00 to a high of $29.50 and the closing market price of
Peoples common stock varied from a low of $1.4375 to a high of $5.25. Changes
in such market prices may result from, among other things:
. changes in market perceptions of the synergies and cost savings expected
to result from the transaction;
. changes in the business, operations or prospects of Old Davel or Peoples;
. changes in the laws and regulations affecting the payphone industry (see
"Regulatory Matters"); and
. changes in general market and economic conditions.
As a result, at the time of the Peoples special meeting and the Davel annual
meeting, you will not know the exact market value of the New Davel common
stock that Peoples shareholders will receive when the transaction is
completed. In addition, the market value of such stock may be volatile for the
reasons described under "--Potential Volatility of New Davel's Common Stock
Price" and "--No Prior Public Market" below.
POTENTIAL VOLATILITY OF NEW DAVEL'S COMMON STOCK PRICE
Old Davel and Peoples believe that the following factors, among others, may
cause the market price of New Davel's common stock to fluctuate, perhaps
substantially:
. changes in the market perceptions of the synergies and cost savings
expected to result from the transaction;
. changes in the business, operations or prospects of New Davel;
. variations in the New Davel's results of operations relative to analysts'
expectations;
. changes in, or the implementation of, the laws and regulations affecting
the payphone industry (see "Regulatory Matters"); and
. changes in general market and economic conditions.
In addition, broad market fluctuations may adversely affect the market price
of New Davel's common stock.
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ABILITY TO PROCURE FINANCING NECESSARY TO COMPLETE THE TRANSACTION
New Davel currently expects to refinance substantially all of the
indebtedness of Old Davel and Peoples through borrowings under the New Credit
Facility. There can be no assurances that New Davel will enter into definitive
agreements with respect to the New Credit Facility. New Davel's ability to
obtain the Financing will depend on the financial condition and results of
operations of each of Old Davel and Peoples, general economic factors, the
condition of the financial markets and factors affecting the
telecommunications or payphone industries, which may adversely affect the
availability of credit overall and the terms on which credit may be available.
If New Davel does not enter into the New Credit Facility, and is otherwise
unable to procure alternative financing on terms and conditions that Old Davel
and New Davel believe are reasonable, the parties would not be able to
complete the transaction.
REDUCED OWNERSHIP INTERESTS IN NEW DAVEL
After completion of the transactions you will own a significantly smaller
percentage of New Davel than you currently own of Old Davel or Peoples.
Accordingly, your investment will depend primarily upon the success of New
Davel's operations as a whole rather than the separate businesses of Old Davel
or Peoples. Immediately following completion of the transaction, holders of
Old Davel common stock and holders of Peoples common stock will hold
approximately 55.3% and 44.7%, respectively, of the outstanding shares of New
Davel common stock on a fully diluted basis. As a result of the transaction,
the principal shareholders of Peoples will own significantly smaller
percentages of New Davel than they own of Peoples prior to the transaction
and, accordingly, may be able to exercise less influence over the management
and policies of New Davel than they currently exercise with respect to
Peoples. The following table sets forth the stock ownership percentages for
shareholders who are affiliates and for shareholders who are not affiliates of
each of Old Davel and Peoples both before and immediately after completion of
the transaction.
<TABLE>
<CAPTION>
OWNERSHIP OF OLD DAVEL OWNERSHIP OF PEOPLES OWNERSHIP OF NEW DAVEL
PRIOR TO THE TRANSACTION PRIOR TO THE TRANSACTION(1) AFTER THE TRANSACTION(1)(2)
------------------------ --------------------------- ---------------------------
<S> <C> <C> <C>
Old Davel
Affiliates............ 62.3% -- 34.7%
Other Shareholders.... 37.7% -- 21.0%
Peoples
Affiliates............ -- 17.3% 9.1%
Other Shareholders.... -- 82.7% 35.2%
</TABLE>
- --------
(1) Assumes the conversion of all shares of Peoples Series C Cumulative
Convertible Preferred Stock into shares of Peoples common stock prior to
the completion of the transaction and the conversion of these shares into
New Davel common stock upon completion of the transaction. Also assumes
the exercise of all currently exercisable options or warrants to acquire
Old Davel common stock or Peoples common stock, the exercise prices of
which are less than or equal to the closing sales price of Old Davel
common stock or Peoples common stock, as the case may be, as of November
17, 1998.
(2) Assumes the receipt by the holder of the Peoples Series C Cumulative
Convertible Preferred Stock of shares of New Davel common stock in
consideration of accrued but unpaid dividends through the date of
completion of the transaction and the future fair value of such preferred
stock had it not been converted.
DIFFICULTIES OF INTEGRATION
The combination of Old Davel and Peoples involves the integration of
separate companies that have previously operated independently and have
different corporate cultures. The process of combining the companies may be
disruptive to their businesses and may cause an interruption of, or a loss of
momentum in, such businesses as a result of the following difficulties, among
others:
. loss of key employees or customers;
. possible inconsistencies in standards, controls, procedures and policies
among the companies being combined and the need to implement company-wide
financial, accounting, information and other systems;
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. failure to maintain the quality of services that such companies have
historically provided;
. the need to coordinate geographically diverse organizations; and
. the diversion of management's attention from the day-to-day business of
New Davel as a result of the need to deal with the above disruptions and
difficulties and the need to add management resources to do so.
Such disruptions and difficulties, if they occur, may cause New Davel to
fail to realize the cost savings, synergies and revenue enhancements that we
currently expect to result from such integration and may cause material
adverse short- and long-term effects on the operating results and financial
condition of New Davel.
UNCERTAINTIES IN REALIZING COST SAVINGS AND OTHER SYNERGIES
Even if New Davel is able to integrate the operations of the companies
successfully, there can be no assurance that such integration will result in
the realization of the full benefits of the cost savings, synergies or revenue
enhancements that we currently expect to result from such integration or that
such benefits will be achieved within the time frame that we currently expect.
. Achieving the economies of scale that we currently anticipate will result
from the transaction depends, in part, on negotiations with third party
providers of goods and services, the results of which are difficult to
predict. Accordingly, the amount and timing of the resulting cost savings
are inherently difficult to estimate.
. The cost savings and other synergies from the transaction may be offset
by costs incurred in integrating the companies.
. The cost savings and other synergies from the transaction may also be
offset by increases in other expenses, by operating losses or by problems
in the business unrelated to the transaction.
SUBSTANTIAL LEVERAGE
Substantially all of the outstanding indebtedness of Old Davel and Peoples
is expected to be refinanced (the "Financing"). In the Financing, New Davel
currently expects to borrow an amount under the New Credit Facility not to
exceed $260 million. In addition, New Davel will assume approximately $2.1
million of indebtedness of Peoples (out of a total of $102.1 million
outstanding as of September 30, 1998) that will not be refinanced in the
Financing.
As a result of the Financing, New Davel will incur significant debt and debt
service obligations. The degree to which New Davel is leveraged could have
important consequences, including the following:
. New Davel's ability to obtain additional financing in the future for
working capital, capital expenditures, potential acquisition
opportunities, general corporate purposes or other purposes may be
impaired;
. a substantial portion of New Davel's cash flow from operations must be
dedicated to the payment of principal of and interest on its
indebtedness;
. New Davel may be more vulnerable to economic downturns, may be limited in
its ability to withstand competitive pressures and may have reduced
flexibility in responding to changing business, regulatory and economic
conditions; and
. fluctuations in market interest rates will affect the cost of New Davel's
borrowings to the extent not covered by interest rate hedge agreements
because interest under the New Credit Facility will be payable at
variable rates.
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See "Operation, Management and Business of New Davel After the Transaction--
The Financing."
New Davel's ability to service its indebtedness will depend on its future
performance, which will be affected by prevailing economic conditions and
financial, business, regulatory and other factors. Certain of these factors
are beyond New Davel's control. See "Regulatory Matters." We believe that,
based upon current levels of operations, New Davel should be able to meet its
debt service obligations when due. If, however, New Davel were unable to
service its indebtedness, it would be forced to pursue one or more alternative
strategies such as selling assets, restructuring or refinancing its
indebtedness or seeking additional equity capital (which may substantially
dilute the ownership interest of holders of its common stock). We cannot
assure you that any of these strategies could be effected on satisfactory
terms, if at all.
IMPACT OF SHARES OF NEW DAVEL COMMON STOCK ELIGIBLE FOR FUTURE SALE
Sales of large amounts of New Davel common stock in the public market after
completion of the transaction could adversely affect the prevailing market
price of such common stock and impair New Davel's ability to raise additional
capital through the sale of equity securities. If the transaction is
completed, about 10.5 million shares of New Davel common stock would be
outstanding (based upon the number of shares of outstanding common stock of
Old Davel and Peoples as of November 17, 1998). About 4.7 million shares of
New Davel common stock would be issued to the holders of Peoples common stock
in connection with the transaction, and about 5.8 million shares of New Davel
common stock would be issued to holders of Old Davel common stock. If the
transaction is completed, about 2.3 million shares of New Davel common stock
will be held by former Old Davel shareholders who are not affiliates of New
Davel and were not affiliates of Old Davel, and about 3.8 million shares of
New Davel common stock will be held by persons who are not affiliates of New
Davel and were not affiliates of Peoples, all of which would be freely
tradeable immediately after the completion of the transaction. The remaining
shares of New Davel common stock will be held by persons who were affiliates
of Old Davel or Peoples and would be subject to the sales restrictions imposed
by Rule 145 of the Securities Act and pooling of interests accounting rules.
ABILITY TO IMPLEMENT ACQUISITION STRATEGY
New Davel intends to maintain an acquisition program, pursuant to which it
may enter into acquisitions, mergers, joint ventures or other business
combinations. See "Business of Old Davel--Business Strategy" and "--
Acquisitions." However, no assurances can be given that New Davel will succeed
in consummating any such transactions. If any such transactions are
consummated, there can be no assurance that New Davel will be able to
successfully manage or integrate the acquired companies or businesses. The
risks involved in attempting to integrate any such companies or businesses
would be the same types of risks described above with respect to the
transaction under "Risk Factors Relating to the Transaction--Difficulties of
Integration." Although management of New Davel will endeavor to evaluate the
risks inherent in any particular transaction, there can be no assurance that
New Davel will properly ascertain all such risks or that such transactions
will achieve the levels of revenue and profitability expected by management or
result in the other benefits anticipated by management.
The success of New Davel's acquisition program will depend on, among other
things, the availability of suitable candidates, the ability of New Davel to
value such candidates accurately and negotiate favorable terms for such
acquisitions, the availability of funds to finance transactions and the
availability of management resources to oversee the integration and operation
of the acquired businesses. Financing for such transactions may come from
several sources, including cash and cash equivalents on hand and marketable
securities and proceeds from the incurrence of indebtedness or the issuance of
additional common stock, preferred stock, convertible debt or other
securities. The issuance of any such additional securities could, among other
things:
. result in substantial dilution of the percentage ownership of the
shareholders of New Davel at the time of any such issuance;
. result in substantial dilution of New Davel's earnings per share;
. adversely affect the prevailing market price for the common stock of New
Davel; and
. result in increased indebtedness, which could negatively affect New
Davel's liquidity and operating flexibility (see "--Substantial
Leverage").
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RESTRICTIONS IMPOSED BY TERMS OF THE FINANCING
The New Credit Facility will contain numerous restrictive covenants that
will limit the discretion of New Davel regarding certain business matters.
These covenants will place significant restrictions on New Davel's ability to
incur additional indebtedness, create liens or other encumbrances, make
certain payments, investments, loans and guarantees and sell or otherwise
dispose of assets and merge or combine with another entity. The New Credit
Facility will also contain a number of financial covenants that will require
New Davel to meet certain financial ratios and tests. A failure to comply with
the obligations in the New Credit Facility could result in an event of default
under the New Credit Facility, which, if not cured or waived, could permit
acceleration of the indebtedness or other indebtedness which could have a
material adverse effect on New Davel. The New Credit Facility will also
contain covenants that restrict or prohibit New Davel's ability to pay
dividends and make other distributions to you as a shareholder. See
"Operation, Management and Business of New Davel After the Transaction--The
Financing."
DEPENDENCE ON KEY PERSONNEL
New Davel will rely on the efforts and abilities of its executive officers.
The loss of one or more of these officers could have a material adverse effect
on New Davel. Old Davel does not currently have any "key man" life insurance
for its key personnel.
INFLUENCE OF PRINCIPAL SHAREHOLDERS
At November 17, 1998, David R. Hill, Old Davel's Chairman of the Board,
beneficially owned about 32% and Samstock, a private investment company
controlled by Samuel Zell, beneficially owned about 28% of the outstanding
shares of Old Davel common stock. For a description of certain agreements
regarding the voting of such shares, see "Operation, Management and Business
of New Davel After the Transaction--New Davel Principal Shareholders." At the
same date, UBS Capital beneficially owned about 15% of the fully diluted
shares of Peoples common stock. The following estimates regarding share
ownership after the transaction are based on these beneficial ownership
levels.
. If the transaction is completed, Mr. Hill will own about 18%, Samstock
will own about 15% and UBS Capital will own about 8% of the outstanding
shares of New Davel common stock and each will continue to have
significant influence over the policies of New Davel and any matters
submitted to a shareholder vote, including the election of directors and
the approval of significant corporate matters.
In addition, as of the completion of the transaction, the New Davel Board of
Directors will include designees of these principal shareholders. Also,
certain current shareholders of the companies will have significant share
ownership in New Davel. See "Operation, Management and Business of New Davel
After the Transaction--New Davel Principal Shareholders."
For more information regarding share ownership after the transaction, see
"Operation, Management and Business of New Davel After the Transaction--
Management of New Davel" and "--New Davel Principal Shareholders."
POSSIBLE ANTI-TAKEOVER EFFECTS
Rights Plan. Each share of New Davel's common stock will have associated
with it one preferred share purchase right entitling the holder under certain
circumstances to purchase from New Davel one one-thousandth of a share of New
Davel's Series A junior participating preferred stock. The rights agreement of
New Davel could have the effect of delaying or preventing a change in the
control of New Davel or the removal of existing management, of deterring
potential acquirors from making an offer to holders of New Davel and of
limiting any
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<PAGE>
opportunity to realize premiums over prevailing market prices for New Davel's
common stock. For more information, see "Description of New Davel Capital
Stock--Rights Plan" and "Description of Capital Stock of Old Davel--Rights
Plan."
Concentration of Ownership. The ownership of a substantial portion of New
Davel's outstanding common stock among a few shareholders, including Mr. David
Hill and Samstock who have agreed, among other things, to vote their
respective shares in favor of the other's designees as directors, could have
the effect of delaying or preventing a change in the control of New Davel or
the removal of existing management, of deterring potential acquirors from
making an offer for your shares of New Davel common stock and of limiting any
opportunity for you to realize premiums over prevailing market prices of your
shares. See "--Influence of Principal Shareholders."
Preferred Stock. After the completion of the transaction, New Davel will
have available for issuance 1,000,000 shares of preferred stock, which the
board of directors of New Davel will be authorized to issue, in one or more
series, without any further action on the part of New Davel's shareholders.
Subject to limitations imposed by law or New Davel's certificate of
incorporation, New Davel's board of directors could determine the designation
of and the number of shares constituting each series of the preferred stock;
the dividend rate for each series; the terms and conditions of any voting,
conversion and exchange rights for each series; the amounts payable on each
series upon redemption or New Davel's liquidation, dissolution or winding-up;
the provisions of any sinking fund for the redemption or purchase of shares of
any series; and the preferences and the relative rights among the series of
the preferred stock. At the discretion of New Davel's board of directors, the
preferred stock could be used to deter any takeover attempt, by tender offer
or otherwise. In addition, New Davel's preferred stock could be issued with
voting and conversion rights which could adversely affect the voting power
and/or economic value to you as a holder of New Davel's common stock. The
issuance of preferred stock could also result in a series of securities
outstanding that would have preferences over New Davel's common stock with
respect to dividends and in liquidation. For more information, see
"Description of New Davel Capital Stock--New Davel Preferred Stock" and
"Description of Capital Stock of Old Davel--Old Davel Preferred Stock."
NO PRIOR PUBLIC MARKET
There has been no public market for New Davel common stock, and there can be
no assurance that an active trading market will develop or be sustained.
Accordingly, you may experience difficulty selling or otherwise disposing of
such shares.
IMPACT ON PEOPLES IF THE TRANSACTION IS NOT COMPLETED
No assurance can be given that the transaction will be consummated. If the
transaction is not consummated, Peoples will have incurred substantial
expenses in connection with the transaction. If the merger agreement is
terminated under certain circumstances, Peoples is required to pay Old Davel a
termination fee of $5,000,000 and expenses of up to $1,000,000. See "The
Merger Agreement--Termination Fees." In addition, under certain circumstances
relating to termination of the merger agreement, Old Davel has the right to
exercise a stock option to purchase up to 19.9% of the issued and outstanding
Peoples Common Stock. See "The Merger Agreement--Termination Option
Agreement." If this option becomes exercisable, its existence could impact
Peoples' ability to attract a competing bid or to attract any other strategic
partner.
RISK FACTORS ASSOCIATED WITH THE PAYPHONE BUSINESS
UNCERTAIN REGULATORY ENVIRONMENT
General. In February 1996, Congress enacted the Telecommunications Act of
1996. The Telecommunications Act has significantly altered the regulatory
landscape in which payphone companies operate. While we believe that the
Telecommunications Act, as implemented by the FCC, will address certain
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historical inequities in the payphone marketplace, uncertainties relating to
the impact and timing of the implementation of the new regulatory framework
still exist. The uncertainty with the greatest potential financial impact
relates to revenue from access code calls and toll-free dialed calls, also
referred to as "dial-around" compensation. Dial-around compensation accounts
for a material percentage of each of Old Davel's and Peoples' revenues.
Certain interexchange carriers (or IXCs as they are sometimes referred to)
have asserted and continue to assert in court and FCC proceedings that the
appropriate level of dial-around compensation payable to operators of
payphones is lower than the level currently mandated by the FCC.
Dial-Around Compensation. In the Telecommunications Act, Congress directed
the FCC to establish a fair compensation system for dial-around calls made on
payphones. On September 20 and November 8, 1996, the FCC adopted the 1996
Payphone Order. The FCC's 1996 Payphone Order 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 (equivalent to 131 calls multiplied by
$0.35 per call). Beginning on October 7, 1997 and ending on October 6, 1998
(later extended to October 6, 1999), the $45.85 per payphone per month rate
was to be phased out in favor of a per-call system at the rate of $0.35 per
call. Several parties filed petitions for court 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 remanded and later
vacated certain portions of the 1996 Payphone Order, including the dial-around
compensation rate. For more information, see "Regulatory Matters."
In response to the Court's decision, the FCC issued the 1997 Payphone Order,
which became effective on October 7, 1997. The 1997 Payphone Order addressed
the per-call compensation rate for access code and 800 subscriber calls in
light of the decision of the Court. The FCC concluded that the rate for per-
call compensation for access code and 800 subscriber calls from payphones is
the market-based local coin rate ($0.35) adjusted for certain cost differences
between dial-around and local coin calls, estimated to be $0.066. As a result,
the FCC established a rate of $0.284 (equivalent to $0.35 less $0.066) per
call for the first two years of per-call compensation (from October 7, 1997
through October 6, 1999). After the first two years of per-call compensation,
the market-based local coin rate, less $0.066, will become the per-call rate
for access code and 800 subscriber calls. In addition, the 1997 Payphone Order
tentatively concluded that the same $0.284 per-call rate adopted on a going-
forward basis should also govern compensation obligations during the period
from November 7, 1996 to October 6, 1997, but deferred for later decision the
manner in which the payment obligations for this period will be allocated
among the IXCs and paid to PSPs.
Certain IXCs challenged in court the portion of the 1997 Payphone Order
establishing the dial-around compensation rate. 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 use of the deregulated local coin
call rate as a starting point in deriving the $0.284 per call rate and stated
that any resulting overpayment would be subject to refund and directed the FCC
to conclude its proceedings within the six-month period ordered by the Court.
On June 19, 1998, the FCC solicited comment from interested parties on the
issues. Certain IXCs and members of the paging industry have urged the FCC to
abandon its efforts to derive a market-based rate from surrogates and either
require the caller to pay dial-around compensation by coin deposit or adopt a
cost-based rate at levels below the $0.284 rate. We believe that the FCC will
issue its ruling in the current proceeding within the specified six-month
period. We cannot predict whether this ruling will result in an increase,
decrease or reaffirmation of the $0.284 compensation rate or other
modifications to the dial-around compensation system.
If the IXCs and other parties in opposition succeed in their efforts to
secure a judicial or administrative order reducing the amount of dial-around
compensation to be paid for calls made before October 6, 1999, such a
reduction could have a material adverse effect on Old Davel and Peoples, or on
New Davel. See "Regulatory Matters," "Old Davel Management's Discussion and
Analysis of Financial Condition and Results of Operations--Regulatory Impact
on Revenue--Dial-Around Compensation," "Peoples Management's Discussion and
Analysis of Financial Condition and Results of Operations--Dial-Around
Compensation."
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Local Coin Call Rates. As a result of the Telecommunications Act and in
accordance with an FCC ruling, certain local exchange carriers and independent
payphone providers, including the companies, have generally increased rates
for local coin calls on their payphones to $0.35. In deciding to deregulate
local coin rates for payphones, the FCC provided for possible modifications or
exemptions from deregulation where an individual state makes a detailed
showing that there are market failures within the state that would not allow
market-based rates to develop. The FCC has not, however, indicated the
specific requirements for obtaining a state exemption. Due to the FCC's lack
of direction and our inability to predict the responses of individual states
or the market, we cannot predict the ultimate impact on operations of local
coin rate deregulation.
EFFECT OF DEREGULATION
As allowed by the FCC's 1997 Payphone Order, the local-call coin rates on
most payphones has increased from $0.25 per call to $0.35 per call. The
increased rates have contributed to a reduction in the volume of coin calls
being placed from the payphones, which has offset in part the increased
revenue from the higher coin rate. While the negative impact on call volume
resulting from the higher coin rate could moderate over time, we cannot assure
you that New Davel will experience call volumes comparable to historical
levels. In addition, because the industry has not yet had significant
experience operating under the FCC's new per-call dial-around compensation
rules (some of which have not yet been issued and some of which are the
subject of litigation), we cannot assure you of the ability of IXCs and other
carriers to correctly monitor, record and pay dial-around compensation to
payphone providers, including New Davel. We also cannot assure you that Old
Davel and Peoples, or New Davel, will be able to challenge successfully, where
necessary, payments from the IXCs and other carriers that are believed to be
delinquent or deficient. Furthermore, new FCC rules regarding Billed Party
Preference require payphone operators to give payphone users the option of
receiving a rate quote before a call is connected when making a 0+ interstate
call. These rules, which became effective on July 1, 1998, could reduce
revenues earned by Old Davel and Peoples, and by New Davel, on long-distance
calls placed from payphones by encouraging more consumers to dial around the
long-distance service provided by the companies. We cannot currently assess
what impact the new rules will have on financial performance. For more
information, see "Regulatory Matters."
COMPETITION
Old Davel and Peoples operate in a highly competitive environment with
limited barriers to entry. Each of the companies competes for payphone
locations with LECs and other IPPs. Some competitors are larger than the
companies, and larger than New Davel will be, and have substantially greater
financial, marketing and other resources available to them. We cannot assure
you that New Davel will be able to compete successfully with those
competitors. In addition, many LECs, faced with competition from Davel,
Peoples and other IPPs, have increased their compensation arrangements with
owners of the properties on which their payphones are located to offer more
favorable commission schedules. This could result in New Davel offering higher
commissions to these location owners. Higher commissions could have a material
adverse effect on New Davel by impeding its ability to maintain profitability
and repay indebtedness and by increasing operating expenses as a percentage of
revenues. In addition, in a deregulated payphone environment, certain LECs may
develop increasingly aggressive marketing and acquisition strategies, which
could have a material adverse effect on New Davel's ability to implement its
business and acquisition strategies. You should also note that cellular,
personal communication systems and other forms of wireless communication
provide an alternative to payphones that could adversely affect operating
results in, or depress the rate of growth of, the payphone industry in general
and New Davel, in particular.
DEPENDENCE UPON THIRD-PARTY PROVIDERS
Each of the companies assembles its payphones from components provided by
outside suppliers. In addition, the companies rely on outside suppliers for
local line access, billing and collection services, and long-distance and
operator services. We believe that multiple suppliers are available to meet
all of New Davel's product and
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service needs at competitive prices and rates and expect the availability of
such products and services to continue in the future. However, we cannot
assure the continuing availability of alternative sources. Transition from
existing suppliers, if necessary, could have a disruptive impact on operations
and could give rise to unforeseen delay and expense. For more information
regarding the companies' dependence on suppliers, see "Business of Old Davel--
Service and Equipment Suppliers" and "Business of Peoples--Payphones--
Telephone Equipment Suppliers."
TECHNOLOGICAL CHANGE AND NEW SERVICES
Continuous technological change, frequent service, product innovations and
evolving industry standards characterize the telecommunications industry. We
believe that the future success of New Davel will depend in part on its
ability to anticipate technological changes and respond in a timely and
effective manner to meet new industry standards. Any failure to keep pace with
technological change (including the technical support component required to
operate payphones) and new customer service demands could have a material
adverse effect on New Davel.
YEAR 2000 ISSUE
Many existing computer programs, including those used by Old Davel and
Peoples in its operations, use only two digits to identify a year in the date
field. These programs were designed and developed without considering the
impact of the upcoming change in the century. If not corrected, many computer
applications could fail or create erroneous results by or at the year 2000.
This potential problem is often referred to as the Year 2000 issue. Old Davel
and Peoples have analyzed the costs of addressing the Year 2000 issue.
Although Old Davel and Peoples do not believe that such costs are likely to
have a material effect on future financial results, we cannot assure you that
the consequences of the Year 2000 issue will not have a material effect on New
Davel's future financial or operating results. See "Old Davel Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Issue" and "Peoples Management's Discussion and Analysis of Financial
Condition and Results of Operations--Impact of Year 2000."
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YOU WILL FIND DEFINITIONS FOR MANY OF THE CAPITALIZED TERMS USED IN THIS JOINT
PROXY
STATEMENT/PROSPECTUS IN THE GLOSSARY BEGINNING ON PAGE 154.
MEETINGS, VOTING AND PROXIES
DAVEL ANNUAL MEETING OF SHAREHOLDERS
Purpose of Davel Annual Meeting. The purpose of the Davel Annual Meeting of
Shareholders is to consider and vote upon (1) a proposal to approve and adopt
the Merger Agreement and (2) a proposal to elect the seven nominees to the
Davel Board of Directors (all of whom will become directors of New Davel if
the Transaction is completed).
THE DAVEL BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND UNANIMOUSLY RECOMMENDS THAT DAVEL SHAREHOLDERS VOTE FOR THE APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND FOR THE ELECTION OF THE SEVEN NOMINEES TO
THE OLD DAVEL BOARD OF DIRECTORS. The completion of the Transaction is
conditioned upon approval by Old Davel shareholders.
Date, Place and Time; Record Date. The Davel Annual Meeting is scheduled to
be held on Tuesday, December 22, 1998, at 9:00 a.m., local time, at One North
Franklin Street, Third Floor, Chicago, Illinois. Shareholders who are present
at the Davel Annual Meeting in person or by proxy will be entitled to one vote
for each of their shares of Old Davel Common Stock held of record at the close
of business on November 11, 1998 (the "Davel Record Date"). At the close of
business on the Davel Record Date, 5,784,209 shares of Old Davel Common Stock
were issued and outstanding and entitled to vote.
Voting Rights. Each share of Old Davel Common Stock outstanding on the Davel
Record Date is entitled to one vote, except in the election of directors. A
majority of shares issued and outstanding and entitled to vote, present in
person or by proxy, will constitute a quorum for the transaction of business
at the Davel Annual Meeting. Abstentions and broker non-votes (proxies from
brokers or nominees indicating that they have not received voting instructions
from the beneficial owners or other persons entitled to vote shares) will be
considered present for the purpose of establishing a quorum. In determining
whether the proposals have received the requisite number of affirmative votes,
abstentions and broker non-votes will have the same effect as votes cast
against approval, except in the election of directors. The affirmative vote of
the holders of at least two-thirds of the outstanding shares of Old Davel
Common Stock is required for approval of the Merger Agreement. The seven
nominees to the Old Davel Board of Directors receiving the highest number of
votes in their favor shall be elected directors of Old Davel. Only votes cast
FOR a nominee will be counted. Abstentions, broker non-votes and instructions
on the accompanying proxy card to withhold authority to vote for one or more
of the nominees will result in the respective nominees receiving fewer votes.
David R. Hill and Samstock, holders of approximately 60% in the aggregate of
the shares of Old Davel Common Stock outstanding as of the Davel Record Date,
have agreed to vote for approval of the Merger Agreement and for the election
of each other's nominees to the Old Davel Board of Directors. See "The Merger
Agreement--Voting Agreements."
All Old Davel shareholders entitled to vote on the Merger Agreement may
exercise dissenters' rights pursuant to the Illinois Law. See "Dissenters'
Rights--Dissenters' Rights of Old Davel Shareholders."
Mr. David R. Hill, Chairman of Old Davel, and Samstock, L.L.C., whose
affiliates Mr. Sam Zell and Mr. F. Philip Handy are directors of Old Davel,
owned approximately 32% and 28%, respectively, of the issued and outstanding
shares of Old Davel Common Stock on the Davel Record Date and have agreed to
vote all of such shares in favor of the Merger Agreement. As of such date, all
other executive officers and directors of Old Davel collectively owned less
than 1% of the outstanding shares of Old Davel Common Stock.
Proxies. Proxies are being solicited on behalf of the Old Davel Board of
Directors. All shares represented by properly executed proxies received in
time for the Davel Annual Meeting will be voted in accordance with
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the instructions specified thereon. If no instructions are specified, the
shares will be voted FOR approval and adoption of the Merger Agreement and FOR
the election of the seven nominees to the Old Davel Board of Directors,
allocating each shareholder's votes evenly among the nominees. Holders of
proxies will be authorized to vote the shares represented thereby in their
discretion as to any matters incident to the conduct of the Old Davel Annual
Meeting.
A shareholder giving a proxy may revoke it at any time before it is voted.
Proxies may be revoked by (a) filing with the Secretary of Old Davel a written
notice of revocation bearing a later date than the proxy; (b) duly executing a
later-dated proxy relating to the same shares and delivering it to the
Secretary of Old Davel before the taking of the vote at the Davel Annual
Meeting; or (c) attending the Davel Annual Meeting and voting in person.
Attendance at the Davel Annual Meeting will not by itself revoke a proxy.
The expenses of soliciting proxies for the Davel Annual Meeting, if any,
will be paid by Old Davel (except that Old Davel and Peoples will share
equally in expenses incurred in connection with the printing and mailing of
this Joint Proxy Statement/Prospectus) and will include reimbursement of
banks, brokerage firms, nominees, fiduciaries and other custodians for
expenses of forwarding solicitation materials to beneficial owners of voting
shares. The solicitation is being made by mail and may also be made in person
or by letter, telephone, telecopy, telegram or other means of communication by
directors, officers and employees of Old Davel and its subsidiaries who will
not be additionally compensated therefor. In addition, MacKenzie Partners,
Inc. has been retained by Old Davel to assist in the solicitation of proxies
and will be paid a fee of $3,000 plus reimbursement for reasonable out-of-
pocket expenses. In these efforts, MacKenzie Partners will make targeted
telephone solicitations of major shareholders and follow up such calls with
reminder mailings and has conducted the required broker search process.
The Davel Annual Meeting may be adjourned to another date or place for any
proper purpose.
PEOPLES SPECIAL MEETING OF SHAREHOLDERS
Purpose of Peoples Special Meeting. The purpose of the Peoples Special
Meeting is to consider and vote upon a proposal to approve and adopt the
Merger Agreement.
THE PEOPLES BOARD OF DIRECTORS, BY A UNANIMOUS VOTE, HAS APPROVED THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND RECOMMENDS THAT
PEOPLES SHAREHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
The completion of the Transaction is conditioned upon approval by Peoples
shareholders at the Peoples Special Meeting.
Date, Place and Time; Record Date. The Peoples Special Meeting is scheduled
to be held on Tuesday, December 22, 1998, at 10:00 a.m., local time, at the
principal executive offices of Peoples, which are located at 2300 N.W. 89th
Place, Miami, Florida. Shareholders who are present at the Peoples Special
Meeting in person or by proxy will be entitled to vote their shares of Peoples
Common Stock and/or Peoples Series C Preferred Stock held of record at the
close of business on November 11, 1998 (the "Peoples Record Date"). At the
close of business on the Peoples Record Date, 16,212,935 shares of Peoples
Common Stock and 150,000 shares of Peoples Series C Preferred Stock were
issued and outstanding and entitled to vote.
Voting Rights. The holders of the Peoples Series C Preferred Stock are
entitled to vote on all matters submitted to the shareholders of Peoples for a
vote together with the holders of the Peoples Common Stock, voting together as
a single class, with each share of Peoples Common Stock entitled to one vote
per share and each share of Peoples Series C Preferred Stock entitled to one
vote for each share of Peoples Common Stock issuable upon conversion of the
Peoples Series C Preferred Stock.
A majority of shares entitled to vote, present in person or by proxy, will
constitute a quorum for the transaction of business at the Peoples Special
Meeting. Abstentions and broker non-votes (proxies from brokers or nominees
indicating that they have not received voting instructions from the beneficial
owners or other persons
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entitled to vote shares) will be considered present for the purpose of
establishing a quorum. The affirmative vote of the holders of two-thirds of
the outstanding shares of Peoples Common Stock and the Peoples Series C
Preferred Stock voting together as a single class (with each share of Peoples
Series C Preferred Stock entitled to one vote for each share of Peoples Common
Stock issuable upon the conversion thereof) and the affirmative vote of the
holders of a majority of the outstanding shares of Peoples Series C Preferred
Stock voting as a separate class at the Peoples Special Meeting is required
for approval and adoption of the Merger Agreement and is a condition to
completion of the Transaction.
Pursuant to the UBS Voting Agreement, UBS Capital has agreed, among other
things, to vote all of its shares of Peoples Series C Preferred Stock to
approve and adopt the Merger Agreement. Such shares represent all of the
shares of the Peoples Series C Preferred Stock and 14.98% of the outstanding
combined voting power of Peoples Common Stock and Peoples Series C Preferred
Stock, voting together as a class. See "The Merger Agreement--Voting
Agreements." In determining whether the Merger Agreement has received the
requisite number of affirmative votes, abstentions and broker non-votes will
have the same effect as votes cast against approval.
As of the Peoples Record Date, the directors and executive officers of
Peoples, together with their affiliates as a group, owned approximately 16% of
the combined voting power of Peoples Common Stock and Peoples Series C
Preferred Stock, voting together as a class. Such persons have indicated to
Peoples that they will vote in favor of approval of the Merger Agreement and
the Davel/Peoples Merger.
Dissenters' rights are not available to Peoples shareholders under the New
York Law because Peoples Common Stock is listed on a national securities
exchange and because the holder of the Peoples Series C Preferred Stock has
assented to the Davel/Peoples Merger. See "The Merger Agreement--Voting
Agreements" and "Dissenters' Rights--No Dissenters' Rights for Peoples
Shareholders."
Proxies. Proxies are being solicited on behalf of the Board of Directors of
Peoples. All shares represented by properly executed proxies received in time
to be voted at the Peoples Special Meeting will be voted in accordance with
the instructions specified thereon. If no instructions are specified, the
shares will be voted FOR the adoption and approval of the Merger Agreement.
Holders of proxies are also authorized to vote the shares represented thereby
in their discretion as to any matters incident to the conduct of the Peoples
Special Meeting.
A shareholder giving a proxy may revoke it at any time before it is voted.
Proxies may be revoked by (a) filing with the Secretary of Peoples, a written
notice of revocation bearing a later date than the proxy; (b) duly executing a
later-dated proxy relating to the same shares and delivering it to the
Secretary of Peoples before the taking of the vote at the Peoples Special
Meeting; or (c) attending the Peoples Special Meeting and voting in person.
Attendance at the Peoples Special Meeting will not by itself revoke a proxy.
The expenses of soliciting proxies for the Peoples Special Meeting will be
paid by Peoples (except Peoples and Old Davel will share equally in expenses
incurred in connection with the filing, printing and mailing of this Joint
Proxy Statement/Prospectus and the registration statement of which this Joint
Proxy Statement/Prospectus forms a part) and will include reimbursement of
banks, brokerage firms, nominees, fiduciaries and other custodians for
expenses of forwarding solicitation materials to beneficial owners of voting
shares. The solicitation is being made by mail and may also be made in person
or by letter, telephone, telecopy, telegram or other means of communication by
directors, officers and employees of Peoples and its subsidiaries who will not
be additionally compensated therefor. In addition, MacKenzie Partners, Inc.
has been retained by Peoples to assist in the solicitation of proxies and will
be paid a fee of $5,000 plus reimbursement for reasonable out-of-pocket
expenses. In these efforts, MacKenzie Partners will make targeted telephone
solicitations of major shareholders and follow up with such calls with
reminder mailings, and has conducted the required broker search process.
The Peoples Special Meeting may be adjourned to another date or place for
any proper purpose.
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THE TRANSACTION
BACKGROUND
Over the last several years, there has been increasing consolidation among
IPPs. Each of Old Davel and Peoples has completed transactions to acquire
additional payphones and payphone routes, thereby expanding its existing
markets or entering new markets, and has continued to explore consolidation
opportunities.
On December 18, 1997, in connection with a review by Peoples of strategic
alternatives for its business, certain members of the Board of Directors and
of management of Peoples met with representatives of Goldman Sachs and
directed Goldman Sachs to examine alternative strategic business combinations
for Peoples. Representatives of Goldman Sachs discussed their analysis of
possible strategic alternatives for Peoples with the Peoples Board of
Directors on January 14, 1998. The Peoples Board of Directors directed Goldman
Sachs to discuss with representatives of PhoneTel Technologies, Inc., another
IPP, a possible transaction with PhoneTel and to examine other strategic
alternatives in the event that Peoples and PhoneTel were unable to agree on
the terms of a transaction. The other strategic alternatives involved
soliciting other bidders to acquire Peoples or seeking to acquire one or more
other IPPs (or assets of one or more IPPs). The Board of Directors of Peoples
decided that it would initially seek to negotiate a transaction with PhoneTel
and that, if such negotiations were unsuccessful, it would begin to solicit
bidders to acquire Peoples, while retaining the possibility of pursuing an
acquisition by Peoples or other business combination transaction involving
Peoples. As more fully described below, the final result is the proposed
Transaction with Old Davel.
PhoneTel and Peoples executed a confidentiality agreement on February 6,
1998. Discussions between Peoples and PhoneTel continued until March 8, 1998
when discussions were terminated. Peoples determined, at that time, that it
would prefer to begin soliciting numerous bidders to acquire Peoples, rather
than continuing discussions solely with PhoneTel, because PhoneTel had
indicated its unwillingness to execute an exclusivity agreement that would
have required each of PhoneTel and Peoples to negotiate solely with the other
for a specified period of time.
During March 1998, Goldman Sachs, with the assistance of Peoples'
management, prepared a Confidential Information Memorandum regarding Peoples
and began to solicit potential bidders for Peoples. As part of this
solicitation process, representatives of Goldman Sachs contacted Old Davel's
financial advisor, ABN AMRO, on March 17, 1998 to inquire about Old Davel's
interest in acquiring Peoples. On March 30, 1998, ABN AMRO notified Goldman
Sachs that Old Davel was not interested in a transaction with Peoples at such
time and declined the opportunity to receive the Confidential Information
Memorandum. Old Davel was not interested at such time because it had just
completed the acquisition of Communications Central Inc. ("CCI") in February
1998. In connection therewith, Old Davel had borrowed a significant amount of
funds to finance such transaction and was contemplating a public equity
offering to reduce its indebtedness. Old Davel was not prepared to proceed
with discussions regarding other significant business transactions until the
equity offering was completed.
Commencing in March 1998, representatives of EGI, a private investment
company controlled by Sam Zell, began reviewing and analyzing the public
payphone industry. Based on such initial review and analysis, EGI determined
that it was interested in pursuing discussions with one or more IPPs regarding
a possible investment by EGI. Thereafter, in late March and early April 1998,
EGI contacted representatives of each of Old Davel, Peoples and PhoneTel to
express an interest in meeting to discuss the public payphone industry. EGI
chose these three companies because they were the only substantial, publicly-
traded IPPs. Although representatives of EGI discussed the independent
payphone industry generally with other persons knowledgeable about such
industry, EGI did not contact any other IPPs with respect to a possible
investment.
In late March 1998, EGI contacted a representative of UBS Capital, a
significant shareholder of Peoples, to discuss a possible investment by EGI in
Peoples. The representative suggested that EGI contact Goldman Sachs.
Thereafter, EGI contacted Goldman Sachs and, in early April 1998, received
from Goldman Sachs a copy of the Confidential Information Memorandum relating
to the possible sale of Peoples.
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On April 1, 1998, the Peoples Board of Directors met and discussed the
status of Peoples' exploration of strategic alternatives and the related
process being undertaken by Goldman Sachs.
In early April 1998, EGI contacted PhoneTel's financial advisor to discuss
the public payphone industry. Thereafter, in early April 1998, representatives
of EGI met in New York with representatives of PhoneTel and a financial
advisor of PhoneTel to discuss the public payphone industry and a possible
equity investment by EGI in PhoneTel. Discussions continued through April and
into early May 1998.
In order to repay a portion of the indebtedness incurred pursuant to Old
Davel's credit agreement in connection with Old Davel's acquisition of CCI in
February 1998, Old Davel had announced in March 1998 its intent to complete a
public offering of shares of Old Davel Common Stock. Shortly thereafter, a
representative of EGI contacted David R. Hill, the Chairman of the Board of
Old Davel, to discuss the public payphone industry. Thereafter, in early April
1998, representatives of EGI met in Jacksonville, Illinois with Mr. Hill and
Michael E. Hayes, the Senior Vice President and Chief Financial Officer of Old
Davel, to discuss the industry. At such meeting, representatives of EGI and
Old Davel agreed to continue their discussions. During the remainder of April,
representatives of EGI and Old Davel had several additional telephone
conversations and agreed to meet on May 1, 1998.
On April 27, 1998, EGI sent a letter to Goldman Sachs indicating EGI's
interest in purchasing substantially all of the outstanding shares of Peoples
Common Stock.
On May 1, 1998, representatives of EGI met with David R. Hill, Robert D.
Hill, Michael E. Hayes, and Paul B. Demirdjian, the Chairman of the Board,
President and Chief Executive Officer, Senior Vice President and Chief
Financial Officer, and Senior Vice President of Operations, respectively, of
Old Davel and representatives of ABN AMRO, Old Davel's financial advisor. The
representatives of Old Davel and ABN AMRO made presentations to EGI with
respect to Old Davel and its business and discussed with EGI a possible
investment by EGI in Old Davel. At such meeting, EGI and Old Davel determined
to meet again the following week to continue EGI's review of Old Davel and its
business and to continue their discussions with respect to a possible
investment by EGI.
On May 4, 1998, EGI sent a letter to Peoples containing a revised indication
of interest with respect to EGI's purchasing substantially all of the
outstanding Peoples Common Stock.
On May 7, 1998, representatives of EGI met with representatives of Old Davel
to continue EGI's review of Old Davel and its business and to continue their
discussions regarding a possible investment by EGI in Old Davel. At such
meeting, EGI and Old Davel determined to proceed to negotiate a significant
investment by EGI in Old Davel. Thereafter, on May 11, 1998, representatives
of EGI and Old Davel commenced meetings in Chicago to negotiate the terms of
definitive agreements for such investment.
The Old Davel Board of Directors met on May 11, 1998 to consider the
proposed investment by EGI in Old Davel. At the meeting, Old Davel's
management and ABN AMRO made presentations to the Old Davel Board of Directors
regarding the proposed EGI Investment.
At a special meeting held on May 14, 1998, the Old Davel Board of Directors
met to consider further the proposed EGI Investment. At such time, the Old
Davel Board of Directors received reports from management, ABN AMRO and Old
Davel's counsel as to the progress of the negotiations with EGI and discussed,
among other things, the reputation of EGI, the history of its investments in
other companies, the terms under negotiation and other alternatives to the EGI
Investment, including the previously proposed public offering by Old Davel. In
addition, the Old Davel Board of Directors discussed EGI's proposal that the
size of the Old Davel Board be reduced from nine directors to seven, with two
being nominated by EGI. Accordingly, four of the current directors would be
asked to resign upon completion of the EGI Investment. With the assistance of
ABN AMRO, the Board analyzed the negotiated terms of EGI's proposal. ABN AMRO
delivered to the Board an opinion to the effect that the price being paid in
the EGI Investment was fair, from a financial point of view, to Old Davel
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and its shareholders. Thereafter, the Old Davel Board of Directors concluded
that the EGI Investment was in the best interests of Old Davel and its
shareholders. The Old Davel Board of Directors approved the EGI Investment,
and Old Davel, Samstock (an affiliate of EGI), Mr. David R. Hill and certain
other directors and members of the senior management of Old Davel then
executed and delivered stock purchase agreements. On May 15, 1998, Old Davel
publicly announced the EGI Investment and the termination of its previously
announced plans for a public offering of equity securities.
In connection with its investment in Old Davel, EGI agreed, among other
things, that, for a period of three years following its investment in Old
Davel, EGI would not effect any acquisition of any entity the principal
business of which is the operation of a network of payphones. As a result of
such agreement, following the execution of definitive agreements with respect
to the EGI Investment in Old Davel, EGI contacted Peoples and PhoneTel to
inform them that EGI had agreed to make an investment in Old Davel and to
inform them of the agreement described in the immediately preceding sentence,
which would preclude EGI from continuing discussions with respect to a direct
investment.
Following EGI's agreement to invest in Old Davel, EGI and Old Davel engaged
in discussions with each other with respect to other acquisition
opportunities, including Peoples and PhoneTel.
Beginning in April 1998, representatives of Goldman Sachs received
indications of interest for acquiring Peoples in response to their contacts
with over 30 potential bidders and related such indications to Peoples'
management. On May 21, 1998, following the public announcement of the
execution of a definitive agreement with respect to the EGI Investment and the
abandonment of Old Davel's previously announced public offering process,
representatives of Goldman Sachs approached representatives of ABN AMRO to
inquire whether Old Davel would now be interested in entering into a
transaction with Peoples and, if so, to request that Old Davel submit a
written preliminary indication of interest.
On May 28, 1998, representatives of Old Davel and PhoneTel met in New York
to begin to negotiate the terms of definitive agreements with respect to a
proposed combination of Old Davel and PhoneTel.
On May 29, 1998, Old Davel sent a preliminary indication of interest to
Peoples proposing that Old Davel enter into a stock-for-stock merger
transaction with Peoples. Such proposal contemplated that shareholders of
Peoples would receive shares of Old Davel Common Stock with a value equal to
$6.00 for each share of Peoples Common Stock although a specific exchange
ratio was not proposed. Neither such proposal (which was made prior to the
time that Old Davel met with Peoples management or undertook its due diligence
review of Peoples) nor the final Exchange Ratio was based on any appraisal of
Peoples or any of its businesses.
Several other potential bidders met with management of Peoples and
representatives of Goldman Sachs during May and early June 1998. Ultimately,
the Peoples Board of Directors determined that the transaction negotiated
between Davel and Peoples was the financially superior transaction of all
transactions discussed.
On May 29, 1998, the Old Davel Board of Directors met to consider the
proposed transaction with PhoneTel. At the meeting, Old Davel's management and
financial advisor discussed the proposed PhoneTel transaction and made
presentations to the Old Davel Board of Directors regarding the proposed
PhoneTel transaction.
During the period May 29 through June 3, 1998, representatives of Old Davel
and PhoneTel continued discussions regarding the proposed combination of
PhoneTel and Old Davel, and conducted due diligence of each other.
On June 1 and 2, 1998, representatives of Old Davel met with representatives
of Peoples. At such meetings, representatives of Peoples provided information
to Old Davel with respect to Peoples' financial performance, operations,
organization and management.
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On June 4, 1998, representatives of Old Davel and PhoneTel commenced
meetings in New York to continue and conclude the negotiation of definitive
agreements with respect to the proposed PhoneTel transaction. Such discussions
continued through early June 1998 and resulted in an agreement in principle
(ultimately reflected in a final merger agreement that was later terminated)
that PhoneTel shareholders would receive New Davel Common Stock valued at
$3.08 per share of PhoneTel common stock.
The Old Davel Board of Directors met on June 11, 1998 to further consider
the proposed transaction with PhoneTel. At such meeting, the Old Davel Board
of Directors unanimously approved a merger agreement with PhoneTel (the
"Davel/PhoneTel Merger Agreement"). On June 11, 1998, at a special meeting of
the PhoneTel Board of Directors held telephonically, the PhoneTel Board of
Directors also approved the merger agreement. The Davel/PhoneTel Merger
Agreement was executed on June 11, 1998, and on June 12, 1998, Old Davel and
PhoneTel publicly announced the signing of the Davel/PhoneTel Merger
Agreement.
On June 16, 1998, following the Peoples Annual Meeting of Shareholders,
management of Old Davel discussed with Peoples' CEO and the Peoples
Acquisition Committee and representatives of Goldman Sachs a proposed
combination involving Peoples and Old Davel. At such meeting, Old Davel
provided information regarding the integration of the operations of CCI into
Old Davel. Old Davel also provided an analysis of the synergies that could
possibly be expected to result from a business combination of Old Davel and
Peoples as well as projections with respect to a combination of Old Davel and
PhoneTel and separate projections for a combination of Peoples, Old Davel and
PhoneTel. At the conclusion of the meeting, Old Davel reiterated its proposal
set forth in its May 29 letter and notified the Peoples Acquisition Committee
and Peoples' management that such proposal was made on the basis that Peoples
negotiate with Old Davel on an exclusive basis. After analyzing other
indications of interest received in connection with the solicitations of
interest, Peoples then agreed to negotiate with Old Davel on an exclusive
basis and so informed Old Davel on June 18, 1998.
The Peoples Acquisition Committee, through representatives of Goldman Sachs,
conducted negotiations with representatives of Old Davel on June 18 and 19 and
reached tentative agreement on a fixed exchange ratio (the "Exchange Ratio")
of 0.235 of a share of Old Davel Common Stock per share of Peoples Common
Stock (representing $6.17 per share based upon the closing sales price of Old
Davel Common Stock on June 19, 1998) subject to further agreement on a variety
of economic and non-economic factors. During such period and in the following
weeks, individual members of Peoples' management and of the Peoples Board of
Directors held informal discussions with Peoples' financial and legal advisors
regarding the status and terms of the potential transaction. Negotiations
among the companies and their advisors regarding a merger agreement commenced
on June 19, 1998 and Davel delivered an initial draft of such agreement to
Peoples and its financial and legal advisors on June 20, 1998. During the week
of June 22, 1998, Old Davel and Peoples conducted due diligence of each other.
Peoples also conducted due diligence of PhoneTel.
On June 25, 1998, the Peoples Board of Directors, at a telephonic meeting,
discussed with Peoples' management and its financial and legal advisors the
proposed business combination, including the principal terms to be
incorporated in a definitive agreement between the companies and the status of
the negotiations between the parties. Following these discussions, the Peoples
Board of Directors authorized management to continue negotiations with Old
Davel, which were ongoing throughout that weekend.
The Peoples Board of Directors held another telephonic meeting on June 28,
1998 with its management and its financial and legal advisors to again discuss
the status of the negotiations with Old Davel, the terms of the draft Merger
Agreement, and legal, financial and accounting matters relating to the
proposed transaction.
On June 29, 1998, the Old Davel Board of Directors met to consider the
proposed transaction with Peoples. At the meeting, Old Davel's management and
financial advisor made presentations to the Old Davel Board of Directors
regarding the proposed transaction.
During the week of June 29, 1998, representatives of Old Davel and
representatives of UBS Capital negotiated the terms on which UBS, as the sole
shareholder of the Peoples Series C Preferred Stock, would consent to a merger
transaction. Each party's representatives negotiated the terms on which UBS
would vote its
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shares in favor of the transaction, the terms of registration rights for the
New Davel Common Stock that UBS would receive in the transaction, and the
terms on which UBS would be entitled to a seat on the New Davel Board of
Directors. Such negotiated terms were reflected in a draft UBS Voting
Agreement.
On June 29 and 30, 1998, the EGI Investment was consummated. On June 30,
1998, at a special meeting of the Old Davel Board of Directors, Samuel Zell
and F. Philip Handy, representatives of Samstock, were elected to the Old
Davel Board of Directors after Messrs. Theodore C. Rammelkamp, Jr., Paul B.
Demirdjian, Michael G. Kouri and Glen E. Barber resigned as directors of Old
Davel in connection with arrangements entered into as part of the EGI
Investment. These four resignations, and the net reduction in the size of the
Old Davel Board of Directors from nine to seven, were agreed upon as part of
the terms of the EGI Investment.
Negotiation of the Original Merger Agreement continued until July 5, 1998.
On that date, at a special telephonic meeting of the Peoples Board of
Directors, Peoples' management updated the Peoples Board of Directors on the
status and terms of the proposed transaction and the proposed Merger
Agreement. Representatives of Goldman Sachs discussed Goldman Sachs' financial
analyses relating to the proposed transaction. Peoples' legal advisors also
reviewed in detail the terms of the Original Merger Agreement and other legal
aspects of the transaction. In addition, Goldman Sachs delivered its oral
opinion (subsequently confirmed in writing) to the effect that, as of such
date, the Exchange Ratio was fair from a financial point of view to holders of
Peoples Common Stock. After discussion, the Peoples Board of Directors
unanimously determined that the Transaction contemplated by the Original
Merger Agreement was in the best interests of Peoples' shareholders and
approved the Original Merger Agreement and the Transaction and unanimously
resolved to recommend that the shareholders of Peoples vote to approve and
adopt the Original Merger Agreement. For a discussion of the reasons for the
Peoples Board of Directors' decision and factors considered by the Peoples
Board of Directors, including the opinion of Goldman Sachs, see "--
Recommendation of the Peoples Board of Directors; Reasons of Peoples for the
Transaction."
The Old Davel Board of Directors met on July 5, 1998 to further consider the
proposed transaction. At the meeting, Old Davel's management and legal and
financial advisors made presentations to the Old Davel Board of Directors
regarding the proposed transaction. Old Davel's legal advisors summarized the
terms of the proposed Original Merger Agreement and related agreements. Old
Davel's management presented its evaluation of Peoples and the proposed
transaction and summarized results of due diligence conducted on Peoples. ABN
AMRO reviewed with the Old Davel Board of Directors various financial and
other information and delivered its oral opinion (subsequently confirmed in
writing) that, as of July 5, 1998, the consideration to be paid by Old Davel
in connection with the transaction was fair to Old Davel and its shareholders
from a financial point of view. Thereafter, the Old Davel Board of Directors
unanimously approved the Original Merger Agreement and the transactions
contemplated thereby, including the UBS Voting Agreement.
During the evening of July 5, 1998, the Original Merger Agreement was
executed, and on July 6, 1998, Old Davel and Peoples publicly announced the
signing of the Original Merger Agreement.
On September 29, 1998, Old Davel announced that it was exercising its
contractual rights to terminate the Davel/PhoneTel Merger Agreement, based on
breaches of representations, warranties and covenants by PhoneTel. On October
1, 1998, Old Davel filed a lawsuit in Delaware Chancery Court seeking damages,
rescission of the Davel/PhoneTel Merger Agreement and a declaratory judgment
that such breaches occurred. See "Business of Old Davel--Legal Proceedings."
On October 22, 1998, Old Davel, New Davel and Peoples amended and restated
the Original Merger Agreement by entering into the Merger Agreement, the
material terms of which are described in "The Merger Agreement" below and a
copy of which is attached as Appendix III to this Joint Proxy
Statement/Prospectus. The reason that Old Davel and Peoples amended the
Original Merger Agreement was to implement a structure pursuant to which Old
Davel and Peoples will become indirect, wholly owned subsidiaries of New Davel
(as opposed to the prior structure, pursuant to which Peoples was to become a
wholly owned subsidiary of Old Davel). Old Davel and Peoples believe that this
holding company structure would result in corporate law benefits and would
provide desirable financing and operating flexibility for New Davel.
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RECOMMENDATION OF THE OLD DAVEL BOARD OF DIRECTORS; REASONS OF OLD DAVEL FOR
THE TRANSACTION
At meetings of the Old Davel Board of Directors held on June 29, 1998 and
July 5, 1998, the Old Davel Board of Directors received and considered the
presentations of management of Old Davel and its legal and financial advisors
regarding the proposed Transaction. On July 5, 1998, the Old Davel Board of
Directors unanimously approved the Original Merger Agreement. On October 22,
1998, the Old Davel Board of Directors unanimously approved amending and
restating the Original Merger Agreement to become the Merger Agreement.
THE OLD DAVEL BOARD OF DIRECTORS HAS DETERMINED THAT THE TRANSACTION IS FAIR
TO AND IN THE BEST INTERESTS OF OLD DAVEL AND ITS SHAREHOLDERS.
In reaching its determination to approve the Transaction, the Old Davel
Board of Directors considered the following factors:
. Opportunities for Efficiencies and Cost Savings. The Old Davel Board of
Directors considered that Old Davel, when combined with Peoples, will be
the largest IPP in the United States, with an installed base of
approximately 83,000 payphones. The Old Davel Board of Directors also
considered that Old Davel, together with Peoples, would have
opportunities for increasing profitability through significant cost
savings, operating efficiencies, economies of scale, stronger market
position and other synergies stemming from the combination of such
companies. Principal areas of cost savings include lower line and
transmission costs, lower field operating costs through more efficient
concentration of payphone routes and elimination of duplicative
administrative and operational facilities. The Old Davel Board of
Directors was advised by management that, excluding the effect of one-
time merger-related expenses, the combined company was estimated to
achieve, within two years after the closing of the merger transactions,
annual savings and improvements attributable to such operating factors of
approximately $10 million from the Transaction.
. Enhanced Sales and Marketing Opportunities. The Old Davel Board of
Directors considered (1) the current trend toward consolidation of IPPs,
(2) the prospect for further changes in the IPP sector and the
telecommunications industry as a whole, and (3) the importance of
operational scale, greater financial resources and an expanded
geographical base in becoming a market leader in providing payphone
services and remaining competitive in the long term. In that regard, the
Old Davel Board of Directors considered that the Transaction would expand
the number of payphones to be operated by New Davel from approximately
40,000 to approximately 83,000, establishing New Davel as the market
leader among IPPs. In addition, the Old Davel Board of Directors
considered that the Transaction would expand the geographical base in
which Old Davel operates payphones from 36 states to 42 states. The Old
Davel Board of Directors considered that these factors would further Old
Davel's goal of becoming the premier IPP in the United States, capable of
providing payphone service to national and regional location owners
throughout the United States, significantly reducing the need to utilize
brokers or subcontractors, as compared to the RBOCs, other LECs and other
competitors that operate principally within a specific geographical
region. The Old Davel Board of Directors considered that such factors may
enhance the combined entity's ability to procure national accounts that
require payphone service over a broad or dispersed geographical base. In
addition, the Old Davel Board considered the prospect that such factors
would enhance the prospects for "Davel" to become recognized as a
national "brand name," further enhancing the ability of New Davel to
procure such accounts.
. Financial Considerations. In evaluating the Transaction, the Old Davel
Board of Directors considered information with respect to the financial
condition, results of operations and businesses of Peoples, on both
historical and prospective basis, and current industry, economic and
market conditions as they would be likely to affect Peoples.
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. Pro Forma Impact on Davel. The Old Davel Board of Directors considered
information relating to the pro forma impact of the Transaction on the
financial condition and results of operations of New Davel. The Old Davel
Board of Directors also considered the dilutive effect of the issuance of
additional stock in connection with the Transaction and the likely effect
of such issuance on the earnings per share and cash flow per share of New
Davel. While the Old Davel Board of Directors recognized that the
Transaction would be dilutive with respect to earnings per share
following consummation of the Transaction, the Old Davel Board of
Directors also considered the prospect that the Transaction should become
accretive to earnings per share in the future and therefore provide
greater returns to Old Davel and its shareholders than would be the case
if the Transaction were not to occur.
. Financing Costs. The Old Davel Board of Directors also considered annual
cost savings attributable to reductions in financing costs that it
expects will result from the Transaction, which were estimated to be
approximately one million dollars. It also took into account the
uncertainties and risks associated with achieving potential savings
related to reductions in financing costs, including general economic
factors, the condition of the financial markets and factors affecting the
telecommunications or payphone industries.
. Opportunities with Respect to Future Acquisitions. The Old Davel Board of
Directors also considered the effect of the combined financial resources
of Old Davel and Peoples and the ability of New Davel to effect
subsequent acquisitions. The Old Davel Board of Directors considered the
additional costs savings that can be realized from future acquisitions
due to the expanded geographical presence and increased payphone route
density of New Davel.
. Increased Market Capitalization and Financial Resources. The Old Davel
Board of Directors considered that the market capitalization of New Davel
will be larger than Old Davel's current capitalization (increasing from
approximately $143 million to approximately $263 million based on the
closing sales prices of Old Davel Common Stock and Peoples Common Stock
as of July 2, 1998, the last trading day prior to approval of the
Transaction by the Old Davel Board of Directors), allowing New Davel to
have additional access to debt and equity markets.
. Fairness Opinion. The Old Davel Board of Directors considered as
favorable to its determination the oral opinion rendered by ABN AMRO
(subsequently confirmed in writing) that, as of July 5, 1998, and based
upon and subject to the matters expressed in the opinion, the
consideration to be paid by Old Davel in connection with the Transaction
was fair to Old Davel and its shareholders from a financial point of
view. The written opinion of ABN AMRO and the analyses underlying such
opinion are summarized below, and a complete copy of such opinion,
setting forth the procedures followed, the matters considered, the scope
of the review undertaken and the assumptions made by ABN AMRO, is
included as Appendix I to this Joint Proxy Statement/Prospectus. See "--
Fairness Opinion of Old Davel Financial Advisor."
. Advanced Technology. The Old Davel Board of Directors also considered
that virtually all of the payphones to be operated by New Davel would be
"smart" microprocessor-based telephones enabling sophisticated remote
monitoring (including coin revenue detail and notification of equipment
malfunctions).
. Terms of the Merger Agreement and Related Agreements. The Old Davel Board
of Directors took into consideration the terms of the Merger Agreement
and the agreements contemplated thereby, including the form and amount of
consideration to be paid to shareholders of Peoples and the
representations, warranties, covenants and conditions contained in such
agreements.
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. Tax and Accounting Treatment. The Old Davel Board of Directors considered
that the Transaction was expected to be tax-free to shareholders of Old
Davel and Peoples (other than with respect to cash received in lieu of
fractional shares of New Davel Common Stock) and to be accounted for as a
pooling of interests for financial accounting purposes. The Old Davel
Board of Directors also considered that the obligation of Old Davel to
consummate the Transaction is conditioned upon receipt of a letter from
Old Davel's independent public accountants to the effect that accounting
for the Transaction as a pooling of interests for financial accounting
purposes is appropriate and an opinion from Old Davel's counsel that the
Transaction would be treated as a tax-free reorganization for federal
income tax purposes.
The foregoing discussion of the factors considered by the Old Davel Board of
Directors is not intended to be exhaustive but is believed to include all
material factors considered by the Old Davel Board of Directors. In light of
the number and variety of factors the Old Davel Board of Directors considered
in connection with its evaluation of the Transaction, the Old Davel Board of
Directors did not find it practicable to, and did not, assign any specific or
relative weights to the foregoing factors, and, individual directors may have
given differing weights to different factors.
RECOMMENDATION OF THE PEOPLES BOARD OF DIRECTORS; REASONS OF PEOPLES FOR THE
TRANSACTION
At meetings of the Peoples Board of Directors held on June 25, 1998 and July
5, 1998, the Peoples Board of Directors received and considered the
presentations of management of Old Davel and its legal and financial advisors
regarding the Transaction. At the meeting of the Peoples Board of Directors
held on July 5, 1998, the Peoples Board of Directors unanimously determined
that the terms of the Transaction were fair to, and in the best interests of,
Peoples and its shareholders and approved and adopted the Merger Agreement. In
addition, at that meeting, the Peoples Board of Directors unanimously
determined to recommend to the shareholders of Peoples that such shareholders
vote to approve and adopt the Merger Agreement. On October 20, 1998, the
Peoples Board of Directors unanimously approved amending and restating the
Original Merger Agreement. In reaching its determination to approve the
Transaction, the Peoples Board of Directors concluded that holding 0.235 of a
share of New Davel Common Stock represented a more favorable investment
opportunity than holding one share of Peoples Common Stock, after taking into
account the risks inherent in each investment. In evaluating such investment
opportunity, the Peoples Board of Directors considered all relevant factors
and information, including the following:
. the fact that the Exchange Ratio of 0.235 of a share of New Davel Common
Stock per share of Peoples Common Stock represented (based on the
$24.9375 per share closing market price for Old Davel Common Stock on
July 2, 1998, the last trading day prior to the execution of the Merger
Agreement)
--a premium of approximately 88% to the $3.125 per share closing market
price of Peoples Common Stock on July 2, 1998, and
--a premium of approximately 109% to the $2.80 per share average closing
market price of Peoples Common Stock for the last 30 trading days prior
to execution of the Original Merger Agreement;
. the fact that shareholders of Peoples would own, based on the Exchange
Ratio, approximately 44.7% of the outstanding Old Davel Common Stock
after giving effect to the Transaction,
. the history of the negotiations with respect to the Exchange Ratio
(including Old Davel's refusal to increase beyond $6.17 the per share
value of Peoples Common Stock upon which the Exchange Ratio was based)
and the belief of the members of the Peoples Board of Directors that the
financial terms reflected in the Merger Agreement represented the best
financial terms that could be obtained from Old Davel;
. the fact that the solicitation by Goldman Sachs of potential acquirors of
Peoples did not result in any offers that were believed by the Peoples
Board of Directors to be financially superior to the Transaction;
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. the July 5, 1998 oral opinion of Goldman Sachs, which was subsequently
confirmed in writing, to the effect that as of such date the Exchange
Ratio was fair from a financial point of view to the holders of Peoples
Common Stock and the financial analyses presented to the Peoples Board of
Directors by Goldman Sachs in connection with the delivery of its opinion
(see "--Fairness Opinion of Peoples Financial Advisor");
. the likelihood of consolidation in the payphone business and the
importance of size and national scope in achieving a stronger competitive
position and profitability;
. the opportunity for shareholders of Peoples to become holders of New
Davel Common Stock, which the Peoples Board of Directors believed would
perform at least as well as Peoples Common Stock over the long term and
would be likely to have greater liquidity than Peoples Common Stock;
. the financial condition, assets, results of operations, business and
prospects of Peoples, and Old Davel and the risks inherent in achieving
those prospects (for a discussion of certain such risks, see "Risk
Factors") and, in particular, the fact that the Transaction would be
expected to be dilutive to Old Davel unless synergies are achieved;
. the opportunities for operational efficiencies that may result from a
combination of Peoples and Old Davel, including:
--a potential reduction in field operating costs through more efficient
concentration of payphone routes,
--the ability to leverage certain general and administrative functions
over a larger operational and revenue base, including by combining
corporate headquarters and certain other offices, and
--the opportunity to negotiate lower line and transmission costs from
LECs and IXCs and higher commission payments from OSPs,
as well as the difficulties and management distractions inherent in
integrating the operations of such companies and achieving such
efficiencies;
. the increased growth potential that may result from a combination of
Peoples and Old Davel, including as a result of:
--the greater financial stability and strength of the combined company,
--the advantages arising from operating a nationwide system of
approximately 83,000 public telephones, and
--the opportunity to raise consumer awareness of the combined company and
its reputation,
as well as the difficulties in achieving such growth while integrating
the operations of such companies;
. the terms and conditions of the Merger Agreement and the Termination
Option Agreement (as described below), including the nature of the
parties' representations, warranties, covenants and agreements (which the
Peoples Board believed would provide reasonably adequate certainty that
Peoples would be able to require Old Davel to consummate the
Transaction), as well as the provisions that permit Peoples to consider
additional bona fide third party offers to acquire Peoples and permit
Peoples to provide information to and negotiate with such parties and,
subject to the payment of significant fees and expenses to Old Davel, to
terminate the Merger Agreement (see "The Merger Agreement");
. the regulatory approvals required to consummate the Transaction and the
prospects for receiving such approvals;
. the advice of Shearman & Sterling, special counsel to Peoples, that the
Transaction is expected to be treated as a tax-free reorganization for
federal income tax purposes (see "--Federal Income Tax Considerations");
. the advice of Peoples' independent public accountants that they concur
with Peoples management's conclusion that no conditions exist related to
Peoples that would preclude Davel's accounting for the Transaction as a
pooling of interests for financial accounting purposes (see "--Accounting
Treatment");
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. the terms of the EGI Investment, in particular the price paid, and the
fact that representatives of EGI would be expected to serve on the Board
of Directors of the combined company (see "--Background"); and
. the risk that the Transaction would not be consummated, and the potential
adverse effects on Peoples' business, operations and financial condition
should it not be possible to consummate the Transaction following public
announcement that the Merger Agreement had been entered into (including
adverse effects resulting from the expenses incurred by Peoples in
connection with the Transaction and the possibility of having to pay
termination fees to Old Davel, as well as adverse effects resulting from
possible loss of customers and employees in reaction to the announcement
or as a result of management being distracted from operating the business
while working to consummate the Transaction).
At the time of the meetings of the Peoples Board of Directors held on June
25, 1998 and July 5, 1998, Old Davel was a party to the Davel/PhoneTel Merger
Agreement. Since consummation of the Davel/PhoneTel Merger Agreement was not a
condition to consummation of the proposed transaction between Old Davel and
Peoples, the Peoples Board of Directors, in reaching its decision with respect
to the proposed transaction, considered the above factors with respect to both
a combination of Old Davel and Peoples and a combination of Old Davel, Peoples
and PhoneTel.
The foregoing discussion of the information and factors considered by the
Peoples Board of Directors is not intended to be exhaustive, but is believed
to include all material factors considered by the Peoples Board of Directors.
In light of the number and variety of information and factors the Peoples
Board of Directors considered in connection with its evaluation of the
Transaction, the Peoples Board of Directors did not find it practicable to,
and did not, assign any specific or relative weights to the foregoing factors,
and, individual directors may have given differing weights to different
factors. For a discussion of the interests of certain members of Peoples'
management and the Peoples Board of Directors in the Transaction, see "--
Interests of Certain Persons." The Peoples Board of Directors recognized such
interests and determined that such interests neither supported nor detracted
from the fairness of the Transaction to Peoples' shareholders. For a
discussion of the potential interests of Peoples' financial advisor, see "--
Fairness Opinion of Peoples Financial Advisor."
THE PEOPLES BOARD OF DIRECTORS HAS APPROVED AND ADOPTED THE MERGER AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED THEREBY BY A UNANIMOUS VOTE AND BELIEVES
THAT THE TERMS OF THE TRANSACTION ARE FAIR TO, AND IN THE BEST INTERESTS OF,
PEOPLES AND ITS SHAREHOLDERS. ACCORDINGLY, THE PEOPLES BOARD OF DIRECTORS
RECOMMENDS THAT PEOPLES SHAREHOLDERS VOTE TO APPROVE AND ADOPT THE MERGER
AGREEMENT.
FAIRNESS OPINION OF OLD DAVEL FINANCIAL ADVISOR
At the meeting of the Old Davel Board of Directors on July 5, 1998, ABN AMRO
delivered its oral opinion (subsequently confirmed in writing) that, as of
such date, and subject to certain assumptions, factors and limitations set
forth in its written opinion, the consideration to be paid in connection with
the proposed Transaction pursuant to the terms of the Merger Agreement was
fair to Davel and its shareholders from a financial point of view. THE FULL
TEXT OF THE WRITTEN OPINION OF ABN AMRO DATED JULY 5, 1998, WHICH SETS FORTH
THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED HERETO AS APPENDIX I TO
THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY REFERENCE.
SHAREHOLDERS OF OLD DAVEL SHOULD READ THIS OPINION IN ITS ENTIRETY. ABN AMRO's
opinion was prepared for the Old Davel Board of Directors and addresses only
the fairness of the consideration to be paid by Old Davel pursuant to the
Merger Agreement from a financial point of view. The opinion does not
constitute a recommendation to any shareholder of Old Davel with respect to
whether to vote his or her shares in favor of the issuance of shares pursuant
to the Transaction. The summary of the opinion of ABN AMRO set forth herein is
qualified in its entirety by reference to the full text of such opinion.
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In arriving at its opinion, ABN AMRO reviewed certain available business and
financial information relating to Old Davel and Peoples. In addition to the
Original Merger Agreement, ABN AMRO also reviewed certain other information,
including financial forecasts provided by Old Davel and Peoples. ABN AMRO met
with the management of Old Davel and Peoples and discussed the past and
current operations, financial conditions and prospects of, and regulatory
environment affecting, Old Davel and Peoples. In addition, ABN AMRO considered
certain financial and stock market data for Old Davel and Peoples. ABN AMRO
compared that data with similar data for other publicly held companies in
businesses similar to those of Old Davel and Peoples and considered the
financial terms of certain other business combinations which have recently
been effected. ABN AMRO also analyzed the pro forma impact of the Transaction
on Old Davel's financial results. ABN AMRO has considered the potential impact
of the proposed transaction on Old Davel, based on conversations with Old
Davel management including management's estimates of potential cost savings
and operating synergies (the "Peoples Savings and Synergies") resulting from
the proposed combination, benefits resulting from greater scale, access to
management resources and New Davel's strategic position following the
Transaction and its implications for New Davel's ability to participate in
additional industry consolidation.
In rendering its opinion, ABN AMRO assumed and relied upon the accuracy and
completeness of the financial and other information reviewed by it, and it did
not make, obtain or assume any responsibility for independent verification of
such information. In addition, ABN AMRO did not make an independent evaluation
or appraisal of Peoples. With respect to financial projections, ABN AMRO
assumed that such projections were reasonably prepared on bases reflecting the
best currently available estimates and judgments of Old Davel's management as
to the future financial performance of Old Davel and Peoples on a stand-alone
basis and, after giving effect to the Transaction, the financial performance
of Old Davel, including the Peoples Savings and Synergies potentially
realizable in the proposed combination. ABN AMRO assumed that the
Davel/Peoples Merger will be consummated in accordance with the terms of the
Original Merger Agreement.
The following is a summary of the material financial analyses ABN AMRO
utilized in connection with providing its written opinion to the Old Davel
Board of Directors on July 5, 1998.
Purchase Price Ratio and Premium Analysis. For the purposes of analyzing the
fairness to Old Davel's shareholders of the consideration to be paid to
Peoples' shareholders in the merger transactions from a financial point of
view, ABN AMRO calculated certain valuation multiples based on a per share
value of $5.85 per share of consideration paid in Old Davel Common Stock
pursuant to the Merger Agreement (assuming a per share price of Old Davel
Common Stock of $24.875 based on Old Davel's closing stock price on June 26,
1998 and an exchange ratio of 0.235 pursuant to the Merger Agreement). In
arriving at the value of the total consideration contemplated in the proposed
transaction, ABN AMRO calculated the value of Peoples' in-the-money warrants
and options to be approximately $3.5 million, assuming an Old Davel share
price of $24.875 based on Old Davel's closing stock price on June 26, 1998.
ABN AMRO also assumed the value of the consideration (using the above
assumptions and pursuant to the terms of the Merger Agreement) offered to the
outstanding preferred stock to be approximately $21.7 million (assuming an Old
Davel share price of $24.875 based on Old Davel's closing stock price on June
26, 1998) and the value of the total indebtedness (including a redemption
premium) and capitalized leases to be approximately $114.3 million. ABN AMRO
calculated the total enterprise value (defined as value of the equity plus
total debt and preferred stock, less cash, also referred to as adjusted market
capitalization) as a multiple of Peoples' LTM EBIT, LTM EBITDA, estimated
calendar 1998 and 1999 EBITDA (as projected by Old Davel's management) and LTM
and estimated calendar 1998 sales as well as adjusted market capitalization
per payphone in operation. The proposed transaction represents multiples of
LTM EBITDA of 10.6x, estimated 1998 EBITDA of 9.6x, estimated 1999 EBITDA of
8.4x, LTM sales of 2.04x and estimated 1998 sales of 1.82x, and adjusted
market capitalization per payphone of $5,439.
In analyzing the consideration to be provided in the transaction, ABN AMRO
also considered the impact of possible Peoples Savings and Synergies
potentially realizable in a business combination with Peoples estimated by Old
Davel's management. These estimates of potential Peoples Savings and Synergies
were not independently
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verified by ABN AMRO nor did ABN AMRO express any opinion as to the possible
realization of such Peoples Savings and Synergies if a transaction were
consummated. Adjusting Peoples' financial performance for the potential
realization of the Peoples Synergies and Savings, the proposed transaction
represented multiples of LTM EBITDA of 6.7x; projected 1998 EBITDA of 6.3x;
and projected 1999 EBITDA of 5.7x.
ABN AMRO considered multiples calculated for the Transaction to multiples
observed for comparable public companies and in comparable transactions which
ABN AMRO deemed relevant, as detailed in the "--Comparable Public Company
Analysis" and the "--Comparable Transaction Analysis" described below.
ABN AMRO also calculated the percentage premium implied by the terms of the
Merger Agreement relative to the market price of the Peoples Common Stock one
day, one week and one month prior to the announcement of the transaction.
Based on this analysis and assuming consideration equivalent to $5.85 per
share of Peoples Common Stock, the implied purchase price represented premiums
to the historical stock prices described above of 85.1%, 99.1% and 117.7%,
respectively. Using average closing prices over the same periods yielded
premiums of 85.1%, 95.4% and 110.7%, respectively. These premiums were
compared to premiums observed in other transactions which ABN AMRO deemed
relevant as detailed in the "Control Premium Analysis" described below.
Comparable Public Company Analysis. ABN AMRO reviewed and analyzed
historical, current and projected financial, operating and stock market
information concerning Peoples, including Peoples' revenue, EBITDA, EBIT and
number of payphones in operation for the latest twelve months (LTM) ended
March 31, 1998, the fiscal years ended December 31, 1997 and 1996 and
estimates of anticipated results for the years ended December 31, 1998 and
1999 as well as Peoples' market capitalization as of June 26, 1998, prior to
the announcement of a transaction. Further, ABN AMRO noted that given the
recent changes in the regulatory environment and the anticipated impact on
industry growth and profitability, public market valuations were based on,
among other measures, estimates of financial performance for calendar years
1998 and 1999.
ABN AMRO also reviewed selected financial ratios, including EBITDA and EBIT
margins, average revenue and expense per payphone in operation and debt-to-
capitalization parameters among other ratios. ABN AMRO compared this
information to publicly available information with respect to other publicly
traded independent payphone service providers, including ChoiceTel and Old
Davel, both stand-alone (pro forma for the EGI Investment) and pro forma for
the pending PhoneTel Transaction, as well as Peoples' public market valuation
prior to the announcement of the proposed merger transaction between Old Davel
and Peoples. In this comparative analysis, ABN AMRO noted several significant
factors. Peoples was most similar in revenue and number of payphones in
service to Old Davel and PhoneTel; however, Peoples was most similar to
PhoneTel in terms of its profitability and leverage characteristics. ABN AMRO
further noted that ChoiceTel was significantly smaller in terms of revenue and
payphone base than the other independent payphone service providers and as
such was of limited comparability to Peoples. ABN AMRO also considered other
route-based, coin-operated, relatively fragmented industries as other possible
comparables. ABN AMRO noted that they traded at higher valuations and did not
reflect the regulatory climate influencing the independent payphone sector and
therefore were of limited comparability for valuation purposes. However, given
the limited number of comparable public companies, ABN AMRO considered the
relative valuations of these companies giving consideration to the relatively
higher regulatory risk of the payphone industry in arriving at a range of
multiples to compare to the valuation of the Transaction.
Accordingly, ABN AMRO calculated multiples of adjusted market capitalization
(defined as market value of common equity plus total debt and preferred stock,
less cash), as of June 26, 1998, for each of the comparable companies and
Peoples as a multiple of LTM EBITDA, estimated 1998 and 1999 EBITDA, LTM and
estimated 1998 sales and current number of payphones in operation and compared
these multiples to those observed in the Transaction.
An analysis of market multiples of LTM EBITDA indicated a range of 7.8x to
11.7x; estimated 1998 EBITDA multiples ranged from 7.2x to 9.0x; estimated
1999 EBITDA multiples ranged from 5.7x to 7.9x; LTM
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sales multiples ranged from 1.53x to 2.76x; estimated 1998 sales multiples
ranged from 1.33x to 2.19x; and adjusted market capitalization per payphone
ranged from $4,078 to $5,979 per payphone. Estimates of calendar years 1998
and 1999 financial performance were based on Old Davel's management's and
industry forecasts.
ABN AMRO reviewed Peoples' operating results for the latest twelve months
ended March 31, 1998, as well as Peoples management's financial forecasts for
the calendar years 1998 and 1999, and determined that such forecasts were the
most appropriate for valuation purposes. ABN AMRO noted that, assuming an
implied purchase price under the Exchange Ratio of $5.85 per share, the
transaction multiples (assuming realization of anticipated Peoples Savings and
Synergies) were at or below the multiples at which Old Davel was trading on a
pro forma basis for the EGI Investment (approximately 7.3x estimated 1998
EBITDA, 5.8x forecasted 1999 EBITDA, 2.19x forecasted 1998 sales and $5,979
per payphone).
Control Premium Analysis. ABN AMRO analyzed the percentage premiums to
historical stock trading prices offered in stock transactions of $100 million
to $300 million in size announced since January 1, 1995. ABN AMRO calculated
the premium offered relative to the market price one day, one week and four
weeks prior to the announcement date of each transaction. The analysis
indicated that the ranges of percentage premiums one day, one week and four
weeks prior to announcement were 0.1% to 108.7%, 0.5% to 107.6% and 0.8% to
121.5%, respectively.
Comparable Transactions Analysis. ABN AMRO compared the valuation of Peoples
implied by the transaction as multiples of LTM EBITDA, Forward EBITDA
(calendar year EBITDA in the year of the transaction), LTM sales and purchase
price per payphone, with available data for 12 completed transactions
involving payphone industry participants which have taken place since March
1996. These transactions could be classified in two groups: (1) acquisitions
of small IPPs (less than 5,000 payphones) by larger IPPs ("Small
Acquisitions") and (2) acquisitions of companies with more than 10,000
payphones which serve to increase substantially the payphone base of the
acquiror ("Platform Acquisitions"). The Small Acquisitions included, but were
not limited to, (i) PhoneTel's acquisitions of London Communications, Inc.;
Advance Pay Systems, Inc.; Coinlink, LLC; Texas Coinphone; Payphones of
America; International Pay Phones; and Paramount Communications and (ii) the
acquisition of Crescent Public Comm. (a division of Amnex) by Coastal Telecom,
Garden State and BekTel. In these transactions, ABN AMRO observed valuations,
where available, ranging from $2,768 to $4,998 per payphone. ABN AMRO
concluded that such Small Acquisitions, while representing premiums for growth
and the opportunity to benefit from operating efficiencies through scale, were
not directly comparable to valuations observed in Platform Acquisitions.
ABN AMRO observed that the Platform Acquisitions involving targets most
comparable to Peoples' size and operating performance included Old Davel's
acquisition of CCI and PhoneTel's acquisition of Cherokee Communications. In
analyzing these transactions, ABN AMRO observed multiple ranges of LTM EBITDA,
Forward EBITDA, LTM sales and adjusted market capitalization per payphone of
6.7x to 13.7x, 4.8x to 5.4x, 1.6x to 1.9x and $4,161 to $5,072, respectively.
ABN AMRO noted that the multiples of Forward EBITDA, adjusted for the Peoples
Savings and Synergies, LTM Sales and adjusted market capitalization per
payphone implied by the Transaction were above the ranges observed in the
comparable transaction analysis. ABN AMRO observed that there were only two
Platform Acquisitions which had been completed with observable data. ABN AMRO
concluded that given the potential benefits to the Transaction described above
and not able to be quantified in this analysis (including the benefits from
increased scale, access to management resources and New Davel's enhanced
strategic position and its implications for New Davel's ability to participate
in additional industry consolidation), together with the favorable comparison
to the LTM EBITDA multiple in this analysis, and the data contained in the
other analyses including the "--Comparable Public Company Analysis", "--
Control Premium Analysis", "--Contribution Analysis", "--Share Trading
History" and "--Discounted Cash Flow Analysis" described herein, the merger
consideration paid by Old Davel in the Transaction was fair to Old Davel and
its shareholders from a financial point of view.
Contribution Analysis. ABN AMRO reviewed certain historical and projected
financial data, including sales and EBITDA for Old Davel and Peoples and the
pro forma combined entity resulting from the Transaction,
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excluding any potentially realizable Peoples Synergies and Savings. This
analysis indicated that based on Peoples' performance for calendar year 1997,
the LTM ended March 31, 1998 and Old Davel's projections of Peoples' 1998
performance, Peoples would contribute to the pro forma combined entity
approximately 52.7%, 50.7% and 55.0% of sales and 53.5%, 52.1% and 43.5% of
EBITDA, respectively, as compared to the approximately 44.1% diluted ownership
interest (based on the Exchange Ratio of 0.235 pursuant to the Merger
Agreement) of the combined entity to be acquired by the Peoples shareholders.
Share Trading History. ABN AMRO reviewed the performance of the trading
price and volume of Peoples' common shares for the one-year period from June
27, 1997 through June 25, 1998, and the three-year period from June 23, 1995
through June 25, 1998. This examination indicated that, during these periods,
the trading price of the shares ranged from $2.31 per share to $4.38 per share
and $1.81 per share to $4.94 per share, respectively.
Discounted Cash Flow Analysis. ABN AMRO prepared a discounted cash flow
("DCF") analysis of Peoples based on Old Davel's management's estimates of
Peoples' projected financial performance for the years ending 1998 through
2002. In the DCF analysis, ABN AMRO calculated a range of present values of
the sum of (i) Peoples' estimated free cash flows for the fiscal years ending
1998 through 2002 using discount rates ranging from 14.0% to 17.0% and (ii)
the estimated terminal value in fiscal year 2002 based on multiples of EBITDA
in fiscal 2002 ranging from 6.0x to 7.0x which were consistent with the
multiples indicated by the comparable company analysis. The terminal value was
also discounted to present value using the range of discount rates. Discount
rates and exit multiples were chosen to reflect growth prospects, relative
risks and market value considerations. With the derived discounted cash flows
and terminal values, ABN AMRO calculated the equity value per share for
Peoples (excluding any potentially realizable Peoples Synergies and Savings)
to range from $3.99 to $5.01 per share of Peoples Common Stock using discount
rates ranging from 14.0% to 16.0% and terminal value multiples ranging from
6.0x to 6.5x EBITDA. When allowing for the possible realization of the
anticipated Peoples Synergies and Savings, the DCF analysis implied equity
values per share for Peoples ranging from $6.96 to $8.36 compared to the
consideration of $5.85 per share (assuming an Exchange Ratio of 0.235). In
addition, ABN AMRO performed various sensitivity analyses for the Old Davel
Board of Directors' consideration relating to various levels of coin revenue
and dial-around compensation and possible attrition in Peoples' customer base
as well as the realization of the Peoples Synergies and Savings and advised
the Old Davel Board of Directors to focus on the values generated by the
scenarios they deemed to most appropriately reflect the operating risk
inherent in Peoples' business.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to practical analysis or summary description.
Selecting portions of the analysis or of the summary set forth above, without
considering the analysis as a whole, could create an incomplete view of the
processes underlying ABN AMRO's opinion. In arriving at its determination of
fairness from a financial point of view, ABN AMRO considered the results of
all such analyses. No company or transaction used in the above analyses as a
comparison was identical to Peoples or the Transaction. The analyses were
prepared solely for purposes of ABN AMRO's opinion provided to the Old Davel
Board of Directors as to the fairness of the consideration to be paid by Old
Davel pursuant to the Original Merger Agreement from a financial point of view
and do not purport to be appraisals or necessarily reflect the prices at which
businesses or securities actually may be sold. Analyses based upon forecasts
of future results are not necessarily indicative of actual future results,
which may be significantly more or less favorable than suggested by such
analyses. Because such analyses are inherently subject to uncertainty, being
based upon numerous factors or events beyond the control of the parties or
their respective advisors, none of Old Davel or ABN AMRO or any other person
assumes responsibility if future results are materially different from those
forecast.
Old Davel has agreed to pay ABN AMRO a non-contingent financial advisory fee
of $200,000 in connection with ABN AMRO's rendering of its opinion. From time
to time during the past two years, ABN AMRO has acted as a financial advisor
to Old Davel. In connection with such services, ABN AMRO was paid an aggregate
of $1,600,000.
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FAIRNESS OPINION OF PEOPLES FINANCIAL ADVISOR
On July 5, 1998, Goldman Sachs delivered its oral opinion (subsequently
confirmed in writing) to the Peoples Board of Directors to the effect that, as
of such date, the Exchange Ratio was fair from a financial point of view to
the holders of Peoples Common Stock.
THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS DATED JULY 5, 1998,
WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED AS APPENDIX II
TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE. HOLDERS OF PEOPLES COMMON STOCK ARE URGED TO, AND SHOULD, READ SUCH
OPINION IN ITS ENTIRETY.
In connection with its opinion, Goldman Sachs reviewed, among other things,
(1) the Original Merger Agreement; (2) the Davel/PhoneTel Merger Agreement;
(3) the Annual Reports to Stockholders and Annual Reports on Form 10-K of
Peoples, Old Davel and PhoneTel for the five years ended December 31, 1997;
(4) certain interim reports to stockholders and Quarterly Reports on Form 10-Q
of Peoples, Old Davel and PhoneTel; (5) certain other communications from
Peoples, Old Davel and PhoneTel to their respective stockholders; (6) certain
internal financial analyses and forecasts for Peoples, Old Davel and PhoneTel
prepared by their respective managements; and (7) certain internal financial
analyses and pro forma consolidated forecasts (including certain projected
cost savings and operating synergies) reflecting the combination of Old Davel
and PhoneTel, Old Davel and Peoples and Old Davel, PhoneTel and Peoples,
prepared by EGI. Goldman Sachs also held discussions with members of the
senior managements of Peoples, Old Davel and EGI regarding the strategic
rationale for, and potential benefits of, the transactions with Peoples and
PhoneTel and the past and current business operations, financial condition and
future prospects of Peoples, Old Davel and PhoneTel. In addition, Goldman
Sachs reviewed the reported price and trading activity for the Peoples Common
Stock and the Old Davel Common Stock; compared certain financial and stock
market information for Peoples and Old Davel with similar information for
certain other companies, the securities of which are publicly traded; reviewed
the financial terms of certain recent business combinations in the independent
payphone industry specifically and in other industries generally; and
performed such other studies and analyses as it considered appropriate.
Goldman Sachs relied upon the accuracy and completeness of all of the
financial and other information reviewed by it and assumed such accuracy and
completeness for purposes of rendering its opinion. In that regard, Goldman
Sachs assumed, with the consent of the Peoples Board of Directors, that the
financial analyses, forecasts and pro forma consolidated forecasts, including
the underlying assumptions, provided to it with respect to Old Davel,
PhoneTel, Peoples, and the transactions with Peoples and PhoneTel, including,
without limitation, the projected cost savings and operating synergies
expected to result from transactions with Peoples and PhoneTel, had been
reasonably prepared on a basis reflecting the best currently available
judgments and estimates of the managements of Peoples, Old Davel, PhoneTel and
EGI. In addition, Goldman Sachs did not make an independent evaluation or
appraisal of the assets and liabilities of Peoples, Old Davel or PhoneTel or
any of their respective subsidiaries and Goldman Sachs has not been furnished
with any such evaluation or appraisal. Goldman Sachs also assumed, with the
consent of the Peoples Board of Directors, that the transaction with Peoples
would be accounted for as a pooling of interests under generally accepted
accounting principles. The opinion referred to herein does not imply any
conclusion as to the likely trading range of the New Davel Common Stock
following consummation of the transaction with Peoples, which may vary
depending upon, among other factors, changes in interest rates, dividend
rates, market conditions, general economic conditions and other factors that
generally influence the price of securities. The opinion of Goldman Sachs
referred to herein was provided for the information and assistance of the
Peoples Board of Directors in connection with its consideration of the
Transaction and such opinion does not constitute a recommendation as to how
any holder of Peoples Common Stock should vote with respect to the
Transaction.
The following is a summary of material financial analyses used by Goldman
Sachs in connection with providing its opinion to the Peoples Board of
Directors dated July 5, 1998.
(i) Stock Trading Analysis. Goldman Sachs reviewed the historical trading
prices and volumes for the Peoples Common Stock and the Old Davel Common
Stock. In addition, Goldman Sachs analyzed the
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<PAGE>
implied market value of the equity consideration to be received by holders
of Peoples Common Stock pursuant to the Original Merger Agreement based on
per share prices for the Old Davel Common Stock ranging from $21.25 to
$29.50. Such analysis indicated that the price per share of Peoples Common
Stock that could be paid pursuant to the Original Merger Agreement ranged
from $4.99 to $6.93, which represented an equity premium ranging from 66.5%
to 131.1% based on a price per share of Peoples Common Stock of $3.00 (the
closing price per share of Peoples Common Stock on June 24, 1998).
(ii) Public Market Valuation Analysis. Goldman Sachs reviewed and
compared certain financial information ratios and public market multiples
for ChoiceTel, Peoples, Old Davel and PhoneTel (the "Payphone Companies").
ChoiceTel and PhoneTel were chosen because they are publicly traded
companies with operations that for purposes of analysis may be considered
similar to Peoples. Goldman Sachs calculated and compared various financial
multiples and ratios. The multiples of Peoples, Old Davel, PhoneTel and
ChoiceTel were calculated using prices of $2.56, $27.63, $1.88 and $3.50,
respectively, the respective closing prices of each such company's common
stock on their primary exchanges on which they are traded on June 11, 1998
(the day prior to the announcement of the Davel/PhoneTel Merger). The
multiples and ratios for the Payphone Companies were, in the case of
multiples and ratios based on historical results, based on publicly
available information and, in the case of multiples and ratios based on
estimated results, were (except in the case of Old Davel, which estimates
(except for EPS projections) were provided by the managements of Old Davel
and EGI) based on information provided by Hoak Breedlove Wesneski & Co.
equity research (other than EPS estimates, which were provided by IBES).
With respect to the Payphone Companies, Goldman Sachs considered levered
market capitalization (i.e., market value of common equity plus estimated
market value of debt less cash) as a multiple of 1997, LTM (to March 31,
1998) and projected 1998 revenues and as a multiple of 1997, LTM and
projected 1998 EBITDA. Goldman Sachs' analyses of Peoples, Old Davel,
PhoneTel and ChoiceTel indicated levered multiples of 1997 revenues of
1.4x, 2.6x, 1.7x and 1.7x, respectively, LTM revenues of 1.4x, 2.6x, 1.8x
and 1.5x, respectively, projected 1998 revenues of 1.2x, 2.5x, 1.5x and
1.2x, respectively, 1997 EBITDA of 7.5x, 18.1x, 7.5x and 4.7x,
respectively, LTM EBITDA of 7.8x, 14.3x, 9.3x and 4.1x, respectively, and
projected 1998 EBITDA of 5.5x, 7.9x, 5.3x, and 3.1x, respectively. Goldman
Sachs also considered for Old Davel and PhoneTel projected five-year EPS
growth rates (provided by IBES) of 25.0% and 20.0%, respectively.
(iii) Discounted Cash Flow Analysis. Goldman Sachs performed a discounted
cash flow analysis of Peoples on a stand-alone basis using projections
provided by management of Peoples (the "Peoples Case"). Goldman Sachs
calculated a net present value of free cash flows for 1998 through 2006
using discount rates ranging from 12.0% to 16.0%. Goldman Sachs calculated
Peoples' terminal values in 2006 based on multiples ranging from 5.0x
EBITDA to 9.0x EBITDA. These terminal values were then discounted to
present value using discount rates ranging from 12.0% to 16.0%.
Using Peoples' terminal values in 2006 based on multiples ranging from
5.0x EBITDA to 9.0x EBITDA and discounting these terminal values to present
value using discount rates ranging from 12.0% to 16.0%, the implied per
share values of the Peoples Common Stock ranged from $3.52 to $10.71.
(iv) Selected Transactions Analysis. Goldman Sachs analyzed certain
information relating to selected transactions in the independent payphone
provider industry since 1990 (the "Selected Transactions"). Such analysis
indicated that for the Selected Transactions (i) levered aggregate
consideration as a multiple of LTM revenues (in this analysis LTM refers to
the latest twelve months of available information prior to announcement of
the particular Selected Transaction) ranging from 0.7x to 2.2x with a mean
of 1.1x, as compared to 1.9x for the levered aggregate consideration to be
received in the Transaction (based on the closing price of the Old Davel
Common Stock on June 24, 1998) and (ii) levered aggregate consideration per
payphone acquired ranging from $534 to $10,975 with a mean of $3,809, as
compared to $5,149 for the levered aggregate consideration to be received
in the Transaction (based on the closing price of the Old Davel Common
Stock on June 24, 1998).
Goldman Sachs also analyzed and compared to the Transaction in greater
detail three of the Selected Transactions: the PhoneTel Transaction, EGI's
investment in Old Davel and Old Davel's acquisition of CCI (the "Recent
Transactions"). Such analysis indicated that for the Recent Transactions
(i) levered aggregate
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<PAGE>
consideration as a multiple of LTM revenues ranging from 1.2x to 2.2x, as
compared to 1.9x for the levered aggregate consideration to be received in
the Transaction, (ii) levered aggregate consideration as a multiple of
projected 1998 revenues (based on projections provided by Old Davel's and
EGI's management) ranging from 1.9x to 2.2x, as compared to 1.7x (in the
Davel/EGI Case) and 1.6x (in the Peoples Case) for the levered aggregate
consideration to be received in the Transaction, (iii) levered aggregate
consideration as a multiple of projected 1999 revenues (based on
projections provided by Davel's and EGI's managements) ranging from 1.8x to
2.0x, as compared to 1.6x (using projections provided collectively by the
management of each of EGI and Old Davel, the "Davel/EGI Case") and 1.5x (in
the Peoples Case) for the levered aggregate consideration to be received in
the Davel/Peoples Merger, (iv) levered aggregate consideration as a
multiple of LTM EBITDA ranging from 9.9x to 17.3x, as compared to 11.1x for
the levered aggregate consideration to be received in the Davel/Peoples
Merger, (v) levered aggregate consideration as a multiple of projected 1998
EBITDA (based on projections provided by Old Davel's and EGI's managements)
ranging from 7.2x to 8.0x, as compared to 9.1x (in the Davel/EGI Case) and
7.2x (in the Peoples Case) for the levered aggregate consideration to be
received in the Davel/Peoples Merger, (vi) levered aggregate consideration
as a multiple of projected 1999 EBITDA (based on projections provided by
Old Davel's and EGI's managements) ranging from 5.4x to 6.2x, as compared
to 7.9x (in the Davel/EGI Case) and 6.2x (in the Peoples Case) for the
levered aggregate consideration to be received in the Davel/Peoples Merger,
and (vii) levered aggregate consideration per payphone acquired ranging
from $4,912 to $6,893 as compared to $5,149 for the levered aggregate
consideration to be received in the Davel/Peoples Merger.
(v) Pro Forma Merger Analysis. Goldman Sachs prepared a pro forma
analysis of the financial impact of the Transaction assuming that no
synergies are obtained in the Davel/Peoples Merger. Using earnings
estimates for Old Davel prepared by Old Davel's management for 1998 and
1999, Goldman Sachs compared the EPS of Old Davel, on a stand-alone basis,
to the EPS of the common stock of the combined company on a pro forma
basis. Goldman Sachs performed this analysis based on a price of $26.00 per
share of Old Davel Common Stock. Such analyses indicated that the
Transaction would be dilutive to Old Davel's stockholders on an EPS basis
in 1998 and 1999.
(vi) Contribution Analysis. Goldman Sachs reviewed certain historical and
estimated future operating and financial information (including, among
other things, revenues and EBITDA) for Peoples and the pro forma combined
entity resulting from the Transaction based on estimates for Old Davel and
Peoples provided by Old Davel's and EGI's managements, collectively, and on
estimates for Peoples provided by Peoples' management. Goldman Sachs
calculated that the holders of Peoples Common Stock would receive 44.8% of
the outstanding common equity of New Davel after the Transaction. Goldman
Sachs analyzed the relative income statement contribution of Old Davel and
Peoples to New Davel on a pro forma basis based on actual 1997, LTM and
estimated 1998 results, in the Davel/EGI Case, and in the Peoples Case,
assuming in each case the achievement of the synergies expected by
management of Old Davel to result from the Transaction and without taking
into account any of such synergies. This analysis indicated that Peoples
would have contributed 55.2% to combined 1997 revenues and 50.8% to
combined 1997 EBITDA; 52.1% to combined LTM revenue and 50.2% to combined
LTM EBITDA; 55.9% to estimated combined 1998 revenues in the Peoples Case
and 55.0% to estimated combined 1998 revenues in the Davel/EGI Case; 43.6%
to estimated combined 1998 EBITDA in the Davel/EGI Case (without synergies)
and 48.4% to estimated combined 1998 EBITDA in the Peoples Case (without
synergies); and 39.7% to estimated combined 1998 EBITDA in the Davel/EGI
Case (assuming the achievement of synergies) and 44.5% to estimated
combined 1998 EBITDA in the Peoples Case (assuming the achievement of
synergies).
(vii) Present Value of Potential Future Performance Analysis. Goldman
Sachs calculated the implied present value of the Peoples Common Stock
based on the implied future per share price of the Old Davel Common Stock
(which was calculated based on Old Davel's management's estimates of EBITDA
for the Combined Company in 2001 both with and without the achievement of
synergies). Goldman Sachs calculated the implied per share price of the
Peoples Common Stock by calculating the future per share price of the Old
Davel Common Stock based on trailing EBITDA multiples ranging from 4.0x to
9.0x and discounting the implied future per share price of the Old Davel
Common Stock with equity discount rates
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ranging from 11.0% to 16.0%. Such analysis indicated a range of present
values per share of Peoples Common Stock of $2.64 to $10.39 (assuming that
no synergies are achieved) and of $4.64 to $14.56 (assuming the achievement
of synergies).
Goldman Sachs also calculated the implied present value of the Peoples
Common Stock on a stand-alone basis based on estimates for Peoples EBITDA
in 2001 provided by Peoples' management. Goldman Sachs calculated the
implied per share price of the Peoples Common Stock by calculating the
future per share price of the Peoples Common Stock based on trailing EBITDA
multiples ranging from 4.0x to 9.0x and discounting the implied future per
share price of the Peoples Common Stock with equity discount rates ranging
from 11.0% to 16.0%. Such analysis indicated a range of present values per
share of Peoples Common Stock of $2.25 to $10.32.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without
considering the analyses as a whole, could create an incomplete view of the
processes underlying Goldman Sachs' opinion. In arriving at its fairness
determination, Goldman Sachs considered the results of all such analyses. No
company or transaction used in the above analyses as a comparison is directly
comparable to Peoples or Old Davel or the Transaction. The analyses were
prepared solely for purposes of Goldman Sachs' providing its opinion to the
Peoples Board of Directors as to the fairness from a financial point of view
of the Exchange Ratio and do not purport to be appraisals or necessarily
reflect the prices at which businesses or securities actually may be sold.
Analyses based upon forecasts of future results are not necessarily indicative
of actual future results, which may be significantly more or less favorable
than suggested by such analyses. Because such analyses are inherently subject
to uncertainty, being based upon numerous factors or events beyond the control
of the parties or their respective advisors, none of Peoples, Old Davel,
Goldman Sachs or any other person assumes responsibility if future results are
materially different from those forecast. As described above, Goldman Sachs'
opinion to the Peoples Board of Directors was one of many factors taken into
consideration by the Peoples Board of Directors in making its determination to
approve the Merger Agreement. In arriving at its opinion, Goldman Sachs did
not attribute any particular weight to any analysis or factor considered by
it; rather Goldman Sachs made its determination as to fairness on the basis of
its experience and professional judgment, after considering the results of all
such analyses. The foregoing summary describes material financial analyses
used by Goldman Sachs in connection with providing its opinion to the Peoples
Board of Directors dated July 5, 1998, but does not purport to be a complete
description of the analysis performed by Goldman Sachs in connection with such
opinion and is qualified by reference to the written opinion of Goldman Sachs
set forth in Appendix II hereto.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements,
and valuations for estate, corporate and other purposes. Peoples selected
Goldman Sachs as its financial advisor because it is a nationally recognized
investment banking firm that has substantial experience in transactions
similar to the Transaction.
Goldman Sachs has provided certain investment banking services to EGI and
certain companies affiliated with EGI and may provide such services to EGI and
its affiliates in the future. Goldman Sachs provides a full range of financial
advisory and securities services and, in the course of its normal trading
activities, may from time to time effect transactions in and hold securities,
including derivative securities of Peoples and Old Davel for its own account
and for the account of customers. As of the date of its opinion, Goldman
Sachs, through Goldman Sachs Asset Management, held long positions of 554,700
shares of Old Davel Common Stock and 1,684,900 shares of Peoples Common Stock.
In retaining Goldman Sachs, an investment bank, as its financial advisor, the
Board of Directors of Peoples was aware of the potential conflicts of interest
that Goldman Sachs' other relationships and securities holdings could create.
However, the Board believed, and continues to believe, that Goldman Sachs had
appropriate policies in place to ensure that its advice to Peoples would not
be influenced by such matters.
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Pursuant to a letter agreement dated December 18, 1997 (the "Engagement
Letter"), Peoples engaged Goldman Sachs to act as its financial advisor in
connection with its review of strategic alternatives. Pursuant to the terms of
the Engagement Letter, Peoples has agreed to pay Goldman Sachs upon
accomplishment of the Transaction a transaction fee equal to 1.50% of the
aggregate consideration (which is equal to approximately $2.7 million based on
a closing price per share of $16.625 per share of Old Davel Common Stock on
November 17, 1998). For purposes of the Engagement Letter, the phrase
"aggregate consideration" means the total consideration paid for Peoples'
equity securities plus the principal amount of all indebtedness for borrowed
money as set forth on the most recent consolidated balance sheet of Peoples
prior to the consummation of the Transaction. Peoples has agreed to reimburse
Goldman Sachs for its reasonable out-of-pocket expenses, including attorney's
fees, and to indemnify Goldman Sachs against certain liabilities, including
certain liabilities under the federal securities laws.
INTERESTS OF CERTAIN PERSONS
Peoples
Certain members of the Peoples Board of Directors and Peoples Management may
be deemed to have certain interests in the Transaction that are in addition to
their interests as holders of Peoples Common Stock. For a description of the
security holdings of the Peoples Board of Directors and certain of Peoples'
executive officers (including a description of option holdings), see "Peoples
Principal Shareholders." The Peoples Board of Directors recognized such
interests and determined that such interests neither supported nor detracted
from the fairness of the Davel/Peoples Merger to Peoples' shareholders.
Appointment of New Davel Board Member. Pursuant to the UBS Voting Agreement,
Old Davel and New Davel have agreed to use all authority to cause Charles J.
Delaney, a director of Peoples and President of UBS Capital or Justin S.
Maccarone, a director of Peoples and a Managing Director of UBS Capital, to be
elected as a member of the Board of Directors of New Davel, to serve from the
Closing Date until the first anniversary of the Closing Date.
Indemnification of Directors. Pursuant to the Merger Agreement, New Davel
has agreed to provide certain indemnification to the present and former
directors of Peoples and has agreed to maintain directors' and officers'
liability insurance to such individuals under certain circumstances. For
further detail regarding these arrangements, see "The Merger Agreement--
Indemnification."
Holdings of Peoples Series C Preferred Stock. Pursuant to the UBS Voting
Agreement, Old Davel and New Davel have agreed to issue to UBS Capital 671,428
shares of New Davel Common Stock in exchange for the 2,857,143 shares of
Peoples Common Stock which UBS Capital will hold after it converts its shares
of Peoples Series C Preferred Stock in accordance with the Merger Agreement.
UBS Capital will also receive an additional 189,735 shares of New Davel Common
Stock in consideration of accrued but unpaid dividends through the date of the
Merger Agreement on the Peoples Series C Preferred Stock and the future fair
value of the Peoples Series C Preferred Stock had it not been converted.
Additionally, UBS Capital will receive such shares of New Davel Common Stock
as will equal in value any dividends accruing on shares of the Peoples Series
C Preferred Stock between July 5, 1998 and the Closing Date. As noted above,
Mr. Delaney is the President of UBS Capital and Mr. Maccarone is a Managing
Director of UBS Capital.
Registration Rights. Pursuant to the UBS Voting Agreement, Old Davel and New
Davel agreed to grant UBS Capital demand and piggyback registration rights, to
become effective under certain circumstances, with respect to the shares of
New Davel Common Stock UBS Capital will receive in the Transaction.
Stock Options. Pursuant to the Merger Agreement, each outstanding option to
acquire Peoples Common Stock ("Peoples Option") will be automatically
converted into an option to acquire shares of New Davel
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<PAGE>
Common Stock. The number of shares of New Davel Common Stock to be subject to
each converted option will be equal to the number of shares of Peoples Common
Stock subject to the original option immediately prior to the Peoples
Effective Time multiplied by the Exchange Ratio (rounded to the nearest whole
number of shares of New Davel Common Stock) at an exercise price per share
equal to the exercise price for each such share of Peoples Common Stock
subject to such option divided by the Exchange Ratio (rounded down to the
nearest whole cent). Following such conversion, all other terms and conditions
governing each converted Peoples Option will continue to apply. The value of
such converted options will depend on the market price of New Davel Common
Stock following completion of the Transaction. As of November 17, 1998, the
following officers and directors of Peoples held the following number of
Peoples Options, which are convertible into options to acquire the following
number of shares of New Davel Common Stock:
<TABLE>
<CAPTION>
PEOPLES NEW DAVEL
NAME OPTIONS COMMON STOCK OPTIONS
---- --------- --------------------
<S> <C> <C>
Charles J. Delaney...................... -- (1) -- (1)
Robert E. Lund.......................... 105,000 24,675
Jody Frank.............................. 85,000 19,975
Justin S. Maccarone..................... -- (1) -- (1)
E. Craig Sanders........................ 600,000(2) 141,000
Lawrence T. Ellman...................... 82,500(2) 19,388
Bruce W. Renard......................... 117,500(2) 27,613
C. Keith Pressley....................... 27,500(2) 6,463
Neil N. Snyder, III..................... 200,000(2) 47,000
David Arvizu............................ 80,000(2) 18,800
William A. Baum......................... 160,000(2) 37,600
All directors and executive officers
as a group (11 persons)................ 1,457,500(1) 342,513
</TABLE>
- --------
(1) Excludes options held for the benefit of UBS Capital, see "Peoples
Principal Shareholders."
(2) Includes currently unvested options which will vest upon completion of the
Transaction.
Employment Agreements. Pursuant to employment agreements between Peoples and
each of Messrs. Sanders, Snyder, Ellman, Pressley, Arvizu and Baum such
employees will be entitled to receive certain payments upon their termination
in connection with a change in control of Peoples. Pursuant to an employment
agreement between Peoples and Mr. Renard, he will be entitled to receive
certain payments upon a change in control of Peoples. Messrs. Sanders, Snyder,
Ellman, Pressley, Arvizu, Baum and Renard will receive approximately $900,000,
$495,000, $223,600, $96,000, $140,000, $272,250 and $192,500, respectively, in
connection with such change of control payments. In addition, pursuant to such
employment agreements, the vesting of such employees' options will accelerate
upon a change in control of Peoples. In connection with the Transaction,
Peoples will also pay certain management bonuses not to exceed $250,000 in the
aggregate and retention payments to certain employees not to exceed $800,000
in the aggregate.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material anticipated U.S. federal income
tax consequences of the Transaction to holders of Peoples Common Stock and
holders of Old Davel Common Stock who hold such stock as a capital asset. This
summary is based on applicable provisions of the Code, Treasury regulations
thereunder, and administrative rulings and court decisions in effect as of the
date hereof, all of which are subject to change at any time, possibly with
retroactive effect. This summary is not a complete description of all of the
consequences of the Transaction and, in particular, may not address U.S.
federal income tax considerations applicable to shareholders subject to
special treatment under U.S. federal income tax law (including, for example,
non-U.S. persons, holders of Peoples Series C Preferred Stock, financial
institutions, dealers in securities, insurance companies or tax-exempt
entities, holders who acquired Peoples Common Stock or Old Davel
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Common Stock pursuant to the exercise of an employee stock option or right or
otherwise as compensation, and holders who hold Peoples Common Stock or Old
Davel Common Stock as part of a hedge, straddle or conversion transaction). In
addition, no information is provided herein with respect to the tax
consequences of the Transaction under applicable foreign, state or local laws.
HOLDERS OF PEOPLES COMMON STOCK AND HOLDERS OF OLD DAVEL COMMON STOCK ARE
URGED TO CONSULT WITH THEIR TAX ADVISORS REGARDING THE TAX CONSEQUENCES OF THE
TRANSACTION TO THEM, INCLUDING THE EFFECTS OF FEDERAL, STATE, LOCAL, FOREIGN
AND OTHER TAX LAWS.
Shearman & Sterling, special counsel to Peoples, has rendered its tax
opinion, dated as of the the date hereof (and will render its tax opinion,
dated as of the Closing Date), that, for U.S. federal income tax purposes, the
Davel/Peoples Merger will be treated as a tax-free reorganization within the
meaning of Section 368(a) of the Code, and Kirkland & Ellis, special counsel
to Old Davel, has rendered its tax opinion, dated as of the date hereof (and
will render its tax opinion, dated as of the Closing Date), that, for U.S.
federal income tax purposes, the Old Davel/New Davel Merger will be treated as
a tax-free reorganization within the meaning of Section 368(a) of the Code
(each, a "Tax Opinion").
Subject to the limitations and qualifications referred to herein, and as a
result of each of the Davel/Peoples Merger and the Old Davel/New Davel Merger
qualifying as part of a tax-free reorganization, the following federal income
tax consequences will result:
(i) No gain or loss will be recognized by the holders of Peoples Common
Stock who exchange all of their Peoples Common Stock solely for New Davel
Common Stock pursuant to the Davel/Peoples Merger (except with respect to
cash received in lieu of a fractional share interest in New Davel Common
Stock);
(ii) No gain or loss will be recognized by the holders of Old Davel
Common Stock who exchange all of their Old Davel Common Stock solely for
New Davel Common Stock pursuant to the Old Davel/New Davel Merger;
(iii) The aggregate tax basis of the New Davel Common Stock received by
holders of Peoples Common Stock who exchange all of their Peoples Common
Stock solely for New Davel Common Stock pursuant to the Davel/Peoples
Merger will be the same as the aggregate tax basis of the Peoples Common
Stock surrendered in exchange therefor (reduced by any basis amount
allocable to the fractional share interest in New Davel Common Stock for
which cash is received), and the aggregate tax basis of the New Davel
Common Stock received by holders of Old Davel Common Stock who exchange all
of their Old Davel Common Stock solely for New Davel Common Stock pursuant
to the Old Davel/New Davel Merger will be the same as the aggregate tax
basis of the Old Davel Common Stock surrendered in exchange therefor;
(iv) Cash received by a holder of Peoples Common Stock in lieu of a
fractional share interest in New Davel Common Stock will be treated as
received in redemption of such fractional share interest, and a holder of
Peoples Common Stock should generally recognize capital gain or loss for
federal income tax purposes measured by the difference between the amount
of cash received and the portion of the tax basis of the share of Peoples
Common Stock allocable to such fractional share interest; and
(v) The holding period of a share of New Davel Common Stock received in
the Davel/Peoples Merger (including fractional share interests deemed
received and redeemed as described above) will include the holder's holding
period in the Peoples Common Stock surrendered in exchange therefor, and
the holding period of a share of New Davel Common Stock received in the Old
Davel/New Davel Merger will include the holder's holding period in the Old
Davel Common Stock surrendered in exchange therefor.
Each party's obligation to consummate the Transaction is conditioned upon
the receipt by each of Old Davel and Peoples of its respective Tax Opinion
dated as of the Closing Date. Each of Kirkland & Ellis and Shearman & Sterling
has rendered its respective Tax Opinion, and will render its respective Tax
Opinion, dated as of the Closing Date, on the basis of facts, representations
and assumptions set forth or referred to in such opinion. None of the Tax
Opinions may be relied upon unless such facts, representations and assumptions
are consistent with the state of facts existing on the Closing Date. In
rendering the Tax Opinions, each such counsel has relied, and, in rendering
the Tax Opinions to be dated as of the Closing Date, will rely, upon usual and
customary representations and covenants including those contained in
certificates of officers of Old Davel, New Davel, Peoples and others.
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The Tax Opinions are not binding on the IRS or the courts, and the parties
do not intend to request a ruling from the IRS with respect to either the
Davel/Peoples Merger or the Old Davel/New Davel Merger. Accordingly, there can
be no assurance that the IRS will not challenge such conclusion or that a
court will not sustain such challenge. In addition, there can be no assurance
that future legislative, judicial or administrative changes or interpretations
will not adversely affect the accuracy of the statements and conclusions set
forth in the Tax Opinions and herein. Any such changes or interpretations
could be applied retroactively and could affect the tax consequences of the
Davel/Peoples Merger and the Old Davel/New Davel Merger to Peoples, Old Davel,
New Davel and their respective shareholders.
A holder of Old Davel Common Stock that receives solely cash in exchange for
such stock pursuant to the exercise of dissenters' rights pursuant to
applicable state law will recognize capital gain or loss at the time of
consummation of the Old Davel/New Davel Merger equal to the difference between
the amount of cash received and the tax basis of the stock surrendered
therefor. Such capital gain will constitute long-term capital gain or loss if
such stock has been held by the holder for more than one year at the time of
the consummation of the respective merger. Under recently adopted amendments
to the Code, capital gain recognized by an investor who is an individual (or
an estate or certain trusts) upon a disposition of stock that has been held
for more than one year will generally be subject to a maximum tax rate of 20%
or, in the case of stock that has been held for one year or less, will be
subject to tax at ordinary income tax rates.
ACCOUNTING TREATMENT
The Transaction is expected to be accounted for as a pooling of interests in
accordance with generally accepted accounting principles. Under this
accounting method, the recorded assets and liabilities of Old Davel and
Peoples will be carried forward at their recorded amounts to the combined
enterprise, income or loss of the combined enterprise, will include income or
loss of Old Davel and Peoples for the entire fiscal year in which the
Transaction occurred and the reported income or loss of Old Davel and Peoples
for prior periods will be combined and restated as income or loss of the
combined enterprise.
DISSENTERS' RIGHTS
Dissenters' rights are not available to Peoples shareholders under the New
York Law because Peoples Common Stock is listed on a national securities
exchange and because the holder of the outstanding Peoples Series C Preferred
Stock has agreed to vote in favor of the Davel/Peoples Merger. See "The Merger
Agreement--Voting Agreements."
All Old Davel shareholders entitled to vote on the Old Davel/New Davel
Merger may exercise dissenters' rights pursuant to the Illinois Law. See
"Dissenters' Rights--Dissenters' Rights of Old Davel Shareholders."
STOCK EXCHANGE LISTING OF NEW DAVEL COMMON STOCK
It is expected that the shares of New Davel Common Stock to be issued in
connection with the Transaction will be quoted and traded on the Nasdaq
National Market under the symbol "DAVL."
FEDERAL SECURITIES LAW CONSEQUENCES
The shares of New Davel Common Stock issuable to holders of Peoples Common
Stock and Old Davel Common Stock upon consummation of the Transaction have
been registered under the Securities Act. Such securities may be traded freely
without restriction by those shareholders who are not deemed to be
"affiliates" of the New Davel, Old Davel or Peoples, as that term is defined
in the rules promulgated under the Securities Act.
Shares of New Davel Common Stock received by those holders of Peoples Common
Stock who are deemed to be "affiliates" of Peoples at the time of the Peoples
Special Meeting or of Old Davel Common Stock who are deemed to be "affiliates"
of Old Davel at the time of the Davel Annual Meeting may be resold without
registration under the Securities Act only as permitted by Rule 145 under the
Securities Act or as otherwise permitted thereunder. Commission guidelines
regarding qualifying for the pooling-of-interests method of
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accounting also limit sales of shares of the acquiring and acquired company by
affiliates of either company in a business combination. Commission guidelines
also indicate that the pooling-of-interests method of accounting generally
will not be challenged on the basis of sales by affiliates of the acquiring or
acquired company if such affiliates do not dispose of more than a de minimis
amount of any of the shares of the corporation they own, or shares of a
corporation they receive in connection with a merger, during the period
beginning 30 days before the merger is consummated and ending when financial
results covering at least 30 days of post-merger operations of New Davel have
been published.
Each of Old Davel and Peoples has agreed in the Merger Agreement to cause
each person who is an affiliate (for purposes of Rule 145 under the Securities
Act and for purposes of qualifying the Transaction for pooling-of-interests
accounting treatment) of such party to deliver Old Davel a written agreement
intended to ensure compliance with the Securities Act and to preserve the
ability of the Transaction to be accounted for as a pooling-of-interests.
Old Davel and New Davel have agreed in the Merger Agreement to use its
reasonable best efforts to publish, not later than 45 days after the end of
the first full calendar month following the month in which the Closing Date
occurs, financial results (including combined sales and net income or loss)
covering at least 30 days of post-transaction combined operations, and in any
event will publish such financial results within 75 days after the end of the
first full calendar month following the month in which the Closing Date
occurs.
THE MERGER AGREEMENT
The following information with respect to the Transaction is qualified in
its entirety by reference to the complete text of the Merger Agreement, a copy
of which is included in this Joint Proxy Statement/Prospectus as Appendix III.
The Merger Agreement sets forth all of the material terms and conditions upon
which the Transaction is to be effected.
At the Peoples Effective Time, Miami Merger Corp., an indirect, wholly owned
subsidiary of New Davel, will be merged with and into Peoples, with Peoples
surviving as the surviving corporation (the "Peoples Surviving Corporation")
and becoming an indirect, wholly owned subsidiary of New Davel.
CONVERSION OF SHARES
At the Peoples Effective Time, each share of Peoples Common Stock will be
converted into the right to receive 0.235 of a share of New Davel Common Stock
(the "Peoples Merger Consideration"). As of the Peoples Effective Time, all
such shares of Peoples Common Stock will no longer be outstanding and will
automatically be canceled and cease to exist, and each holder of such Peoples
Common Stock will cease to have any rights with respect thereto, except the
right to receive the Peoples Merger Consideration and any cash in lieu of
fractional shares of New Davel Common Stock to be paid as described below.
After the Peoples Effective Time, there will be no transfers on the stock
transfer books of Peoples or the Peoples Surviving Corporation of shares of
Peoples Common Stock.
At the Davel Effective Time, each share of Old Davel Common Stock, except
for any such shares as to which dissenters' rights have been properly
exercised, will be converted into one share of New Davel Common Stock (the
"Old Davel Merger Consideration"). As of the Davel Effective Time, all such
shares of Old Davel Common Stock will no longer be outstanding and will
automatically be canceled and cease to exist, and each holder of such Old
Davel Common Stock will cease to have any rights with respect thereto, except
the right to receive the Old Davel Merger Consideration.
Each outstanding option to acquire shares of Old Davel Common Stock will be
automatically converted into an option to acquire the same number of shares of
New Davel Common Stock at the same exercise price. Each Peoples Option will be
automatically converted into an option to acquire shares of New Davel Common
Stock. The number of shares of New Davel Common Stock to be subject to each
converted Peoples Option will
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be equal to the number of shares of Peoples Common Stock subject to the
original option immediately prior to the Peoples Effective Time multiplied by
the Exchange Ratio at an exercise price per share equal to the original
exercise price divided by the Exchange Ratio. Each outstanding warrant for
Peoples Common Stock will be converted into a warrant to purchase that number
of shares of New Davel Common Stock equal to the number of shares of Peoples
Common Stock subject to the original warrant immediately prior to the Peoples
Effective Time multiplied by the Exchange Ratio at an exercise price per share
equal to the original exercise price divided by the Exchange Ratio.
FRACTIONAL SHARES
No fractional shares of New Davel Common Stock will be issued in the
Transaction; instead, New Davel will pay to each holder of Peoples Common
Stock who would otherwise be entitled to a fractional share of New Davel
Common Stock (after taking into account all certificates formerly representing
shares of such Common Stock delivered by such holder of such Common Stock) an
amount in cash (without interest) determined by multiplying the fractional
share interest to which such holder would otherwise be entitled by the closing
price for a share of New Davel Common Stock as reported on the Nasdaq National
Market on the Closing Date.
EXCHANGE OF STOCK CERTIFICATES
Peoples Stock Certificates
Prior to the Peoples Effective Time, New Davel will deposit with the
Exchange Agent the certificates representing the shares of New Davel Common
Stock (the "New Davel Certificates") and an estimated amount of cash to be
paid in respect of any dividends and in lieu of fractional shares to which a
holder of certificates formerly representing Peoples Common Stock (the
"Peoples Certificates") would otherwise be entitled pursuant to the Merger
Agreement.
As soon as reasonably practicable after the Peoples Effective Time, the
Exchange Agent will mail to each holder of record of shares of Peoples Common
Stock transmittal materials for use in exchanging such holder's Peoples
Certificates for New Davel Certificates. Upon surrender of Peoples
Certificates for cancellation to the Exchange Agent, together with a letter of
transmittal, duly executed, and such other documents as may reasonably be
required by the Exchange Agent, the holder of such Peoples Certificates shall
be entitled to receive in exchange therefor a certificate representing that
number of whole shares of New Davel Common Stock which such holder has the
right to receive, any dividends or other distributions with respect thereto
and any cash payable in lieu of any fractional share of New Davel Common
Stock, and the surrendered Peoples Certificates shall be canceled. Until
surrendered, each of the Peoples Certificates shall be deemed at any time
after the Peoples Effective Time to represent only the right to receive upon
such surrender that number of whole shares of New Davel Common Stock which the
holder thereof has the right to receive, any dividends or other distributions
payable to the holder thereof and cash in lieu of any fractional share of New
Davel Common Stock. No interest shall be paid or shall accrue on any cash
payable to holders of Peoples Certificates.
HOLDERS OF PEOPLES COMMON STOCK SHOULD NOT SEND IN THEIR PEOPLES
CERTIFICATES UNTIL THEY RECEIVE THE TRANSMITTAL MATERIALS FROM THE EXCHANGE
AGENT.
None of New Davel, Peoples or the Exchange Agent shall be liable to any
person in respect of any shares of New Davel Common Stock, any dividends or
distributions with respect thereto, or any cash in lieu of fractional shares
of Combined Company Common Stock, in each case, delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law. If any
Peoples Certificates shall not have been surrendered prior to the date on
which the Peoples Merger Consideration or any dividends, distributions or cash
payable to the holder of such Peoples Certificates would otherwise escheat to
or become the property of any governmental entity, such Peoples Merger
Consideration, dividends, distributions or cash shall, to the extent permitted
by applicable law, become the property of the Peoples Surviving Corporation,
free and clear of all claims or interest of any person previously entitled
thereto.
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No dividends or other distributions with respect to New Davel Common Stock
with a record date occurring after the Peoples Effective Time will be paid to
the holder of any unsurrendered Peoples Certificates until the holder thereof
surrenders such Peoples Certificates in accordance with the terms of the
Merger Agreement. After the proper surrender of Peoples Certificates, the
record holder thereof will be entitled to receive any such dividends or other
distributions, without any interest thereon, which theretofore had become
payable with respect to shares of New Davel Common Stock represented by such
Peoples Certificates.
Old Davel Stock Certificates
As soon as reasonably practicable after the Davel Effective Time, the
Exchange Agent will mail to each holder of record of shares of Old Davel
Common Stock transmittal materials for use in exchanging such holder's Old
Davel Certificates for the Old Davel Merger Consideration. Upon surrender of
an Old Davel Certificate for cancellation to the Exchange Agent, together with
a letter of transmittal, duly executed, and such other documents as may
reasonably be required by the Exchange Agent, the holder of such Old Davel
Certificate shall be entitled to receive in exchange therefor a certificate
representing that number of whole shares of New Davel Common Stock that such
holder has the right to receive and any dividends or other distributions with
respect thereto, and the surrendered Old Davel Certificate shall be canceled.
Until surrendered, each Old Davel Certificate shall be deemed at any time
after the Davel Effective Time to represent only the right to receive upon
such surrender that number of whole shares of New Davel Common Stock that the
holder thereof has the right to receive and any dividends or other
distributions payable to the holder thereof. No interest shall be paid or
shall accrue on any cash payable to holders of Old Davel Certificates.
HOLDERS OF OLD DAVEL COMMON STOCK SHOULD NOT SEND IN THEIR OLD DAVEL
CERTIFICATES UNTIL THEY RECEIVE THE TRANSMITTAL MATERIALS FROM THE EXCHANGE
AGENT.
None of New Davel, D Subsidiary, Inc. or the Exchange Agent shall be liable
to any person in respect of any shares of New Davel Common Stock or any
dividends or distributions with respect thereto, in each case, delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law. If any Old Davel Certificate shall not have been surrendered
prior to the date on which the Old Davel Merger Consideration or any dividends
or distributions payable to the holder of such Old Davel Certificate would
otherwise escheat to or become the property of any governmental entity, such
Old Davel Merger Consideration, dividends or distributions shall, to the
extent permitted by applicable law, become the property of the Davel Surviving
Corporation, free and clear of all claims or interest of any person previously
entitled thereto.
No dividends or other distributions with respect to New Davel Common Stock
with a record date occurring after the Davel Effective Time will be paid to
the holder of any unsurrendered Old Davel Certificate until the holder thereof
surrenders such Old Davel Certificate in accordance with the terms of the
Merger Agreement. After the proper surrender of an Old Davel Certificate, the
record holder thereof will be entitled to receive any such dividends or other
distributions, without any interest thereon, which theretofore had become
payable with respect to shares of New Davel Common Stock represented by such
Old Davel Certificate.
REPRESENTATIONS AND WARRANTIES
In the Merger Agreement, Peoples has made various representations and
warranties to Old Davel and New Davel relating to, among other things, the
following: (1) Peoples' incorporation, existence, good standing, corporate
power and similar corporate matters; (2) Peoples' authorization, execution,
delivery and performance and the enforceability of the Merger Agreement and
related matters; (3) Peoples' capitalization; (4) Peoples' ownership of
subsidiaries and other investments; (5) the absence of conflicts, violations
and defaults under Peoples' certificate of incorporation or bylaws, under
agreements or other obligations to which Peoples is bound, and under any
applicable federal, state, local or foreign order, injunction, decree,
statute, rule or regulation, subject to certain exceptions; (6) the documents
and reports filed with the Commission and the accuracy and completeness of the
information contained therein; (7) the absence of undisclosed liabilities,
subject to certain exceptions; (8) the absence of certain material changes or
events, since December 31, 1997, subject to certain
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exceptions; (9) the absence of pending or threatened investigations or
litigation, subject to certain exceptions; (10) certain contracts and
commitments of Peoples; (11) environmental and safety matters; (12) compliance
with tax obligations; (13) certain employment agreements to which Peoples is a
party and change of control provisions in such agreements; (14) the employee
benefit plans of Peoples and their compliance with legal requirements; (15)
Peoples' licenses, permits and approvals; (16) real property owned by Peoples
and real estate leases to which Peoples is a party; (17) the intellectual
property of Peoples; (18) compliance with certain instruments and laws; (19)
certain employee and labor matters; (20) the registration statement filed with
the Commission and this Joint Proxy Statement/Prospectus, and the accuracy and
completeness of the information provided therein and herein; (21) the absence
of certain fees arising from the Transaction; (22) the receipt of a fairness
opinion from Peoples' financial advisor; (23) the voting requirements for
approval of the Transaction by the Peoples shareholders; (24) compliance with
the requirements of state takeover statutes; (25) Peoples' title to, the
condition of, and the location agreements for a specified number of payphones;
and (26) the average net revenue of Peoples' payphones.
In the Merger Agreement, Old Davel has made various representations and
warranties to Peoples relating to, among other things, the following: (1) Old
Davel's and New Davel's incorporation, existence, good standing, corporate
power and similar corporate matters; (2) Old Davel's and New Davel's
authorization, execution, delivery and performance and the enforceability of
the Merger Agreement and related matters; (3) Old Davel's and New Davel's
capitalization; (4) Old Davel's ownership of subsidiaries and other
investments; (5) the absence of conflicts, violations and defaults under Old
Davel's and New Davel's articles of incorporation or bylaws, or comparable
organizational documents, under agreements or other obligations to which Old
Davel or New Davel is bound and under any applicable federal, state, local or
foreign order, injunction, decree, statute, rule or regulation, subject to
certain exceptions; (6) the documents and reports filed with the Commission
and the accuracy and completeness of the information contained therein; (7)
the absence of undisclosed liabilities, subject to certain exceptions; (8) the
absence of certain material changes or events since December 31, 1997, subject
to certain exceptions; (9) the absence of pending or threatened investigations
or litigation, subject to certain exceptions; (10) environmental and safety
matters; (11) the absence of certain fees arising from the Transaction; (12)
compliance with tax obligations; (13) change of control provisions in certain
agreements; (14) the obtaining of licenses, permits and approvals; (15)
compliance with certain instruments and laws; (16) certain employee and labor
matters; (17) the registration statement filed with the Commission and this
Joint Proxy Statement/Prospectus, and the accuracy and completeness of the
information provided therein and herein; (18) the receipt of a fairness
opinion from Old Davel's financial advisor; (19) compliance with the
requirements of state takeover statutes; (20) ownership of Peoples Common
Stock; (21) the inapplicability of Old Davel's shareholder rights plan to the
Transaction; and (22) financing arrangements relating to the transactions.
All representations and warranties of Peoples and Old Davel expire on the
closing date of the Transaction.
CERTAIN COVENANTS
Prior to the Peoples Effective Time, except as contemplated by the Merger
Agreement or pursuant to certain disclosures made by Peoples, without the
prior written consent of Old Davel, Peoples has agreed that: (1) the
businesses of Peoples and its subsidiaries shall be conducted only in the
ordinary and usual course and, to the extent consistent therewith, Peoples
shall use its reasonable best efforts to preserve intact its business
organization and goodwill, keep available the services of its officers and
employees and maintain satisfactory relationships with its suppliers,
distributors, customers and others having business relationships with Peoples
and its subsidiaries and Peoples shall notify Old Davel and New Davel as
promptly as practicable of any material event not in the ordinary and usual
course of business; (2) Peoples shall not amend its articles of incorporation
or bylaws or split, combine or reclassify the outstanding Peoples Common Stock
or declare, set aside or pay any dividend payable in cash, stock or property;
(3) other than the issuance of shares of capital stock by a subsidiary to
Peoples and the issuance of shares of capital stock upon exercise of certain
existing options or warrants, or upon the conversion of existing preferred
stock, Peoples and each of its subsidiaries shall not issue or agree to issue
any additional shares of, or rights to acquire any kind to acquire shares of,
any class of its capital stock; (4) neither Peoples nor any of its
subsidiaries shall enter into or amend any contract or agreement with any
labor
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unions; (5) except as specifically permitted, Peoples shall not authorize,
recommend, propose or announce an intention to authorize, recommend, or
propose, or enter into an agreement in principle or an agreement with respect
to any merger, consolidation or business combination, any acquisition or
disposition of a material amount of assets or securities, any material change
in its capitalization, or enter into, other than in the ordinary course of
business consistent with past practice, a material contract or any release or
relinquishment of any material contract rights; (6) neither Peoples nor any of
its subsidiaries shall enter into or amend any employment, severance or
change-of-control agreement or any bonus, incentive compensation, deferred
compensation, profit sharing, retirement, pension, group insurance or other
benefit plan except as required by law or regulation or make any contribution
to any such plan except for contributions specifically required by law or
pursuant to the terms of such plans; (7) Peoples shall not create, incur or
assume any long-term debt or, except in the ordinary course of business or
except to fund out-of-pocket costs incurred in connection with the
Transaction, create, incur, assume, maintain or permit to exist any short-term
indebtedness for borrowed money in an aggregate amount exceeding $250,000, or
assume, guarantee, endorse or otherwise become liable or responsible for the
obligations of any other person, except wholly owned Peoples subsidiaries in
the ordinary course of business consistent with past practice, or make any
loans, advances or capital contributions to, or investments in, any other
person, except wholly owned Peoples subsidiaries; or (8) neither Peoples nor
any of its subsidiaries shall agree in writing to take any action prohibited
by (1)-(7) above or any action that would result in a breach in any material
respect of any covenant, agreement, or representation or warranty set forth in
the Merger Agreement.
In the Merger Agreement, Peoples has also agreed to (1) take all actions
reasonably necessary to allow all outstanding shares of Peoples Series C
Preferred Stock to be converted by the holders thereof into Peoples Common
Stock and (2) use its reasonable best efforts to (a) consummate the tender
offer for all of the Peoples Notes at a price reasonably acceptable to Old
Davel, subject to the receipt of funds sufficient for such purpose from the
proceeds of the Financing, pursuant to which at least 85% of the aggregate
outstanding principal amount of the Peoples Notes shall have been tendered,
(b) procure the consent of the requisite principal amount of the Peoples Notes
to allow Peoples to amend the indenture governing the Peoples Notes in a
manner reasonably satisfactory to Old Davel and (c) enter into a supplemental
indenture with respect to the Peoples Notes reflecting such amendments.
In the Merger Agreement, Old Davel and New Davel have also agreed that,
unless Peoples otherwise consents, they will not, except as otherwise
contemplated by the Merger Agreement, (1) amend their charters or bylaws or
split, combine or reclassify their Common Stock in a manner reasonably likely
to have a material disparate adverse effect on the holders of Peoples Common
Stock or declare or pay a dividend in cash or property or, if it would be
reasonably likely to have a material disparate adverse effect on the holders
of Peoples Common Stock, declare or pay a dividend in stock or otherwise; (2)
enter into any new line of business that is not substantially related to
existing or past businesses; (3) acquire a business or assets if such
acquisition is in a new line of business or is reasonably likely to delay or
prevent the Financing or the Davel/Peoples Merger; or (4) take any action that
is prohibited by the Merger Agreement or that would constitute or is likely to
cause a material breach of such agreement.
The Merger Agreement also contains certain other agreements relating to the
conduct of the parties prior to the Peoples Effective Time, including those
requiring the parties (1) to use their reasonable best efforts to take
necessary actions to consummate the Transaction; (2) to cooperate in the
preparation of this Joint Proxy Statement/Prospectus and the registration
statement of which it forms a part and any other filed disclosure document;
(3) to consult with each other before issuing any press release or making any
public statement with respect to the Merger Agreement or the Transaction and
not to issue any such press release or make any such public statement prior to
such consultation, except as may be required by applicable law or regulation;
(4) to notify each other of any communication from any person alleging that
its consent may be required in connection with the Transaction or from any
governmental entity in connection with the Transaction, of any proceedings
commenced or threatened against Peoples, Old Davel, New Davel or their
subsidiaries that relate to the Transaction, or of any action that would
constitute a breach of any representation, warranty, covenant or agreement of
it set forth in the Merger Agreement; (5) to use reasonable best efforts to
obtain from their respective independent accountants (a) customary comfort
letters and (b) letters to the effect that accounting for
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the Transaction as a pooling of interests is appropriate if the Transaction is
consummated in accordance with the Merger Agreement; (6) to deliver or cause
to be delivered to Old Davel letters from Pooling Affiliates in the form
attached to the Merger Agreement; and (7) to use their reasonable best efforts
to cause the Transaction to qualify as a tax-free transaction (except with
respect to any cash received in lieu of fractional share interests).
NO SOLICITATION OF ACQUISITION PROPOSALS
In the Merger Agreement, Peoples has agreed that it will not, and it will
use reasonable best efforts to cause its officers, directors, employees,
investment bankers, attorneys, accountants and other agents not to, initiate,
solicit, or encourage any inquiries relating to, or the making of, any
Acquisition Proposal or engage in negotiations with or discussions with, or
furnish any information to, any third party relating to any Acquisition
Proposal. Notwithstanding the foregoing, if the Peoples Board of Directors
determines in good faith, after consultation with counsel, that failure to
take such action may constitute a breach of its fiduciary duties or otherwise
violate applicable law, Peoples (1) may participate in discussions or
negotiations with, or furnish information to, any third party with respect to
any Acquisition Proposal and (2) may take and disclose to the Peoples
shareholders a position with respect to an Acquisition Proposal or amend or
withdraw such position or its position with respect to the Transaction or make
disclosure to the Peoples shareholders. Peoples has agreed to promptly notify
Old Davel in writing of (1) the receipt, directly or indirectly, of any
inquiries relating to an Acquisition Proposal, (2) the status of any
discussion or negotiations with respect thereto, (3) its intention to enter
into any agreement relating to an Acquisition Proposal at least 24 hours prior
to executing such agreement, and (4) any actions taken otherwise encouraging,
supporting or recommending an Acquisition Proposal.
INDEMNIFICATION
Old Davel and New Davel have agreed to indemnify, for six years following
the Peoples Effective Time, the present and former officers and directors of
Peoples and its subsidiaries to the fullest extent permitted by law for costs
and expenses incurred in respect of actions taken prior to and including the
Peoples Effective Time in connection with their duties as such and to maintain
for six years following the Peoples Effective Time applicable charter and
bylaw provisions no less favorable to the present and former directors and
officers of Peoples than those in effect as of the date of the Merger
Agreement. In addition, Davel has agreed to maintain in effect directors' and
officers' liability insurance covering such persons, to the extent the costs
of such liability insurance do not exceed 200% of the costs to Peoples of such
insurance in effect as of the date of the Merger Agreement.
CONDITIONS TO OBLIGATIONS TO EFFECT THE TRANSACTION
The obligation of each of the parties to consummate the Transaction is
conditioned upon the satisfaction of each of the following: (1) the Merger
Agreement and the Transaction shall have been approved by the requisite vote
of the holders of Peoples Common Stock and the holders of Old Davel Common
Stock; (2) any applicable waiting period under the HSR Act, relating to the
Transaction shall have expired or been terminated; (3) no judgment,
injunction, order or decree shall have been issued by any governmental entity
and become final and nonappealable that permanently enjoins, restrains or
otherwise prohibits the Transaction; (4) the registration statement of which
this Joint Proxy Statement/Prospectus forms a part shall have become effective
and no stop order suspending the effectiveness of such registration statement
shall have been issued; (5) the shares of New Davel Common Stock issuable
pursuant to the Merger Agreement shall have been approved for listing on the
Nasdaq National Market, subject to official notice of issuance; (6) the
Peoples Series C Preferred Stock shall have been converted; and (7) New Davel
shall have obtained the Financing.
The obligations of Old Davel and New Davel to consummate the Transaction are
further conditioned upon the satisfaction of each of the following: (1) the
representations and warranties of Peoples set forth in the Merger Agreement
shall be true and correct as if made on the Closing Date (except where the
failure to be true and correct in the aggregate would not be reasonably likely
to have a material adverse effect) and Peoples shall have complied with or
performed in all material respects all agreements and covenants required to be
complied with or performed by it under the Merger Agreement at or prior to the
Closing Date; (2) receipt by Old Davel of a
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letter from Arthur Andersen LLP, its independent public accountants, stating
that accounting for the Transaction as a pooling of interests is appropriate
if the Transaction is consummated in accordance with the Merger Agreement; (3)
at least 85% of the aggregate outstanding principal amount of the Peoples
Notes shall have been tendered to Peoples; and (4) Old Davel shall have
received an opinion from Kirkland & Ellis, counsel to Old Davel, dated as of
the Closing Date, to the effect that the Transaction will constitute a tax-
free reorganization within the meaning of Section 368(a) of the Code. The
obligations of Peoples to consummate the Transaction are further conditioned
upon the satisfaction of each of the following: (1) the representations and
warranties of Old Davel set forth in the Merger Agreement shall be true and
correct as if made on the Closing Date (except where the failure to be true
and correct in the aggregate would not be reasonably likely to have a material
adverse effect) and Old Davel and New Davel shall have complied with or
performed in all material respects all agreements and covenants required to be
complied with or performed by them under the Merger Agreement at or prior to
the Closing Date; (2) Peoples shall have received a letter from Ernst & Young
LLP, its independent public accountants, stating that accounting for the
Transaction as a pooling of interests is appropriate if the Transaction is
consummated in accordance with the Merger Agreement; and (3) Peoples shall
have received an opinion from Shearman & Sterling, special counsel to Peoples,
dated as of the Closing Date, to the effect that the Transaction will
constitute a reorganization for U.S. federal income tax purposes within the
meaning of Section 368(a) of the Code.
Peoples has received irrevocable tenders of approximately $99.9 million
principal amount of the Peoples Notes (out of $100 million principal amount
outstanding). As a result, the 85% minimum tender condition referenced in the
immediately preceding paragraph will be satisfied on the Closing Date.
The Merger Agreement provides that if, as a result of the exercise of
dissenters' rights by shareholders of Old Davel with respect to a greater
number of shares of Old Davel Common Stock than would permit the satisfaction
of the conditions to consummation of the Transaction described above relating
to (i) receipt of Financing (as a result of too significant an amount of cash
being required to be paid to shareholders of Old Davel) or (ii) receipt of
required letters regarding the accounting treatment for the Transaction or
receipt of required opinions regarding the tax treatment of the Transaction
(in either case, as a result of too significant a change in the equity
interests of Old Davel occurring), then the parties will amend the Merger
Agreement to provide for a structure similar to the one contemplated by the
Original Merger Agreement. Under that structure, Peoples would have become a
subsidiary of Old Davel and Old Davel would not have been merged with any
other entity and, accordingly, no dissenters' rights would have been available
to shareholders of Old Davel. If the alternative structure were to be
implemented, the parties would take the necessary steps to seek the approval
of their respective shareholders for that transaction and would resolicit
proxies.
BENEFIT PLANS
The Peoples Surviving Corporation will continue to honor those employment,
severance, separation and other compensation agreements disclosed to Old Davel
and existing as of the Closing Date between Peoples and any Affected Employee
of Peoples as of the Closing Date.
New Davel shall, or shall cause Peoples or any of its subsidiaries to, give
Affected Employees full credit for purposes of eligibility and vesting under
any employee benefit plans or arrangements maintained by New Davel, Peoples or
any of its subsidiaries for such Affected Employees' service with New Davel,
Peoples or any affiliate thereof to the same extent recognized immediately
prior to the closing date of the Transaction.
Subject to the following sentence, New Davel and Old Davel have also agreed
to, or to cause Peoples or their subsidiaries to, provide coverage and
benefits to Affected Employees pursuant to employee benefit plans or
arrangements until December 31, 1998. New Davel is not required by the Merger
Agreement to provide or maintain any equity-based compensation plans of
Peoples. New Davel will, or will cause Peoples or one of its subsidiaries to,
waive the waiting periods and preexisting conditions exclusions applicable to
the Affected Employees under any welfare benefit plans in which such employees
may be eligible to participate, except for
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those limitations and waiting periods that were already in effect with regard
to such Affected Employees and that will not have been satisfied as of the
closing date of the Transaction.
TERMINATION
The Merger Agreement may be terminated, and the Transaction may be
abandoned, at any time prior to the Closing Date: (1) by the mutual written
consent of Peoples and Old Davel; (2) by either Peoples or Old Davel, if the
Transaction has not been consummated by December 31, 1998 (provided that such
party's failure to fulfill any of its obligations under the Merger Agreement
shall have been the reason that the Peoples Effective Time shall not have
occurred on or before such date); (3) by either Peoples or Old Davel, if there
shall be adopted or enacted any law or regulation that makes consummation of
the Transaction illegal or otherwise prohibited or if any final, nonappealable
judgment, injunction, order or decree is entered enjoining Old Davel or
Peoples from consummating the Transaction; (4) by either Peoples or Old Davel,
if the Merger Agreement shall not have been approved and adopted by the
Peoples shareholders or if the issuance of Old Davel Common Stock in the
Transaction shall not have been approved by the Old Davel shareholders; (5) by
Old Davel, if the Peoples Board of Directors shall (a) withdraw, modify or
change its recommendation or approval of the Merger Agreement or the
Transaction in a manner adverse to Old Davel or New Davel or (b) have
recommended any Acquisition Proposal other than by Old Davel or New Davel or
the merger subsidiary; (6) by Old Davel, if any third person shall have become
the beneficial owner of 15% or more of the outstanding Peoples Common Stock
and filed a Schedule 13D with the Commission describing an intention that
could prevent or materially delay the consummation of the Transaction; (7) by
Old Davel (provided that Old Davel is not then in breach of its obligations
under the Merger Agreement in any material respect), if Peoples shall have
breached in any material respect any of its representations, warranties,
covenants or agreements contained in the Merger Agreement and shall not have
cured such breach within 30 days after Peoples receives written notice of such
breach from Old Davel; (8) by Peoples, to allow Peoples to enter into an
agreement in respect of an Acquisition Proposal which the Peoples Board of
Directors has determined in the exercise of its fiduciary duties is more
favorable to Peoples and its shareholders than the Transaction; or (9) by
Peoples (provided that Peoples is not then in breach of its obligations under
the Merger Agreement in any material respect), if Old Davel shall have
breached in any material respect any of its representations, warranties,
covenants or agreements contained in the Merger Agreement and shall not have
cured such breach within 30 days after Old Davel receives written notice of
such breach from Peoples.
TERMINATION FEES
If the Merger Agreement is terminated pursuant to its terms, the Merger
Agreement shall become void and of no effect with no liability on the part of
any party except that (1) certain covenants shall survive such termination and
(2) such termination will not relieve any party from liability for any breach
of the Merger Agreement by it or any failure by it to perform its obligations
thereunder.
In the event that Old Davel or New Davel terminates the Merger Agreement as
a result of the Peoples Board of Directors withdrawing, modifying or changing
its recommendation or approval of the Merger Agreement or the Transaction in a
manner adverse to Old Davel or New Davel or such Board's recommending an
alternative Acquisition Proposal or in the event that Peoples terminates the
Merger Agreement to allow Peoples to enter into an agreement in respect of an
Acquisition Proposal which the Peoples Board of Directors has determined in
the exercise of its fiduciary duties is more favorable to Peoples and its
shareholders than the Transaction, Peoples will pay to Old Davel a termination
fee of $5,000,000 and an amount not to exceed $1,000,000 equal to the actual
and reasonably documented out-of-pocket expenses incurred by Old Davel and EGI
directly attributable to the proposed Transaction.
AMENDMENT AND WAIVER
At any time prior to the Closing Date, the parties may (1) extend the time
for the performance of any of their obligations under the Merger Agreement,
(2) waive any inaccuracies in the representations and warranties
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contained therein or in any document delivered pursuant thereto, and (3)
except for specified requirements set forth therein and for required
governmental filings and approvals, waive compliance with any of the
agreements or conditions contained therein. Any provision of the Merger
Agreement may be (1) waived in writing by the party against whom the waiver is
to be effective, or (2) amended at any time by an agreement in writing among
all of the parties, except that, after the approval of the shareholders of
Davel or Peoples, no such amendment or waiver to any of the terms and
conditions of the Merger Agreement may, without further approval of such
shareholders, alter or change (1) the amount or kind of consideration to be
received by such shareholders in the Transaction, (2) any term of the articles
of incorporation of Peoples (except for alterations or changes that could
otherwise be adopted by the board of directors of Peoples following the
Transaction) or (3) any of the terms or conditions of the Merger Agreement if
such alteration or change would adversely affect the holders of any class or
series of shares of Capital Stock of Peoples.
TERMINATION OPTION AGREEMENT
Old Davel and Peoples, in connection with the execution of the Original
Merger Agreement on July 5, 1998, also entered into the Termination Option
Agreement, pursuant to which Peoples granted an irrevocable termination option
to purchase up to 3,226,274 shares of Peoples Common Stock (or the number of
shares of Peoples Common Stock that equals 19.9% of the issued and outstanding
shares of Peoples Common Stock at the time of exercise of the Termination
Option) at an exercise price of $5.86 per share to Old Davel. The Termination
Option may be exercised in writing by Old Davel only after the termination of
the Davel/Peoples Merger Agreement because (1) the Peoples Board of Directors
(a) withdraws, modifies or changes its recommendation or approval in respect
of the Merger Agreement or the Transaction in a manner adverse to Old Davel or
New Davel or (b) recommends any Acquisition Proposal other than by Old Davel
or New Davel or the merger subsidiary; (2) a person or group (as defined in
Section 13(d)(3) of the Exchange Act) other than Old Davel or New Davel or any
of their respective subsidiaries or affiliates (a "Third Party") shall have
become the beneficial owner of more than 15% of the outstanding shares (either
on a primary or a fully diluted basis) of Peoples Common Stock and such Third
Party files or is required to file a Schedule 13D with the Commission
describing any plan or proposal of such Third Party which would result in its
acquisition of additional securities of Peoples, any change in the present
Peoples Board of Directors or management or any other extraordinary corporate
transaction involving Peoples that could prevent or materially delay the
consummation of the Transaction; or (3) Peoples enters into an agreement in
respect of an Acquisition Proposal which the Peoples Board of Directors has
determined in the exercise of its fiduciary duties is more favorable to
Peoples and its shareholders than the Transaction. The Termination Option is
exercisable until the earliest to occur of (1) the closing of any transaction
pursuant to an Acquisition Proposal with any Third Party; (2) any Third Party
acquiring beneficial ownership of more than 50% of the outstanding Peoples
Common Stock; or (3) twelve months after the date of termination of the Merger
Agreement.
VOTING AGREEMENTS
In connection with the execution of the Original Merger Agreement, Old
Davel, New Davel, Peoples and UBS Capital entered into the UBS Voting
Agreement on July 5, 1998. Pursuant to the UBS Voting Agreement, UBS Capital
has agreed to vote all of its shares of Peoples Series C Preferred Stock for
approval of the Transaction and for approval and adoption of the Merger
Agreement. The Peoples Series C Preferred Stock held by UBS Capital represents
approximately 15% of the outstanding voting stock of Peoples. See "Peoples
Principal Shareholders." UBS Capital has also agreed to convert all of its
shares of Peoples Series C Preferred Stock into Peoples Common Stock prior to
the Peoples Effective Time. See "The Transaction--Interests of Certain
Persons."
The UBS Voting Agreement also requires Old Davel and New Davel to exercise
all authority to cause the UBS Designee to be elected to fill one of the
vacancies on the Old Davel Board of Directors. The initial UBS Designee is
Justin S. Maccarone, who is currently a director of Peoples and an employee of
UBS Capital. The UBS Designee shall hold such director position until the
first anniversary of the Peoples Effective Time, except
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that if UBS shall, at any time during the one-year period following the
Peoples Effective Time, be the beneficial owner of less than 95% of the number
of shares of common stock of Old Davel or New Davel received by it in the
Transaction, then the UBS Designee shall immediately thereupon resign as a
director.
The UBS Voting Agreement further provides that, at the Peoples Effective
Time, the existing registration rights agreement between Peoples and UBS will
terminate and, in lieu thereof, UBS Capital shall be granted
certain registration rights by Old Davel or New Davel, as applicable, with
respect to the shares received in the Transaction. Such registration rights do
not become available until the UBS Designee is no longer serving on the board
of directors of Old Davel or New Davel, as appropriate. Although the shares of
New Davel Common Stock received by UBS Capital in the Transaction will be
registered on the Form S-4 Registration Statement of which this Joint Proxy
Statement/Prospectus forms a part, it is possible that such shares may not be
freely tradeable under Rule 145 of the Securities Act. These registration
rights have been granted because of the Rule 145 restrictions.
Each of David R. Hill and Samstock executed Voting Agreements with Peoples,
dated as of July 5, 1998, to vote all shares of Old Davel Common Stock owned
by them for the issuance of Old Davel Common Stock pursuant to the Merger
Agreement. As of the Davel Record Date, Mr. Hill and Samstock collectively
owned approximately 60% of the total outstanding Old Davel Common Stock.
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REGULATORY MATTERS
YOU WILL FIND DEFINITIONS FOR MANY OF THE CAPITALIZED TERMS USED IN THIS JOINT
PROXY
STATEMENT/PROSPECTUS IN THE GLOSSARY BEGINNING ON PAGE 154.
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 rules and policies to implement Section
276 of the Telecommunications Act. The Telecommunications 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 Telecommunications
Act on both an interstate and intrastate basis. Among other provisions, the
Telecommunications Act granted the FCC the power to preempt state regulations
to the extent that any state requirements are inconsistent with the FCC's
implementation of Section 276 thereof.
FEDERAL REGULATION OF LOCAL COIN AND DIAL-AROUND CALLS
TOCSIA established various requirements for companies that provide operator
services and for call aggregators, including payphone providers, who send
calls to those companies. The requirements of TOCSIA as implemented by the FCC
included call branding, information posting, rate quoting, the filing of
information 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.
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 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 at $0.40 per call. The failure by the
FCC to provide compensation for 800 subscriber dial-around calls was
challenged by the IPPs, and a federal court subsequently ruled that the FCC
should have provided compensation for these calls.
In 1996, recognizing that IPPs 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. Section
276 directed the FCC to implement FCC Rules by November 1996 which would:
. create a standard regulatory scheme for all public payphone providers;
. 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;
. terminate subsidies for LEC payphones from LEC-regulated base operations;
. prescribe, at a minimum, nonstructural safeguards to eliminate
discrimination between LECs and IPPs and remove the LEC payphones from
the LEC's regulated asset base;
. provide for the RBOCs to have the same rights that IPPs 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;
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. 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;
. 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 that they are required; and
. preempt any state requirements which are inconsistent with the FCC's
regulations implementing Section 276.
In September and November 1996, the FCC issued 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. As
a result of the deregulation of the local coin rate, most of the RBOCs and
other PSPs have publicly announced or implemented an increase in the local
coin rate to $0.35 per call in most jurisdictions.
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 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 were 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 subscriber 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, the 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 remand of the Court, the FCC issued the 1997 Payphone
Order in October 1997. The FCC determined that distinct and severable costs of
$0.066 were attributable to a coin call that did not apply to the costs
incurred by the PSPs in providing access for a dial-around call. 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 for
later decision the precise method of allocating the initial interim period
flat-rate payment obligation among the IXCs and the number of calls to be used
in determining the total amount of the payment obligation.
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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. On June 19,
1998, the FCC solicited comment from interested parties on the issues
remanded. In initial and reply comments certain IXCs and members of the paging
industry have urged the FCC to abandon its efforts to derive a market-based
rate from surrogates and either require the caller to pay dial-around
compensation by coin deposit or to adopt a cost-based rate at levels
substantially below the $0.284 rate. The Companies believe that the FCC will
issue its ruling in the current proceeding within the six-month period
established by the Court.
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 Companies 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, Old Davel and Peoples each 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, each of the Companies recorded dial-around compensation at
the same rate of $37.20 per payphone per month. See "Old Davel Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Peoples Management's Discussion and Analysis of Financial Condition and
Results of Operations." The amount of dial-around compensation recognized by
Old Davel and Peoples in the period from July 1, 1997 to October 6, 1997 is
approximately $14.4 million in the aggregate and is subject to adjustment upon
final resolution by the FCC and the Court of the appropriate level of
compensation for that period and the method of allocating the payment
obligation among the IXCs.
The Companies believe that they are legally entitled to fair compensation
under the Telecommunications Act for dial-around calls which were delivered to
any carrier during the period from November 7, 1996 to October 6, 1997. Based
on the information available, the Companies believe that the minimum amount of
fair compensation under the Telecommunications Act for the period from
November 7, 1996 to October 6, 1997 is $37.20 per payphone per month, and
based on the information available to them do not believe that it is
reasonably possible that the amount will be materially less than $37.20 per
payphone per month.
While the amount of $0.284 per call constitutes the Companies' 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 $0.284 per call or
should be determined by requiring the user to deposit coinage at the time of
making an 800 subscriber or access code call.
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The payments for dial-around calls prescribed in the 1997 Payphone Order
significantly increase dial-around compensation revenues to the Companies over
the levels received prior to implementation of the Telecommunications Act.
However, market forces and factors outside the Companies' control could
significantly affect the resulting revenue impact. These factors include the
following: (1) the resolution of the pending reconsideration of the $0.284
rate before the FCC and the possibility of subsequent appeals to the courts,
(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, (3) the possible adoption by the
FCC of a "caller pays" approach to dial-around compensation, (4) the
possibility of other litigation seeking to modify or overturn the 1997
Payphone Order or portions thereof, (5) pending litigation in the federal
courts concerning the constitutionality or validity of the Telecommunications
Act, (6) 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 (7) 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 Calls. 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, the Court issued an order which
upheld the FCC's authority to deregulate local coin call rates, which issue
the United States Supreme Court has declined to consider on appeal. In
accordance with the FCC's rulings and the Court's orders, certain LECs and
IPPs, including the Companies, began to adjust rates for local coin calls to
reflect market-based pricing. The Companies believe that, given the historical
subsidization of local coin rates under regulation, deregulation, where
implemented, will likely result in higher rates charged for local coin calls
and may lead to increased revenues from such calls.
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 some reduction in the number of calls made. While the Companies
believe that deregulation of local coin rates may result in revenue increases,
the Companies are unable to predict at this time with any degree of certainty
the magnitude or certainty of the increase, if any. The Companies are also
unable to provide assurance that deregulation, if and where implemented, will
lead to higher local coin call rates, and the Companies are thus unable to
predict the ultimate impact on its operations of local coin rate deregulation.
OTHER PROVISIONS OF THE TELECOMMUNICATIONS ACT AND FCC RULES
As a whole, the Telecommunications Act and FCC Rules should significantly
alter the competitive framework of the payphone industry. The Companies
believe that implementation of the Telecommunications Act and FCC Rules will
address certain historical inequities in the payphone marketplace and lead to
a more equitable competitive environment for all payphone providers. However,
there are numerous uncertainties in the implementation and interpretation of
the Telecommunications Act which make it impossible for the Companies to
provide assurance that the Telecommunications Act or the FCC Rules will result
in a long-term positive impact on the Companies. The Companies have been able
to identify the following such uncertainties:
. Various matters pending in several federal courts which, while not
directly challenging Section 276, relate to the validity and
constitutionality of the Telecommunications Act, as well as other
uncertainties related to the impact, timing and implementation of the
Telecommunications Act.
. The FCC Rules 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
cost to the LEC plus a reasonable margin of profit.
59
<PAGE>
. 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.
. The FCC Rules preempt 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. The
FCC Rules did not preempt state regulations that, for public safety
reasons, require routing of "0-" calls to the LEC, provided that the
state does not require that the LEC be routed such calls when the call is
determined to be non-emergency in nature.
. The FCC Rules determined that the administration of programs for
maintaining Public Interest Payphones should be left to the states within
certain guidelines.
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 0- 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. Some IXCs servicing the Companies' payphones are now in
compliance with this requirement. Some have not yet completed implementation
of the service, including DavelTel, Inc., Old Davel's IXC subsidiary. Some of
the larger IXCs have sought and obtained waivers for the delay in
implementation of the service, but DavelTel and other small carriers have not
done so. It is anticipated that the service will be available for virtually
all of the Companies' 0+ calls by the end of 1998. The ruling could affect the
financial performance of the Companies as relates to this call category.
However, the Companies are unable at this time to assess the ultimate impact,
if any, on their future operations or results.
UNIVERSAL SERVICES FUND
The Telecommunications Act provided for the establishment of a Joint Board
to make recommendations to the FCC concerning the continued provision of
"universally available" telecommunications services throughout the United
States. Congress directed the FCC, upon the recommendation of the Joint Board,
to implement and provide funding for (1) access to advanced telecommunications
services in rural, insular and high-cost areas at the same cost as similar
services are provided in urban areas, (2) access to advanced
telecommunications services for health care providers in rural areas and (3)
below-cost access to advanced telecommunications services for schools and
libraries. On May 8, 1997, the FCC affirmed the Universal Services Order which
required all telecommunications providers, including PSPs such as the
Companies, to contribute to universal services support beginning in January
1998. The FCC established mechanisms in the Universal Services Order and
related subsequent orders whereby carriers and PSPs would be billed monthly,
based on previously filed semi-annual gross revenue call traffic reports, at
rates assessed quarterly by USAC. In February 1998, the USAC issued its first
monthly assessment, which applied to January 1998. The FCC determined that
carriers and PSPs would be assessed at a factor of 0.0072 on its interstate,
intrastate and international coin and long-distance revenues to meet the
anticipated needs of the schools, libraries and rural health care funds and at
0.0319 on its interstate and international coin and long-distance revenues for
the high-cost and low-income funds. These factors have been set at 0.0076 and
0.0314, respectively, for the second quarter of 1998. The universal service
assessments, if not modified, may increase monthly costs by as much as $80,000
to $160,000 or more per month in the aggregate for the Companies. Old Davel
and Peoples are paying these assessments under protest. One or both of the
Companies may contest the amount and the validity of the assessments before
the FCC and the courts.
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<PAGE>
PRESUBSCRIBED IXC CHARGE
Other changes in federal regulations affect the charges incurred by the
Companies for local and long-distance telecommunications services. For
example, in May 1997, the FCC adopted new regulations that restructure
interstate access charges. As a result of these changes, LECs are supposed to
reduce the per-minute interstate access charges to IXCs. To partially offset
these reductions, LECs were authorized to assess IXCs a flat "Presubscribed
Interexchange Carrier Charge" of up to $2.75 per line per month which, at the
IXC's option, could be passed through to the end users. In the event that an
end user elects not to designate a pre-subscribed IXC, the LEC is authorized
to assess an equivalent charge to the end user. As a net result of these and
other changes, many carriers have restructured their rates. Based upon these
latter FCC actions, the Companies are experiencing an increase in carrier
costs that will be subsumed within, and to some extent offset by, the carrier
cost reductions otherwise expected from application of the FCC's new services
test and the advent of competition in LEC services, but no assurances can be
given as to the actual aggregate net impact of these actions.
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 Companies to comply with
applicable rules, regulations and reporting requirements. The 49 states that
currently permit IPPs to supply local and long-distance payphone service, 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 Telecommunications Act
contains provisions that require all states to allow payphone competition on
fair terms for both LECs and IPPs. State authorities also regulate LECs'
tariffs for interconnection of independent payphones, as well as the LECs' own
payphone operations and practices.
The Companies are 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 Companies must comply with regulations designed to afford
consumers notice at the payphone location of the long-distance company
servicing the payphone and the ability to access alternate carriers. Each of
the Companies believes that it is currently in material compliance with all
regulatory requirements pertaining to their offerings of operator services
directly or through other long-distance companies.
In accordance with requirements under the Telecommunications Act, state
regulatory authorities are currently reviewing the rates that LECs charge
independent payphone providers for local line access and associated services.
Local line access charges have been reduced in certain states and the
Companies believe that selected states' continuing review of local line access
charges, coupled with competition for local line access service resulting from
implementation of the Telecommunications Act, could lead to more options
available to the Companies for local line access at competitive rates. No
assurance can be given, however, that such options or local line access rates
will become available. The Telecommunications Act and FCC Rules also contain
other provisions which will affect the rates payphone providers can charge for
local coin calls and other aspects of the regulation of payphone services by
the states, although the extent of any future federal preemption of state
regulation cannot be accurately predicted.
The Companies believe 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 Companies
believe that some of these fees and restrictions may be in violation of
provisions of the Telecommunications Act prohibiting barriers to entry into
the business of operating payphones and the policy of the Telecommunications
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 Companies and the PSPs unless the industry is successful
in resisting this trend.
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<PAGE>
REGULATORY APPROVALS
Hart-Scott-Rodino. Under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act") and the rules promulgated thereunder by the
Federal Trade Commission (the "FTC"), certain acquisition transactions may not
be consummated unless notice has been given and certain information has been
furnished to the Antitrust Division of the Department of Justice (the "DOJ")
and the FTC and specified waiting period requirements have been satisfied. In
August 1998, Old Davel and Peoples and certain of their shareholders filed
Pre-Merger Notification and Report Forms with the FTC and the DOJ under the
HSR Act. Early termination of the waiting period with respect to Old Davel's
and Peoples' Pre-Merger Notification and Report Forms occurred on August 27,
1998. The waiting period for the Transaction with respect to UBS' Pre-Merger
Notification and Report Form expired on September 24, 1998. At any time before
or after the effective time of a transaction, the FTC or the DOJ could take
such action under the antitrust laws as it deems necessary or desirable in the
public interest, including seeking to enjoin the Transaction or seeking the
divestiture of substantial assets of Old Davel or Peoples or their respective
subsidiaries. Private parties and state attorneys general may also bring an
action under the antitrust laws under certain circumstances. Based upon an
examination of information available to Old Davel and Peoples relating to the
businesses in which the Companies and their respective subsidiaries are
engaged, the Companies believe that the consummation of the transactions will
not violate the antitrust laws. However, there can be no assurance that a
challenge to the Transaction on antitrust grounds will not be made or, if such
a challenge is made, of the result. Completion of the Transaction is subject
to no action having been instituted by the DOJ or the FTC that is not
withdrawn or terminated prior to the effective time of the transaction.
Other. As a result of the Transaction, Peoples and Old Davel are required to
make certain filings in, and obtain certain approvals from, the various states
in which New Davel will own and operate payphones, which process is underway.
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<PAGE>
OPERATION, MANAGEMENT AND BUSINESS OF
NEW DAVEL AFTER THE TRANSACTION
Statements in "Operation, Management and Business of New Davel after the
Transaction" relating to matters that are not historical facts are forward-
looking statements. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of New Davel to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such known and unknown risks, uncertainties and
other factors include, but are not limited to, the following: the impact of
competition, especially in a deregulated environment (including the ability of
New Davel to implement higher market-based rates for local coin calls) as well
as competition from alternative telecommunications products, uncertainties
with respect to the implementation and effect of the Telecommunications Act,
including any new rule-making by the FCC or litigation which may seek to
modify or overturn the FCC orders implementing such act or portions thereof,
particularly in the area of dial-around compensation, the ability of New Davel
to deploy its payphones in favorable locations, New Davel's ability to
continue to implement operational improvements and the ability of New Davel to
efficiently integrate the operations of Peoples and other payphone companies
it may acquire.
BUSINESS OF NEW DAVEL
Following completion of the Transaction, the business of New Davel will
consist of the businesses of Old Davel and Peoples. New Davel will be the
largest IPP in the United States, with an installed base of approximately
83,000 payphones, virtually all of which would be "smart" microprocessor-based
telephones enabling sophisticated remote monitoring (including verification of
coin activity and equipment malfunctions).
New Davel expects to achieve significant cost savings, operating
efficiencies, economies of scale, stronger market position and other synergies
stemming from the combination of Old Davel and Peoples. Principal areas of
cost savings include lower line and transmission costs, lower field operating
costs through more efficient concentration of payphone routes and elimination
of duplicative administrative and operational facilities. New Davel believes
that, excluding the effect of one-time transaction-related expenses, New Davel
will, within two years after the closing of the Transaction, achieve annual
savings and improvements attributable to such operating factors of
approximately $10 million.
New Davel's expanded geographical base will enable it to provide payphone
service throughout the United States under a national brand name, without
significant use of brokers or subcontractors--as compared to RBOCs, other LECs
and other competitors that do not operate nationally but operate principally
within a specific geographical region (and who rely on third parties to
provide payphone services outside of such region). New Davel believes that its
ability to service national accounts will uniquely position it to market to
Location Owners with operations that are national or multi-regional and who
seek one provider to service their accounts.
New Davel believes that its cost structure will enable it to accelerate its
acquisition strategy. A principal component of New Davel's strategy will be to
acquire smaller IPPs, to integrate their payphone networks into New Davel's
infrastructure, and thereby enhance cash flows by reducing the costs incurred
to service the acquired payphones. In the past three years, Old Davel has
completed a number of acquisitions (not including the Transaction) and
continues to be engaged in discussions with other payphone operators with
respect to possible acquisitions of other payphone businesses.
New Davel believes that its expanded geographical base, the cost savings and
synergies associated with the transactions and New Davel's increased
operational scale and financial resources (both of which will be substantially
greater than that of Old Davel or Peoples standing alone) will (i) establish
New Davel as a market leader in providing payphone services, (ii) result in
enhanced revenues (as compared to the historical revenues of Old Davel and
Peoples), (iii) allow New Davel to pursue and realize additional marketing
opportunities, (iv) enhance New Davel's ability to effect subsequent
acquisitions, which it intends to pursue and (v) enhance New Davel's ability
to remain competitive in the long term.
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<PAGE>
For a description of Old Davel's business strategy, which New Davel
currently intends to continue, see "Business of Old Davel--Business Strategy."
New Davel is organized under the laws of the State of Delaware, and its
principal executive offices will be located at 1429 Massaro Boulevard, Tampa,
Florida 33619. New Davel's telephone number will be (813) 623-3545.
THE FINANCING
In the Financing, New Davel currently expects that the New Credit Facility
will provide for borrowings not to exceed $260 million. In connection with the
Financing, Old Davel has entered into a commitment letter with NationsBank,
N.A., as administrative agent, NationsBanc Montgomery Securities LLC, as lead
arranger, BancBoston Robertson Stephens Inc., as syndication agent, and the
Chase Manhattan Bank, as documentation agent, pursuant to which such banks, in
the aggregate, have committed, or are holding for syndication to other
participant banks, $120 million of the New Credit Facility. Old Davel and such
banks are currently in discussions with other financial institutions with
respect to the remainder of the New Credit Facility.
On August 12, 1998, Peoples commenced the Peoples Debt Tender. Peoples has
received irrevocable tenders of approximately $99.9 million principal amount
of the Peoples Notes out of $100 million principal amount outstanding. A
portion of the proceeds from the Financing will be utilized to purchase
Peoples Notes tendered in the Peoples Debt Tender.
MANAGEMENT OF NEW DAVEL
The management team of New Davel will be comprised of the existing
management of Old Davel and may include members of the existing management of
Peoples. Pursuant to certain transition plans that are currently being
developed, it is expected that the business of Peoples will be centralized
under Old Davel's existing management within one year following completion of
the Transaction.
NEW DAVEL PRINCIPAL SHAREHOLDERS
At November 17, 1998, Mr. David R. Hill, Davel's Chairman of the Board,
beneficially owned about 32% of the outstanding shares of Old Davel Common
Stock, and Samstock beneficially owned about 28% of the outstanding shares of
Old Davel Common Stock. In the event the Transaction is consummated, it is
expected that Mr. Hill, Samstock and UBS will beneficially own immediately
thereafter approximately 18%, 15%, and 8%, respectively, of the outstanding
shares of New Davel Common Stock.
In connection with the EGI Investment, Mr. David R. Hill, Samstock and Old
Davel entered into a Shareholders Agreement and an Investment Agreement.
Pursuant to the Shareholders Agreement, Samstock has agreed to vote all of its
shares of New Davel Common Stock in favor of the election of Mr. Hill's
nominees to the New Davel Board of Directors, for so long as Mr. Hill is
entitled to designate directors under the Investment Agreement. Pursuant to
the Investment Agreement, Mr. Hill has agreed to vote all of his shares of New
Davel Common Stock in favor of the election of Samstock's nominees to the New
Davel Board of Directors, for so long as Samstock is entitled to designate
directors under the Shareholders Agreement. Pursuant to the Investment
Agreement, Mr. Hill and his affiliates have the right to designate three
directors of New Davel until such time as Mr. Hill and his affiliates
beneficially own less than 10% of the combined voting power of all voting
securities of New Davel. Pursuant to the Shareholders Agreement, Samstock and
its affiliates have the right to designate two directors of New Davel until
such time as Samstock and its affiliates beneficially own less than 10% of the
combined voting power of all voting securities of New Davel. In addition,
until June 29, 1999, Mr. Hill shall be entitled to designate two persons to be
elected as independent directors, provided that such designees are reasonably
acceptable to Samstock. After June 29, 1999, Mr. Hill and Samstock shall
jointly designate the two persons to be elected to the the New Davel Board of
Directors as independent directors. Pursuant to the Investment Agreement, each
of Mr. Hill and Samstock have agreed to vote all of their shares of New Davel
Common Stock in favor of such independent director designees. Pursuant to the
UBS Voting Agreement, UBS shall be entitled to designate one director to the
New Davel Board of Directors for a one-year period following the effective
time of the Transaction. UBS has determined that such designee will be Justin
S. Maccarone.
LISTING OF NEW DAVEL COMMON STOCK
Application will be made for quotation of all New Davel Common Stock
(including shares issued in connection with the Davel/Peoples Merger and the
Old Davel/New Davel Merger) on the Nasdaq National
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Market under the symbol "DAVL." This listing is a condition to the obligation
of each of Old Davel and Peoples to consummate the respective mergers to which
each is a party. So long as Old Davel continues to meet applicable
requirements, Old Davel Common Stock will continue to be quoted on the Nasdaq
National Market under the symbol "DAVL" until consummation of the Old
Davel/New Davel Merger, and will, in the event such merger is not consummated,
continue to be quoted thereon, subject to applicable requirements.
TRANSFER AGENT
The Transfer Agent and Registrar for the New Davel Common Stock will be
ChaseMellon Shareholder Services, L.L.C.
DIVIDENDS
Since Old Davel's initial public offering in 1993, Old Davel has not
declared or paid any cash or other dividends on its Common Stock and does not
expect to pay dividends in the foreseeable future. Instead, New Davel intends
to retain earnings to support its growth strategy and to reduce indebtedness.
As a holding company, New Davel's ability to pay dividends in the future is
dependent upon the receipt of dividends and other payments from its principal
operating subsidiaries. The payment of dividends or other distributions by
such operating subsidiaries will be restricted by the New Credit Facility. Any
future determination to pay dividends will be at the discretion of the New
Davel Board of Directors and will depend upon, among other factors, New
Davel's results of operations, financial condition, capital requirements and
contractual restrictions.
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NEW DAVEL UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements of
New Davel give effect to the Transaction as if the Transaction occurred as of
January 1, 1995, with respect to the unaudited pro forma condensed combined
statements of operations for the fiscal years ended December 31, 1995, 1996
and 1997, and the nine months ended September 30, 1998, and as of September
30, 1998 with respect to the unaudited pro forma condensed combined balance
sheet.
Such pro forma information includes: (i) the historical results of
operations of Old Davel for the fiscal years ended December 31, 1995 and 1996
and the historical balance sheet of Old Davel as of September 30, 1998, (ii)
the pro forma results of operations of Old Davel for the fiscal year ended
December 31, 1997, and the nine months ended September 30, 1998, and (iii) the
historical results of operations of Peoples for the fiscal years ended
December 31, 1995, 1996 and 1997 and the nine months ended September 30, 1998
and the historical balance sheet of Peoples as of September 30, 1998. The Old
Davel pro forma results of operations include adjustments for acquisitions
made by Old Davel during the most recent fiscal year and interim period
presented as if such acquisitions occurred at the beginning of the most recent
fiscal year presented.
The unaudited pro forma condensed combined financial statements also give
effect to the refinancing of certain Old Davel and Peoples debt and preferred
stock and to the EGI Investment as if such refinancing and investment occurred
as of January 1, 1997, with respect to the unaudited pro forma condensed
combined statements of operations for the fiscal year ended December 31, 1997
and the nine months ended September 30, 1998, and as of September 30, 1998
with respect to the unaudited pro forma condensed combined balance sheet.
The unaudited pro forma condensed combined financial statements exclude the
results of Old Davel's hospitality and remanufacturing divisions, Peoples'
inmate division, and CCI's inmate division, which were previously discontinued
and/or disposed. The unaudited pro forma condensed combined financial
statements also do not give effect to any events occurring after consummation
of the transaction. Although Old Davel believes that revenue enhancements,
additional cost reductions and operating expense synergies will be realized
after New Davel has integrated the businesses and has consolidated
administrative functions, these and other possible synergies in overhead
expenses have not been reflected in the unaudited pro forma condensed combined
financial statements.
The Transaction will be accounted for as a pooling-of-interests. Under the
pooling-of-interests method of accounting, the recorded assets and liabilities
of Old Davel and Peoples will be carried forward to New Davel's consolidated
financial statements at their historical amounts and the consolidated earnings
of New Davel will include the earnings of Old Davel and Peoples for the entire
fiscal year in which the Transaction occurs and for all prior years presented
and the reported retained earnings of Old Davel and Peoples for prior periods
will be combined and restated as consolidated retained earnings of New Davel.
The unaudited pro forma condensed combined financial statements are not
necessarily indicative of either future results of operations or results that
might have been achieved if the Transaction had been consummated as of the
indicated dates. The unaudited pro forma condensed combined financial
statements should be read in conjunction with the historical consolidated
financial statements of Old Davel and Peoples together with the related notes
thereto, which are included in this Joint Proxy Statement/Prospectus.
The unaudited pro forma condensed combined statements of operations included
herein do not reflect an extraordinary charge of approximately $11,770,000
(net of taxes) relating to the anticipated refinancing of certain debt of Old
Davel and Peoples and $4,818,000 (net of taxes) relating to estimated merger-
related transaction costs.
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<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
OLD
DAVEL PEOPLES PRO FORMA PRO FORMA
ASSETS HISTORICAL HISTORICAL COMBINED REFINANCING PRO FORMA
------ ---------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents........... $ 4,247 $ 6,746 $ 10,993 $ -- (1) $ 10,993
Trade and other
receivables........... 25,111 18,579 43,690 -- 43,690
Other current assets... 3,890 2,149 6,039 -- 6,039
-------- -------- -------- -------- --------
Total current assets.. 33,248 27,474 60,722 -- 60,722
-------- -------- -------- -------- --------
Noncurrent assets:
Property, plant and
equipment, net........ 87,434 49,809 137,243 -- 137,243
Intangibles and other
assets................ 62,556 35,745 98,301 3,500 (1) 96,817
(4,984)(2)
Deferred tax assets.... -- 3,407 3,407 8,396 (2) 11,803
-------- -------- -------- -------- --------
Total noncurrent
assets............... 149,990 88,961 238,951 6,912 245,863
-------- -------- -------- -------- --------
Total assets.......... $183,238 $116,435 $299,673 $ 6,912 $306,585
======== ======== ======== ======== ========
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY
--------------------
<S> <C> <C> <C> <C> <C>
Accounts payable and
accrued expenses....... $ 13,334 $ 21,754 $ 35,088 $ -- $ 35,088
Other current
liabilities............ 20,833 6,008 26,841 (3,173)(1) 23,668
Long-term debt, less
current maturities..... 74,927 101,488 176,415 26,673 (1) 203,088
Deferred income taxes... 10,189 -- 10,189 -- 10,189
Redeemable preferred
stock.................. -- 17,579 17,579 (17,579)(2) --
Total stockholders'
equity................. 63,955 (30,394) 33,561 991 (2) 34,552
-------- -------- -------- -------- --------
Total liabilities and
stockholders' equity. $183,238 $116,435 $299,673 $ 6,912 $306,585
======== ======== ======== ======== ========
</TABLE>
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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(IN THOUSANDS)
1. The net effect on cash and cash equivalents of the Transaction and the
concurrent debt refinancing reflects the following:
<TABLE>
<S> <C>
TOTAL SOURCES:
New Davel Line of Credit....................................... $ 17,660
New Davel Term Loan............................................ 200,000
--------
$217,660
========
TOTAL USES:
Repayment of Old Davel Term Loan............................... $ 79,330
Repayment of Old Davel Line of Credit.......................... 14,830
Purchase of Peoples Notes...................................... 100,000
Debt Refinancing Costs......................................... 3,500
Debt Repayment Premiums........................................ 14,000
Merger-Related Transaction Costs............................... 6,000
--------
$217,660
========
</TABLE>
2. Represents the net change in stockholders' equity as a result of the
Transaction, the concurrent refinancing of certain Old Davel and Peoples
debt and the conversion of Peoples Series C Preferred Stock:
<TABLE>
<S> <C>
Conversion of Peoples Series C Preferred Stock to Peoples'
Common Stock, net of premium paid upon conversion and excess
of redemption amount over carrying amount of $1,289.......... $17,579
Write-off of Old Davel historical deferred financing costs,
net of tax of $807........................................... (1,317)
Write-off of Peoples historical deferred financing costs, net
of tax of $1,087............................................. (1,773)
Estimated premiums related to repayment of Peoples debt, net
of tax of $5,320............................................. (8,680)
Estimated merger-related transaction costs, net of tax of
$1,182....................................................... (4,818)
-------
Pro forma adjustment to stockholders' equity.................. $ 991
=======
</TABLE>
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UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OLD DAVEL PEOPLES PRO FORMA
PRO FORMA HISTORICAL PRO FORMA PRO FORMA DEBT
(1) (2) ADJUSTMENTS COMBINED REFINANCING PRO FORMA
--------- ---------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Coin calls............. $44,062 $ 59,222 $(1,243)(3) $102,041 $ -- $102,041
Non-coin............... 29,153 27,043 -- 56,196 -- 56,196
------- -------- ------- -------- ------ --------
Total revenues........ 73,215 86,265 (1,243) 158,237 -- 158,237
------- -------- ------- -------- ------ --------
Costs and expenses:
Telephone charges...... 15,494 19,061 -- 34,555 -- 34,555
Commissions............ 11,723 24,535 -- 36,258 -- 36,258
Service, maintenance,
and network costs..... 18,294 17,892 -- 36,186 -- 36,186
Selling, general and
administrative costs.. 12,946 8,996 (1,243)(3) 20,699 -- 20,699
Unusual charges........ 825 -- -- 825 -- 825
Depreciation and
amortization.......... 12,587 16,641 -- 29,228 (338)(4) 28,890
------- -------- ------- -------- ------ --------
Total costs and
expenses............. 71,869 87,125 (1,243) 157,751 (338) 157,413
------- -------- ------- -------- ------ --------
Operating income
(loss)............... 1,346 (860) -- 486 338 824
------- -------- ------- -------- ------ --------
Interest expense........ (7,074) (9,703) -- (16,777) 1,213 (5) (15,564)
Other................... 152 -- -- 152 -- 152
------- -------- ------- -------- ------ --------
Income (loss) from
continuing operations
before income taxes.. (5,576) (10,563) -- (16,139) 1,551 (14,588)
Provision for (benefit
from) income taxes..... (1,562) -- -- (1,562) 589 (6) (973)
------- -------- ------- -------- ------ --------
Income (loss) from
continuing
operations........... (4,014) (10,563) -- (14,577) 962 (13,615)
Preferred stock
dividends and
accretion.............. -- (1,300) -- (1,300) 1,300 (7) --
------- -------- ------- -------- ------ --------
Income (loss) from
continuing operations
applicable to common
shares............... $(4,014) $(11,863) $ -- $(15,877) $2,262 $(13,615)
======= ======== ======= ======== ====== ========
Basic and diluted loss
per share (8).......... $ (0.80) $ (0.73) $ (1.80) $ (1.40)
======= ======== ======== ========
Weighted average common
shares outstanding (8). 5,032 16,212 8,842 9,703
======= ======== ======== ========
</TABLE>
69
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. The following Old Davel unaudited pro forma condensed combined statement of
operations is based on the historical financial statements of Old Davel and
CCI and has been prepared to illustrate the effects of the CCI Acquisition.
<TABLE>
<CAPTION>
OLD DAVEL 9 CCI
MONTHS ENDED PERIOD FROM
SEPTEMBER 30, JANUARY 1, 1998,
1998 TO FEBRUARY 2,
HISTORICAL 1998 PRO FORMA OLD DAVEL
(A) (A) ADJUSTMENTS PRO FORMA
------------- ---------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Coin calls............. $41,430 $2,632 $ -- $44,062
Non-coin............... 27,753 1,400 -- 29,153
------- ------ ----- -------
Total revenue......... 69,183 4,032 -- 73,215
------- ------ ----- -------
Costs and expenses:
Telephone charges...... 15,019 475 -- 15,494
Commissions............ 10,943 780 -- 11,723
Service, maintenance
and network costs..... 17,880 414 -- 18,294
Selling, general and
administrative costs.. 10,869 2,077 -- 12,946
Unusual charges........ 825 -- -- 825
Depreciation and
amortization.......... 11,683 821 83 (b) 12,587
------- ------ ----- -------
Total costs and
expenses............. 67,219 4,567 83 71,869
------- ------ ----- -------
Operating income
(loss)............... 1,964 (535) (83) 1,346
------- ------ ----- -------
Interest expense........ (6,295) (308) (471)(c) (7,074)
Other................... 152 -- -- 152
------- ------ ----- -------
Loss from continuing
operations before
income taxes......... (4,179) (843) (554) (5,576)
Benefit from income
taxes.................. (1,455) -- (107)(d) (1,562)
------- ------ ----- -------
Loss from continuing
operations........... (2,724) (843) (447) (4,014)
Preferred stock
dividends and
accretion.............. -- -- -- --
------- ------ ----- -------
Loss from continuing
operations applicable
to common shares..... $(2,724) $ (843) $(447) $(4,014)
======= ====== ===== =======
Basic and diluted loss
per share.............. $ (0.54) $ (0.80)
======= =======
Weighted average common
shares outstanding..... 5,032 5,032
======= =======
</TABLE>
- --------
(a) Certain reclassifications were made to Old Davel and CCI historical
information to conform the presentation of such information.
(b) Reflects additional depreciation and amortization expense related to
the CCI Acquisition.
(c) Reflects additional interest expense related to the incurrence of
$120,000 in long-term debt under the $125,000 credit agreement related
to the CCI Acquisition.
(d) Reflects income tax effect of the CCI pro forma adjustments in Notes
(b) and (c) above.
2. Certain reclassifications were made to Peoples historical information to
conform the presentation of such information.
3. To present coin revenues net of related sales tax.
70
<PAGE>
4. To adjust for the change in amortization of deferred financing costs as a
result of the refinancing of certain Old Davel and Peoples debt.
5. In connection with the Transaction, New Davel intends to refinance and
consolidate approximately $194,000 of existing indebtedness of Old Davel
and Peoples. The following table reflects the pro forma adjustments to
interest expense related to the refinancing of certain debt.
<TABLE>
<S> <C>
Amount included in historical pro forma statement of
operations for refinanced debt............................... $ 15,432
Amounts for new facility and debt............................. (14,219)
--------
Pro forma interest expense adjustment......................... $ 1,213
========
</TABLE>
The pro forma adjustment to interest expense assumes a weighted average
interest rate of 8.57% per annum. A 0.125% increase or decrease in the
weighted average interest rate would change pro forma interest expense by
$204 for the nine months ended September 30, 1998.
6. The pro forma adjustment to the provision for income taxes is based upon a
tax rate of 38% applied to the pro forma income before income taxes.
7. Eliminates preferred stock accretion and dividends.
8. Reflects the Exchange Ratio of 0.235 of a share of New Davel Common Stock
for each issued and outstanding share of Peoples Common Stock.
The following table presents a reconciliation of the pro forma weighted
average number of shares outstanding used in calculating pro forma loss per
share of New Davel Common Stock:
<TABLE>
<S> <C>
Historical weighted average number of shares of Peoples Common
Stock outstanding for the nine months ended September 30, 1998... 16,212
Exchange Ratio.................................................... 0.235
------
Pro forma number of shares of New Davel Common Stock issued to
Peoples Common Shareholders...................................... 3,810
Historical weighted average number of shares of Old Davel Common
Stock outstanding for the nine months ending September 30, 1998.. 5,032
------
Pro forma number of shares of New Davel Common Stock prior to
conversion of Peoples Series C Preferred Stock................... 8,842
------
Pro forma number of shares of Peoples Common Stock converted from
Peoples Preferred Stock, Preferred Stock Dividends Payable and
Premium Paid upon Conversion..................................... 3,665
Exchange Ratio.................................................... 0.235
------
Pro forma number of shares of New Davel Common Stock issued in
conversion of Peoples Series C Preferred Stock, Preferred Stock
Dividends Payable and Premium Paid upon Conversion to Peoples
Common Stock..................................................... 861
------
Pro forma number of shares of New Davel Common Stock outstanding
after completion of the Transaction and conversion of Peoples
Preferred Stock.................................................. 9,703
======
</TABLE>
71
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OLD DAVEL PEOPLES PRO PRO FORMA
PRO FORMA HISTORICAL PRO FORMA FORMA DEBT
(1) (2) ADJUSTMENTS COMBINED REFINANCING PRO FORMA
--------- ---------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Coin calls............. $ 58,113 $ 76,449 $(757)(3) $133,805 $ -- $133,805
Non-coin............... 44,804 35,786 -- 80,590 -- 80,590
-------- -------- ----- -------- ------ --------
Total revenues........ 102,917 112,235 (757) 214,395 -- 214,395
-------- -------- ----- -------- ------ --------
Costs and expenses:
Telephone charges...... 19,281 24,877 -- 44,158 -- 44,158
Commissions............ 15,179 29,656 -- 44,835 -- 44,835
Service, maintenance
and network costs..... 33,746 24,031 -- 57,777 -- 57,777
Selling, general and
administrative costs.. 15,222 13,023 (757)(3) 27,488 -- 27,488
Depreciation and
amortization.......... 15,078 21,304 -- 36,382 (203)(4) 36,179
-------- -------- ----- -------- ------ --------
Total costs and
expenses............. 98,506 112,891 (757) 210,640 (203) 210,437
-------- -------- ----- -------- ------ --------
Operating income
(loss)............... 4,411 (656) -- 3,755 203 3,958
-------- -------- ----- -------- ------ --------
Interest expense........ (9,955) (13,106) -- (23,061) 3,224 (5) (19,837)
Other................... 6,028 -- -- 6,028 -- 6,028
-------- -------- ----- -------- ------ --------
Income (loss) from
continuing operations
before income taxes.. 484 (13,762) -- (13,278) 3,427 (9,851)
Provision for income
taxes.................. 753 -- -- 753 1,302 (6) 2,055
-------- -------- ----- -------- ------ --------
Income (loss) from
continuing
operations........... (269) (13,762) -- (14,031) 2,125 (11,906)
Preferred stock
dividends and
accretion.............. -- (1,206) -- (1,206) (664)(7) (1,870)
-------- -------- ----- -------- ------ --------
Income (loss) from
continuing operations
applicable to common
shares............... $ (269) $(14,968) $ -- $(15,237) $1,461 $(13,776)
======== ======== ===== ======== ====== ========
Basic and diluted loss
per
share(8)............... $ (0.06) $ (0.92) $ (1.81) $ (1.34)
======== ======== ======== ========
Weighted average common
shares outstanding(8).. 4,601 16,198 8,408 10,269
======== ======== ======== ========
</TABLE>
72
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. The following Old Davel unaudited pro forma condensed combined statement of
operations is based on the historical financial statements of Old Davel and
CCI and has been prepared to illustrate the effects of the CCI Acquisition.
<TABLE>
<CAPTION>
OLD DAVEL
YEAR ENDED CCI
DECEMBER 31, YEAR ENDED
1997 DECEMBER 31,
HISTORICAL 1997 PRO FORMA OLD DAVEL
(A) (A) (B) ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Coin calls............... $25,211 $32,902 $ -- $ 58,113
Non-coin................. 21,797 23,007 -- 44,804
------- ------- ------- --------
Total revenue........... 47,008 55,909 -- 102,917
------- ------- ------- --------
Costs and expenses:
Telephone charges........ 9,576 9,705 -- 19,281
Commissions.............. 6,202 8,977 -- 15,179
Service, maintenance and
network costs........... 17,040 16,706 -- 33,746
Selling, general and
administrative costs.... 3,175 12,047 -- 15,222
Depreciation and
amortization............ 4,316 8,491 2,271 (c) 15,078
------- ------- ------- --------
Total costs and
expenses............... 40,309 55,926 2,271 98,506
------- ------- ------- --------
Operating income (loss). 6,699 (17) (2,271) 4,411
------- ------- ------- --------
Interest expense.......... (475) (3,983) (5,497)(d) (9,955)
Other..................... 497 5,531 -- 6,028
------- ------- ------- --------
Income (loss) from
continuing operations
before income taxes.... 6,721 1,531 (7,768) 484
Provision for (benefit
from) income taxes....... 2,459 -- (1,706)(e) 753
------- ------- ------- --------
Income (loss) from
continuing operations.. 4,262 1,531 (6,062) (269)
Preferred stock dividends
and accretion............ -- -- -- --
------- ------- ------- --------
Income (loss) from
continuing operations
applicable to common
shares................. $ 4,262 $ 1,531 $(6,062) $ (269)
======= ======= ======= ========
Basic earnings (loss) per
share.................... $ 0.93 $ (0.06)
======= ========
Diluted earnings (loss)
per share................ $ 0.90 $ (0.06)
======= ========
Weighted average common
shares outstanding....... 4,601 4,601
======= ========
</TABLE>
- --------
(a) Certain reclassifications were made to Old Davel and CCI historical
information to conform the presentation of such information.
(b) CCI amounts do not include $32,487 of revenues, $40,485 of costs and
expenses, and $11,635 of loss from continuing operations related to
CCI's inmate operations which were sold to Talton Holdings, Inc. on
October 1, 1997.
(c) Reflects additional depreciation and amortization expense related to
the CCI Acquisition.
(d) Reflects additional interest expense related to the incurrence by Old
Davel of $120,000 in long-term debt under the $125,000 credit agreement
related to the CCI Acquisition.
(e) Reflects income tax effect of the CCI pro forma adjustments described
in Notes (c) and (d) above.
73
<PAGE>
2. Certain reclassifications were made to Peoples historical information to
conform the presentation of such information.
3. To present coin revenues net of related sales tax.
4. To adjust for the change in amortization of deferred financing costs as a
result of the refinancing of certain Old Davel and Peoples debt.
5. In connection with the Transaction, New Davel intends to refinance and
consolidate approximately $194,000 of existing indebtedness of Old Davel
and Peoples. The following table reflects the pro forma adjustments to
interest expense related to the refinancing of certain debt.
<TABLE>
<S> <C>
Amount included in historical pro forma statement of
operations for refinanced debt............................... $ 22,182
Amounts for new facility and debt............................. (18,958)
--------
Pro forma interest expense adjustment......................... $ 3,224
========
</TABLE>
The pro forma adjustment to interest expense assumes a weighted average
interest rate of 8.57% per annum. A 0.125% increase or decrease in the
weighted average interest rate would change pro forma interest expense by
$273 for the year ended December 31, 1997.
6. The pro forma adjustment to the provision for income taxes is based upon a
tax rate of 38% applied to the pro forma income before income taxes.
7. In connection with the Transaction, holders of Peoples Series C Preferred
Stock intend to convert their shares to Peoples Common Stock. In
consideration for the accrued but unpaid dividends and premium paid upon
conversion, the holders of Peoples Series C Preferred Stock will also be
paid an additional 190 shares of New Davel Common Stock (plus such
additional number as will equal in value (calculated based on the Exchange
Ratio of 0.235 of a share of New Davel Common Stock multiplied by the
closing price of the common stock of Old Davel on the trading day
immediately prior to the date of the Merger Agreement) any additional
dividends on the Preferred Shares accruing after the date of the Merger
Agreement and prior to the Effective Time). These shares are valued at
$3,225. The following table reflects the pro forma adjustments to the net
loss applicable to common shares related to the conversion of the Peoples
Series C Preferred Stock.
<TABLE>
<S> <C>
Amount included in historical net loss applicable to common
shares for preferred stock accretion and dividends............. $1,206
Premium paid upon conversion of preferred stock to common stock
and excess of redemption amount over carrying amount........... (1,870)
------
Pro forma adjustment to net loss applicable to common shares.... $ (664)
======
</TABLE>
74
<PAGE>
8. Reflects the Exchange Ratio of 0.235 of a share of New Davel Common Stock
for each issued and outstanding share of Peoples Common Stock.
The following table presents a reconciliation of the pro forma weighted
average number of shares outstanding used in calculating pro forma loss per
share of New Davel Common Stock:
<TABLE>
<S> <C>
Historical weighted average number of shares of Peoples Common
Stock outstanding for the year ended December 31, 1997.......... 16,198
Exchange Ratio................................................... 0.235
------
Pro forma number of shares of New Davel Common Stock issued to
Peoples Common Shareholders..................................... 3,807
Historical weighted average number of shares of Old Davel Common
Stock outstanding for the year ended December 31, 1997.......... 4,601
------
Pro forma number of shares of New Davel Common Stock prior to the
conversion of Peoples Series C Preferred Stock.................. 8,408
------
Pro forma number of shares of Peoples Common Stock converted from
Peoples Preferred Stock, Preferred Stock Dividends Payable and
Premium Paid upon Conversion.................................... 3,665
Exchange Ratio................................................... 0.235
------
Pro forma number of shares of New Davel Common Stock issued in
conversion of Peoples Series C Preferred Stock and Preferred
Stock Dividends Payable to Peoples Common Stock and Premium Paid
upon Conversion to Peoples Common Stock......................... 861
------
Pro forma number of shares of Davel Common Stock outstanding
after completion of Transaction and conversion of Peoples Series
C Preferred Stock............................................... 9,269
Pro forma number of shares of Old Davel Common Stock issued in
connection with the EGI Investment.............................. 1,000
------
Pro forma number of shares of New Davel Common Stock outstanding
after completion of the Transaction, conversion of Peoples
Series C Preferred Stock and the EGI Investment................. 10,269
======
</TABLE>
75
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OLD DAVEL PEOPLES
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
(1) (1) ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Coin calls....................... $18,560 $ 77,389 $(557)(2) $ 95,392
Non-coin......................... 18,413 29,617 -- 48,030
------- -------- ----- --------
Total revenues.................. 36,973 107,006 (557) 143,422
------- -------- ----- --------
Costs and expenses:
Telephone charges................ 7,501 25,263 -- 32,764
Commissions...................... 6,286 28,250 -- 34,536
Service, maintenance and network
costs........................... 12,245 23,974 -- 36,219
Selling, general and
administrative costs............ 2,703 12,491 (557)(2) 14,637
Unusual charges.................. -- (1,500) -- (1,500)
Depreciation and amortization.... 2,986 20,466 -- 23,452
------- -------- ----- --------
Total costs and expenses........ 31,721 108,944 (557) 140,108
------- -------- ----- --------
Operating income (loss)......... 5,252 (1,938) -- 3,314
------- -------- ----- --------
Interest expense.................. (289) (12,875) -- (13,164)
Other............................. 100 545 -- 645
------- -------- ----- --------
Income (loss) from continuing
operations before income taxes. 5,063 (14,268) -- (9,205)
Provision for income taxes........ 1,868 -- -- 1,868
------- -------- ----- --------
Income (loss) from continuing
operations..................... 3,195 (14,268) -- (11,073)
Preferred stock dividends and
accretion........................ -- (1,194) -- (1,194)
------- -------- ----- --------
Income (loss) from continuing
operations applicable to common
shares......................... $ 3,195 $(15,462) $ -- $(12,267)
======= ======== ===== ========
Basic and diluted income (loss)
per share (3).................... $ 0.70 $ (0.96) $ (1.47)
======= ======== ========
Weighted average common shares
outstanding (3).................. 4,513 16,188 8,317
======= ======== ========
</TABLE>
76
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. Certain reclassifications were made to Old Davel and Peoples historical
information to conform the presentation of such information.
2. To present coin revenues net of related sales tax.
3. Reflects the Exchange Ratio of 0.235 of a share of New Davel Common Stock
for each issued and outstanding share of Peoples Common Stock.
The following table presents a reconciliation of the pro forma weighted
average number of shares outstanding used in calculating pro forma loss per
share of New Davel Common Stock.
<TABLE>
<S> <C>
Historical weighted average number of shares of Peoples Common
Stock outstanding for the year ended December 31, 1996.......... 16,188
Exchange Ratio................................................... 0.235
------
Pro forma number of shares of New Davel Common Stock issued to
Peoples Common Shareholders..................................... 3,804
Historical weighted average number of shares of Old Davel Common
Stock outstanding for the year ended December 31, 1996.......... 4,513
------
Pro forma number of shares of New Davel Common Stock outstanding
after completion of the Transaction............................. 8,317
======
</TABLE>
77
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
OLD DAVEL PEOPLES
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
(1) (1) ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Coin calls....................... $14,357 $ 78,353 $(431)(2) $ 92,279
Non-coin......................... 17,473 34,009 -- 51,482
------- -------- ----- --------
Total revenues.................. 31,830 112,362 (431) 143,761
------- -------- ----- --------
Costs and expenses:
Telephone charges................ 6,076 29,304 -- 35,380
Commissions...................... 4,968 27,599 -- 32,567
Service, maintenance and network
costs........................... 10,138 27,412 -- 37,550
Selling, general and
administrative costs............ 2,366 11,160 (431)(2) 13,095
Unusual charges.................. -- 6,177 -- 6,177
Depreciation and amortization.... 2,136 19,180 -- 21,316
------- -------- ----- --------
Total costs and expenses........ 25,684 120,832 (431) 146,085
------- -------- ----- --------
Operating income (loss)......... 6,146 (8,470) -- (2,324)
------- -------- ----- --------
Interest expense.................. (48) (10,355) -- (10,403)
Other............................. 125 (566) -- (441)
------- -------- ----- --------
Income (loss) from continuing
operations before income taxes. 6,223 (19,391) -- (13,168)
Provision for (benefit from)
income taxes..................... 2,403 (217) -- 2,186
------- -------- ----- --------
Income (loss) from continuing
operations..................... 3,820 (19,174) -- (15,354)
Preferred stock dividends and
accretion........................ -- (542) -- (542)
------- -------- ----- --------
Income (loss) from continuing
operations applicable to common
shares......................... $ 3,820 $(19,716) $ -- $(15,896)
======= ======== ===== ========
Basic and diluted income (loss)
per share (3).................... $ .85 $ (1.23) $ (1.93)
======= ======== ========
Weighted average common shares
outstanding (3).................. 4,455 16,091 8,236
======= ======== ========
</TABLE>
78
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. Certain reclassifications were made to Old Davel and Peoples historical
information to conform the presentation of such information.
2. To present coin revenues net of related sales tax.
3. Reflects the Exchange Ratio of 0.235 of a share of New Davel Common Stock
for each issued and outstanding share of Peoples Common Stock.
The following table presents a reconciliation of the pro forma weighted
average number of shares outstanding used in calculating pro forma loss per
share of New Davel Common Stock.
<TABLE>
<S> <C>
Historical weighted average number of shares of Peoples Common
Stock outstanding for the year ended December 31, 1995.......... 16,091
Exchange ratio................................................... 0.235
------
Pro forma number of shares of New Davel Common Stock issued to
Peoples Common Shareholders..................................... 3,781
Historical weighted average number of shares of Old Davel Common
Stock outstanding for the year ended December 31, 1996.......... 4,455
------
Pro forma number of shares of New Davel Common Stock outstanding
after completion of the Transaction............................. 8,236
======
</TABLE>
79
<PAGE>
DESCRIPTION OF NEW DAVEL CAPITAL STOCK
GENERAL
As of the Davel Effective Time, the total amount of authorized capital stock
of New Davel will be 50,000,000 shares of New Davel Common Stock, and
1,000,000 shares of the New Davel Preferred Stock. The following description
is qualified in its entirety by reference to New Davel's proposed Certificate
of Incorporation and By-laws, which are attached as Appendices IV and V
hereto, respectively.
NEW DAVEL COMMON STOCK
Immediately following the Davel Effective Time, the holders of New Davel
Common Stock will be entitled to one vote for each share held of record on all
matters submitted to a vote of shareholders. Cumulative voting in the election
of directors will not, as of the Davel Effective Time, be permitted. Subject
to preferences that may be granted to holders of New Davel Preferred Stock,
holders of New Davel Common Stock will, at such time, be entitled to receive
ratably such dividends as may be declared by the New Davel Board of Directors
to the extent legally payable. In the event of a liquidation, dissolution or
winding-up of New Davel, holders of New Davel Common Stock will be entitled to
share ratably in all assets remaining after payment of liabilities and the
liquidation preference, if any, that may be granted to the holders of New
Davel Preferred Stock. Holders of New Davel Common Stock will, immediately
following the time the Davel Effective Time, have no conversion, preemptive or
other rights to subscribe for additional shares or other securities, and there
will be no redemption or sinking fund provisions with respect to such shares.
The issued and outstanding shares of New Davel Common Stock will be fully paid
and nonassessable. If the Transaction is completed, about 2.3 million shares
of New Davel Common Stock will be held by persons who are not affiliates of
Davel and about 3.8 million shares of New Davel Common Stock will be held by
persons who are not affiliates of Peoples (in each case, based upon the number
of shares of outstanding common stock of Old Davel and Peoples as of November
17, 1998), all of which would be freely tradeable immediately after the
completion of the transactions. However, shares of New Davel Common Stock held
by Old Davel and Peoples affiliates would be subject to the sales restrictions
imposed by Rule 145 of the Securities Act and to pooling-of-interests
accounting rules.
NEW DAVEL PREFERRED STOCK
The New Davel Board of Directors will have the authority to issue by
resolution up to 1,000,000 shares of New Davel Preferred Stock in one or more
series and to fix the number of shares constituting any such series and the
rights and preferences thereof, including dividend rates, terms of redemption
(including sinking fund provisions), redemption price or prices, voting
rights, conversion rights and liquidation preferences of the shares
constituting such series, without any further vote or action by New Davel's
shareholders. The issuance of New Davel Preferred Stock by the New Davel Board
of Directors could adversely affect the rights of holders of New Davel Common
Stock. For example, an issuance of New Davel Preferred Stock could result in a
class of securities outstanding that would have preferences over the New Davel
Common Stock with respect to dividends and in liquidation, and that could
(upon conversion or otherwise) enjoy all of the rights appurtenant to New
Davel Common Stock.
The authority possessed by the New Davel Board of Directors to issue New
Davel Preferred Stock could potentially be used to discourage attempts by
others to obtain control of New Davel, through merger, tender offer, proxy
contest or otherwise, by making such attempts more difficult to achieve or
more costly. The New Davel Board of Directors may issue New Davel Preferred
Stock without shareholder approval and with voting and conversion rights that
could adversely affect the voting power of holders of New Davel Common Stock.
RIGHTS PLAN
Each share of New Davel Common Stock will have associated with it a right
(each, a "New Right") entitling the registered holder, under certain
circumstances, to purchase from New Davel one one-thousandth of a share of New
Davel Series A Preferred Stock, at the purchase price of $100.00 per one-
thousandth of a share of New Davel Series A Preferred Stock (the "New Right
Purchase Price"), subject to adjustment. The terms of the New Rights are
substantially similar to those set forth in the Rights Agreement of Old Davel
as currently in effect.
80
<PAGE>
The New Rights will not be immediately exercisable and will be transferable
only with the related New Davel Certificates. The New Rights will become
exercisable and separately transferable only in the event a person, other than
certain exempt persons, acquires beneficial ownership of 15% or more of the
outstanding New Davel Common Stock. Specifically, the New Rights will become
exercisable and transferrable upon the earlier of (1) the date of public
disclosure that a person or group, other than an "exempt" person, together
with non-exempt persons affiliated or associated with it, has acquired, or
obtained the right to acquire, beneficial ownership of 15% or more of the
outstanding New Davel Common Stock and (2) the tenth day after the date of
commencement of disclosure of an intention to commence a tender offer or
exchange offer by a person (other than an exempt person, Old Davel and certain
related entities) if, upon consummation of the offer, such person or group,
together with non-exempt persons affiliated or associated with it, could
acquire beneficial ownership of 15% or more of the outstanding New Davel
Common Stock. Mr. David R. Hill and his spouse and certain trusts for their
benefit and Samstock will be considered "exempt persons," as long as the
aggregate New Davel Common Stock ownership of such persons, as the case may
be, does not exceed the respective amounts of New Davel Common Stock
beneficially owned by such person as of the effective time of the Old
Davel/New Davel Merger, expressed as a percentage of the total outstanding
Common Stock, on a fully diluted basis, plus 1% of such amount.
The New Rights will expire on the close of business on the tenth anniversary
of the Transaction (the "New Rights Expiration Date"), unless the New Rights
are earlier redeemed or exchanged by New Davel. At any time prior to the
earlier of (1) 12:00 midnight on the tenth day following the public
announcement that a non-exempt person or persons has acquired beneficial
ownership of 15% or more of the outstanding New Davel Common Stock and (2) the
New Rights Expiration Date, New Davel may redeem the New Rights in whole, but
not in part, at a price of $.01 per New Right. The New Right Purchase Price
and the number of shares of New Davel Series A Preferred Stock or other
securities, cash or other property issuable upon exercise of the rights are
subject to adjustment from time to time to prevent dilution.
If a non-exempt person or persons has acquired beneficial ownership of 15%
or more of the outstanding New Davel Common Stock, the rights will "flip in"
and entitle each holder of a New Right (other than such non-exempt person or
persons or an affiliate or associate of any such person) to purchase, upon
exercise at the then-current New Right Purchase Price, that number of shares
of New Davel Common Stock having a market value of two times such New Right
Purchase Price. In addition, following a "flip-in" the New Davel Board of
Directors has the option of exchanging all or part of the New Rights (other
than New Rights held by such non-exempt person or persons or an affiliate or
associate of any such person) for New Davel Common Stock (and/or other equity
securities deemed to have the same value as the New Davel Common Stock).
In the event that New Davel is acquired in a merger or other business
combination in which the New Davel Common Stock does not remain outstanding or
is changed or 50% or more of its consolidated assets or earning power is sold,
leased, exchanged, mortgaged, pledged or otherwise transferred or disposed of
(in one transaction or a series of related transactions), the New Rights will
"flip over" and entitle each holder of a New Right (other than such non-exempt
person or persons or an affiliate or associate of any such person) to
purchase, upon the exercise of the New Right at the then-current New Right
Purchase Price, that number of shares of common stock of the acquiring company
(or, in certain circumstances, one of its affiliates) which, at the time of
such transaction, would have a market value of two times such New Right
Purchase Price.
The New Rights will have certain anti-takeover effects. The New Rights may
cause substantial dilution to a person or group other than an exempt person
that attempts to acquire New Davel on terms not approved by the New Davel
Board of Directors, except pursuant to an offer conditioned on a substantial
number of New Rights being acquired. The New Rights should not interfere with
any merger or other business combination approved by the New Davel Board of
Directors prior to the time a person or group other than an exempt person has
acquired beneficial ownership of 15% or more of the New Davel Common Stock.
TRANSFER AGENT
The Transfer Agent and Registrar for the New Davel Common Stock will be
ChaseMellon Shareholder Services, L.L.C.
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BUSINESS OF OLD DAVEL
GENERAL OVERVIEW
Old Davel is one of the leading independent payphone service providers in
the United States. Old Davel owns and operates a network of approximately
40,000 payphones in 36 states and the District of Columbia and provides
operator services to those payphones through its long-distance switching
equipment and through contractual relationships with various long-distance
companies. Old Davel's payphones accept coins for local and long-distance
calls and also process non-coin calls, including calling card, credit card and
third-party billed calls. Old Davel's payphones are located at convenience
stores, truck stops, service stations, grocery stores and other locations
which typically have a high demand for payphone service.
Old Davel employs advanced telecommunications technology that automates many
of the operations necessary for the efficient management of payphones. Old
Davel's payphones are computer-based "smart" phones, enabling Old Davel to
monitor payphones in the field from its central office or one of its
divisional offices which are strategically located to maximize their efficient
operation. This advanced technology allows Old Davel to monitor payphone call
volume, identify malfunctioning equipment, dispatch service technicians,
schedule efficient coin collections, calculate commissions, print commission
checks for Location Owners, rate and process long-distance calls and generate
reports that permit management to analyze and monitor the profitability of its
payphones.
Old Davel was incorporated in Illinois in 1979. Old Davel's principal
executive offices are located at 1429 Massaro Boulevard, Tampa, Florida 33619,
and its telephone number is (813) 623-3545.
INDUSTRY OVERVIEW
Today's telecommunications marketplace was principally shaped by the 1984
court-approved divestiture by American Telephone & Telegraph of its RBOCs (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 and is comprised of local, intraLATA and
interLATA facilities. 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
RBOCs or other LECs were permitted to own and operate payphones. Following the
AT&T Divestiture, the independent payphone sector developed as a competitive
alternative to the RBOCs and other LECs by providing more responsive customer
service, lower cost of operations and higher commissions to Location Owners.
Prior to the AT&T Divestiture, the RBOCs 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, independent payphone operators 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 OSP industry emerged and enabled
independent payphone providers to compete more effectively with the regulated
telephone companies by paying commissions to payphone owners for non-coin
calls. For the first time, independent payphone providers were able to
participate in long-distance or non-coin call revenue from their payphones.
With this incremental source of revenue from non-coin calls, independent
payphone providers were able to compete more vigorously with RBOCs and other
LECs for site location agreements by paying more competitive commissions to
business operators.
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As part of the AT&T Divestiture, the United States was divided into LATAs.
RBOCs and other LECs provide intraLATA services pursuant to tariffs filed with
and approved by state regulatory authorities. Until recently, RBOCs were
prohibited from offering or deriving revenues or income from interLATA
services. Long-distance companies, such as AT&T, MCI and Sprint, provide
interLATA services and, in some circumstances, may also provide 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-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. This
terminating LEC then delivers the call to the recipient.
Payphones today are primarily owned and operated by RBOCs and other LECs and
independent payphone providers, such as Old Davel. Of the approximately 2.1
million payphones estimated to be operated in the United States in 1997,
industry reports estimate that approximately 1.8 million, or 84%, were
operated by RBOCs and other LECs and approximately 350,000, or 16%, were
operated by independent payphone providers.
BUSINESS STRATEGY
Old Davel's objective is to increase revenues and earnings through internal
sales growth, acquisitions and continued reductions in its overall cost
structure. Old Davel has implemented the following strategy to meet its
objective.
Utilize Advanced Payphone Technology. Old Davel's payphones utilize "smart"
technology which provides voice-synthesized calling instructions, detects and
counts coins deposited during each call, informs the caller at certain
intervals of the time remaining on each call, identifies the need for and the
amount of an additional deposit in order to continue the call, and performs
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 Old Davel's central
computer facilities to update rate information or to direct different kinds of
calls to particular carriers. Old Davel's payphones can also distinguish coins
by size and weight, report to a remote location the total amount of coins in
the coin box, perform self-diagnosis and automatically report problems to a
pre-programmed service number. Virtually all of Old Davel's payphones operate
on power available from the payphone lines, thereby avoiding the need for and
reliance upon an additional power source at the installation location.
Apply Sophisticated Monitoring and Management Information Systems. Old Davel
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 Location Owners. The software
allows Old Davel to generate detailed financial information by customer, by
location and by payphone, which allows Old Davel to monitor the profitability
and operating condition of each location and payphone.
Provide Outstanding Customer Service. The technology used by Old Davel
enables it to (i) respond quickly to equipment malfunctions and (ii) maintain
accurate records of payphone activity which can be verified by customers. Old
Davel strives to minimize "downtime" on its payphones by identifying service
problems immediately. Old Davel's standard of performance is to repair
malfunctions within 24 hours of their occurrence, thereby minimizing downtime
and lost revenues. Old Davel's ability to service payphones promptly allows it
to retain existing customers and attract new ones. The records of payphone
activity generated through Old Davel's technology allow for the more timely
and accurate payment of commissions.
Develop Strong Relationships with Service Providers and Suppliers. As part
of its strategy to continue to reduce operating costs, Old Davel has formed
strategic alliances with a number of service and equipment providers. Old
Davel has formed alliances with a number of LECs and competitive local
exchange carriers to purchase local line access services, and has agreements
with a number of IXCs to provide operator services to its payphones for call
traffic not carried by its switch. In addition, Old Davel's consistent volume
of new payphone installations has allowed it to negotiate favorable purchasing
arrangements with a number of providers of payphone equipment and components.
Old Davel expects to be able to further strengthen its relationships with
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its suppliers and service providers as its market presence continues to
increase, thereby allowing it to negotiate more favorable agreements for
equipment and services.
Facilitate Growth Through Internal Sales and Marketing. Old Davel actively
seeks to install new payphones by obtaining additional contracts with new and
existing customers. Old Davel conducts site surveys to examine various
factors, including population density, traffic patterns and historical usage
information. With the addition of CCI's salesforce, Old Davel intends to
install approximately 3,500 payphones in 1998. Old Davel installed
approximately 1,933 payphones in 1997, 2,449 payphones in 1996 and 2,859
payphones in 1995, exclusive of acquisitions.
Pursue Strategic Acquisitions. Old Davel intends to use its experience in
identifying, negotiating and consummating strategic acquisitions, and
integrating the operations of the acquired assets or businesses, as it
participates in the continued consolidation of the fragmented payphone
industry. Strategic acquisitions have enabled Old Davel to expand its market
presence and further its strategy of concentrating the geographic presence of
its payphones more rapidly than with internal sales growth alone.
Concentrating its payphones in close proximity allows Old Davel to plot more
efficient collection routes. Old Davel believes that route density contributes
to cost savings. Smaller companies typically are not able to achieve the
economies of scale that can be realized by Old Davel. The integration of
payphones acquired from smaller companies into Old Davel's network of
payphones can result in a lower overall cost structure than the sellers of
such payphones may have been able to realize on their own. In addition, as Old
Davel increases its payphone base in a geographic area, "fill-in" and
contiguous acquisitions become less attractive to other potential acquirors as
their ability to achieve significant payphone density is reduced. Old Davel
also believes that such growth will further enhance its ability to negotiate
favorable rates with long-distance service providers, operator service
providers and suppliers of payphones, components and other related equipment.
ACQUISITIONS
Old Davel generates growth by pursuing the acquisition of payphone companies
or assets within its existing market areas and in areas in which Old Davel
desires to establish a new market presence. In the CCI Acquisition, Old Davel
added approximately 20,000 payphones to its network. During 1997, Old Davel
added 2,861 payphones to its network through acquisitions. Old Davel believes
that it is well positioned to capitalize on the fragmented nature of the
independent payphone industry by maintaining an active acquisition program.
Old Davel seeks to acquire payphone companies or assets that can provide cost
savings and economies of scale through integration into Old Davel's service
and maintenance, long-distance and management information networks and
believes that further acquisitions present a significant growth opportunity
for Old Davel.
Listed below is a summary of acquisitions completed by Old Davel during
1998, 1997 and 1996.
<TABLE>
<CAPTION>
TOTAL
NUMBER OF CONSIDERATION
COMPANY DATE ACQUIRED PAYPHONES (IN THOUSANDS)
- ------- ------------- --------- --------------
<S> <C> <C> <C>
Call Communications, Inc................. August 1998 1,251 $ 2,947.5
CCI...................................... February 1998 19,543 106,400.0
Tele/Data Pay Telephone.................. August 1997 183 510.9
Blair Telephone.......................... June 1997 1,255 3,867.9
Quarter Call............................. June 1997 954 2,159.8
Mid-Eastern.............................. April 1997 117 233.0
Pay Telephone America, Ltd............... November 1996 1,008 3,500.0
Payphone Corp. of America................ July 1996 653 1,785.3
Cottonwood Communications................ June 1996 933 2,620.1
Capital Pay Phone Group, LLC............. January 1996 103 271.5
All others (less than 100 phones each)... Various 511 567.4
------ ----------
Totals............................... 26,511 $124,863.4
====== ==========
</TABLE>
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OPERATIONS
As of December 31, 1997 and December 31, 1996, Old Davel owned and operated
18,909 and 15,281 payphones, respectively, an increase of 3,268 installed
payphones. The CCI Acquisition on February 3, 1998 and other acquisitions in
1998 have to date increased the number of installed payphones to approximately
40,000. Substantially all of Old Davel's payphones accept coins as payment for
local or long-distance calls and also process local or long-distance non-coin
calls.
Coin Calls
Old Davel's payphones generate coin revenues primarily from local calls. 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 or $0.35 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 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 providers, including Old Davel,
began to increase rates for local coin calls from $0.25 to $0.35 on October 7,
1997. See "Old Davel Management's Discussion and Analysis of Financial
Condition and Results of Operations--Regulatory Impact on Revenue--Local Coin
Rates."
InterLATA long-distance coin calls are generally carried by Old Davel's
long-distance switching equipment and long-distance carriers that have agreed
to provide service to Old Davel's payphones. Old Davel pays a charge to a
long-distance carrier each time that carrier transports a long-distance call
for which Old Davel receives coin revenue. Old Davel's payphones also generate
coin revenue from intraLATA long-distance calls. IntraLATA long-distance coin
calls are generally carried by Old Davel's long-distance switching equipment.
Non-Coin Calls
Old Davel also receives revenues from non-coin calls made from its
payphones. Non-coin calls include credit card, calling card, collect and
third-party billed calls. Certain non-coin calls from Old Davel's payphones
are handled by Old Davel's subsidiary, DavelTel. DavelTel's switching
equipment is located in Tampa, Florida. See "--Technology." DavelTel performs
certain of the operator services necessary to complete non-coin 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. Old Davel has
contracted with an operator service provider to provide live operators for
calls which require operator services. Billing information is verified and
collect calls and credit cards are validated by Old Davel's switch through one
of several companies that provide on-line access to validation databases. Old
Davel contracts for transport of its calls over networks operated by long-
distance carriers. Old Davel's switch is programmed to select the most cost-
effective carrier and transmission circuit then available to Old Davel to
complete the call as dialed. Billing and collection of call charges is
performed for Old Davel by one of several service bureaus specializing in that
activity.
Old Davel believes the extensive data processing capabilities of Old Davel's
switch enhance (i) the availability of management information relating to non-
coin call traffic, (ii) the services provided to Location Owners, and (iii)
Old Davel's ability to respond to any difficulties in call completion. Old
Davel has begun to utilize its switching equipment to process non-coin call
traffic originating from payphones acquired in the CCI Acquisition.
Old Davel realizes additional revenues from certain long-distance companies,
pursuant to FCC regulation, 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, generally by dialing a 1-800/888 number,
a 950-number or a five-digit "10XXX" code before dialing
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"0" for operator service. Recently enacted rules adopted pursuant to the
Telecommunications Act are expected to increase the amount of dial-around call
compensation received by Old Davel and other IPPs. See "Regulatory Matters."
Payphone Base
In addition to payphones acquired by Old Davel (see "--Acquisitions"), Old
Davel's payphone base includes new payphones installed by Old Davel. The
following table sets forth, for the last three fiscal years, the number of Old
Davel payphones acquired, installed and removed during the year, as well as
the net increase in Old Davel payphones in operation.
<TABLE>
<CAPTION>
1995 1996 1997
----- ------ ------
<S> <C> <C> <C>
Acquired........................................... 717 2,767 2,861
Installed.......................................... 2,859 2,449 1,933
Removed............................................ (762) (1,098) (1,166)
----- ------ ------
Net Increase................................... 2,814 4,118 3,628
===== ====== ======
</TABLE>
Old Davel 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 and hotels. 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. In locations where historical revenue
information is not available, Old Davel relies on its site survey to examine
geographic factors, population density, traffic patterns and other factors in
determining whether to install a payphone. Old Davel's marketing staff is
encouraged to obtain Placement Agreements for locations with favorable
historical data regarding payphones.
Placement Agreements generally provide for revenue sharing with Location
Owners. Old Davel's Placement Agreements generally provide commissions based
on fixed percentages of revenues and are generally for a five-year term. Old
Davel can generally terminate a Placement Agreement on 30 days' notice to the
Location Owner if the payphone does not generate sufficient revenue.
Old Davel routinely monitors its payphone base and removes underperforming
payphones, which it relocates to locations with more potential for
profitability. In particular, Old Davel often removes and relocates a number
of payphones following acquisitions because its performance criteria are
generally higher than the criteria of the payphone operators from which Old
Davel acquired the payphones. In addition, Old Davel often removes payphones
when Location Owners close facilities at which Old Davel payphones are located
or when Old Davel loses payphone customers or locations for other reasons.
Service and Maintenance
Old Davel employs field service technicians, each of whom collects coin
boxes from, and cleans and maintains, between 125 and 225 payphones. Field
service technicians also respond to trouble calls made by a Location Owner, a
user of a payphone or 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 Old Davel's payphones to one of its
divisional offices and the ability of the field service technicians to perform
on-site service and maintenance functions, Old Davel 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
Old Davel 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 Placement Agreements
with Location Owners within their geographic areas. Old Davel believes that
using regional marketing personnel provides better market penetration because
of their familiarity with and proximity to their regions. To date, independent
payphone providers 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
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generally were unable to derive revenues from interstate calls and non-coin,
interLATA calls, and consequently, were unable to offer commissions on such
calls. Recently enacted rules adopted pursuant to the Telecommunications Act
grant LECs the ability to select the long-distance carrier for interLATA long-
distance calls in conjunction with the Location Owner. This will enable LECs
to derive revenues from and pay commissions on these calls in the future. See
"Regulatory Matters."
Old Davel's national sales personnel are responsible for accounts that
overlap regional boundaries, such as multiple store chains and restaurant
franchises that often have hundreds or thousands of potential locations, and
also provide support to Old Davel's regional personnel. Old Davel has
historically installed approximately 70% of its payphones through the sales
and marketing efforts of Old Davel's regional marketing personnel and the
remaining 30% from the efforts of national sales personnel. Old Davel's
marketing personnel receive incentive compensation based upon their
achievement of sales goals.
Old Davel's customers are a diverse group of small- and medium-sized
businesses which are frequented by individuals often needing payphone access.
The majority of Old Davel's customers are convenience stores, truck stops,
service stations, grocery stores, shopping centers and hotels. As of September
30, 1998, corporate payphone accounts of 50 or more payphones represented
approximately 28% of Old Davel's installed payphones.
SERVICE AND EQUIPMENT SUPPLIERS
Old Davel's primary suppliers provide payphone components, local line
access, billing and collection services and long-distance services. In order
to promote acceptance by end users accustomed to using LEC-owned payphone
equipment, Old Davel utilizes payphones designed to be similar in appearance
and operation to payphones owned by LECs.
Old Davel's primary supplier of circuit boards is Protel, Inc. of Lakeland,
Florida, a leading supplier of payphone equipment. Old Davel utilizes the
billing and collection services of ILD Teleservices, Inc. and obtains local
line access from various LECs, including BellSouth, GTE, Ameritech,
Southwestern Bell, US West and various other suppliers of local line access.
New sources of local line access are expected to emerge as competition is
authorized in local service markets. Long-distance services are provided to
Old Davel through the use of its own long-distance switching equipment and by
various long-distance and operator service providers, including AT&T, MCI,
Sprint, WilTel, LCI, Opticom and others.
Old Davel believes that multiple suppliers are available to meet all of its
product and service needs at competitive prices and rates and expects the
availability of such products and services to continue in the future. However,
the continuing availability of alternative sources cannot be assured. Any
transition from Old Davel's existing suppliers, if necessary, could have a
disruptive influence on Old Davel's operations and could give rise to
unforeseen delays and expense. Old Davel is not aware of any current
circumstances that would require Old Davel to seek alternative suppliers for
any of the products or services used in the operation of its business.
ASSEMBLY AND REPAIR OF PAYPHONES
Old Davel assembles and repairs payphone equipment for its own use. The
assembly of payphone equipment provides Old Davel with technical expertise
used in the operation, service, maintenance and repair of its payphones. Old
Davel 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. Old Davel believes that the integrated circuit board is the
single most important component in an independent payphone and obtains these
boards from Protel, Inc. However, all of the components purchased by Old Davel
(including integrated circuit boards) are available from several suppliers,
and Old Davel does not believe that the loss of any supplier would have a
material adverse effect on its assembly operations.
Old Davel's payphones comply with all FCC requirements regarding the
performance and quality of payphone equipment and have all of the operating
characteristics required by the regulatory authorities of most states,
including: free access to local emergency ("911") telephone numbers and, where
not available, to the
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LEC operator; access to local directory assistance; 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 Old Davel makes use of microprocessors
to 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 and other functions associated with 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 Old Davel's
central computer facilities to update rate information or to direct different
kinds of calls to particular carriers. Old Davel assembles its payphones from
standard components and believes that they incorporate the latest technology.
Old Davel's payphones can distinguish coins by size and weight, report to a
remote location the total coinage 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. Virtually all 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.
Old Davel utilizes proprietary and non-proprietary software that
continuously 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 Old Davel to generate detailed financial
information by Location Owner, location and payphone, which allows Old Davel
to monitor the profitability and operating condition of each location and
payphone.
All technical support required to operate the payphones, such as computers
and software and hardware specialists, is provided at Old Davel's headquarters
in Tampa, Florida. Materials, equipment and spare parts and accessories are
provided by Old Davel's manufacturing support operations and inventories are
maintained at each divisional office for immediate access by field service
technicians.
Old Davel's switching equipment in Tampa, Florida was obtained from Harris
Corporation, one of several suppliers of switches to the telecommunications
industry. Switches are digital computerized routing systems that receive
calls, route calls through transmission lines to their destination and record
information about the source, destination and duration of the call. Switches
have limits on their capacity to handle and transmit calls, but can be
upgraded to handle more calls as traffic increases. Old Davel's switch is
located in an office building in proximity to its Tampa headquarters. Long-
distance calls from Old Davel's payphones that are not handled by its switch
or an unbundled services arrangement are serviced by long-distance companies
that pay commissions to Old Davel for those calls. If Old Davel experiences
sufficient long-distance call volume from other LATAs, Old Davel will evaluate
the need to upgrade transmission circuitry to direct additional call traffic
to its switching equipment, thereby reducing transmission costs to Old Davel's
switch.
Using the data capabilities of its switching equipment, Old Davel has
implemented a management information system that Old Davel believes affords it
competitive advantages. Old Davel's management information system monitors
call traffic to provide information regarding payphone or network equipment
trouble, the fraudulent use of calling cards or credit cards, or other
problems, thereby allowing Old Davel to respond promptly. This management
information system has enabled Old Davel to increase call completion rates and
enhance site selection for its payphones. As a result, Old Davel has increased
revenues from its installed payphones and reduced costs through the selection
of the most economical means of completing calls. Old Davel believes that some
of this information is unavailable to independent payphone providers that do
not maintain their own switching equipment.
COMPETITION
Old Davel competes for payphone locations with LECs and IPPs. Old Davel also
competes, indirectly, with long-distance companies, which can offer Location
Owners commissions on long-distance calls made from LEC-
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owned payphones. Most LECs and long-distance companies against which Old Davel
competes and some independent payphone providers may have substantially
greater financial, marketing and other resources than Old Davel. In addition,
many LECs, faced with competition from Old Davel and other independent
payphone companies, have increased their compensation arrangements with
Location Owners to offer more favorable commission schedules.
Old Davel believes the principal competitive factors in the payphone
business are (i) 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, (ii) the ability to serve accounts with
locations in several LATAs or states, (iii) the quality of service and the
availability of specialized services provided to a Location Owner and payphone
users, and (iv) responsiveness to customer service needs. Old Davel believes
it is currently competitive in each of these areas.
Old Davel competes with long-distance carriers who provide dial-around
services which can be accessed through Old Davel's payphones. Certain national
long-distance operator service providers have recently launched advertising
promotions which have increased dial-around activity on payphones owned by
LECs and independent payphone providers, including Old Davel. Old Davel is
receiving compensation for dial-around calls placed from its payphones, and
recent regulatory initiatives resulting from implementation of the
Telecommunications Act are expected to increase the amount of dial-around
compensation received on its payphones. See "Regulatory Matters."
EMPLOYEES
As of October 31, 1998, Old Davel had 491 full-time employees, none of whom
is the subject of a collective bargaining agreement. Old Davel believes that
its relationships with its employees are good.
PROPERTIES
Old Davel leases approximately 19,000 square feet in Tampa, Florida that
includes executive office space, a divisional office for payphone operations
and facilities for the assembly of payphones. Old Davel also leases an
aggregate of approximately 33,000 square feet to house divisional offices for
payphone operations in Mesa, Arizona; Miami, Florida; Jacksonville, Florida;
Harrisburg, Illinois; Jacksonville, Illinois; Jackson, Mississippi; Charlotte,
North Carolina; Myrtle Beach, South Carolina; Atlanta, Georgia; Cedar Rapids,
Iowa; Beltsville, Maryland; Jackson, Tennessee; Salt Lake City, Utah;
Ebensburg, Pennsylvania; and Chesapeake, Virginia. In addition, Old Davel
operates a regional distribution and assembly center in approximately 10,000
square feet of office space in Jacksonville, Illinois, which Old Davel leases
from its Chairman. See "Certain Transactions Involving Old Davel." Old Davel
also leases 18,000 square feet of warehouse space in Jacksonville, Illinois
from its Chairman. Old Davel believes that these facilities are adequate to
meet New Davel's needs in the foreseeable future.
LEGAL PROCEEDINGS
On September 29, 1998, Old Davel announced that it was exercising its
contractual rights to terminate the Davel/PhoneTel Merger Agreement, based on
breaches of representations, warranties and covenants by PhoneTel. On October
1, 1998, Old Davel 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 Old Davel and New Davel alleging
that the Davel/PhoneTel Merger Agreement had been wrongfully terminated, and
also filed a claim against Peoples alleging that Peoples wrongfully caused the
termination of the Davel/PhoneTel Merger Agreement. The counterclaim seeks
specific performance of the transactions contemplated by the Davel/PhoneTel
Merger Agreement and damages and other equitable relief from Old Davel, New
Davel and Peoples. Old Davel and New Davel believe that they have meritorious
claims against PhoneTel and intend to defend vigorously against the
counterclaim initiated by PhoneTel.
Old Davel is involved in other litigation arising in the normal course of
its business. Old Davel believes that these other matters will not materially
affect its financial position or results of operations.
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OLD DAVEL MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with Old
Davel's consolidated financial statements and the 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. See "Forward-Looking
Statements May Prove Inaccurate" and "Risk Factors."
GENERAL
During 1997, Old Davel 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 Old Davel's payphones generate revenues in an
amount that depends upon whether Old Davel or a long-distance company handles
the call. If the non-coin call is handled by Old Davel through its switch or
an "unbundled" services arrangement, Old Davel recognizes non-coin revenue
equal to the total amount charged for the call. If the non-coin call is
handled by a long-distance company, Old Davel generally recognizes revenues in
an amount equal to the commission on that call paid to Old Davel by the long-
distance company. Under an unbundled services arrangement, Old Davel 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.
Old Davel 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 payphone; this is commonly referred to as dial-around
access. See "Regulatory Matters." Old Davel also derives a small amount of
non-coin revenues from certain LECs for intraLATA non-coin calls.
The principal costs related to the ongoing operation of Old Davel's
payphones include telephone charges, commissions, and service, maintenance and
network costs. Telephone charges consist of payments made by Old Davel 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 Old
Davel's switch and, in connection with unbundled services arrangements, the
fees paid for those services.
On February 3, 1998, Old Davel acquired all the issued and outstanding
shares of common stock, $.01 par value per share of CCI (including the
associated rights to purchase shares of common stock) 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 $6.9 million in transaction
costs. In order to finance the acquisition of CCI, Old Davel entered into a
credit agreement, dated as of February 3, 1998, with NationsBank, N.A., as
Administrative Agent, SunTrust Bank, Tampa Bay, as Documentation Agent,
LaSalle National Bank, as Co-Agent, and other lenders, pursuant to which the
lenders made available to Old Davel an initial revolving loan commitment of
$15 million and a term loan commitment of $110 million.
REGULATORY IMPACT ON REVENUE
Local Coin Rates
In ensuring "fair compensation" for all calls, the FCC previously determined
that local coin rates for 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
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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 providers, including Old Davel, began to change charges
for local coin calls from $0.25 to $0.35. Old Davel believes that
deregulation, where implemented, will likely result in higher rates charged
for local coin calls and may increase Old Davel's revenues from such calls.
However, given the lack of direction on the part of the FCC on specific
requirements for obtaining a state exemption, Old Davel's inability to predict
the responses of individual states or the market and Old Davel's inability to
provide assurance that deregulation, if and where implemented, will lead to
higher local coin call rates, Old Davel is unable to predict the ultimate
impact on its operations of local coin rate deregulation.
Dial-Around Compensation
On September 20, 1996, the FCC adopted 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
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 Old Davel, beginning October 7, 1997. After the first two
years of per-call compensation, the market-based local coin rate, adjusted for
certain costs defined by the FCC as $0.066 per call, is the surrogate for the
per-call rate for 800 subscriber and access code calls. These new rule
provisions were made effective as of October 7, 1997.
In addition, the 1997 Payphone Order tentatively concluded that the same
$0.284 per-call rate adopted on a going-forward basis should also govern
compensation obligations during the period from November 7, 1996 to October 6,
1997, and that payphone service providers are entitled to compensation for all
access code and 800 subscriber calls during this period. The FCC stated that
the manner in which the payment obligation of the IXCs for the period from
November 7, 1996 to October 6, 1997 will be allocated among the IXCs will be
addressed in a subsequent order.
Based on the FCC's tentative conclusion in the 1997 Payphone Order, Old
Davel has 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 $1.2 million ($0.7 million
net of applicable commissions and income taxes). For periods beginning
November 7, 1996, Old Davel has recorded dial-around compensation at the rate
of $37.20 per payphone per month. The amount of dial-around revenue recognized
in the period July 1, 1997 to October 6, 1997 for the interim period of flat-
rate compensation is approximately $2.2 million and such amount will be billed
after final resolution of the allocation obligations of the IXCs as determined
by the FCC.
Old Davel recorded dial-around compensation revenue, net of the provision
for dial-around compensation, of approximately $1.2 million for the period
from November 7, 1996 through December 31, 1996, approximately $7.7 million
for the period from January 1, 1997 through December 31, 1997, and
approximately $12.4 million for the period from January 1, 1998 through
September 30, 1998.
Old Davel believes that it is legally entitled to fair compensation under
the Telecommunications Act for dial-around calls which Old Davel delivered to
any carrier during the period November 7, 1996 to October 6, 1997. Based on
the information available, Old Davel believes that the minimum amount to which
it is entitled as fair compensation under the Telecommunications Act for the
period November 7, 1996 to October 6, 1997 is $37.20 per payphone per month
and Old Davel, based on the information available to it, does not believe that
it is reasonably possible that the amount will be materially less than $37.20
per payphone per month.
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On May 15, 1998, the Court remanded the per-call compensation rate to the
FCC for further explanation without vacating the $0.284 per call 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. Old Davel believes that the FCC
will issue its ruling in the current proceeding within the six-month period
established by the Court. Based on the information available to it, Old Davel
does not believe that it is reasonably possible that the amount of
compensation for dial-around calls will be materially reduced from the amount
recorded as dial-around compensation. While the amount of $0.284 per call
constitutes Old Davel's position on the minimum appropriate level of fair
compensation, certain IXCs have challenged this rate level, asserting that the
appropriate level of fair compensation should be lower than $0.284 per call,
such determination could have a material adverse impact on the Company's
results of operations and financial position.
The payment levels for dial-around calls prescribed in the 1996 and 1997
Payphone Orders significantly increase dial-around compensation revenues to
Old Davel over the levels received prior to implementation of the
Telecommunications Act. However, market forces and factors outside Old Davel's
control could significantly affect these revenue increases. These factors
include the following: (i) 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, (ii)
resolution of the legal appeals by both the IXCs and representatives of the
payphone service providers of various aspects of the 1997 Payphone Order,
(iii) the possibility of other litigation seeking to modify or overturn the
1997 Payphone Order or portions thereof, (iv) pending litigation in the
federal courts concerning the constitutionality or validity of the
Telecommunications Act, and (v) 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.
Billed Party Preference
New FCC rules regarding Billed Party Preference require payphone operators
to give payphone users the option of receiving a rate quote before a call is
connected when making a 0+ interstate call. These rules, which became
effective on July 1, 1998, could reduce revenues earned by Old Davel on long-
distance calls placed from payphones by encouraging more consumers to dial
around the long-distance service provided by Old Davel. Old Davel cannot
currently assess what impact the new rules will have on its financial
performance.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Results of Operations
For the year ended December 31, 1997, total revenues from continuing
operations increased approximately $10.0 million, or 27.1%, compared to the
year ended December 31, 1996. This growth was primarily attributable to an
increase from 15,281 payphones on December 31, 1996 to 18,909 payphones on
December 31, 1997. Coin call revenues increased approximately $6.7 million, or
35.8%, driven primarily by an increase of approximately $5.8 million in coin
call revenues resulting from the growth in the number of installed payphones
and an increase of approximately $0.9 million resulting from the acquisition
and installation of payphones at locations with favorable coin call traffic.
Non-coin call revenues increased approximately $6.3 million, or 40.9%. 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
Telecommunications Act, which became effective in November 1996 and
approximately $4.1 million in additional non-coin call revenues resulting from
the growth in the number of installed payphones. Approximately $1.3 million of
the increase is attributed to the terms of a Telecommunications Services
Agreement (the "Services Agreement") connected with the sale of ComTel its
hospitality division ("Hospitality Division") in 1996, which called for the
provision of certain long distance services to ComTel for a period of one year
after the effective date of the sale. The Services Agreement provided that,
effective January 1, 1997, gross revenues on calls carried over Old Davel's
long distance network would be recorded by ComTel rather than by Old Davel as
was the case in the prior period. Amounts recorded as non-coin revenues by Old
Davel related to the Services
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Agreement in the year ended December 31, 1997, consisted of payments made to
Old Davel for use of its long distance network rather than the gross call
revenue. The gross call revenue was recorded as related party revenues in 1996
and 1995. The increase in non-coin call revenues was partially offset by the
fact that during the third quarter of 1997, Old Davel 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, non-coin call
revenues for the year ended December 31, 1997, were reduced by approximately
$1.2 million ($0.7 million net of applicable commissions and income taxes).
The increase in non-coin call revenues was also offset by a decrease of
approximately $4.0 million related to lower volumes of calls per payphone
routed through its long distance network due to an increase in the number of
dial-around calls placed from its payphones.
Switching services provided to Hospitality Division decreased from $2.4
million of the year ended December 31, 1996 to $0 for the year ended December
31, 1997 resulting from the terms of the Services Agreement. Amounts recorded
by Old Davel related to the Services Agreement for payments made to Old Davel
for use of its long distance network were recorded in non-coin revenues in
1997. In addition, there was no administrative support provided to
discontinued subsidiaries during the year ended December 31, 1997.
Telephone charges remained stable at 20.4% of total revenues compared to
20.3% in the prior year. Old Davel's average monthly telephone charge on a per
payphone basis decreased from $47.66 in 1996 to $46.36 in 1997.
Commissions, including commissions paid to Hospitality Division, decreased
to 13.2% of total revenues compared to 17.0% in the prior year. The decrease
in commissions as a percentage of total revenues was primarily attributable to
higher payphone revenues. A portion of Old Davel's contracts with location
owners 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 decreased to 22.7% of total revenues
compared to 23.1% in the prior-year period. The decrease in service,
maintenance and network costs as a percentage of total revenues was primarily
attributable to higher payphone revenues and increasing operating efficiencies
achieved through increasing density in Old Davel's payphone routes resulting
from expansion of its installed base of payphones. Old Davel's average monthly
service, maintenance and network costs on a per payphone basis decreased from
$55.87 per month in 1996 to $51.69 per month in 1997.
Selling, general and administrative expenses on continuing operations
increased approximately $4.5 million, or 47.5%, from the prior year. The
increase was partially attributable to an increase in depreciation and
amortization expense which rose approximately $1.3 million, or 44.6%, from the
prior year, reflecting a net increase of 3,628 installed payphones and a
slight increase in the cost of circuit boards installed in Old Davel's new
payphone installations to keep pace with technological innovations and more
sophisticated call tracking capabilities. Old Davel also incurred 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 Old
Davel's expanding base of installed payphones.
Other income increased approximately $0.4 million, or 397.0%, in 1997 over
1996. This increase resulted primarily from a currently recognizable gain of
approximately $0.1 million on the sale of certain assets to Old Davel's
Chairman. The assets consisted of a life insurance policy, a home and an
airplane which were subsequently leased back to Old Davel on terms approved by
Old Davel's disinterested directors. The sale price was at the estimated fair
value of the assets as determined based upon independent appraisals. The sale
of the house and airplane are being treated as a sale/leaseback and Old Davel
will recognize a deferred gain over the term of the leases of the house and
airplane of approximately $0.1 million. See "Certain Transactions Involving
Old Davel." In the year ended December 31, 1997, Old Davel also recognized
interest income of approximately $0.2 million on the note receivable related
to the sale of ComTel on December 31, 1996. (See Note 3 of Notes
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to Davel's Consolidated Financial Statements.) Interest expense in 1997
increased approximately $0.2 million, or 64.4%, compared to the prior-year
period. 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.
Net income from continuing operations increased approximately $1.1 million,
or 33.4%, from the prior year period. Net income increased approximately $0.5
million or 12.0% from approximately $3.8 million in 1996 to approximately $4.3
million in 1997. Old Davel's earnings on discontinued operations in 1996
included a gain on the sale of ComTel of approximately $0.7 million, net of
income taxes of $0.4 million. Discontinued operations in 1996, before the
effect of the gain on the sale of ComTel, generated a loss of approximately
$0.1 million, net of income taxes and income tax benefits.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Results of Operations
For the year ended December 31, 1996, total revenues from continuing
operations increased approximately $5.1 million, or 16.2%, compared to the
year ended December 31, 1995. This growth was primarily attributable to
additional coin call revenues resulting from an increase from 11,163 payphones
on December 31, 1995 to 15,281 payphones on December 31, 1996. Coin call
revenues increased approximately $4.2 million, or 29.3%. Non-coin call
revenues increased approximately $0.2 million, or 1.5%. The increase in non-
coin call revenues was primarily attributable to approximately $1.3 million in
additional revenues resulting from an increase in the rate of dial-around call
compensation associated with the implementation of the Telecommunications Act,
which became effective in November 1996, and approximately $3.2 million in
additional non-coin call revenues resulting from the growth in the number of
installed payphones. The increase in non-coin call revenues was offset by a
decrease of approximately $4.3 million related to lower volumes of calls per
payphone routed through its long distance network due principally to an
increase in the number of dial-around calls placed from its payphones.
Switching services provided to Hospitality Division increased approximately
$0.6 million from $1.8 million for the year ended December 31, 1995 to $2.4
million for the year ended December 31, 1996. Switching services provided to
Hospitality Division related to long distance services provided through the
Services Agreement with ComTel. The increase is attributable to additional
long distance traffic routed through Old Davel's switching equipment.
Administrative support provided to discontinued subsidiaries increased
approximately $0.1 million to approximately $0.6 million for the year ended
December 31, 1996 from approximately $0.5 million for the year ended December
31, 1995. The increase is attributable to the shifting of administrative
functions from ComTel's office in Colorado to Old Davel's administrative
office in Illinois.
Telephone charges increased to 20.3% of payphone revenues compared to 19.1%
in the prior year. The increase in telephone charges as a percentage of total
revenues was primarily attributable to lower monthly long-distance revenues as
a result of an increase in dial-around calls placed from Old Davel's
payphones. However, Old Davel's average monthly telephone charge on a per
phone basis decreased from $50.98 in 1995 to $47.66 in 1996.
Commissions, including commissions paid to Hospitality Division, increased
to 17.0% of total revenues compared to 15.6% in the prior year. The increase
in commissions as a percentage of total revenues was primarily attributable to
lower long-distance revenues as a result of an increase in dial-around calls
placed from Old Davel's payphones. Commissions to Location Owners in 1996
actually decreased on a per phone basis by approximately 9.5% from 1995 as a
result of lower long-distance revenues resulting from an increase in dial-
around calls placed from Old Davel's payphones. In addition, commissions paid
to its Hospitality division increased by 0.5% in 1996 over 1995, accounting
for approximately one-half of the increase in commissions as a percentage of
total revenue.
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Service, maintenance and network costs remained relatively stable at 23.1%
of total revenues compared to 23.2% in the prior-year period. Old Davel's
average monthly service, maintenance and network costs on a per payphone basis
decreased from $61.84 per month in 1995 to $55.87 per month in 1996 due to
operating efficiencies achieved through expansion of Old Davel's installed
payphone base.
Selling, general and administrative expenses increased approximately $2.1
million, or 29.2%, from the prior year. This increase was primarily
attributable to an increase in depreciation and amortization expense, which
rose approximately $0.9 million, or 39.8%, from the prior year, reflecting a
36.9% increase in the number of installed payphones. Old Davel also incurred
additional costs associated with the opening and operation of four new
divisional sales and service offices and the hiring of additional support
personnel needed to service Old Davel's expanding base of installed payphones.
Other income decreased approximately $25,000, or 20.0%, in 1996 over 1995.
This decrease resulted primarily from lower cash balances available for
investment due to the use of cash for the acquisition and installation of new
payphones during 1996. Interest expense in 1996 increased approximately $0.2
million, or 502.1%, compared to the prior-year period. This increase was
primarily attributable to the incurrence of approximately $5.6 million in debt
in connection with the acquisition of payphones during 1996.
Net income from discontinued operations increased approximately $3.1
million, or 124.3%, over the prior-year period, rising to approximately $0.6
million in 1996 from a loss of approximately $2.5 million in 1995. Old Davel's
earnings on discontinued operations in 1996 included a gain on the sale of
ComTel of approximately $0.7 million, net of income taxes of $0.4 million.
Discontinued operations in 1996, before the effect of the gain on the sale of
ComTel, generated a loss of approximately $0.1 million, net of income taxes
and income tax benefits. Net income from discontinued operations in 1995
included non-recurring charges of approximately $2.9 million due to impairment
of intangible and long-lived assets after applying certain provisions of
Statement of Financial Accounting Standards No. 121. Discontinued operations
in 1995, before the effect of the non-recurring charges, generated earnings of
approximately $0.2 million, net of income taxes and income tax benefits.
Net income from continuing operations decreased approximately $0.6 million,
or 16.4%, from the prior-year period. Net earnings increased approximately
$2.5 million, or 190.0%, from approximately $1.3 million in 1995 to
approximately $3.8 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
As of December 31, 1997, Old Davel had a current ratio of 3.25 to 1, as
compared to a current ratio of 5.62 to 1 on December 31, 1996. The decrease
was primarily attributable to a decrease in working capital from approximately
$12.1 million as of December 31, 1996, to approximately $10.3 million as of
December 31, 1997. This decrease in working capital resulted primarily from a
decrease in cash and cash equivalents related primarily to capital
expenditures for new payphone installations and an increase of approximately
$1.4 million in current maturities of long-term debt related to borrowings on
Old Davel's credit line during 1997 for the acquisition of payphone companies
and payphone assets. Old Davel also experienced an increase of approximately
$3.0 million in accounts receivable during the period related primarily to an
increase in dial-around call compensation receivable.
Old Davel's capital expenditures, exclusive of acquisitions, for the years
ended December 31, 1997 and 1996 were $4.1 million and $5.1 million,
respectively. Old Davel's capital expenditures primarily consisted of costs
associated with the installation of new payphones. Old Davel made acquisitions
of payphones totaling approximately $7.1 million and $8.6 million,
respectively, during the years 1997 and 1996. In 1997, Old Davel financed its
capital expenditures and acquisitions primarily with approximately $5.6
million in cash provided by continuing operations and an increase in long-term
debt and current maturities of long-term debt of approximately $2.5 million.
In 1996, Old Davel financed its capital expenditures and acquisitions
primarily with approximately $5.9 million in cash provided by continuing
operations and an increase in long-term debt of approximately $5.5 million.
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Credit Agreement
On September 30, 1996, Old Davel entered into a $25 million revolving line
of credit with NationsBank, N.A. (the "1996 Credit Agreement"), with
provisions to convert up to $17.5 million of the line of credit to term loans.
The terms of the agreement called for Old Davel to pay interest on a graduated
scale based on NationsBank, N.A.'s CBR, which was 8.50% on December 31, 1997.
The interest rate was indexed based on Old Davel's ratio of funded debt to
EBITDA as defined in the 1996 Credit Agreement and adjusted based on market
interest rates for CBR and LIBOR. The maturity date of the revolving portion
of the credit facility was September 30, 2001. Principal outstanding on each
term loan under the convertible portion of the credit facility was scheduled
to be payable in 12 to 20 quarterly installments with the last installment due
no later than September 30, 2003.
In connection with the CCI Acquisition, Old Davel entered into a credit
agreement, dated as of February 3, 1998, with NationsBank and other lenders,
pursuant to which the lenders made available to Old Davel a Revolving Credit
Facility of $15 million and a Term Loan Facility of $110 million (the "1998
Davel Credit Agreement"). The balance of $8.7 million outstanding on the 1996
Credit Agreement was refinanced simultaneously with the signing of the 1998
Credit Agreement and is included as part of the balances outstanding on the
1998 Credit Agreement.
Old Davel believes that cash generated from operations and available
borrowings under the New Credit Facility will be sufficient to fund Old
Davel's foreseeable cash requirements, including capital expenditures through
February 3, 2004. Old Davel also believes that it will be able to fund any
future acquisitions through a combination of cash generated from operations,
additional borrowing and the issuance of shares of Old Davel Common Stock.
There can be no assurance, however, that Old Davel 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 Old Davel.
Impact of Inflation
Inflation has not historically been a material factor affecting Old Davel's
business. General operating expenses such as salaries, employee benefits and
occupancy costs are, however, subject to normal inflationary pressures.
Seasonality
Old Davel's revenues from its payphone operating regions are affected by
seasonal variations, geographic distribution of payphones and type of
location. Because many of Old Davel's payphones are located outdoors, weather
patterns have differing effects on Old Davel's results depending on the region
of the country where they are located. Most of Old Davel's payphones in
Florida produce substantially higher call volume in the first and second
quarters than at other times during the year, while Old Davel'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, Old Davel 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 Old Davel's results.
Year 2000 Issue
Old Davel is working to resolve the potential impact of the year 2000 on the
ability of Old Davel's computerized information systems to accurately process
information that may be date-sensitive. Any of Old Davel's programs that
recognize a date using "00" as the year 1900 rather than the year 2000 could
result in errors or system failures. Old Davel utilizes a number of computer
programs across its entire operation. Old Davel has assessed the impact of the
year 2000 on both its computer programs and its computer systems. As Old Davel
acquires other payphone assets, it will continue to assess the impact of the
year 2000 on such acquired
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assets. To date, Old Davel has spent approximately $0.1 million in assessing
and addressing year 2000 issues and estimates that its total costs will not
exceed $0.2 million, which is approximately 10% of Old Davel's budgeted
expenditures for information technology. Old Davel does not believe that these
costs will have a material effect on its financial position. Old Davel is also
in the process of addressing the potential impact of the year 2000 on its
suppliers and other parties on whom it relies in providing payphone and
operator services. Old Davel intends to complete this assessment by December
31, 1998. The failure of third parties on which Old Davel relies to address
their year 2000 issues in a timely manner could result in a material financial
risk to Old Davel. Through its assessment of the impact of year 2000 on both
its computer programs and systems, Old Davel believes that it has sufficient
resources available to implement new and modified computer systems to address
the impact of the year 2000 and, accordingly, has not to date identified any
need for other contingency planning. However, Old Davel's continuing
assessment of its assets and of third parties external to Old Davel may reveal
the need for contingency planning in the future. Old Davel plans to devote all
resources required to resolve any significant year 2000 issues in a timely
manner.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997.
Results of Operations
For the nine months ended September 30, 1998, total revenues increased
approximately $34.7 million, or 100.8%, from approximately $34.5 million in
the nine months ended September 30, 1997 to approximately $69.2 million in the
same period of 1998. This growth was primarily attributable to an increase
from 18,772 payphones on September 30, 1997 to 40,893 payphones on September
30, 1998, an increase of 22,121 payphones or 117.8%. The increase in the
number of installed payphones was due primarily to the CCI Acquisition, which
added approximately 19,500 payphones to Old Davel's network. During 1997 and
the first nine months of 1998, Old Davel also added approximately 1,333
payphones to its network through other acquisitions.
Coin call revenues increased approximately $23.2 million, or 127.4%, from
approximately $18.2 million in the nine months ended September 30, 1997, to
approximately $41.4 million in the same period of 1998. The growth in coin
call revenues was driven by growth in the number of installed payphones
primarily due to the CCI Acquisition. In accordance with the new FCC rules,
certain LECs and independent payphone service providers, including Old Davel,
began to increase rates for local coin calls in many locations from $0.25 to
$0.35 commencing October 7, 1997. While Old Davel has increased the local coin
call rate on substantially all of its payphones, it has experienced lower
volumes of local coin calls originating from its payphones in the fourth
quarter of 1997 and the first nine months of 1998.
Non-coin call revenues increased approximately $11.5 million, or 70.9%, from
approximately $16.2 million for the nine months ended September 30, 1997, to
approximately $27.7 million for the nine months ended September 30, 1998. The
growth in non-coin revenues was primarily due to an increase of approximately
$16.5 million in non-coin revenues (including an increase of approximately
$7.4 million in dial-around compensation) resulting from an increase in the
number of installed payphones. In addition, Old Davel 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 $37.20
($.284 per call multiplied by 131 calls). As a result of this adjustment, non-
coin call revenues for the nine month period ended September 30, 1997 were
reduced by approximately $1.2 million ($0.7 million net of applicable
commissions and income taxes). For all periods subsequent to June 30, 1997,
Old Davel has recorded dial-around compensation at the rate of $37.20 per
payphone per month. The increase in non-coin call revenues was offset by a
decrease of approximately $5.0 million related to lower volumes of calls per
payphone routed through its long distance network due to an increase in the
number of dial-around calls placed from its payphones.
Telephone charges rose approximately $7.8 million, or 109.0%, increasing
from approximately $7.2 million in 1997 to approximately $15.0 million in the
nine months ended September 30, 1998. The increase was primarily due to the
increase in the number of installed payphones. Due to more favorable contracts
with LECs and CLECs for local line access, Old Davel's average monthly
telephone charge on a per phone basis decreased
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from $47.85 in 1997 to $45.41 in 1998. Old Davel is currently negotiating
contracts that it believes will further reduce local access charges on a per-
phone basis, but is unable to provide assurance that such contracts will be
entered into or estimate the impact of further telephone charge reductions at
this time.
Commissions rose approximately $6.3 million, or 135.8%, from approximately
$4.6 million for the nine-month period ended September 30, 1997 to
approximately $10.9 million in the same period of 1998. The increase was
primarily due to the increase in the number of installed payphones.
Commissions as a percentage of revenues increased from 13.5% in the nine
months ended September 30, 1997 to 15.8% in the first three quarters of 1998,
reflecting a higher concentration of national and regional payphone contracts
(contracts representing 50 or more payphones), primarily as a result of the
CCI Acquisition. However, this was partially offset by the fact that while
many of Old Davel's contracts with location owners provide for commission
percentages proportionate with increases in revenues, some are based on flat
monthly rates set by the agreements.
Service, maintenance and network costs increased approximately $6.5 million,
or 84.1%, from approximately $7.8 million in the first three quarters of 1997
to approximately $14.3 million in the nine months ended September 30, 1998.
The increase was primarily due to the increase in the number of installed
payphones. Old Davel's average monthly service, maintenance and network costs
on a per phone basis decreased from $51.88 in the first nine months of 1997 to
$43.37 in the nine months ended September 30, 1998. The decrease in service,
maintenance and network costs on a per-phone basis was primarily attributable
to increasing operating efficiencies achieved through increasing density in
Old Davel's payphone routes resulting from the CCI Acquisition and expansion
of its installed base of payphones.
Selling, general and administrative ("SG&A") expenses increased
approximately $15.9 million, or 157.6%, from the prior year, from
approximately $10.1 million in 1997 to approximately $26.0 million in the
first nine months of 1998. The increase was partially attributable to higher
depreciation and amortization expense, which rose approximately $8.6 million,
or 283.8%, from the prior year, primarily reflecting depreciation and
amortization expense related to the CCI Acquisition. Old Davel also incurred
approximately $7.2 million in additional SG&A expenses associated with the
operation of CCI administrative and field office facilities and other branch
office facilities opened and increased salaries and administrative costs
during the last quarters of 1997 and the first three quarters of 1998, and
$0.1 million in additional bank fees related to a $2.5 million note entered
into on September 30, 1998. Old Davel is finalizing the integration of its
operations with the operations of CCI and began eliminating redundant sales
and administrative personnel and office facilities in the second quarter of
1998. Old Davel also recognized a non-recurring charge of approximately $0.83
million in the first quarter of 1998 related to corporate restructuring
resulting from the CCI Acquisition. The restructuring charge includes reserves
of approximately $0.3 million for lease termination costs, $0.2 million for
severance pay and $0.33 million for facility closing costs.
Other income decreased approximately $0.2 million, or 61.5%, in the nine-
month period ended September 30, 1998 over the prior-year period, from
approximately $0.4 million in 1997 to approximately $0.2 million in 1998. This
decrease resulted primarily from a write off of approximately $0.4 million in
costs associated with the terminated PhoneTel transaction. This decrease was
partially offset by an increase in interest income resulting from higher cash
balances in Old Davel's interest-bearing accounts in the first three quarters
of 1998 over the same period of 1997. Interest expense in the nine months
ended September 30, 1998 increased approximately $6.0 million, from
approximately $0.3 million for the nine months ended September 30, 1997 to
approximately $6.3 million for the nine months ended September 30, 1998. This
increase resulted primarily from the incurrence of $120.0 million in
indebtedness on February 3, 1998 in connection with the CCI Acquisition and
refinancing of Old Davel's existing credit facility. On June 30, 1998 and on
August 6, 1998, pursuant to the terms of the 1998 Credit Agreement, Old Davel
reduced the principal amounts outstanding under its credit facility by $24.3
million, and by $5.5 million, respectively.
Net income decreased approximately $5.7 million or 190.4% from the prior-
year period, from net income of approximately $3.0 million, in the nine months
ended September 30, 1997 to a net loss of approximately $2.7 million in the
first three quarters of 1998. Before the effect of the non-recurring
restructuring charge of
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approximately $0.83 million recognized in the first quarter of 1998 and the
non-recurring write-off of $0.4 million in the third quarter of 1998 related
to the terminated PhoneTel Transaction, net income decreased approximately
$4.5 million or 150.0% from the prior year period, decreasing from net income
of approximately $3.0 million in the nine months ended September 30, 1997 to a
net loss of approximately $1.9 million in the first three quarters of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
As of September 30, 1998, Old Davel had a current ratio of 0.97 to 1, as
compared to a current ratio of 3.25 to 1 on December 31, 1997. The decrease
was primarily attributable to an increase in current maturities of long-term
debt of approximately $19.3 million related to the incurrence of indebtedness
in connection with the CCI Acquisition and refinancing of Old Davel's existing
credit facility. The increases in Old Davel's assets and liabilities between
December 31, 1997 and September 30, 1998 are generally due to the CCI
Acquisition. Specifically, the allowance for doubtful accounts increased from
$0.2 million at December 31, 1997 to $5.4 million at September 30, 1998, due
to a large allowance on fully reserved receivables related to CCI's former
inmate operations which were not sold in connection with the sale of the
inmate operations to Talton Holdings, Inc. Other assets increased from $3.5
million at December 31, 1997 to $62.6 million at September 30, 1998 due to the
addition of $45.7 million of goodwill and $11.6 million of other intangible
assets in connection with the CCI Acquisition. Additional paid-in capital
increased from $20.7 million at December 31, 1997 to $49.4 million at
September 30, 1998 due to the sale of 1.0 million shares of Old Davel Common
Stock for $28.0 million on June 29, 1998 to an affiliate of Equity Group
Investments, Inc., a privately-held investment company controlled by Sam Zell.
Cash flows from investing activities decreased $115.6 million primarily as a
result of the CCI Acquisition.
Old Davel's capital expenditures, exclusive of acquisitions, for the nine
months ended September 30, 1998 and 1997 were $7.1 million and $4.4 million,
respectively. Old Davel's capital expenditures primarily consisted of costs
associated with the installation of new payphones. In the first three quarters
of 1998, Old Davel financed its capital expenditures and acquisitions
primarily with approximately $113.8 million in cash provided by financing
activities. In the same period of 1997, Old Davel financed its capital
expenditures primarily with approximately $4.7 million in cash provided by
operating activities and approximately $6.2 million in long term debt
financing and cash reserves.
Credit Agreement
In connection with the CCI Acquisition on February 3, 1998, Old Davel
entered into a credit agreement dated as of February 3, 1998 with NationsBank,
N.A., as Administrative Agent, SunTrust Bank, Tampa Bay, as Documentation
Agent, LaSalle National Bank, as Co-Agent, and other lenders (the "Lenders"),
pursuant to which the Lenders made available to Old Davel an initial revolving
loan commitment (the "Revolving Credit Facility") of $15 million, including a
$5.0 million sublimit available for the issuance of letters of credit, and a
term commitment (the "Term Loan Facility") of $110 million (the "1998 Credit
Agreement"). The balance of $8.7 million outstanding on the 1996 Credit
Agreement was refinanced simultaneously with the signing of the 1998 Credit
Agreement and is included as part of the balances outstanding on the 1998
Credit Agreement.
The loans outstanding under the Term Loan Facility and the Revolving Credit
Facility bear interest, at Old Davel's option, equal to (i) the Base Rate (as
defined in the 1998 Credit Agreement) plus a margin of 1.25% or (ii) LIBOR (as
defined in the 1998 Credit Agreement), based on one, two, three or six month
periods, plus a
margin of 2.75%, with the applicable margins for the Term Loan Facility and
the Revolving Credit Facility being subject to reductions based on Old Davel's
ratio of Funded Debt (as defined in the 1998 Credit Agreement) to EBITDA (as
defined in the 1998 Credit Agreement) at given times. As of November 16, 1998,
the interest rates on the balance of $76.8 million outstanding under the Term
Loan Facility and on a $8.0 million, a $5.0 million, and a $1.8 million note
outstanding under the Revolving Credit Facility were 8.07%, 8.35%, 8.13% and
7.98%, respectively.
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Amounts outstanding under the Term Loan Facility are required to be repaid
in consecutive quarterly installments. The first was paid on June 30, 1998 and
the next two installments (each in the aggregate principal amount of
approximately $3.33 million) are due on the last day of each of the two
calendar quarters commencing with the quarter ending September 30, 1998. The
next 20 installments in the aggregate principal amount of $5.0 million each
will be due on the last day of each calendar quarter commencing with the
quarter ending March 31, 1999. The final installment under the Term Loan
Facility will be payable on February 3, 2004. The Revolving Credit Facility
will mature on February 3, 2004. As of November 16, 1998, $76.8 million in
outstanding principal amount had been borrowed under the Term Loan Facility
and $14.8 million in outstanding principal amount had been borrowed under the
Revolving Credit Facility.
Loans under the Term Loan Facility and the Revolving Credit Facility may be
prepaid at any time and are subject to certain mandatory prepayments in an
amount equal to (i) 100% of the net proceeds in excess of $1.0 million
received from the issuance of equity by Old Davel or its subsidiaries, (ii)
100% of the net proceeds from certain asset sales in excess of $0.5 million in
any calendar year and (iii) 50% (75% for Old Davel's 1998 fiscal year) of Old
Davel's Excess Cash Flow (as defined in the 1998 Credit Agreement) if the
ratio of its Funded Debt to EBITDA as of the last day of the fiscal year is
less than 2.5 to 1.0. Prepayments under the Revolving Loan Facility will be
applied first to reduce Base Rate loans until they are reduced to zero and
then to reduce LIBOR loans. On June 30, 1998, pursuant to the terms of the
1998 Credit Agreement, Old Davel reduced the principal amount outstanding
under the Term Loan Facility by $24.3 million, and by $5.5 million on August
6, 1998.
The Term Loan Facility and the Revolving Credit Facility are guaranteed, on
a joint and several basis, by Old Davel and certain of the direct and indirect
subsidiaries of Old Davel. The 1998 Credit Agreement contains representations
and warranties, affirmative and negative covenants and events of default
customary for similar financings.
On September 30, 1998, Old Davel and its lenders agreed to the fifth
amendment to the 1998 Credit Agreement which revised the definition of the
borrowing base to include the entire amount of the Revolving Loan Facility
through January 1, 1999. As of June 30, 1998, Old Davel was in violation of
the covenant contained in the 1998 Credit Agreement which required the ratio
of funded debt to EBITDA for the trailing twelve month period to be at or
below 4.25 to 1. Old Davel and the lenders agreed to waive this requirement by
entering into the fourth amendment to the 1998 Credit Agreement to increase
the maximum allowable ratio of funded debt to EBITDA to 5.00 to 1.00 for each
of the fiscal quarters ended June 30, 1998 and September 30, 1998. The fourth
amendment also increased the amount of capital expenditures allowed in the
fiscal year ended December 31, 1998, from $6.0 million to $10.0 million to
allow Old Davel to pursue additional payphone acquisitions. Old Davel prepaid
a portion of the Term Loan Facility in August 1998 to a level within the
required ratio of funded debt to EBITDA as of June 30, 1998. Old Davel
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 1998 Credit Agreement as current liabilities.
On September 30, 1998, Old Davel entered into an additional revolving loan
commitment of $5 million with NationsBank, N.A., under the same terms as the
1998 Credit Agreement. The principal of this revolving loan commitment and all
accrued interest thereon will be payable on January 15, 1999. As of November
16, 1998, $2.5 million was outstanding under this revolving loan commitment.
Old Davel believes that cash generated from operations and available
borrowings under the New Credit Facility will be sufficient to fund Old
Davel's foreseeable cash requirements, including capital expenditures through
February 3, 2004. Old Davel also believes that it will be able to fund any
future acquisitions through a combination of cash generated from operations,
additional borrowing and the issuance of shares of Old Davel Common Stock.
There can be no assurance, however, that Old Davel 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 Old Davel.
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MANAGEMENT OF OLD DAVEL
DIRECTORS AND OFFICERS
The following table sets forth certain information with respect to those
individuals who are currently serving as members of the Board of Directors or
as executive officers of Old Davel.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
David R. Hill........... 67 Chairman of the Board
Robert D. Hill.......... 47 President, Chief Executive Officer and Director
Michael E. Hayes........ 40 Senior Vice President, Chief Financial Officer and Director
Paul B. Demirdjian...... 38 Senior Vice President and Chief Information Officer
Michael G. Kouri........ 54 Senior Vice President of Business Development
Theodore C. Rammelkamp,
Jr..................... 53 Senior Vice President, General Counsel and Secretary
Marlin E. Turnipseed.... 45 Senior Vice President of Sales and Marketing
F. Philip Handy......... 54 Director
Thomas M. Vitale........ 41 Director
A. Jones Yorke.......... 67 Director
Samuel Zell............. 57 Director
</TABLE>
David R. Hill, Chairman of the Board of Directors, founded Old Davel. He has
been Chairman of the Board of Old Davel since its date of incorporation. He
served as the Chief Executive Officer of Old Davel through December 1994. He
has been involved in industries related to electronics and telecommunications
since 1951. Mr. Hill is the father of Robert D. Hill.
Robert D. Hill, President and Chief Executive Officer, joined Old Davel in
1981 as the general manager of its largest telephone remanufacturing facility.
Between January 1990 and December 1994, he served as Old Davel's President and
Chief Operating Officer. Since January 1995, he has served as Old Davel's
President and Chief Executive Officer.
Michael E. Hayes, Senior Vice President and Chief Financial Officer, joined
Old Davel in 1992 as its Controller and Treasurer. Mr. Hayes became Vice
President and Chief Financial Officer in August 1993 and became a Senior Vice
President in January 1996.
Paul B. Demirdjian, Senior Vice President and Chief Information Officer,
joined Old Davel in 1984. From 1990 to June 1998, he served as Old Davel's
Senior Vice President of Operations.
Michael G. Kouri, Senior Vice President of Business Development, served as a
financial consultant to Old Davel from October 1990 through August 1993. He
was appointed Senior Vice President of Development and Finance of Old Davel in
November 1993. Prior to his employment with Old Davel, he was Chairman of the
Board and Chief Executive Officer of Elite Financial Corporation, a financial
services company. Two of Elite's subsidiaries, Telco Leasing Acceptance
Corporation and Eastern Payphones, Inc., specialize in the financing,
operating and marketing of payphones.
Theodore C. Rammelkamp, Jr., Senior Vice President, General Counsel and
Secretary, has been with Old Davel since April 1994. Prior to becoming an
employee of Old Davel, Mr. Rammelkamp was a member of the law firm of
Rammelkamp, Bradney, Dahman, Kuster, Keaton, Fritsche & Lindsay, P.C. from
1979 through March 1994, serving as its managing partner from January 1991
through March 1994.
Marlin E. Turnipseed, Senior Vice President of Sales and Marketing, joined
Old Davel in 1988 as National Sales Manager and served as Old Davel's Vice
President of Sales and Marketing from August 1993 to June 1998. Prior to
joining Old Davel, Mr. Turnipseed served for eleven years as a regional sales
manager for U.S. Steel.
F. Philip Handy was appointed to the board of directors of Old Davel in June
1998. Mr. Handy is a managing director of Equity Group Corporate Investments,
a division of EGI. Prior to joining EGI, Mr. Handy was Chairman and President
of Winter Park Capital Company, a private investment firm he founded in 1980.
He
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also serves as a director of Anixter International Inc., Banca Quadrum, S.A.,
Q-Tel S.A. de C.V., Jacor Communications, Inc., Chart House Enterprises, Inc.
and Transmedia Network Inc.
Thomas M. Vitale has been a partner in the law firm of Mayer, Brown & Platt
for over five years.
A. Jones Yorke has been Chairman of the Board of Auerbach, Pollack &
Richardson, Inc., a registered securities dealer, and Auerbach Financial
Group, Inc., a financial holding company ("Auerbach"), since June 1998. Mr.
Yorke also formerly served as Chairman of Auerbach from November 1994 through
November 1995. From November 1995 through June 1998, Mr. Yorke was the
Chairman and Chief Executive Officer of Weatherly Securities, a registered
securities dealer. Mr. Yorke was a financial consultant to and President of
Asset Channels, Inc., an investment company, from 1990 to 1996 and currently
serves as Chairman of 42nd Street Development Corporation, a not-for-profit
corporation.
Samuel Zell became a director of Old Davel in June 1998. Mr. Zell was the
founder, and serves as Chairman of the Board, of EGI, which is an affiliate of
Samstock (a principal shareholder of Old Davel). In addition, he serves on the
board of directors of Anixter International Inc., American Classic Voyages
Co., Chart House Enterprises, Inc., Fred Meyer, Inc., Jacor Communications,
Inc. and Manufactured Home Communities. Mr. Zell also serves on the board of
trustees of Equity Residential Properties Trust, Equity Office Properties
Trust and Capital Trust. He is a non-executive director of RAMCO Energy plc.
OLD DAVEL EXECUTIVE OFFICER COMPENSATION AND BENEFITS
EXECUTIVE OFFICER COMPENSATION
The following tables and notes set forth the compensation of Old Davel's
Chief Executive Officer and the four highest paid executive officers whose
salary and bonuses exceeded $100,000 in the fiscal year ended December 31,
1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------- -----------------------------------
COMMON SECURITIES
NAME AND OTHER ANNUAL STOCK UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION(1) GRANTS OPTIONS COMPENSATION(2)
- -------- ---- ------ ----- -------------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
David R.
Hill, 1997 $400,000 $160,000 $-- $100,000 34,412 $2,250
Chairman of
the Board 1996 250,000 91,777 -- -- 200,000 2,250
1995 250,000 70,480 -- -- -- 2,250
Robert D.
Hill, 1997 $200,000 $ 80,000 $-- $ 40,000 17,206 $2,400
President
and Chief 1996 200,000 33,664 -- 40,000 6,000 2,250
Executive
Officer 1995 150,000 75,016 -- -- -- 2,250
Paul B.
Demirdjian, 1997 $145,000 $ 59,450 $-- $ 30,000 12,824 $2,091
Senior Vice
President 1996 145,000 30,696 -- 30,000 6,000 2,250
and Chief 1995 90,000 90,938 -- -- -- 2,080
Information
Officer
Michael G.
Kouri, 1997 $145,000 $ 56,550 $-- $ 30,000 12,183 $2,091
Senior Vice
President 1996 145,000 24,100 -- 30,000 6,000 2,250
of Business
Development 1995 85,000 88,419 -- -- -- 1,957
Michael E.
Hayes, 1997 $120,000 $ 49,200 $-- $ 30,000 10,613 $1,693
Senior Vice
President 1996 120,000 13,034 -- 30,000 6,000 1,995
and Chief
Financial
Officer 1995 75,000 35,947 -- -- -- 1,277
</TABLE>
- --------
(1) Other Annual Compensation was paid in the form of perquisites and was less
than the level required for reporting.
(2) All Other Compensation disclosed in this column represents Old Davel's
contributions, both vested and unvested, to Old Davel's defined
contribution plan.
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OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------
PERCENT OF TOTAL
NUMBER OF OF ALL OPTIONS EXERCISE OR POTENTIAL REALIZABLE
SHARES UNDERLYING GRANTED TO BASE PRICE EXPIRATION VALUE(1)
NAME OPTION GRANTS EMPLOYEES PER SHARE DATE 0%/5%/10%
- ---- ----------------- ---------------- ----------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
David R. Hill........... 34,412 33% $24.875 7/1/03 $0/$236,496/$522,596
Robert D. Hill.......... 17,206 16% 24.875 7/1/03 0/ 118,248/ 261,298
Paul B. Demirdjian...... 12,824 12% 24.875 7/1/03 0/ 88,133/ 194,751
Michael G. Kouri........ 12,183 12% 24.875 7/1/03 0/ 83,728/ 185,016
Michael E. Hayes........ 10,613 10% 24.875 7/1/03 0/ 72,938/ 161,173
</TABLE>
- --------
(1) The values shown are purely hypothetical and have been calculated on the
assumption that the value of Old Davel Common Stock underlying an option
appreciates at the specified rate (0%, 5% or 10% per annum) from the date
of the grant of the option until its expiration. In fact, the options
cannot be valued without prediction of the future movement of the price of
Old Davel's stock. The amount realized from the options disclosed in this
table will depend upon, among other things, the continued employment of
the recipient of the option and the actual performance of Old Davel's
stock during the applicable period.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SHARES IN-THE-MONEY OPTIONS
NUMBER OF UNDERLYING UNEXERCISED AT YEAR-END
SHARES ACQUIRED VALUE OPTIONS AT YEAR-END ($) EXERCISABLE/UNEXERCISABLE
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE (1)
- ---- --------------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
David R. Hill........... 0 0 200,000/0 $2,075,000/$0
Robert D. Hill.......... 0 0 50,000/0 630,250/0
Paul B. Demirdjian...... 0 0 39,900/0 504,000/0
Michael G. Kouri........ 0 0 32,800/0 411,500/0
Michael E. Hayes........ 0 0 17,900/0 229,000/0
</TABLE>
- --------
(1) Equals the difference between the aggregate exercise price of such options
and the aggregate fair market value of the shares of Old Davel Common
Stock that would be received upon exercise, assuming such exercise
occurred on December 31, 1997, at which date the closing price of the Old
Davel Common Stock as quoted on the Nasdaq National Market was $25.50 per
share. The above valuations may not reflect the actual value of
unexercised options, as the value of unexercised options fluctuates with
market activity.
EMPLOYMENT AGREEMENTS
In June 1998, Davel entered into new employment agreements with Messrs.
Robert Hill, Rammelkamp, Hayes, Demirdjian, Kouri and Turnipseed
(collectively, the "Executives"), which replaced certain employment agreements
entered into between Old Davel and the Executives in 1996 and subsequently
amended in 1997. The employment agreements provide for an initial employment
period through December 31, 2000, with automatic one-year renewals unless
either party notifies the other at least 60 days prior to the end of any term.
The employment agreements provide for an annual base salary of at least
$250,000 for Mr. Hill, $170,000 for Mr. Rammelkamp, $170,000 for Mr. Hayes,
$180,000 for Mr. Demirdjian, $170,000 for Mr. Kouri and $130,000 for Mr.
Turnipseed. The employment agreements provide for employment of such persons
in their current respective positions, subject to change or reassignment of
duties by Old Davel.
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The employment agreements provide for certain fringe benefits and incentive
compensation as outlined below. Under the employment agreements, Old Davel may
terminate any Executive for cause (as defined therein). An Executive can
voluntarily terminate his employment agreement by providing 60 days' written
notice to Old Davel at any time. In the event of termination with cause or
voluntary termination the Executive will receive all accrued base pay and a
credit for certain unused vacation.
If Old Davel breaches any provisions of, terminates without cause or fails
to renew an employment agreement with any Executive, the Executive will be
deemed to have been involuntarily terminated. In the event of involuntary
termination or termination for a disability, all of such Executive's options
fully vest and all accrued base pay and a credit for certain unusual vacation
benefits become due. The Executive will also receive the greater of one year's
base pay or the remaining base pay due under the term of the employment
agreement, the greater of the target incentive bonus for such year or the
highest annualized bonus during the prior three years, and continuation of
benefits for the remainder of the term.
The Executives will be deemed to have been terminated upon a "Change in
Control" if any party other than David Hill or his descendants or Samstock
acquires control of 25% or more of the combined voting power of Old Davel and
within two years Davel terminates the Executive or the Executive resigns for
any reason. In the event of termination upon such a Change in Control, an
Executive will receive a severance payment equal to the sum of the Executive's
base salary and target incentive bonuses for the year in which the Change in
Control occurred multiplied by three, subject to certain reductions if such
amounts would constitute "parachute payments" under the Code. In addition, the
Executive will receive those other benefits described in the preceding
paragraph afforded to the Executive as if he had been involuntarily
terminated.
In September 1996, Old Davel entered into an employment agreement with Mr.
David Hill for employment in his current position as Chairman of the Board and
Chairman of the Executive Committee of the Board for six years at an annual
base salary of $400,000. Mr. David Hill has agreed to accept the duties
commonly involved in carrying out the position and any other duties as may be
required. Under the agreement, Mr. David Hill is eligible to receive a cash
bonus as well as a grant of options based upon the percentage by which the
annual before tax profit exceeds the annual before tax profit for 1996. Mr.
David Hill has agreed not to compete with Old Davel during his employment and
for a period of one year afterwards. The agreement also provides that upon a
change of control (as defined therein), (1) all stock options previously
awarded to Mr. David Hill will vest and become immediately exercisable and (2)
in the event of a termination of Mr. David Hill, he will receive severance pay
from Old Davel as specified in his employment agreement. Although the
Transaction will constitute a change of control under the terms of his
employment agreement, Mr. David Hill will continue as Chairman of the Board,
and he has agreed to waive the accelerated vesting of his outstanding options.
INCENTIVE COMPENSATION
Old Davel has implemented a bonus plan that allows each Executive to receive
a substantial cash bonus. Under the plan, Mr. Robert Hill has a maximum bonus
of 120% of his base pay with a target bonus of 60% of base pay, and Messrs.
Rammelkamp, Turnipseed, Demirdjian, Kouri and Hayes have maximum bonuses of
60% of base pay and target bonuses of 30% of base pay. The bonuses are
comprised of three parts: company objectives, departmental objectives and
personal objectives. The company objectives are based upon growth in earnings
per share and EBITDA, and the department and personal goals are determined
with respect to each Executive by January 30 of the applicable year. Old Davel
also maintains a stock option plan pursuant to which the Executives are
granted options to purchase Old Davel Common Stock at the latest closing price
that is available prior to the date the options are awarded. Under the new
employment agreements, each Executive is awarded a minimum of 5,000 stock
options each year of his employ and may be awarded a greater number at the
discretion of the Compensation Committee.
Under the stock option plan, other employees may be granted Old Davel Common
Stock and options to purchase shares of Common Stock of Old Davel. The
Compensation Committee of the Board currently administers the Stock Option
Plan. The Compensation Committee determines which individuals will be granted
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options, the number of shares to be subject to options and other terms and
conditions applicable to the grants. The employment agreement with Mr. David
Hill provides that Mr. David Hill will receive option grants in amounts within
a range based upon the percentage change in earnings per share of Old Davel
Common Stock measured against a base year (1996 being set as the base year).
Mr. David Hill also received a grant of options to purchase 200,000 shares of
Old Davel Common Stock upon the signing of his employment agreement.
Pursuant to the Stock Option Plan, Mr. David Hill is also entitled to annual
grants of Old Davel Common Stock during the term of his employment agreement.
The employment agreement provides that the annual stock grant will be valued
at $100,000 for Mr. David Hill.
Old Davel maintains a bonus plan pursuant to which Mr. David Hill is
eligible to receive annual cash bonuses in an amount within a range based upon
the percentage change in earnings per share of Old Davel's Common Stock
measured against a base year (1996 being set as the base year). The incentive
bonuses range from 5% to a maximum of 45% of his base salary.
401(K) PLAN
Old Davel maintains a 401(k) Plan which is available to all employees of Old
Davel, including its executive officers. Old Davel provides a matching
contribution to the plan up to a maximum of 1.5% of the salary of the
contributing employee. Old Davel's contribution to an employee's account vests
over a period of five years.
COMPENSATION OF DIRECTORS
Through December 31, 1995, Old Davel did not pay cash compensation for
service as directors. In 1996, Old Davel began paying cash compensation to
directors who are not employees of Old Davel in the amount of $2,500 per
meeting. In April 1998, Old Davel's Board of Directors approved a resolution
to eliminate the per-meeting payment and begin paying (effective as of the
date of the 1998 annual meeting) an annual cash retainer to directors who are
not employees of Old Davel in the amount of $20,000.
Directors of Old Davel who are not employees of Old Davel 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 Old Davel's Directors' Stock Option Plan.
Old Davel also provides Mr. Yorke with individual health insurance coverage
and provided Mr. Glen Barber with family health insurance coverage.
COMPLIANCE WITH SECTION 16 OF THE SECURITIES EXCHANGE ACT
Section 16(a) of the Securities Exchange Act generally requires the officers
and directors of a public company, and persons who own more than ten percent
of a registered class of a public company's equity securities, to file reports
of beneficial ownership and changes in beneficial ownership with the
Securities and Exchange Commission. Based solely on its review of the copies
of such reports received by it, or upon written representations obtained from
certain reporting persons, Old Davel believes that, during 1997, all Section
16(a) filing requirements applicable to its officers, directors and ten-
percent shareholders were complied with.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee in 1997 were Messrs. Vitale, Yorke
and Barber. No member of the Compensation Committee was at any time during
1997, or formerly, an officer or employee of Old Davel or any subsidiary of
Old Davel, nor has any member of the Compensation Committee had any
relationship with Old Davel requiring disclosure under Item 404 of Regulation
S-K under the Securities Act.
No executive officer of Old Davel has served as a director or member of the
Compensation Committee (or other committee serving an equivalent function) of
Old Davel.
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COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Old Davel Board of Directors was
responsible for determining the compensation of all executive officers of Old
Davel. The Compensation Committee was composed exclusively of directors who
were neither employees or former employees of Old Davel nor eligible to
participate in Old Davel's Stock Option Plan. The Stock Option Committee,
comprised of Messrs. Barber and Yorke, administered the Old Davel Stock Option
Plan during 1997.
COMPENSATION PHILOSOPHY
The Compensation Committee's objective in its compensation decisions were to
establish incentives for Old Davel's executive officers to achieve optimal
short-term and long-term operating performance of Old Davel and to link
executive and shareholder interests. The Committee determined the elements of
each executive officer's compensation package by evaluating the
responsibilities of his position, his performance and that of Old Davel
generally, as well as his contribution to Old Davel's performance.
Compensation for the CEO of Old Davel was determined through a process and
based on considerations similar to those for the executive officers generally.
1997 COMPENSATION
The 1997 compensation of Old Davel's executive officers was established
pursuant to the parameters contained in their employment agreements with Old
Davel effective January 1996. These agreements provided for four elements of
compensation of Old Davel's executive officers: a base salary, an annual cash
bonus, stock options granted under the Stock Option Plan and annual stock
grants.
Each executive officer's 1997 base salary was set forth in his employment
agreement. Base salaries of all officers were intended to be relatively
moderate and were believed to be at or below the median of the base salaries
paid in 1997 by public telecommunications companies of a size comparable to
Old Davel. The employment agreements did not provide for any increase in the
base salaries of Old Davel's executive officers during the term of the
agreements; accordingly, no increases in base salaries were made for 1997.
Executive officers were also entitled to cash bonuses determined in
accordance with their employment agreements. Under each executive officer's
employment agreement, the percentage growth in earnings per share of Old
Davel, adjusted for extraordinary items, for the year in which the bonus is
applicable determined a range within which that executive officer's cash bonus
would fall. The Compensation Committee determined each executive officer's
cash bonus within the applicable range based on the executive officer's
performance and contribution to Old Davel's financial performance. These
bonuses were intended to reward executive officers for increasing Old Davel's
profitability.
In an effort to provide a long-term incentive for future performance that
aligns their interests with the interests of shareholders, executive officers
are eligible for participation in Old Davel's Stock Option Plan. Stock options
were intended to provide an incentive for the creation of shareholder value
over the term of several years since the full benefit of options will be
realized only if the price of the securities underlying the options
appreciates over that term. Pursuant to their employment agreements, executive
officers were entitled to receive options falling within a range determined in
a manner similar to the applicable ranges of cash bonuses, as described above.
Old Davel's Stock Option Committee determined each executive officer's option
grant within the applicable ranges based on the executive officer's
performance and his contribution to Old Davel's financial performance. In
accordance with the terms of their employment agreements, executive officers
also received specified stock grants under the Stock Option Plan. Stock
awarded under the Stock Option Plan contained certain restrictions on
transfer, and were awarded to further long-term incentives to align the
interests of the shareholder with the interests of the executive officers.
The Compensation Committee reviewed the aggregate 1997 compensation paid to
the executive officers in respect of 1997 and found it to be generally
consistent with the Compensation Committee's policies and
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objectives regarding executive compensation. However, noting the increasing
trend toward consolidation in the payphone industry and Old Davel's intention
to participate in such consolidation, the Compensation Committee in July 1997
approved amendments to the executive officers' employment agreements to
clarify certain ambiguities regarding, and generally to increase, the
severance benefits to which the executives would be entitled upon a change in
control of Old Davel. The Compensation Committee decided to implement such
changes in order to keep Old Davel's management team intact during Old Davel's
consideration, pursuit or consummation of any strategic alternatives. In
contemplation of Old Davel's participation in such consolidation, including
consummating the CCI Acquisition and entering into the Transaction, the
Compensation Committee approved in July 1998 new employment agreements with
the Company's executive officers, the terms of which are described above.
DEDUCTIBILITY OF COMPENSATION
Section 162(m) of the Internal Revenue Code of 1986, as amended, generally
establishes, with certain exceptions, a $1 million deduction limit on
executive compensation for public companies. The Committee believes that it is
in the best interests of Old Davel's shareholders to structure its
compensation plans to achieve maximum deductibility under Section 162(m) to
the extent consistent with Old Davel's need to attract and retain qualified
executives.
This Report of Compensation Committee on Executive Compensation shall not be
deemed incorporated by reference by any general statement incorporating by
reference this proxy statement or any portion hereof into any of Old Davel's
filings with the SEC, and such information shall not be deemed filed with the
SEC, except as specifically otherwise provided in such other filings or to the
extent required by Item 402 of Regulation S-K.
Glen E. Barber
Thomas M. Vitale
A. Jones Yorke
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<PAGE>
PERFORMANCE GRAPH
The comparative stock performance graph below compares the cumulative
shareholder return on the Old Davel Common Stock for the period from October
20, 1993, the date the Old Davel Common Stock began trading on the Nasdaq
Stock Market, through December 31, 1997, with the cumulative total return on
(i) the Nasdaq Composite Index and (ii) a peer group of companies that compete
with Old Davel in the operation of privately owned payphones, in each case
assuming the reinvestment of dividends. None of the companies in the peer
group offers a range of products and services fully comparable to those of Old
Davel, although each competes with Old Davel with respect to certain of Old
Davel's significant business segments. The returns of each company have been
weighted according to their respective stock market capitalization for
purposes of arriving at a peer group average. The members of the peer group
are Peoples, PhoneTel and CCI.
TOTAL RETURN TO STOCKHOLDERS
(Assumes $100 investment on 10/20/93)
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Davel Communications
Group, Inc. Peer Group Nasdaq Composite (US)
-------------------- ---------- ---------------------
<S> <C> <C> <C>
10/20/93 100 100 100
12/31/93 92 79 101
12/30/94 76 45 99
12/29/95 81 26 136
12/31/96 109 40 171
12/31/97 152 47 204
</TABLE>
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CERTAIN TRANSACTIONS INVOLVING OLD DAVEL
Old Davel has entered in the past, and New Davel may enter in the future,
into certain transactions with its largest shareholder, Mr. David R. Hill, the
Chairman of Old Davel. During 1997, Old Davel sold a life insurance policy, a
house and an airplane to Mr. Hill, who at the Davel Record Date owned
approximately 32% of the Old Davel Common Stock. The sale price was at the
estimated fair market value of the assets as determined based upon independent
appraisals, and the sale resulted in a gain for Old Davel of $273,000. The
house and the airplane were subsequently leased back to Old Davel and a
portion of the gain was deferred and is being recognized ratably over the term
of the lease. In September 1997, Davel purchased long-distance switching
equipment that had previously been leased from Mr. Hill for a purchase price
of $378,000, which was the estimated fair market value of the equipment based
upon independent appraisals. Prior to such sale, Mr. Hill received payments
from Old Davel for the lease of such equipment and the rental of office space
in Jacksonville, Illinois in the aggregate amount of $196,000, $239,000 and
$232,000 in 1997, 1996 and 1995, respectively. In addition, Old Davel received
payments from Mr. Hill for administrative services provided to him by certain
employees of Davel in the aggregate amounts of $107,000, $122,000 and $127,000
in 1997, 1996 and 1995, respectively.
In connection with advisory services provided by EGI, an affiliate of
Samstock, to Old Davel, Old Davel has agreed to pay to EGI a fee, payable in
New Davel Common Stock, equal to 0.35% of the enterprise value of the
Transaction, payable upon consummation of the Transaction.
PRINCIPAL SHAREHOLDERS OF OLD DAVEL
The following table sets forth certain information as of October 31, 1998
with respect to the beneficial ownership of Old Davel Common Stock by (1) each
person who is known by Old Davel to own beneficially more than five percent of
the Old Davel Common Stock, (2) each of Old Davel's directors and executive
officers and (3) all current directors and executive officers as a group.
Unless otherwise indicated, each person has sole voting power and investment
power with respect to the shares attributed to him.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY PERCENTAGE
DIRECTORS, EXECUTIVE OFFICERS AND 5% SHAREHOLDERS(1) OWNED OF CLASS
- ---------------------------------------------------- ------------ ----------
<S> <C> <C>
David R. Hill(2)(3)(4)................................. 2,063,004 33.3%
Robert D. Hill(2)(3)(5)................................ 42,405 *
Michael E. Hayes(2)(3)(6).............................. 33,421 *
Paul B. Demirdjian(2)(7)............................... 30,584 *
Michael G. Kouri(2)(8)................................. 11,737 *
Theodore C. Rammelkamp, Jr.(2)(9)...................... 43,343 *
Marlin E. Turnipseed(2)(10)............................ 22,459 *
F. Philip Handy(3)(11)................................. 1,973,900 32.0%
Thomas M. Vitale(3)(12)................................ 20,000 *
A. Jones Yorke(3)(13).................................. 15,000 *
Samuel Zell(3)(11)..................................... 1,973,900 32.0%
Goldman, Sachs & Co.................................... 432,800 7.0%
FMR Corp............................................... 401,500 6.5%
Samstock, L.L.C.(14)................................... 1,973,900 32.0%
All current directors and executive officers as a group
(11 persons)(15)...................................... 6,200,364 64.6%
</TABLE>
- --------
* Represents less than 1.0%.
(1) For purposes of calculating the beneficial ownership of each shareholder,
it was assumed (in accordance with the Commission's definition of
"beneficial ownership") that such shareholder had exercised all options,
conversion rights or warrants by which such shareholder had the right,
within 60 days following October 31, 1998, to acquire shares of such class
of stock.
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(2) Such person is an employee of Old Davel.
(3) Such person is a director of Old Davel.
(4) Includes 211,471 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.
(5) Includes 37,069 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.
(6) Includes 31,371 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.
(7) Includes 28,608 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.
(8) Includes 10,061 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.
(9) Includes 41,775 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.
(10) Includes 19,801 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.
(11) Includes 8,000 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Directors' Stock Option Plan
and 1,973,900 shares beneficially owned by Samstock (including warrants
to acquire 350,000 shares of Old Davel Common Stock) that Messrs. Handy
and Zell could be deemed to beneficially own as a result of being
principals of EGI, an affiliate of Samstock. Each of Messrs. Handy and
Zell disclaims beneficial ownership of such shares.
(12) Includes 20,000 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Directors' Stock Option Plan.
(13) Includes 12,000 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Directors' Stock Option Plan.
(14) Includes 293,304 shares and warrants to acquire 63,216 shares that are
beneficially owned by EGI--Davel Investors, L.L.C., a limited liability
company of which Samstock is the managing member.
(15) Includes 440,155 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan and the
Directors' Stock Option Plan and 1,973,900 shares beneficially owned by
Samstock (including warrants to acquire 350,000 shares of Old Davel
Common Stock) that Messrs. Handy and Zell could be deemed to beneficially
own as a result of being principals of EGI, an affiliate of Samstock.
Each of Messrs. Handy and Zell disclaims beneficial ownership of such
shares.
See "Certain Transactions Involving Old Davel" for a description of material
transactions between Old Davel and Old Davel's Chairman during the past three
years.
DESCRIPTION OF CAPITAL STOCK OF OLD DAVEL
The total amount of authorized capital stock of Old Davel is 10,000,000
shares of Old Davel Common Stock and 1,000,000 shares of Old Davel Preferred
Stock. As of the Davel Record Date, 5,784,209 shares of Old Davel Common Stock
were issued and outstanding and no shares of Old Davel Preferred Stock were
issued and outstanding. The following description is qualified in its entirety
by reference to Old Davel's Articles of Incorporation and By-laws, which are
incorporated herein by reference.
OLD DAVEL COMMON STOCK
The holders of Old Davel Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of shareholders.
Cumulative voting in the election of directors is not permitted. Subject to
preferences that may be granted to holders of Old Davel Preferred Stock,
holders of Old Davel Common Stock
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are entitled to receive ratably such dividends as may be declared by the Board
of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of Old Davel, holders of Old Davel
Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preference, if any, which may be
granted to the holders of Old Davel Preferred Stock. Holders of Old Davel
Common Stock have no conversion, preemptive or other rights to subscribe for
additional shares or other securities, and there are no redemption or sinking
fund provisions with respect to such shares. The issued and outstanding shares
of Old Davel Common Stock are fully paid and nonassessable.
OLD DAVEL PREFERRED STOCK
The Old Davel Board of Directors has the authority to issue by resolution up
to 1,000,000 shares of Old Davel Preferred Stock in one or more series and to
fix the number of shares constituting any such series and the rights and
preferences thereof, including dividend rates, terms of redemption (including
sinking fund provisions), redemption price or prices, voting rights,
conversion rights and liquidation preferences of the shares constituting such
series, without any further vote or action by Old Davel's shareholders. The
issuance of Old Davel Preferred Stock by the Old Davel Board of Directors
could adversely affect the rights of holders of Old Davel Common Stock. For
example, an issuance of Old Davel Preferred Stock could result in a class of
securities outstanding that would have preferences over the Old Davel Common
Stock with respect to dividends and in liquidations, and that could (upon
conversion or otherwise) enjoy all of the rights appurtenant to Old Davel
Common Stock.
The authority possessed by the Old Davel Board of Directors to issue Old
Davel Preferred Stock could potentially be used to discourage attempts by
others to obtain control of Old Davel, through merger, tender offer, proxy
contest or otherwise, by making such attempts more difficult to achieve or
more costly. The Old Davel Board of Directors may issue Old Davel Preferred
Stock without shareholder approval and with voting and conversion rights that
could adversely affect the voting power of holders of Old Davel Common Stock.
RIGHTS PLAN
Each share of Old Davel Common Stock has associated with it a right (each,
an "Old Right") entitling the registered holder, under certain circumstances,
to purchase from Old Davel one one-thousandth of a share of Old Davel Series A
Preferred Stock, at the Purchase Price of $100 per one one-thousandth of a
share of Old Davel Series A Preferred Stock (the "Purchase Price"), subject to
adjustment.
The Old Rights are not immediately exercisable and are transferable only
with the related Old Davel Common Stock certificates. The Old Rights will
generally become exercisable and separately transferable only in the event a
person, other than certain exempt persons, acquires beneficial ownership of
15% or more of the outstanding New Davel Common Stock. Specifically, the New
Rights will become exercisable and transferrable upon the earlier of (1) the
date of public disclosure that a person or group, other than an exempt person,
together with non-exempt persons affiliated or associated with it, has
acquired, or obtained the right to acquire, beneficial ownership of 15% or
more of the outstanding Old Davel Common Stock and (2) the tenth day after the
date of commencement of disclosure of an intention to commence a tender offer
or exchange offer by a person (other than an exempt person, Old Davel and
certain related entities) if, upon consummation of the offer, such person or
group, together with non-exempt persons affiliated or associated with it,
could acquire beneficial ownership of 15% or more of the outstanding Old Davel
Common Stock upon the Old Davel Distribution Date. Mr. David R. Hill and his
spouse, and certain trusts for their benefit, and Samstock are considered
"exempt persons" so long as the aggregate Old Davel Common Stock ownership of
such persons, as the case may be, does not exceed the respective amounts of
Old Davel Common Stock beneficially owned by such person (as of May 4, 1998,
in the case of Mr. David R. Hill, and as of June 29, 1998, in the case of
Samstock), expressed as a percentage of the total outstanding Common Stock, on
a fully diluted basis, plus 1% of such amount.
The Old Rights expire at the close of business on May 4, 2008 (the "Old
Rights Expiration Date"), unless earlier redeemed or exchanged by Old Davel.
At any time prior to the earlier of (1) 12:00 midnight ending the tenth day
following the public announcement that a non-exempt person or persons has
acquired beneficial ownership of 15% or more of the outstanding Old Davel
Common Stock and (2) the Old Rights Expiration Date,
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<PAGE>
Old Davel may redeem the Old Rights in whole, but not in part, at a price of
$.01 per Old Right. The Purchase Price and the number of shares of Old Davel
Series A Preferred Stock or other securities, cash or other property issuable
upon exercise of the rights are subject to adjustment from time to time to
prevent dilution.
If a non-exempt person or persons has acquired beneficial ownership of 15%
or more of the outstanding Old Davel Common Stock, the rights will "flip in"
and entitle each holder of an Old Right (other than such non-exempt person or
persons or an affiliate or associate of such persons) to purchase, upon
exercise at the then-current Purchase Price, that number of shares of Old
Davel Common Stock having a market value of two times such Purchase Price. In
addition, following a "flip-in" the Old Davel Board of Directors has the
option of exchanging all or part of the Old Rights (other than Old Rights held
by such non-exempt person or persons or an affiliate or associate of any such
person) for Old Davel Common Stock (and/or other equity securities deemed to
have the same value as the Old Davel Common Stock).
In the event that Old Davel is acquired in a merger or other business
combination in which the Old Davel Common Stock does not remain outstanding or
is changed or 50% or more of its consolidated assets or earning power is sold,
leased, exchanged, mortgaged, pledged or otherwise transferred or disposed of
(in one transaction or a series of related transactions) the Old Rights will
"flip over" and entitle each holder of an Old Right (other than the non-exempt
person or persons or an affiliate or associate of such person) to purchase,
upon the exercise of the Old Right at the then-current Purchase Price, that
number of shares of Common Stock of the acquiring company (or, in certain
circumstances, one of its affiliates) which at the time of such transaction
would have a market value of two times such Purchase Price.
The Old Rights have certain anti-takeover effects. The Old Rights may cause
substantial dilution to a person or group other than an exempt person that
attempts to acquire Old Davel on terms not approved by the Old Davel Board of
Directors, except pursuant to an offer conditioned on a substantial number of
Old Rights being acquired. The Old Rights should not interfere with any merger
or other business combination approved by the Old Davel Board of Directors
prior to the time a person or group other than an exempt person has acquired
beneficial ownership of 15% or more of the Old Davel Common Stock.
TRANSFER AGENT
The Transfer Agent and Registrar for the Old Davel Common Stock is
ChaseMellon Shareholder Services, L.L.C.
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<PAGE>
BUSINESS OF PEOPLES
GENERAL AND RECENT DEVELOPMENTS
Peoples is a leading independent provider of payphone services in the United
States, on the basis of the number of the payphones in operation, Peoples'
longevity in the industry and the quality of services offered to the public.
Since installing its first payphone in 1985, Peoples' core payphone business
has grown to an installed base, as of September 30, 1998, of approximately
43,000 payphones operated in 39 states and the District of Columbia.
Peoples owns, operates, services and maintains a system of independent
payphones. Its payphone business generates revenues from coin calls and non-
coin calls such as telephone calling card, commercial credit card, collect and
third-party billed calls made from its payphones. Non-coin calls also include
dial-around calls. Peoples, in past years, grew through the acquisition of
payphone routes from other IPPs. From 1990 through 1994, Peoples acquired over
33,000 payphones from 27 IPPs. Between 1995 and 1997, Peoples focused on
growth through internal sales. However, on January 12, 1998, Peoples closed
its first payphone company acquisition since October 1994, in an asset
purchase transaction that added approximately 2,600 new payphones to Peoples'
installed base. Peoples continually focuses on improvements to its payphone
business with the intent of increasing cash flow, enhancing operating
efficiencies, and achieving balanced, profitable growth.
Peoples grows internally by entering into contracts for the installation of
payphones in locations where Peoples believes there will be significant demand
for payphone service, such as convenience stores, grocery stores, service
stations, shopping centers, hotels, restaurants, airports and truck stops.
Peoples believes that its nationwide presence in the payphone marketplace
makes it a particularly attractive supplier of payphone services for Location
Owners with regional or national facilities. Further external growth will be
achieved through the targeted acquisition of other payphone routes that meet
Peoples' strict financial and operational criteria for such transactions.
Peoples believes that substantially all of its payphones are in high traffic
locations.
Between 1990 and 1993 Peoples entered into several non-payphone businesses,
including telephone debit card services, cellular rental services,
international services and inmate services. In late 1994, Peoples adopted a
new strategic direction to return its focus to the core payphone business and
to divest itself of the other non-core businesses. The sale of these non-
strategic businesses took place largely in 1995 and concluded with the sale of
the remaining portion of Peoples's inmate services division in December 1997.
See "Peoples Management's Discussion and Analysis of Financial Condition and
Results of Operations."
During 1996, E. Craig Sanders joined Peoples as a Director, President and
CEO and Neil N. Snyder, III joined as Executive Vice President and Chief
Operating Officer. During the first quarter of 1997, David A. Arvizu joined
Peoples as Senior Vice President of Sales and Services and during the third
quarter of 1997, William A. Baum joined Peoples as Senior Vice President and
Chief Financial Officer.
PAYPHONE INDUSTRY OVERVIEW
Based on information compiled largely from the "Statistics of
Telecommunications Common Carriers" filed with the FCC, there were
approximately 2 million payphones in the United States, as of December 31,
1996. Of this total, approximately 350,000 payphones were operated by IPPs,
and the balance were provided by the various LECs. Using these figures,
Peoples' payphone base represents approximately 2% of the total domestic U.S.
payphone installed base.
The telecommunications marketplace through 1995 was principally shaped by
the 1984 ruling in the well-documented AT&T Divestiture case. The AT&T
Divestiture created various business opportunities in the telecommunications
industry and paved the way for FCC rulings in 1984 which authorized
independent payphone equipment to be connected to the public switched network
and operated competitively. Subsequent to the 1984 FCC rulings, virtually all
state jurisdictions have authorized the competitive provision of payphone
services within their territories.
In 1990, Congress passed TOCSIA, which established the mandate that payphone
providers adopt a series of operational measures designed to provide
information and "open access" for consumers seeking to place calls
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at payphones nationwide. As a result of TOCSIA, PSPs are required to afford
open consumer access to carrier access code dialing and 800 subscriber calls
from payphones. TOCSIA also required the FCC to consider fair compensation to
payphone providers for the access offered on such calls.
The various state and FCC regulatory rulings implementing competition in the
payphone business, both before and after Congress' enactment of TOCSIA,
created an operating environment in which IPPs, such as Peoples, were placed
at a fundamental disadvantage vis-a-vis their primary competitors, the LEC
payphone operators, in a variety of operational and financial aspects integral
to the competitive provision of payphone services. For example, LECs were
permitted to subsidize their payphone operations from their regulated local
exchange telephone company operations. This cross-subsidization resulted in
various market distortions, including "below cost" end-user rates for local
coin and certain other calls. Yet regulators applied these same end-user rates
as rate ceilings for competitive payphone providers, even though the latter
did not have an opportunity to subsidize their payphone operations from
monopoly telephone operations.
On February 8, 1996, the Telecommunications Act was signed into law, giving
broad powers to the FCC to preside over the development of competitive
telecommunications markets, including local exchange, long distance and
payphone sectors. The significant payphone provisions of the new law contained
in Section 276 are designed to improve parity among payphone service providers
and to address those fundamental regulatory inequities that have long plagued
the public communications industry sector. For a discussion of the FCC's
implementation of the Telecommunications Act and the related regulatory
proceedings, see "Regulatory Matters."
PAYPHONES
Peoples' payphone system consists of approximately 43,000 payphones located
in 39 states and the District of Columbia. The majority of Peoples' payphones
are located in the eastern half of the United States and California, with the
largest geographic concentrations in the following states: Florida, New York,
California, Indiana, Texas, Maryland, Virginia, Pennsylvania, Tennessee,
Georgia, Louisiana, Ohio and North Carolina.
Peoples' core payphone business generates revenues from coin and non-coin
calls. Coin calls are made by depositing coins into the payphone. Non-coin
calls include calling card, credit card, collect and third-party billed calls
made using the OSP pre-selected by Peoples for its payphones and dial-around
calls.
Coin Calls
Peoples' payphones generate coin revenues primarily from local calls.
Pursuant to FCC rulings implementing the Telecommunications Act, Peoples has,
effective October 7, 1997, begun to price local coin calls using market-based
rates in most jurisdictions. Long distance intrastate coin calls are priced in
accordance with applicable state regulatory rate caps or guidelines, while
Peoples continues to maintain pricing flexibility on certain intrastate and
all interstate coin calls. Peoples pays local line and usage charges to the
LECs, or in certain circumstances CLECs, for the underlying local exchange
transmission services provided for each of Peoples' installed payphones. These
line and usage charges cover basic dial tone service to the payphone, as well
as the transport and completion of local coin calls. Peoples also pays usage-
based charges to its primary interexchange carriers for the underlying
telecommunications transmission service used to initiate and complete coin
long distance calls.
Non-Coin Calls
Peoples receives revenues (typically in the form of carrier paid
commissions) from non-coin calls made from its payphones. The services needed
to complete a non-coin call include providing an automated or live operator to
answer and process the call, verifying billing information, validating calling
cards and credit cards, routing and transmitting the call to its destination,
monitoring the call's duration, determining the charge for the
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call and billing and collecting the applicable end-user charges. In all
jurisdictions, Peoples has the right to select the operator service provider
for interLATA, interstate and international traffic for use on its payphones.
In certain jurisdictions, Peoples has historically been required to use the
LEC as the local, intraLATA and 0- service provider. The Telecommunications
Act, however, has preempted and thereby eliminated most of these requirements
prospectively and Peoples is now authorized to select the provider for
substantially all 0+ revenue generating calls from its payphones. Currently,
Peoples selects third-party OSPs to handle the calls for all of its traffic.
Peoples uses the operator services of AT&T, Sprint and other smaller OSPs, in
addition to certain LEC providers. Peoples has initiated a process of
consolidating its traffic with fewer OSPs, to obtain the most beneficial
commission and service arrangements, and believes this consolidation
initiative will result in a positive impact to Peoples, although there can be
no assurance of this.
Each OSP selected by Peoples handles 0+ and/or 0- calls and pays Peoples a
commission for each call completed thereby, except in those limited instances
where Peoples is prohibited contractually, legally or otherwise from selecting
the OSP. The state regulatory authorities have jurisdiction to mandate rates
for intrastate calls other than local coin calls, and many have adopted such
requirements. The FCC has the authority to regulate the amount payphone
operators may charge for interstate calls, although no rate ceilings have been
established. On January 29, 1998, the FCC adopted certain rate disclosure
requirements for interstate 0+ calls originated from payphones and other
transient locations. While Peoples believes that such rate disclosure
requirements will prove beneficial for the payphone industry generally and
Peoples specifically, there can be no assurance of this. See "Regulatory
Matters."
Peoples also receives non-coin revenue from IXCs pursuant to FCC regulations
as dial-around compensation for certain non-coin calls made from its
payphones. Pursuant to current FCC regulations adopted in the 1997 Payphone
Order, Peoples is entitled to receive $0.284 per call for all dial-around
calls completed from its payphones, for a two-year period beginning October 7,
1997. The FCC, in its 1997 Payphone Order, has tentatively concluded that this
same $0.284 call compensation rate will also govern compensation obligations
of the OSP's for the period from November 7, 1996 through October 6, 1997 and
that PSPs are entitled to receive this compensation for all dial-around calls
during this prior period. The 1997 Payphone Order further states that the
allocation of this payment obligation between the OSPs for the period from
November 7, 1996 through October 6, 1997 will be addressed in a subsequent
order. See "Regulatory Matters."
Operating Expenses
Peoples pays monthly charges to the LECs and CLECs for interconnection to
the public switched network for basic dial tone and local usage. These charges
are computed, depending on the LEC or CLEC, using either a flat monthly rate
or a fixed monthly charge plus a per message or per minute usage rate, based
on the duration of the call. Additionally, Peoples pays the LECs, CLECs and
IXCs a fee, based on usage, for intraLATA and interLATA transmission service
used to complete coin long-distance calls. Peoples also typically shares coin
revenues and commissions paid to Peoples by the OSPs with the Location Owners.
Once accessed to the public switched network, Peoples is also responsible for
the associated billing, collection, bad-debt and validation costs, when
Peoples is acting as the OSP. As previously noted, Peoples currently is using
AT&T and Sprint as its primary national providers of operator services, where
none of these costs applies directly to Peoples.
The Telecommunications Act was designed to open virtually all markets to
competition in the telecommunications industry and Peoples believes that the
future effect will be to lower certain costs of Peoples such as line charges
and usage rates for local interconnection, although there can be no assurances
as to the specific timing or amount of such reductions. In this regard,
recently, the FCC has ordered the implementation of several new charges,
namely Universal Service Funding charges, Presubscribed Interexchange Carrier
charges, and payphone line coding charges, which represent increases in
Peoples' telephone charges and which are in varying stages of administrative
review. These new charges may limit the cost reductions otherwise anticipated
under the Telecommunications Act, although there can be no assurance of the
ultimate impacts experienced by Peoples or the materiality of such impacts.
See "Regulatory Matters."
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Internal Growth
Placement of Payphones. Peoples seeks to install its payphones in locations
where it believes there will be significant demand for payphone service, such
as convenience stores, grocery stores, gasoline service stations, shopping
centers, hotels, restaurants, airports and truck stops. In evaluating
locations, Peoples generally conducts a site survey to examine geographical
factors, population density, traffic patterns, historical information (to the
extent available) and other factors, in determining whether to install a
payphone. Peoples has focused its efforts to date on securing payphone
locations from local and regional accounts, and large national accounts which
can provide a large number of high quality locations.
Peoples installs its payphone equipment pursuant to Placement Agreements
with the Location Owners. Peoples' typical Placement Agreement has a three to
five-year term and may provide Peoples with the option to renew for an
additional three to five years. Each Placement Agreement provides for a
revenue-sharing arrangement between Peoples and the Location Owner based on
the revenue generated from the payphone. The percentage of revenue paid to a
Location Owner is generally fixed for the period of the Placement Agreement.
Peoples estimates that the average cost of installing a new payphone,
including site selection, hardware and labor, is approximately $1,950.
In the past several years, Peoples has been able to grow internally through
use of existing inventory and parts. To meet planned growth in new phone
installations, Peoples now expects to significantly increase purchases of new
payphones and parts for installations and repair purposes.
Peoples is obligated to repair, maintain and service the payphone equipment
installed pursuant to the Placement Agreements. Through its computer systems,
Peoples generally is able to determine potential malfunctions before they are
reported and repairs such malfunctions within 24 hours in the majority of
cases. Generally, the failure of Peoples to remedy a default within 30 days
after notice gives the Location Owner the right to terminate the Placement
Agreement and Peoples may terminate a Placement Agreement on 30 days' prior
notice to the Location Owner if the payphone does not generate sufficient
total revenue for two consecutive months.
Marketing. Although Peoples' past growth in its core payphone business was
primarily driven by acquisitions through 1994, Peoples has more recently
focused on internal sales growth to increase the number of payphones that
Peoples owns, operates or services at local, regional and national accounts.
An aggressive multi-channel sales organization is currently being developed by
Peoples as a complement to this process. The primary focus of Peoples'
marketing efforts has been, and continues to be, regional and national
corporate accounts, although Peoples does operate a large number of its
installed payphone base at local account locations. As one of the country's
largest independent payphone providers, Peoples believes it is in a strong
position to service national accounts, in contrast to smaller competitors or
LECs, which currently operate only in their specific geographic regions. In
contrast to the limited resources of the smaller independent payphone
operators, Peoples' "smart" payphones, sophisticated management information
systems, and highly trained national service and support staff allow Peoples
to maintain a high level of service and react quickly to repair damaged
equipment. Peoples' size and cost structure also allow it to offer attractive
commissions to Location Owners that are competitive with other independent
operators and the LECs, although the industry has become substantially more
competitive with regard to commissions. Based upon the Telecommunications Act,
Peoples believes that there will be additional changes in the competitive
payphone environment, which may create both opportunities and risks for
Peoples, the ultimate outcome of which cannot be predicted with any assurance.
Acquisitions
Through 1994, Peoples' core payphone business grew primarily through
acquisition of other payphone companies. Peoples' acquisition of payphones for
amounts in excess of $500,000 from 1990 through 1994 included approximately
32,350 payphones from 17 companies. On January 12, 1998, Peoples acquired the
operating assets of Indiana Telcom Corporation, Inc. for approximately $11.3
million in cash. This transaction added approximately 2,600 payphones.
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Competition
Peoples believes the principal competitive factors in the payphone business
are: (i) commission payments to Location Owners; (ii) the ability to serve
accounts with locations in several LATAs or states; (iii) the quality of
service provided to the Location Owners and the users of the payphones; and
(iv) responsiveness to customer service needs.
In the payphone business, Peoples principally competes with the LECs, a
number of IPPs, major OSPs and IXCs. Some of these IPPs have increased in size
through acquisitions and many of these companies compete for the most
favorable payphone contracts and sites. Most LECs and IXCs with which Peoples
competes have substantially greater financial, marketing and other resources
than Peoples. In addition, many LECs, faced with competition from IPPs, have
increased their compensation arrangements with Location Owners by offering
more favorable commission schedules and other incentives. As a result of the
passage of the Telecommunications Act and other regulatory changes, under
certain circumstances, the LECs have been allowed to begin providing services
outside of their monopoly franchise territories in a more deregulated mode,
and other companies may also compete against the LECs for in-territory local
business. The potential for competition from other new entrants in the
payphone industry exists as well. These possibilities present both business
opportunities and risks for Peoples. Opportunities include, but are not
necessarily limited to, potential lower interconnection costs due to the
advent of competition in the local service business and improved revenues as a
result of the adoption of dial-around compensation. The risks include
increased competition from the LECs, other new entrants, and a range of
wireless technologies, particularly in light of recent increases in local coin
call prices. See "Regulatory Matters."
Telephone Systems Management and Service
Peoples has internally developed a computer software system which interfaces
with microprocessors in Peoples' payphones. Peoples' computer system polls the
payphones each night to determine the amount of coin revenue in each payphone
and to diagnose possible operational problems occurring with the payphones.
Based on the results of each night's polling, Peoples determines which
payphones require collection or service. Each of Peoples' technicians
generally removes from 20 to 25 sealed coin boxes each day, depending upon the
number of payphones within the collector's specified collection route. Once
the route is completed, the technician returns to one of Peoples' coin
collection rooms located at its executive office or one of its regional
offices, where the seal on the coin box is removed and the coins are
electronically counted. The actual amount in each coin box is automatically
recorded and compared to the expected amount determined by polling the
payphone on the previous night.
Peoples maintains a staff of approximately 230 field service payphone
technicians located throughout the states in which Peoples' payphones are
installed. Peoples has imposed a high standard of service and maintenance in
order to ensure that the payphones are operating properly and generating
maximum revenue. Through its computer system, Peoples generally is able to
determine malfunctions before they are reported and is able, in most cases, to
repair such malfunctions within 24 hours. The most typical payphone
malfunctions or problems are caused by vandalism and theft. On average, less
than 2% of Peoples' payphones are out of service or are not operating properly
at any one time. For accounting purposes, payphone repair costs are expensed
by Peoples as incurred. Peoples also continuously monitors and reviews the
latest technology in the industry to prevent tampering, vandalism, fraud and
theft at its payphones. Peoples' management systems allow Peoples to
decentralize its operations by giving its field operations personnel access to
more information, thus allowing for quicker response and reduced out-of-
service downtime.
Peoples has continued its refurbishment program to improve the condition of
its installed payphone base. In connection with this program, Peoples has
created its own repair center located at its headquarters. This repair center
has assisted in lowering Peoples' repair costs and providing a steadier supply
of repaired equipment back to the field for deployment.
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Telephone Equipment Suppliers
Peoples purchases its payphones from independent manufacturers. Peoples'
payphones use microprocessors that provide voice synthesized calling
instructions and the capability to detect and count coins deposited during
each call. These "smart" payphones also provide information to the caller at
certain intervals regarding the time remaining on the call and the need for an
additional deposit to continue to call. As of June 30, 1998, approximately
34,900, or 81%, of the payphones that Peoples operates were manufactured by
Intellicall. Peoples also operates payphones manufactured by other
manufacturers. Peoples believes that it can purchase payphones from other
payphone manufacturers on terms similar to those in effect with Intellicall.
Peoples has a non-exclusive arrangement with Intellicall whereby the software
and engineering schematics to repair the Intellicall telephones are held in
escrow, to protect Peoples against the bankruptcy of, the cessation of
business operations by, or the failure to provide system support maintenance
by, Intellicall. Peoples, therefore, believes that the loss of Intellicall as
a manufacturer of Peoples' payphone equipment would not have a material
adverse effect on its business, although no assurances can be given.
LONG-DISTANCE OPERATOR SERVICES AGGREGATOR
Peoples has developed a program involving the aggregation and resale of
certain operator ("0+"/"0-") services and transmission ("1+") services to
other PSPs. Peoples is able to arbitrage these services to smaller payphone
companies based upon the favorable higher volume terms and conditions under
which Peoples is able to obtain the services from the underlying LECs, OSPs
and IXCs. Network and operator services which Peoples presently is authorized
to resell to other PSPs either directly or through agency agreements include
those of AT&T, Sprint, GTE Corp. and Ameritech Corp. Peoples is committed to
developing alternate distribution channels for both carrier services and a
full range of other public communications support services, which Peoples
believes it is uniquely suited to provide. Peoples believes this area of the
business should provide future revenue streams that will assist in Peoples'
return to profitability, although there can be no assurances that such a
positive impact will occur.
PREPAID CALLING CARD/INTERNATIONAL TELEPHONE CENTERS/CELLULAR/INMATE
TELECOMMUNICATIONS OPERATIONS
In December 1994, as part of its strategic initiative to return its focus to
the core payphone business, the Peoples Board of Directors approved the sale
of Peoples' prepaid calling card, international telephone center, cellular and
inmate telecommunications operations. The sale of these units occurred largely
in 1995. On December 19, 1997, Peoples sold the remaining operating assets of
its inmate services division to Talton for a cash purchase price of
$10,625,000, plus possible deferred consideration contingent on future
operating results. Sale of the division resulted in a one-time gain on
disposition of $4.2 million, recorded in the fourth quarter of 1997. As one of
the continuing terms of the transaction, Peoples will maintain, subject to
specified conditions and for a limited period, a performance bond and related
collateralization with respect to an ongoing Clark County, Nevada inmate
services agreement. In addition, pursuant to a management agreement
concurrently entered into between the parties, and subject to the terms and
conditions of the asset purchase agreement, Talton will, for the benefit of
Peoples, supervise and manage the ongoing daily operations of the business
with respect to those inmate services agreements requiring either regulatory
or contractual approval prior to formal transfer of title to the assets. For
additional information, see "Peoples Management's Discussion and Analysis of
Financial Condition and Results of Operations."
PEOPLES EMPLOYEES
As of October 31, 1998, Peoples had approximately 450 employees,
approximately 130 of whom were executive, administrative, accounting, sales or
clerical personnel and approximately 320 of whom were installers, maintenance
and repair personnel and coin collectors.
LEGAL PROCEEDINGS
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
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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 is seeking damages
alleged to exceed $10 million. Formal discovery is nearly completed. Trial has
been scheduled for February 1999. Based on the proceedings conducted to date,
Peoples continues to believe that it has several meritorious legal and factual
defenses. However, based upon the current status of the case, Peoples is
unable to predict the outcome of this litigation.
On September 29, 1998, Old Davel announced that it was exercising its
contractual rights to terminate the Davel/PhoneTel Merger Agreement, based on
breaches of representations, warranties and covenants by PhoneTel. On October
1, 1998, Old Davel 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 Old Davel and New Davel alleging
that the Davel/PhoneTel Merger Agreement had been wrongfully terminated, and
also filed a third party claim against Peoples alleging that Peoples
wrongfully caused the termination of the Davel/PhoneTel Merger Agreement. The
counterclaim and third party claim seek specific performance by Old Davel and
New Davel of the transactions contemplated by the Davel/PhoneTel Merger
Agreement and damages and other equitable relief from Old Davel, New Davel and
Peoples. Peoples believes that the third party claim is without merit and
intends to defend against it vigorously.
Peoples is also subject to other various ordinary and routine legal
proceedings arising out of the conduct of its business. Peoples does not
believe that the ultimate disposition of such other proceedings will have a
material adverse effect on its financial position. For information regarding
regulatory proceedings which could affect Peoples, see "Regulatory Matters."
PEOPLES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis compares the year ended December 31,
1997 to the year ended December 31, 1996 and the year ended December 31, 1996
to the year ended December 31, 1995, and the quarter and nine months ended
September 30, 1998 to the quarter and nine months ended September 30, 1997 and
should be read in conjunction with the audited consolidated financial
statements, the unaudited interim consolidated financial statements, and the
notes thereto of Peoples appearing elsewhere in this Joint Proxy
Statement/Prospectus, as well as the discussion set forth in "Regulatory
Matters" above.
Statements in "Peoples Management's Discussion and Analysis of Financial
Condition and Results of Operations" relating to matters that are not
historical facts are forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of Peoples to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such known and
unknown risks, uncertainties and other factors include, but are not limited
to, the following: the impact of competition, especially in a deregulated
environment (including the ability of Peoples to implement higher market-based
rates for local coin calls, as well as competition from alternative
telecommunications products such as wireless communications), uncertainties
with respect to the implementation and effect of the Telecommunications Act,
including any new rule-making by the FCC or litigation which may seek to
modify or overturn the FCC orders implementing such act or portions thereof,
particularly in the area of dial-around compensation, the ongoing ability of
Peoples to deploy its public payphones in favorable locations, Peoples'
ability to continue to implement operational improvements and the ability of
Peoples to efficiently integrate acquisitions of other telephone companies.
See "Forward-Looking Statements May Prove Inaccurate."
OVERVIEW
On November 13, 1995, Peoples sold its cellular telephone operations for
approximately $6.0 million (see Note 17 to the audited consolidated financial
statements of Peoples included elsewhere herein). The results of operations
and loss on disposal are included in the consolidated financial statements as
discontinued operations.
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On October 9, 1995, Peoples sold a portion of its inmate telephone
operations for approximately $1.7 million and on December 19, 1997, Peoples
sold its remaining inmate telephone operations for approximately $10.6 million
(see Notes 1 and 17 to the audited consolidated financial statements of
Peoples included elsewhere herein). The results of operations and gain/(loss)
on disposal are included in the consolidated financial statements as
discontinued operations.
On January 12, 1998, Peoples acquired the operating assets of Indiana Telcom
Corporation, Inc. for approximately $11.3 million in cash (see Note 7 to the
unaudited interim consolidated financial statements of Peoples included
elsewhere herein). This transaction added approximately 2,600 pay phones,
located primarily in Indiana and adjacent Midwestern states, and was largely
financed with the proceeds from the sale of Peoples' inmate division assets in
December 1997.
On July 5, 1998, Peoples entered into the Merger Agreement. As of September
30, 1998, Peoples had incurred approximately $0.9 million in accounting, legal
and advisory costs relating to the pending business combination. These costs
have been recorded in other assets on Peoples' unaudited interim consolidated
balance sheet and will be recognized in results of operations on consummation
of the Transaction.
DIAL-AROUND COMPENSATION
Effective November 6, 1996, pursuant to FCC regulations, Peoples derived
additional revenues from dial-around calls placed from its public payphones.
Under the 1996 Payphone Order, from November 6, 1996 to June 30, 1997, Peoples
recorded gross dial-around revenue at the then-mandated rate of $45.85 per
payphone per
month, as compared with the flat fee of $6.00 per payphone per month in place
prior to November 6, 1996. Pursuant to the 1997 Payphone Order, in the period
from July 1 to October 6 of 1997, Peoples recorded gross dial-around
compensation revenue at a rate of $37.20 per payphone per month and recorded a
charge of approximately $2.1 million in the third quarter of 1997 for the
retroactive reduction in the dial-around compensation rate from $45.85 to
$37.20 per payphone per month, applicable to the November 6, 1996 to June 30,
1997 period. (See "Provision for Dial-Around Compensation Adjustment" below.)
From October 7, 1997 to October 6, 1999, Peoples is entitled to receive
dial-around compensation at a per-call rate of $0.284 based on the actual
number of dial-around calls placed from each of its payphones (or such other
number of calls as may be ultimately permitted by the FCC or the courts).
Thereafter, the dial-around compensation rate is anticipated to be at a per-
call rate equal to the local coin call rate less $0.066. For the period from
October 7, 1997 to September 30, 1998, Peoples recorded dial-around
compensation revenue using an estimated 131 calls per month per payphone.
Peoples has based its compensation on an estimated number of calls per
payphone per month because actual call counts are not available from the IXCs
until four to nine months after the calls are made. From October 7, 1997
forward, the estimated amount may be adjusted for actual call counts provided
by the IXCs. For the periods subsequent to October 7, 1997, Peoples did not
begin to receive detail call count reporting from the carriers until July
1998. That reporting is still not complete. AT&T, in particular, has not
provided accurate call count reporting for this period and has therefore
agreed to pay Peoples on all of its payphones at a surrogate flat rate for the
period from October 7, 1997 through March 31, 1998. Until detailed information
is available to support higher estimates, Peoples continues to accrue dial-
around compensation at an estimated 131 call average per payphone per month
based on the FCC's original industry average figures. Actual receipts from
carriers to date for the period from October 7, 1997 through December 31, 1997
are equivalent to an average of approximately 132 calls per month per
payphone, supporting the accuracy of Peoples original call count estimates.
The FCC, in its Order issued April 3, 1998, left in place the requirement
for payment of per-call compensation for payphones 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. Based on the information available to it,
including actual payments from IXCs
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for the fourth quarter of 1997, Peoples does not believe application of this
order will result in any material adjustment to the dial-around compensation
revenues recorded for the period from October 7, 1997 forward.
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 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. Peoples believes that the FCC will
issue its ruling in the current proceeding within the six-month period
established by the Court. Based on the information available to it, Peoples
does not believe that it is reasonably possible that the amount of
compensation for dial-around calls will be materially reduced from the amount
recorded as dial-around compensation. While the amount of $0.284 per call
constitutes Peoples' position on the minimum appropriate level of fair
compensation, certain IXCs have challenged this rate level, asserting that the
appropriate level of fair compensation should be lower than $0.284 per call.
As part of non-coin revenue, Peoples recorded dial-around compensation
revenue of approximately $3.2 million for the period from November 7, 1996
through December 31, 1996, approximately $17.2 million for the period from
January 1, 1997 through December 31, 1997, and approximately $14.4 million for
the period from January 1, 1998 through September 30, 1998.
SUMMARY MEASURES OF FINANCIAL PERFORMANCE
The financial results discussed below relate to continuing operations and
are presented as additional analysis of Peoples' results of operations.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
-------------------------------------
FOR THE 9
MONTHS
ENDED
YEAR ENDED SEPTEMBER
DECEMBER 31, 30,
--------------------- -------------
1997 1996 1995 1998 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Coin calls........................... 68.1% 72.3% 69.7% 68.7% 67.9%
Non-coin calls(1).................... 31.9 27.7 30.2 31.3 32.1
Service and other.................... 0.0 0.0 0.1 0.0 0.0
----- ----- ----- ----- -----
Total revenues..................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Costs and expenses:
Telephone charges.................... 26.1 28.1 31.7 24.4 26.5
Commissions(1)....................... 26.4 26.4 24.6 28.4 25.7
Field service and collection......... 17.5 17.9 18.8 18.5 17.4
Depreciation and amortization........ 19.0 19.1 17.1 19.3 19.0
Selling, general and administrative.. 11.6 11.7 9.9 10.4 11.3
Other operating (income) expense..... 0.0 (1.4) 5.5 0.0 0.0
----- ----- ----- ----- -----
Total costs and expenses........... 100.6 101.8 107.6 101.0 99.9
----- ----- ----- ----- -----
Operating income (loss).............. (0.6) (1.8) (7.6) (1.0) 0.1
----- ----- ----- ----- -----
Other (income) and expenses:
Interest expense, net................ 11.7 12.0 9.2 11.2 11.7
(Gain) loss on disposal of prepaid
calling card and international
telephone centers................... 0.0 (0.5) 0.5 0.0 0.0
----- ----- ----- ----- -----
Total other (income) and expenses,
net............................... 11.7 11.5 9.7 11.2 11.7
----- ----- ----- ----- -----
Loss from continuing operations before
income taxes.......................... (12.3) (13.3) (17.3) (12.2) (11.6)
Benefit from income taxes.............. 0.0 0.0 0.2 0.0 0.0
----- ----- ----- ----- -----
Net loss from continuing operations.... (12.3)% (13.3)% (17.1)% (12.2)% (11.6)%
===== ===== ===== ===== =====
</TABLE>
- --------
(1) Includes 1997 dial-around compensation adjustment. See note 19 to the
accompanying audited consolidated financial statements.
121
<PAGE>
<TABLE>
<CAPTION>
DOLLARS PER PHONE PER MONTH
-----------------------------------------------
FOR THE 9 MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------- --------------------
1997 1996 1995 1998 1997
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Average number of phones...... 39,237 38,354 39,197 42,791 38,981
Revenues:
Coin calls.................. $162.37 $168.15 $166.58 $ 153.78 $ 162.55
Non-coin calls(1)........... 76.00 64.35 72.04 70.22 76.75
Service and other........... 0.00 0.00 0.26 0.00 0.00
------- ------- ------- --------- ---------
Total revenues............ 238.37 232.50 238.88 224.00 239.30
------- ------- ------- --------- ---------
Costs and expenses:
Telephone charges........... 62.25 65.41 75.65 54.59 63.35
Commissions(1).............. 62.98 61.38 58.68 63.71 61.55
Field service and
collection................. 41.62 41.57 44.93 41.36 41.67
Depreciation and
amortization............... 45.25 44.47 40.78 43.21 45.56
Selling, general and
administrative............. 27.66 27.14 23.73 23.36 26.94
Other operating (income)
expense.................... 0.00 (3.26) 13.13 0.00 0.00
------- ------- ------- --------- ---------
Total costs and expenses.. 239.76 236.71 256.90 226.23 239.07
------- ------- ------- --------- ---------
Operating income (loss)..... (1.39) (4.21) (18.02) (2.23) 0.23
------- ------- ------- --------- ---------
Other (income) and expenses:
Interest expense, net....... 27.83 27.97 22.01 25.19 27.99
(Gain) loss on disposal of
prepaid calling card and
international telephone
centers.................... 0.00 (1.18) 1.20 0.00 0.00
------- ------- ------- --------- ---------
Total other (income) and
expenses, net............ 27.83 26.79 23.21 25.19 27.99
------- ------- ------- --------- ---------
Loss from continuing
operations before incomes
taxes........................ (29.22) (31.00) (41.23) (27.42) (27.76)
Benefit from income taxes..... 0.00 0.00 0.46 0.00 0.00
------- ------- ------- --------- ---------
Net loss from continuing
operations................... $(29.22) $(31.00) $(40.77) $ (27.42) $ (27.76)
======= ======= ======= ========= =========
</TABLE>
- --------
(1) Includes 1997 dial-around compensation adjustment. See note 19 to the
accompanying audited consolidated financial statements.
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Revenues
Peoples primarily derives its revenues from coin and non-coin calls. Coin
revenue is generated exclusively from calls made by depositing coins in
Peoples' payphones. Coin revenue decreased 1.2% to $76.4 million in 1997 as
compared to 1996. Peoples' average installed payphone base was 39,237 phones
and 38,354 phones for the years ended December 31, 1997 and 1996,
respectively. Coin revenue on a per phone basis decreased by approximately
3.4% for the year ended December 31, 1997, as compared to 1996. Peoples
believes that this decrease can be attributed to a shift in call mix,
particularly away from coin and operator assisted long-distance traffic to
dial-around calls. Also, the decline was magnified by a temporary increase in
the number of local and long-distance coin calls in 1996 resulting from the
implementation and promotion of new calling programs during the spring and
summer months of 1996. Coin revenue decreased by 1.2% to approximately $77.4
million in 1996 as compared to $78.4 million in 1995. Although Peoples'
installed payphone base decreased to an average of 38,354 phones in 1996
compared to 39,197 phones in 1995, coin revenue on a per phone basis remained
relatively consistent between 1996 and 1995.
122
<PAGE>
Peoples believes that the number of coin calls made at its payphones may
remain flat or decrease over time. Peoples believes that, among other things,
the decrease will primarily result from the increased usage of alternative
methods of calling such as prepaid calling cards and wireless technologies and
the operation of more payphones in closer proximity to Peoples' telephones.
Peoples also believes that these decreases may be offset, over time, by
increases in local coin call rates as a result of recent regulatory changes,
although there can be no assurances. Effective October 7, 1997, the FCC
deregulated local coin rates. See "Regulatory Matters". During the fourth
quarter of 1997, Peoples increased the local call rate from $0.25 to $0.35 on
approximately 50% of its payphones. An additional 35% were converted in
January, 1998. Since implementing these local coin call increases, Peoples has
experienced a reduction in the number of coin calls on average from its
payphones.
Non-coin operator services revenue is derived from calling card calls,
credit card calls, collect calls and third-party billed calls placed from
Peoples' payphones. During the second quarter of 1995, Peoples signed a
contract with AT&T to act as its primary national OSP. Prior to the execution
of this agreement, non-coin calls were routed through Peoples' private label
OSP. Peoples used its private label operator service or a third-party operator
service provider based on which service Peoples believed netted it the highest
gross margin from the call. Peoples recorded as revenue the total amount the
end user paid for the call (net of taxes) when the call was completed through
Peoples' private label operator service. In contrast, when the call is
completed through a third-party OSP, Peoples records as revenue the amount it
receives from the third-party OSP which represents a negotiated percentage of
the total amount the caller pays for the call.
In May 1996, AT&T began paying a specified per call amount for interLATA
(800) dial-around calls as opposed to a percentage of the revenue generated by
those calls. Peoples estimates that the reduction in non-coin revenue from the
change in the compensation structure under the AT&T contract was approximately
$3.7 million for the year ended December 31, 1996. During 1997, Peoples signed
new contracts with AT&T and Sprint to provide operator services on terms
favorable to Peoples. In addition to the change in compensation under the AT&T
contract, Peoples is continuing to experience a shift in call traffic from
0+/0- calls, for which Peoples receives a commission percentage of the revenue
generated by those calls, to dial-around calls for which Peoples receives
dial-around compensation. Due to aggressive advertising campaigns by long-
distance companies promoting the use of dial-around calls, Peoples believes
that the decrease in non-coin primary operator services revenue is likely to
continue. Peoples believes that this decrease in revenues should be largely
offset by changes in the amount of dial-around compensation received by
Peoples, as required under the FCC rulings, and continued favorable contract
terms with its primary carrier, although there can be no assurances. See
"Regulatory Matters".
Dial-around compensation is included in non-coin revenue and is compensation
paid to Peoples for the use of its payphones to access operator services
providers other than the service provider selected by Peoples and to originate
subscriber calls. Under the terms of the 1996 Payphone Order, Peoples recorded
dial-around compensation at $45.85 ($0.35 multiplied by an assumed 131 calls)
per month per phone for the period from November 7, 1996 through June 30,
1997. See "Dial-Around Compensation" and "Provision for Dial-Around
Compensation Adjustment" for further information. The FCC, in its 1997
Payphone Order, established a rate of $0.284 per call for dial-around
compensation for the two-year period from October 7, 1997 through October 6,
1999. From July 1, 1997 through October 6, 1997, Peoples has recorded dial-
around compensation at $37.20 per payphone per month ($0.284 multiplied by an
assumed 131 calls). From October 7, 1997 through December 31, 1997, Peoples
has based its compensation on an estimated number of calls (131) per payphone
per month because actual call counts from the IXCs are not available until
later in 1998. From October 7, 1997 forward, this amount may be adjusted for
actual call counts provided by the IXCs. See "Regulatory Matters".
Revenue from non-coin calls increased by 20.8% to $35.8 million in 1997,
compared to 1996. The increase was primarily attributable to the increased
dial-around compensation, offset by the decline in operator assisted calls.
Non-coin revenue decreased by approximately 12.6% to $29.6 million in 1996 as
compared to 1995. This decrease is primarily attributable to: (i) the method
of recording revenue for certain non-coin calls as a result of the change to
AT&T as Peoples' primary national operator service provider as described
above; and (ii) the change in Peoples' compensation structure under the AT&T
contract.
123
<PAGE>
Operating Expenses
Operating expenses include telephone charges, commissions, field service and
collection expenses and selling, general and administrative expenses.
Telephone charges consist of local line charges paid to LECs which include
costs of basic service and transport of local coin calls, long-distance
transmission charges and network costs and billing, collection and validation
costs. Commissions represent payments to Location Owners for revenues
generated by payphones located on their properties. Field service and
collection expenses represent the costs of servicing and maintaining the
payphones on an ongoing basis, costs of collecting coins from the payphones
and other related operational costs. Selling, general and administrative
expenses primarily consist of payroll and related costs, legal and other
professional fees, promotion and advertising expenses, property, gross receipt
and certain other taxes, corporate travel and entertainment and various other
expenses.
Telephone charges decreased as a percentage of total revenues to 26.1% for
the year ended December 31, 1997, compared to 28.1% for the same period in
1996 and 31.7% for the same period in 1995. Peoples has experienced decreased
telephone charges as a result of regulatory changes and emerging competition
within the local/intraLATA service markets. In addition, the decrease in
telephone charges can be partially attributed to a decline in the number of
calls placed through Peoples' private label operator service program. Peoples
paid the costs incurred to transmit, bill, collect and validate the call when
the call was completed through its private label operator services. Peoples
incurred no such costs when a third-party operator service provider such as
AT&T or Sprint completed the call.
Commissions expense remained relatively consistent as a percentage of total
revenues in 1997 compared with 1996. However, during the third quarter of
1997, Peoples renegotiated its contract terms under a joint venture with AT&T
for providing payphones at Atlanta's Hartsfield International Airport and
recorded other adjustments which in total reduced commissions expense by
approximately $2.0 million. Excluding these adjustments, commissions expense
as a percent of total revenues would have been 28.2% in 1997 compared to 26.4%
in 1996. This increase in commissions as a percentage of revenues from 1996 to
1997 as well as in 1996 as compared to 1995 was primarily attributable to: (i)
higher commission rates for new and renewed contracts due to increasing
competition in the payphone markets; and (ii) the reduced revenue base due to
the method of recording revenue for certain non-coin calls as a result of the
change to AT&T and Sprint as Peoples' primary national operator service
providers. Additionally, Peoples adjusted commissions expense in the third
quarter of 1997 by approximately $0.5 million as part of the provision for
dial-around compensation adjustment discussed more fully below.
Field service and collection expenses as a percentage of revenues decreased
slightly in 1997 as compared to 1996 and 1996 as compared to 1995. Peoples has
been able to realize economies of scale and improve operating efficiencies
from its field service operation. Peoples currently expects that field service
and collection expenses will remain relatively constant or may decrease
slightly over the next twelve months, on a per payphone per month basis, but
no assurances can be given.
Selling, general and administrative expenses remained relatively consistent
at approximately 11.6% and 11.7% as a percentage of revenues for the years
ended December 31, 1997 and 1996, respectively, compared to 9.9% in 1995. The
increase from 1995 to 1996 and 1997 relates primarily to settlements of
employment agreements with former executives, increases in insurance premiums
and the salaries associated with the hiring of an internal sales force.
Depreciation and Amortization
Depreciation is based on the cost of the telephones, booths, pedestals and
other enclosures, related installation costs and line interconnection charges
and is calculated on a straight-line method using a ten-year useful life for
payphone equipment. Amortization is primarily based on acquisition costs,
including location contracts, goodwill, non-competition provisions, signing
bonuses and sales commissions, and is calculated on a straight-line method
using estimated useful lives ranging from three to twenty years. Depreciation
and amortization increased to $21.3 million in 1997 from $20.5 million in 1996
and $19.2 million in 1995. The increases in depreciation and amortization are
primarily attributable to amortization expense related to the cost of
acquiring and renewing location contracts.
124
<PAGE>
Provision for Dial-Around Compensation Adjustment
Based on the FCC's tentative conclusion in the 1997 Payphone Order, Peoples
has 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 per payphone per month to $37.20 per payphone per month ($0.284
per call multiplied by an assumed 131 calls). See "Regulatory Matters." As a
result of this adjustment, the Company recorded a net provision in the third
quarter of 1997 for reduced dial-around compensation of approximately $2.1
million ($0.13 per share), consisting of a reduction in non-coin revenue of
approximately $2.6 million and a reduction in commissions expense of
approximately $0.5 million. For the period from July 1, 1997 through October
6, 1997, Peoples has recorded dial-around compensation at the rate of $37.20
per payphone per month. The amount of dial-around compensation recognized in
the period from July 1, 1997 through October 6, 1997 is approximately $4.7
million and such amount will be billed after final resolution of the
allocation obligations of the IXCs as determined by the FCC. A future order
from the FCC to resolve the issue of allocation of compensation obligations
among the carriers is expected during the first six months of 1999.
Peoples is of the opinion that it is legally entitled to fair compensation
under the Telecommunications Act for dial-around calls Peoples delivered to
any carrier during the period from November 7, 1996 through October 6, 1997.
Based on the information available, Peoples believes that the minimum amount
it is entitled to as fair compensation under the Telecommunications Act for
the period from November 7, 1996 through October 6, 1997 is $37.20 per
payphone per month and Peoples, based on the information available to it, does
not believe that it is reasonably possible that the amount will be materially
less than $37.20 per payphone per month. The foregoing sentence constitutes a
forward-looking statement within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. While the amount of $0.284 per call
constitutes Peoples' position on the minimum appropriate level of fair
compensation, certain IXCs have challenged this rate level, asserting that
appropriate level of fair compensation should be lower than $0.284 per call.
For further information, see "Regulatory Matters."
Other Operating (Income) Expense
Other income for the year ended December 31, 1996 consists of amounts
received in connection with the settlement of outstanding litigation. In 1995,
other expenses included approximately $0.9 million incurred in connection with
the settlement of a lawsuit brought by two shareholders against Peoples,
approximately $0.6 million of losses for Peoples' equity interest in an
unconsolidated affiliate, approximately $1.4 million for the settlement of an
employment contract with a former officer and approximately $3.2 million of
reserves for potentially uncollectible loans receivable from certain officers
(see Note 18 to the audited consolidated financial statements of Peoples
included elsewhere herein).
Operating Loss
Operating losses for the years ended December 31, 1997, 1996 and 1995 were
approximately $(0.7) million, $(1.9) million and $(8.5) million, respectively.
Interest
Interest expense increased approximately $0.2 million to $13.1 million in
1997 as compared to 1996. Interest expense in 1995 was approximately $10.4
million. The increase in 1996 is primarily attributable to the higher interest
rate on the $100.0 million of Peoples Notes as compared with the rates in
effect on Peoples' line of credit outstanding for the first half of 1995.
(Gain) Loss on Disposal of Prepaid Calling Card and International Telephone
Centers
The year ended December 31, 1996 includes gains on disposal of approximately
$0.3 million received in connection with the sale of Peoples' international
telephone center operations and approximately $0.3 million recognized in
connection with the merger of Global Link Telco Corporation and Global
Telecommunications
Solutions, Inc. (See Note 16 to the audited consolidated financial statements
of Peoples included elsewhere herein.)
125
<PAGE>
In 1995, loss on disposal of prepaid calling card and international
telephone centers includes the write-off of approximately $1.1 million of
accounts receivable related to Peoples' prepaid calling card business offset
by $0.5 million received in connection with Peoples' sale of its international
telephone center operations.
Benefit from Income Taxes
Since the second quarter of 1995, Peoples has recorded valuation allowances
for 100% of the deferred tax assets generated from operating losses. Peoples
records valuation allowances for deferred tax assets which may not be realized
in future periods. As a result, Peoples' benefit from income taxes decreased
approximately $0.2 million from 1995 to 1996. Peoples recorded deferred tax
asset valuation allowances for continuing operations of approximately $3.3
million, $3.0 million and $12.0 million during 1997, 1996 and 1995,
respectively.
Net (Loss) Income from Continuing Operations Before Extraordinary Item
Peoples had a net loss from continuing operations before extraordinary item
of approximately $13.8 million in 1997 compared to $14.3 million in 1996 and
$19.2 million in 1995.
Extraordinary Loss
As a result of debt modifications during 1995, Peoples recorded an
extraordinary loss of approximately $5.0 million, before the related income
tax benefit of approximately $1.7 million, from the write-off of deferred
financing costs associated with the early extinguishment of debt. There were
no such transactions in 1997 or 1996.
Discontinued Operations
On November 13, 1995, Peoples sold its cellular telephone operations to STC
for approximately $6.0 million. The assets were sold for $0.3 million in cash,
a $2.0 million promissory note bearing interest at 8.0% with principal and
interest payable semiannually through 2000, shares of STC common stock and
payment of approximately $1.2 million of liabilities of Peoples' cellular
telephone operations by STC. This transaction resulted in a loss of
approximately $14.6 million which was recorded as a loss on disposal in the
accompanying statements of operations for the year ended December 31, 1995.
(See Note 17 to the audited consolidated financial statements of Peoples
included elsewhere herein.) Income of $0.3 million was recorded in 1997 with
respect to a payment on the promissory note which had been fully reserved.
During the third quarter of 1995, Peoples sold a portion of its inmate
telephone business for approximately $1.7 million. Impairment losses of
approximately $0.3 million and a net loss on the sale of these inmate
telephone operations of approximately $0.4 million are included in the loss
from discontinued operations in the accompanying 1995 Consolidated Statements
of Operations.
On December 19, 1997, Peoples 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 a net income of approximately $1.8
million from the discontinued inmate division in 1997.
THREE AND NINE MONTHS ENDING SEPTEMBER 30, 1998 AND 1997
Revenues
Coin revenue represented approximately 67.9% and 74.9% of total revenues for
the quarters ended September 30, 1998 and 1997, respectively, and 68.7% and
67.9% of total revenues for the nine months ended September 30, 1998 and 1997,
respectively. Coin revenue decreased 0.5% to $19.7 million during the quarter
ended September 30, 1998, and increased approximately 3.8% to $59.2 million
for the nine months ended
126
<PAGE>
September 30, 1998, as compared to the same periods in 1997. Peoples' average
installed payphone base was approximately 42,800 phones and 39,000 phones for
the nine month periods ended September 30, 1998 and 1997, respectively. Coin
revenue on a per phone basis decreased by 8.4% and 5.4% for the quarter and
the nine months ended September 30, 1998, respectively, as compared to the
same periods in 1997. The decrease in coin revenue on a per phone basis is
primarily attributable to the higher than expected call suppression resulting
from the implementation of higher market-based local calling rates following
local coin rate deregulation. Peoples believes that the decrease is the result
of, among other things, the increased usage of alternative methods of calling
such as prepaid calling cards and wireless technologies and the operation of
more payphones in close proximity to the Peoples' telephones.
Additional one-time non-coin revenue of approximately $0.4 million was
recorded in the third quarter of 1998, primarily from Peoples' joint venture
which provides payphones at Atlanta's Hartsfield International Airport. This
additional revenue is related to joint venture payphones not previously
included in the joint venture reporting system.
Non-coin revenue represented approximately 32.1% and 25.1% of total revenues
for the quarters ended September 30, 1998 and 1997, respectively, and
approximately 31.3% and 32.1% for the nine months ended September 30, 1998 and
1997, respectively. For the quarter ended September 30, 1998, revenues from
non-coin calls increased 40.4%, to approximately $9.3 million, compared to the
quarter ended September 30, 1997. This increase was primarily attributable to
the Provision for Dial-Around Compensation Adjustment recorded during the
third quarter of 1997 and the increased revenue from the Atlanta Hartsfield
joint venture in the third quarter of 1998, as noted above. For the nine
months ended September 30, 1998 and 1997, non-coin revenues increased 0.4%, to
approximately $27.0 million, compared to the nine months ended September 30,
1997, primarily due to the increased revenue from the Atlanta Hartsfield joint
venture and the increased number of payphones from the Indiana Telcom
acquisition, offset by the lower revenue received by Peoples for operator
service calls.
Effective July 1, 1998, new FCC rules regarding Billed Party Preference
require payphone operators to give payphone users the option of receiving a
rate quote before a call is connected when making a O+ interstate call. These
rules could reduce revenues earned by Peoples on long-distance calls placed
from payphones by encouraging more consumers to dial around the OSP utilized
by Peoples. Peoples cannot currently assess what impact the new rules will
have on its financial performance.
Peoples has continued to experience a shift in call traffic from operator
service calls, for which Peoples receives a percentage of the revenue
generated by those calls, to access code calls for which Peoples receives a
flat rate per phone or per call dial-around compensation amount. Due to
aggressive advertising campaigns by long-distance companies promoting the use
of access code calls, Peoples believes that the decrease in non-coin revenue
due to the changes in call traffic patterns is likely to continue. Subject to
possible changes resulting from the FCC's response to the Court's decision on
the 1997 Payphone Order, these decreases in non-coin revenue are currently
being offset to some extent by changes in the amount of compensation due to
Peoples for access code calls as well as (800) subscriber calls, as required
under the 1997 Payphone Order. The 1997 Payphone Order mandates dial-around
compensation to payphone providers for both types of calls at a rate of $0.284
per call beginning October 7, 1997.
For the period from November 7, 1996 through October 6, 1997, Peoples has
collected approximately $10.1 million from carriers for dial-around
compensation. At September 30, 1998, Peoples' accounts receivable include
approximately $6.3 million of accrued revenue for dial-around compensation
from this period which should be collected after final resolution of the
allocation obligation of the IXCs as determined by the FCC. See "Regulatory
Matters" and "--Provision for Dial-Around Compensation Adjustment" for a more
complete discussion.
Operating Expenses
Total operating expenses were approximately 80.7% and 83.5% of total
revenues for the quarters ended September 30, 1998 and 1997, respectively. For
the nine months ended September 30, 1998, total operating expenses were 81.7%
of total revenue as compared to 80.9% for the same period in 1997.
127
<PAGE>
Telephone charges decreased as a percentage of total revenues to 23.7% for
the quarter ended September 30, 1998, compared to 28.3% for the same period in
1997. For the nine months ended September 30, 1998 and 1997, telephone charges
were 24.4% and 26.5% of total revenues, respectively. Peoples continues to
experience decreased telephone charges as a result of regulatory changes and
competition within the local/intraLATA service market.
Commissions as a percentage of total revenues for the three months ended
September 30, 1998 increased to approximately 28.4% as compared to 22.8% for
the same period of the prior year. The increase in commissions as a percentage
of revenues for the three months was primarily attributable to an adjustment
recorded in the third quarter of 1997 as a result of the renegotiation of a
lower commission percentage during the contract term under a joint venture
with AT&T for providing pay telephones at Atlanta's Hartsfield International
Airport and other adjustments, totaling approximately $1.5 million. For the
nine months ended September 30, 1998 and 1997, commissions were approximately
28.4% and 25.7% of total revenues, respectively, again increasing primarily
because of the same adjustment noted above for the three month period.
Field service and collection expenses as a percentage of total revenues were
18.5% and 18.8% for the third quarters of 1998 and 1997, respectively, and
18.5% and 17.4% for the nine months ended September 30, 1998 and 1997,
respectively. Field service and collection expenses decreased as a percentage
of revenue for the three months due to the revenue adjustment as part of the
Provision for Dial-Around Compensation Adjustment. Field service and
collection expenses increased as a percent of revenue for the nine months
primarily as a result of the increased number of phones coupled with the
decrease in revenue per phone, as discussed above. Field service and
collection expenses increased approximately 8.1%, to approximately $5.4
million for the third quarter of 1998, as compared to the same period in 1997
and approximately 9.0%, to approximately $15.9 million for the nine months
ended September 30, 1998, as compared to the same period in 1997, due to the
increase in the average number of phones.
Selling, general and administrative expenses decreased approximately $0.7
million for the third quarter of 1998 to approximately $2.9 million, as
compared to the same period in 1997. This decrease was primarily attributable
to additional costs in 1997 associated with legal and regulatory work
performed pertaining to the 1997 Payphone Order and the settlement of an
employment contract with a former executive. Additionally, Peoples received
approximately $0.3 million as payment of a loan from a former director, which
had previously been fully reserved by Peoples.
Depreciation and Amortization
Depreciation and amortization increased to $5.5 million for the quarter
ended September 30, 1998, compared to $5.4 million for the same period in
1997. For the nine months ended September 30, 1998 and 1997, depreciation and
amortization expense was approximately $16.6 million and $16.0 million,
respectively. These increases are primarily attributable to additional
depreciation and amortization expenses related to the Indiana Telcom
acquisition and to the renewal costs of location contracts.
Interest Expense
For the third quarter of 1998, net interest expense was approximately $3.2
million, which was the same as interest expense in the same quarter in 1997.
For the first nine months of 1998, net interest expense remained consistent
with net interest expense in the same period of 1997, at approximately $9.7
million and $9.8 million, respectively.
Benefit from Income Taxes
Peoples recorded deferred tax assets and deferred tax asset valuation
allowances of approximately $1.2 million and $4.0 million for the three and
nine months ended September 30, 1998.
128
<PAGE>
Net Loss
Net loss for the three months ended September 30, 1998 was approximately
$3.1 million as compared to $4.9 million for the third quarter of 1997. For
the nine months ended September 30, 1998 and 1997, Peoples had net losses of
approximately $10.6 million and $11.8 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1997, Peoples financed its operations
primarily from operating cash flow. Peoples' operating cash flow was $7.0
million in 1997 compared to $6.0 million in 1996 and $12.0 million in 1995.
Peoples' working capital was approximately $11.0 million, with a current
ratio of 1.34 to 1, at December 31, 1997. This is compared to working capital
of $6.0 million and a current ratio of 1.21 to 1 at December 31, 1996. The
change in Peoples' working capital is primarily a result of increases in
certain accounts receivable balances related to dial-around compensation and
other non-coin revenues.
Peoples' primary sources of financing are the Peoples Notes and the Peoples
Series C Preferred Stock issued in July, 1995. At that date, Peoples also
entered into the $40.0 million New Peoples Credit Facility. Proceeds from the
sale of the Peoples Notes, together with the proceeds from the sale of the
Preferred Stock, were used to repay the prior credit facility and various
other obligations of Peoples.
During April 1996, Peoples amended the New Peoples Credit Facility reducing
the availability to $10.0 million, and amended the financial covenants, among
other things. In March 1997, Peoples executed a third amendment to the New
Peoples Credit Facility with Creditanstalt increasing the amount available to
$20.0 million and modifying certain of the financial covenants. In June, 1998,
Peoples executed a fourth amendment to the New Peoples Credit Facility
modifying certain of the financial covenants. All outstanding balances are due
in full in 2000, and interest is payable monthly for loans based on the prime
rate and quarterly for loans based on the LIBOR rate. As of September 30,
1998, Peoples was in compliance with the financial covenants and had no
amounts borrowed under the New Peoples Credit Facility.
In March 1997, Peoples' shareholders approved an increase to the number of
authorized shares of Peoples' Common Stock to 75 million shares.
During the first nine months of 1998, Peoples continued to finance its
operations from current and prior period operating cash flow. For the nine
months ended September 30, 1998, People's operating cash flow was $0.6 million
compared to $1.9 million for the same period in 1997, due primarily to
increases in accounts receivable and other assets (primarily costs related to
the Transaction), offset to some extent by a reduced net loss and increased
depreciation. Accounts receivable, primarily due from carriers for dial-around
compensation, increased during the nine months ended September 30, 1998,
primarily due to payment delays as carriers implemented new payment systems
for per-call compensation under the FCC's dial-around compensation orders.
Subsequent to September 30, Peoples has received approximately $5.1 million in
dial-around compensation payments from various carriers primarily with respect
to obligations from the first and second quarters of 1998.
Peoples' net working capital was approximately $(0.3) million, with a
current ratio of 0.99 to 1.0, at September 30, 1998. This compares with a net
working capital of $11.0 million at December 31, 1997. Peoples used $11.3
million of cash in January 1998 to acquire the assets of Indiana Telcom
Corporation, Inc.
Under terms of Peoples' Series C Preferred Stock agreement, the Peoples
Series C Preferred Stock cumulates dividends at an annual rate of 7%. The
dividends are payable in cash, or, at Peoples' option during the first three
years, will cumulate. Peoples' indenture agreement for the Peoples Notes
allows cash payment of these dividends only in the event that Peoples' fixed
charge coverage ratio exceeds a certain value. As of September 30, 1998, the
fixed charge coverage ratio did not exceed that value. As a result, and as
permitted under the preferred stock agreement, these dividends will continue
to cumulate, until People's fixed charge coverage ratio exceeds the required
value.
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Based upon current expectations, Peoples believes that cash flow from
operations, together with amounts which may be borrowed under the New Peoples
Credit Facility, will be adequate for it to meet its working capital
requirements, pursue its business strategy and service its obligations with
respect to the Peoples Notes through December 31, 1999, although there can be
no assurance that it will be able to do so. The preceding forward-looking
information is subject to a variety of factors and uncertainties, including
the impact of competition on People's operations, the ultimate implementation
and effect of the Telecommunications Act, the collectibility of amounts owed
for dial-around compensation and the ongoing ability of Peoples to deploy its
phones in favorable locations and to continue to implement operational
improvements.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs using two digits
rather than four to define the applicable year. Any of Peoples' computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system
failure, disruption of operations, and/or a temporary inability to conduct
normal business activities.
Peoples' Year 2000 project is broken into seven major sub-projects,
including: 1) Telecommunications Equipment, 2) Computer Equipment, 3)
Software, 4) Databases, 5) Data Services, 6) Network Infrastructure, and 7)
Telephone Equipment. Each sub-project is divided into 4 phases: a)
Analysis/Assessment, b) Plan Development, c) Implementation, and d) Testing.
As each phase and sub-project is completed, project progress will be tracked
against planned targets, and resource adjustments made as necessary. Two
subprojects, Telecommunications Equipment and Software, began in the third
quarter of 1998. The remaining sub-projects will all be underway by the fourth
quarter of 1998. The project is estimated to be complete by August of 1999,
which is prior to any anticipated impact on Peoples' operating systems.
Peoples believes that with modifications to existing software, conversions to
new software and replacement or modification of certain embedded systems, the
Year 2000 issue will not pose significant operational problems. However, if
such modifications and conversions are not made, or are not completed on a
timely basis, the Year 2000 issue would have a material adverse impact on
Peoples' business, financial condition and results of operations. In addition,
formal communications with all significant suppliers and customers have been
initiated to determine the extent to which related interfaces with Peoples'
systems are vulnerable if these third parties fail to remediate their own Year
2000 Issues. There can be no assurance that these third parties' systems will
be converted on a timely basis and will not adversely affect Peoples' systems.
Peoples has completed the initial assessment of the Year 2000 issue with
respect to internal business systems, and believes that it has secured
sufficient resources to implement new and modified computer systems to address
the issue. As a result, Peoples has not identified a need for contingency
planning with respect to those systems at this time. The assessment of
embedded systems is nearing completion and, due to the manageable quantity of
embedded devices encountered in Peoples' facilities, Peoples does not believe
that findings in this assessment warrant contingency planning at this time.
The assessment of third parties external to Peoples is underway, and may
reveal the need for contingency planning based on the progress and findings of
the Year 2000 project.
Peoples will utilize both internal and external resources to complete and
test the Year 2000 project. At the present time, the total estimated cost of
this project is in a range of $0.5 million to $1.0 million and is being funded
through operating cash flows. Approximately 20% of the total will relate to
purchased software and hardware and will be capitalized. The remainder will be
expensed as incurred. Through September 30, 1998, Peoples has incurred costs
of approximately $0.1 million. Project costs and the targeted completion date
are based on management's best estimates, which were derived utilizing
numerous assumptions of future events, including the continued availability of
certain resources, the ability to locate and correct all relevant computer
codes, third party modification plans and other factors. There can be no
assurance these estimates will be achieved or that the actual results will not
differ materially from those anticipated.
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PEOPLES PRINCIPAL SHAREHOLDERS
The following table sets forth certain information concerning the beneficial
ownership of Peoples Common Stock as of November 11, 1998 (except as otherwise
indicated) by (i) each person known by Peoples to beneficially own more than
five percent of the outstanding Peoples Common Stock, (ii) each current
director, (iii) the Named Executive Officers and (iv) all directors and
executive officers of Peoples, as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL PERCENT
NAME OF BENEFICIAL OWNER OWNERSHIP(1) OF CLASS(2)
- ------------------------ -------------------- -----------
<S> <C> <C>
Charles J. Delaney............................ 0(13) *
Robert E. Lund................................ 116,350(3) *
Jody Frank.................................... 233,262(4) 1.43%
Justin S. Maccarone........................... 0(13) *
E. Craig Sanders.............................. 600,000(5) 3.57%
Lawrence T. Ellman............................ 52,500(6) *
Bruce W. Renard............................... 87,500(7) *
C. Keith Pressley............................. 9,500(8) *
Neil N. Snyder, III........................... 133,332(9) *
All directors and executive officers as a 1,316,444(10) 7.58%
group (11 persons)...........................
Creditanstalt American Corp................... 850,000(11) 5.03%
245 Park Avenue
New York, New York 10167
Heartland Advisors, Inc....................... 3,847,400(12) 23.73%
790 N. Milwaukee Street
Milwaukee, Wisconsin 53202
UBS Capital II LLC............................ 2,930,893(13) 15.31%
299 Park Avenue
New York, New York 10171
Vanguard Explorer Fund, Inc................... 1,540,300(14) 9.50%
P.O. Box 2600, VM #V34
Valley Forge, PA 19482
Goldman Sachs Group LP........................ 1,652,000(15) 10.19%
85 Broad Street
New York, New York 10004
ING Baring (U.S.) Capital Corporation......... 1,249,800(16) 7.71%
667 Madison Avenue
New York, NY 10021
Strong Capital Management, Inc................ 1,826,475(17) 11.27%
100 Heritage Reserve
Menomonee Falls,WI 53051
</TABLE>
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- --------
* Less than one percent.
(1) Includes shares of Common Stock issuable upon the exercise of stock
options, which are exercisable within 60 days of November 11, 1998. Except
as otherwise indicated, the persons named in the table have sole voting
and investment power with respect to the shares shown as beneficially
owned by them.
(2) Each beneficial owner's percentage ownership is determined by assuming
that convertible securities, options or warrants that are held by such
person (but not those held by any other person) and which are exercisable
within 60 days of the date of this Proxy Statement have been exercised.
(3) Includes 105,000 shares subject to options.
(4) Includes 85,000 shares subject to options and 3,812 shares owned by Jody
Frank as custodian for Aaron Frank, Rebekah Frank and Lucy Frank, Mr.
Frank's minor children.
(5) Includes 600,000 shares subject to options.
(6) Includes 52,500 shares subject to options.
(7) Includes 87,500 shares subject to options.
(8) Includes 9,500 shares subject to options.
(9) Includes 133,332 shares subject to options.
(10) Includes all of the shares subject to options in footnotes 3-9 above.
(11) Includes 700,000 shares subject to exercisable warrants.
(12) Based on a Schedule 13G filed as of August 10, 1998 by Heartland
Advisors, Inc. Heartland Advisors, Inc. reports that it has sole voting
power over 2,062,500 of these shares. Peoples has not independently
verified this information.
(13) Includes 70,000 shares subject to options held for the benefit of UBS
Capital by current directors Charles J. Delaney and Justin S. Maccarone,
2,857,143 shares issuable upon conversion of 150,000 shares of Preferred
Stock currently outstanding owned by UBS Capital (a wholly owned
subsidiary of Union Bank of Switzerland), and 3,750 shares held by UBS AG
(which owns 100% of UBS Capital Holding LLC, the parent company of UBS
Capital) of which it has both voting and dispositive power for 750 shares
and voting power only for 2,000 shares.
(14) Based on a Schedule 13G filed as of February 9, 1998 by Vanguard Explorer
Fund, Inc. ("Vanguard"). Vanguard reports that it has sole voting power
over all of the reported shares. Peoples has not independently verified
this information. A Schedule 13G filed as of February 11, 1998 by
Wellington Management Company, LLP ("WMC") reported that Vanguard had the
"right to receive, or the power to direct the receipt of, dividends from,
or the proceeds from the sale of," more than 5% of the shares of Peoples
Common Stock reported as beneficially owned by WMC. WMC has subsequently
filed a Schedule 13G/A dated as of July 31, 1998 which reports that it no
longer beneficially owns any shares of Peoples Common Stock. As of
November 11, 1998, Vanguard had not filed a Schedule 13G/A reporting any
changes in its holdings of Peoples Common Stock.
(15) Based on a Schedule 13G filed as of May 11, 1998 by Goldman Sachs Group
LP. Goldman Sachs Group LP reports that it has sole voting power over
none of the reported shares and shared voting power over 1,262,500 of the
reported shares. Peoples has not independently verified this information.
(16) Based on a Schedule 13G filed as of July 6, 1998 by ING Baring (U.S.)
Capital Corporation. ING Baring (U.S.) Capital Corporation reports that
it has sole voting power over all of the reported shares. Peoples has not
independently verified this information
(17) Based on a Schedule 13G filed as of July 31, 1998 by Strong Capital
Management, Inc. ("Strong"). Strong reports that it has sole voting power
over 774,725 of these shares. Peoples has not independently verified this
information.
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DESCRIPTION OF CAPITAL STOCK OF PEOPLES
Peoples is authorized to issue 75,000,000 shares of Peoples Common Stock and
5,000,000 shares of Peoples Preferred Stock, of which 600,000 shares have been
designated as Series B Preferred Stock and 160,000 shares have been designated
as Peoples Series C Preferred Stock. As of the Peoples Record Date, there were
16,212,935 shares of Peoples Common Stock, no shares of Series B Preferred
Stock and 150,000 shares of Peoples Series C Preferred Stock outstanding. The
following description is qualified in its entirety by reference to the Peoples
Certificate and Peoples Bylaws, which are incorporated herein by reference.
PEOPLES COMMON STOCK
The holders of Peoples Common Stock have one vote per share for the election
of directors, without provision for cumulative voting, and on all other
matters. The outstanding shares of Peoples Common Stock are fully paid and
non-assessable. The Peoples Common Stock is not redeemable and has no
conversion or preemptive rights. In the event of liquidation of Peoples,
subject to the rights of the holders of Peoples' Series B Preferred Stock,
Peoples Series C Preferred Stock and any other series of Peoples Preferred
Stock, the holders of the Peoples Common Stock will share equally in the
balance of the corporate assets available for distribution to them.
SERIES B PREFERRED STOCK
In 1990, Peoples authorized 600,000 shares of Series B Preferred Stock which
are issuable only pursuant to the exercise of outstanding warrants held by
Creditanstalt American Corporation. Dividends and distributions on the Series
B Preferred Stock are to be paid on a parity with Peoples Common Stock, as
though the Series B Preferred Stock and the Peoples Common Stock were one and
the same class, provided that in determining the number of shares of Series B
Preferred Stock outstanding and entitled to receipt of any such dividend or
distribution, each share of Series B Preferred Stock outstanding shall be
deemed to be equal to the number of shares of Peoples Common Stock into which
one share of Series B Preferred Stock could have been converted on the date of
such dividend or distribution pursuant to the conversion provisions of the
Series B Preferred Stock described below. The Series B Preferred Stock is
nonredeemable by Peoples and does not have any voting rights other than those
specifically provided by New York law. The Series B Preferred Stock ranks
prior to the Peoples Common Stock upon liquidation and has a liquidation value
of one cent ($.01) per share, provided that, after payment on all amounts due
to any stock ranking prior to the Peoples Common Stock as to rights and
preferences on dissolution or liquidation, in addition to this liquidation
value, the Series B Preferred Stock shall also be paid from the remaining net
assets of Peoples equally and ratably with the holders of the Peoples Common
Stock as though the Peoples Common Stock and the Series B Preferred Stock were
one and the same class, provided that in determining the number of shares of
Series B Preferred Stock outstanding and entitled to receipt of any such
payment, each share of Series B Preferred Stock outstanding shall be deemed to
be equal to the number of shares of Peoples Common Stock into which one share
of Series B Preferred Stock could have been converted on the date of such
payment pursuant to the conversion provisions of the Series B Preferred Stock
described below.
Each share of the Series B Preferred Stock is convertible, at the option of
the holders, into one fully paid and nonassessable share of Peoples Common
Stock, subject to certain antidilution adjustments, provided, however, that a
holder thereof shall not have the right to convert the shares of Series B
Preferred Stock held by it if the Peoples Common Stock to be received upon
conversion would, when aggregated with the shares of Peoples Common Stock then
beneficially owned by such holder and its affiliates, exceed 4.99% of the
outstanding Peoples Common Stock, unless (i) if the holder is subject to the
Bank Holding Act, there is available authority under the Bank Holding Act for
the holder to acquire such 4.99%, or (ii) if the holder is not subject to the
Bank Holding Act, the holder obtained the Series B Preferred Stock (a) in a
transaction in which no individual or group would have acquired more than 2%
of the outstanding Peoples Common Stock if the Series B Preferred Stock so
acquired had been converted into Peoples Common Stock, or (b) in a widely
dispersed public offering.
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PEOPLES SERIES C PREFERRED STOCK
Peoples issued 150,000 shares of its Peoples Series C Preferred Stock to UBS
Capital in 1995. The Peoples Series C Preferred Stock cumulates dividends at
an annual rate of 7%, subject to increase up to 11% under certain
circumstances, including accelerations of indebtedness of Peoples and material
breaches of representations, warranties and covenants, which are payable in
cash or, at Peoples' option during the first three years after issuance, will
continue to cumulate. The Peoples Series C Preferred Stock is immediately
convertible, at the option of the holders, into approximately 2,857,143 shares
of Peoples Common Stock at a conversion price of $5.25 per share, subject to
reduction pursuant to antidilution adjustments in connection with, among other
things, certain issuances of shares of, or rights to acquire, Peoples Common
Stock at less than the Conversion Price of the Peoples Series C Preferred
Stock. The Peoples Series C Preferred Stock is subject to (i) mandatory
redemption by Peoples ten years after issuance or, subject to the prior
payment in full of Peoples' indebtedness under the New Peoples Credit Facility
and the Peoples Notes, in the event of certain bankruptcy or related events
relating to Peoples, (ii) redemption at Peoples' option, and (iii) upon the
occurrence of a change of control (as defined in the Indenture relating to the
Peoples Notes), redemption, at the option of the holders thereof, in all cases
at its liquidation preference ($15.0 million in the aggregate) plus accrued
and unpaid dividends.
The holders of the Peoples Series C Preferred Stock are entitled to elect
two members of the Board of Directors of Peoples, which is limited to a
maximum of six members. The Peoples Series C Preferred Stock is also entitled
to vote on all other matters submitted to the shareholders for a vote together
with the holders of the Peoples Common Stock voting as a single class with
each share of Peoples Series C Preferred Stock entitled to one vote for each
share of Peoples Common Stock issuable upon conversion.
In connection with the Peoples Series C Preferred Stock, Peoples has agreed
to certain affirmative and negative covenants with respect to the conduct of
its business, among other matters. For so long as 25% of the shares of Peoples
Series C Preferred Stock or the Peoples Common Stock into which such Peoples
Series C Preferred Stock is convertible remain outstanding and have not been
sold publicly, Peoples has agreed with UBS Capital and Appian to observe
certain negative covenants, including that Peoples will not:
(a) (i) amend its Certificate of Incorporation or bylaws in a way which
would adversely affect the rights of holders of the Peoples Series C
Preferred Stock or underlying Peoples Common Stock or subordinate the
rights of the holders of the Preferred Stock to the rights of other holders
of capital stock of Peoples; (ii) to the extent not prohibited by Peoples'
Amended and Restated Certificate of Incorporation, except in an
underwritten public offering, or issuances of Peoples Common Stock pursuant
to options, warrants and other rights outstanding on the date of the
Securities Purchase Agreement relating to the Peoples Series C Preferred
Stock or employee stock options, and issuances of Peoples Common Stock in
certain permitted acquisitions, sell capital stock of Peoples unless
holders of the Peoples Series C Preferred Stock, the underlying Peoples
Common Stock or the warrants to purchase Peoples Common Stock originally
issued to Appian are given the right to purchase such capital stock to
maintain such holders' percentage interest in Peoples Common Stock; or
(iii) effect a fundamental change, including (a) the sale or transfer of
more than 40% of the consolidated assets of Peoples and its subsidiaries
and (b) mergers and consolidations other than those in which the Peoples
Series C Preferred Stock is unaffected and the holders of the majority of
the voting power to elect the Board of Directors continue to own such
majority voting power unless such fundamental change provides that upon the
consummation thereof, Peoples shall have purchased all such shares of the
Peoples Series C Preferred Stock tendered to Peoples for purchase at a
price per share equal to its liquidation preference of $100 per share plus
accrued and unpaid dividends thereon pursuant to an offer to purchase given
to the holders of the Peoples Series C Preferred Stock not less than 15
days prior to the date such fundamental change is to be consummated; or
(b) without the approval of 75% of the members of the Board of Directors:
(i) engage in transactions with shareholders, directors, officers,
employees or defined affiliates which transactions would require disclosure
under Rule 404 of Regulation S-K under the Securities Act; (ii) issue (a)
debt securities which are convertible into Peoples Common Stock or with
equity features such as warrants unless such equity features meet certain
tests or (b) capital stock or other equity securities senior to or on a
parity with the
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Peoples Series C Preferred Stock or having a voting power equivalent to or
greater than one vote per share of Peoples Common Stock; (iii) merge or
consolidate or, except for certain permitted acquisitions or dispositions,
allow a subsidiary to merge or consolidate; (iv) sell, lease or otherwise
dispose of assets of Peoples or its subsidiaries involving consideration
greater than $5 million; (v) liquidate, dissolve or effect a
recapitalization or reorganization; (vi) acquire an interest in or assets
of any other company involving aggregate consideration greater than $5
million; (vii) own, manage or operate any business other than the domestic
payphone business; or (viii) hire, elect or replace Peoples' CEO,
President, Chief Financial Officer or Chief Operating Officer or change the
terms of employment or compensation thereof. Notwithstanding the foregoing,
Peoples may sell certain discontinued operations and enter into and borrow
under the New Credit Agreement.
So long as any shares of the Peoples Series C Preferred Stock remain
outstanding, without the prior consent of the holders of a majority of the
then outstanding shares of Peoples Series C Preferred Stock, Peoples is
prohibited from redeeming, purchasing or otherwise acquiring junior securities
(including Peoples Common Stock), paying or declaring any dividend or making
any distribution on any other capital stock of Peoples (other than dividends
payable solely in the securities in respect of which such dividends are paid).
See "The Merger Agreement--Voting Agreements" for a discussion of the voting
of the Peoples Series C Preferred Stock in connection with the Davel/Peoples
Merger.
TRANSFER AGENT
Peoples' Transfer Agent and Registrar is ChaseMellon Shareholder Services,
L.L.C.
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COMPARISON OF SHAREHOLDERS' RIGHTS
If the Transaction is completed, Old Davel shareholders and Peoples
shareholders will receive shares of New Davel Common Stock in exchange for
their shares of Old Davel Common Stock or Peoples Common Stock, as applicable.
The following is a summary of the material differences between the rights of
holders of New Davel Common Stock and the rights of holders of Old Davel
Common Stock or Peoples Common Stock. These differences arise in part from the
differences between the Delaware Law, the Illinois Law and the New York Law.
Additional differences arise from the governing instruments of the companies
(in the case of New Davel, the New Davel Certificate and the New Davel Bylaws;
and, in the case of Old Davel, the Old Davel Articles and the Old Davel
Bylaws; and, in the case of Peoples, the Peoples Certificate and the bylaws of
Peoples). Although it is impractical to compare all of the aspects in which
the Delaware Law, the Illinois Law and the New York Law and the companies'
governing instruments differ with respect to shareholders' rights, the
following discussion summarizes the material differences between them.
AMENDMENT OF CHARTER DOCUMENTS
New Davel. Unless the certificate of incorporation otherwise provides, the
Delaware Law requires approval by holders of a majority of the voting power of
New Davel Common Stock in order to amend the New Davel Certificate. The New
Davel Certificate does not provide otherwise.
Old Davel. Under the Illinois Law, most amendments to an Illinois
corporation's articles of incorporation require the recommendation of the
board of directors and, unless otherwise specified in the corporation's
articles of incorporation, the approval of shareholders holding two-thirds of
the voting power of the corporation (except in cases where class voting is
required, in which case, approval of two-thirds of the voting power of each
such class is required). Because the Old Davel Articles do not provide for a
different required vote, such amendments currently require the approval of the
holders of two-thirds of the outstanding Old Davel Common Stock.
Peoples. The New York Law requires that any amendment or change to the
certificate of incorporation, other than those relating to certain immaterial
procedural matters, requires the majority vote of both the board of directors
and the shareholders. In addition, the New York Law requires that any
amendment to the certificate of incorporation specifying a vote requirement
for the transaction of specified items of business, which vote requirement is
higher than that otherwise required by law, must be authorized by such greater
vote. There is no provision in the Peoples Certificate which provides for such
increased voting requirement.
AMENDMENT AND REPEAL OF BYLAWS AND REGULATIONS
New Davel. Under the Delaware Law, holders of a majority of the voting power
of a corporation and, when provided in the certificate of incorporation, the
directors of the corporation, have the power to adopt, amend and repeal the
bylaws of a corporation. The New Davel Certificate grants the directors of New
Davel the power to make, alter or repeal the bylaws of New Davel; provided,
however, that the New Davel Board of Directors shall have no power to change
the quorum for meetings of stockholders or of the board of directors, or to
change the minimum or maximum number of directors that can be elected to the
board of directors.
Old Davel. Unless the power to make, alter, amend or repeal an Illinois
corporation's bylaws is reserved to the shareholders by the corporation's
articles of incorporation, the Illinois Law provides that both the board of
directors and the shareholders of an Illinois corporation have the power to
alter or amend the corporation's bylaws, except that if the bylaws so provide,
the board of directors may not alter, amend or repeal any bylaw adopted by the
shareholders. The Old Davel Bylaws provide that shareholders holding a
majority of the outstanding shares of Old Davel Common Stock may make, alter,
amend or repeal the Old Davel Bylaws and that the board of directors may make,
alter, amend or repeal the Old Davel Bylaws, except that the holders of a
majority of the outstanding shares of Old Davel Common Stock may alter, amend
or repeal those bylaws made by Old Davel's board of directors and except that
Old Davel's board of directors may not change the quorum for meetings of
shareholders or the board of directors or change any provision of the Old
Davel Bylaws with respect to the removal of directors or the filling of
vacancies on the board of directors resulting from removal by the
shareholders.
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Peoples. Under the New York Law, holders of a majority of the voting power
of a corporation and, when provided in the certificate of incorporation or
bylaws, the directors, may adopt, amend or repeal the bylaws of a corporation.
The Peoples Bylaws provide that either the board of directors or the
shareholders may adopt, alter, amend or repeal the Peoples Bylaws, unless the
bylaw relates to an impending election of directors, in which case the
shareholders must approve the change.
SIZE OF THE BOARD OF DIRECTORS
New Davel. The Delaware Law provides that, unless the certificate of
incorporation specifies the number of directors, a board of directors may
change the authorized number of directors by an amendment to the bylaws if
fixed therein, or in such manner as may be provided therein. If the
certificate of incorporation specifies the number of directors, then that
number can be changed only by amending the certificate of incorporation. The
New Davel Certificate does not specify the number of directors. Under the New
Davel Bylaws, the number of directors of New Davel shall be not less than
five, nor more than eleven directors, as determined from time to time by the
board of directors by vote of a majority of the entire board of directors.
Old Davel. Under the Illinois Law, the number of directors is to be fixed by
the bylaws of the corporation. The bylaws of an Illinois corporation may
prescribe a variable range for the size of the board of directors (so long as
the maximum number does not exceed the minimum number by more than five), and,
if a variable range is established, the number of directors may be changed,
within the minimum and maximum, by the directors or by the shareholders. The
Old Davel Bylaws provide that the number of directors shall be not less than
five, nor more than nine, as determined from time to time by a majority of Old
Davel's entire board of directors.
Peoples. Under the New York Law, the number of directors may be fixed,
increased or decreased by the corporation's bylaws, or by action of the
shareholders or of the board of directors under the specific provisions of a
bylaw adopted by the shareholders. However, if the board of directors is
authorized by the bylaws to change the number of directors, whether by
amending the bylaws or by taking action under the specific provisions of a
bylaw adopted by the shareholders, such amendment or action shall require the
vote of a majority of the entire board of directors. The Peoples Bylaws
provide that the Company shall have at least five and not more than ten
directors. The number of directors shall be determined from time to time by
the board of directors.
REMOVAL OF DIRECTORS
New Davel. The Delaware Law provides that directors may be removed from
office, with or without cause, by the holders of a majority of the voting
power of all outstanding voting stock, unless the corporation has a classified
board (in which case directors may only be removed by shareholder vote for
cause) or its certificate otherwise provides. The New Davel Certificate does
not so provide. The New Davel Bylaws provide that any director or the entire
board of directors may be removed with or without cause at any time by the
affirmative vote of shareholders holding of record in the aggregate at least a
majority of the outstanding shares of New Davel Common Stock then entitled to
vote at an election of directors.
Old Davel. Under the Illinois Law, a director may be removed with or without
cause at a meeting of shareholders, in the absence of a classified board of
directors or cumulative voting by the holders of a majority of the outstanding
shares then entitled to vote at an election of directors, except that no
director may be removed at a meeting of shareholders unless the notice of the
meeting states that the purpose of the meeting is to vote upon the removal of
the director. In the case of a corporation having cumulative voting, if less
than the entire board is to be removed, no director may be removed, with or
without cause, if the votes cast against his or her removal would be
sufficient to elect him or her if then cumulatively voted at an election of
the entire board of directors. In addition, an Illinois court may, in certain
limited circumstances, remove a director at the request of the corporation or
the holders of at least ten percent of the outstanding shares of any class of
capital stock. The Old Davel Bylaws provide that any director may be removed
with or without cause by the affirmative vote of shareholders holding a
majority of the outstanding shares of the corporation at a special meeting of
shareholders called for that purpose, and may be removed for cause by action
of Old Davel's board of directors.
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Peoples. The New York Law provides that any or all of the directors of a
corporation may be removed for cause and, if the certificate or bylaws of the
corporation provide, without cause by vote of the shareholders. The Peoples
bylaws provide that, at a meeting of shareholders called expressly for that
purpose, any director or the entire board of directors may be removed, with or
without cause, by a vote of the holders of a majority of the shares then
entitled to vote at an election of directors.
VACANCIES ON THE BOARD
New Davel. The Delaware Law provides that unless the governing documents of
a corporation provide otherwise, vacancies and newly created directorships
resulting from a resignation or any increase in the authorized number of
directors may be filled by a majority of the directors then in office. The New
Davel Certificate does not otherwise provide. The New Davel Bylaws provide
that any vacancy in the board of directors occurring by reason of an increase
in the number of directors, or by reason of the death, resignation or removal
of a director, shall be filled for the unexpired portion of the term by a
majority vote of the remaining directors, though less than a quorum, at any
regular meeting or special meeting of the board of directors called for that
purpose.
Old Davel. Under the Illinois Law, any vacancy in a directorship (including
a vacancy resulting from an increase in the size of the board of directors)
may be filled by election at an annual meeting or special meeting called for
that purpose, and (except as otherwise specified by the corporation's bylaws)
by the corporation's board of directors for vacancies arising prior to any
such meeting. The Old Davel Bylaws provide that any vacancy in the board of
directors occurring by reason of an increase in the number of directors, or by
reason of the death, resignation, disqualification, removal (unless a vacancy
created by the removal of a director by the shareholders shall be filled by
the shareholders at the meeting at which the removal was effected) or
inability to act of any director, or otherwise, shall be filled for the
unexpired portion of the term by a majority vote of the remaining directors,
though less than a quorum, at any regular meeting or special meeting of the
board of directors called for that purpose.
Peoples. The New York Law provides that any vacancy occurring in the board
of directors for any reason, other than for removal without cause, may be
filled by the board of directors. Unless the certificate of incorporation or
bylaws provide otherwise, a vacancy due to removal without cause may only be
filled by a vote of the shareholders. The Peoples bylaws provide that any
vacancy occurring in the board of directors, including any vacancy created by
reason of an increase in the number of directors, may be filled by the
affirmative vote of a majority of the remaining directors, though less than a
quorum, of the Peoples Board of Directors. A director elected to fill a
vacancy shall hold office only until the next election of directors by the
shareholders. If there are no remaining directors, the vacancy shall be filled
by the shareholders.
RIGHT TO CALL SPECIAL MEETINGS OF SHAREHOLDERS
New Davel. The Delaware Law permits special meetings of stockholders to be
called by the board of directors and such other persons, including
stockholders, as the certificate of incorporation or bylaws may provide. The
Delaware Law does not require that stockholders be given the right to call
special meetings. The New Davel Bylaws provide that a special meeting of the
shareholders may be called at any time only by a majority of the board of
directors or by the chairman or the president.
Old Davel. Special meetings of the shareholders of an Illinois corporation
may be called by the president of the corporation, by the corporation's board
of directors, by the holders of not less than one-fifth of all outstanding
shares entitled to vote on the matter for which the meeting is called, or by
other officers or persons as provided in the Illinois corporation's articles
of incorporation or bylaws. The Old Davel Bylaws provide that a special
meeting of the shareholders may be called at any time by the board of
directors or by the chairman of the board and shall be called by the president
or secretary at the written request of the holders of twenty-five percent of
the shares then outstanding and entitled to vote thereat, or as otherwise
required by law.
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Peoples. Under the New York Law, a special meeting of shareholders may be
called by the board of directors or by any person authorized to do so in the
corporation's certificate or bylaws. The Peoples bylaws provide that special
meetings of the shareholders shall be held when directed by the president or
the Peoples Board of Directors, or when requested in writing by the holders of
not less than 10% of all the shares entitled to vote at the meeting.
SHAREHOLDER ACTION WITHOUT A MEETING
New Davel. The Delaware Law provides that, unless otherwise provided by the
certificate of incorporation, any action that may be taken at a meeting of
stockholders may be taken without a meeting, without prior notice and without
a vote, if the holders of Common Stock having not less than the minimum number
of votes otherwise required to approve such action at a meeting of
stockholders consent in writing. The New Davel Certificate does not provide
otherwise.
Old Davel. The Illinois Law specifies that, unless the articles of
incorporation otherwise provide, any action required to, or which may, be
taken at any annual or special meeting of the shareholders of an Illinois
corporation may be taken without a meeting and without a vote if a written
consent is signed by the holders of outstanding shares having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voting or by all of the corporation's shareholders entitled to vote with
respect to the subject matter thereof. If, however, the consent is signed by
less than all of the shareholders entitled to vote, the consent will not
become effective unless a notice in writing is delivered to all the
shareholders entitled to vote with respect to the subject matter thereof at
least five days prior to the execution of the consent and, after the effective
date of the consent, prompt written notice of such action is delivered to
those shareholders who have not so consented. The Old Davel Articles do not
provide otherwise.
Peoples. The New York Law requires the unanimous consent in writing of the
holders of all outstanding shares entitled to vote thereon for any action
requiring a vote of shareholders, if such action is taken without a meeting.
The Peoples bylaws provide that any action required by law, the Peoples bylaws
or the Peoples Certificate to be taken at any annual or special meeting of
shareholders, or any action which may be taken at any annual or special
meeting of shareholders, may be taken without prior notice and without a vote,
if a consent in writing, setting forth the action so taken, shall be signed by
all of the holders of outstanding stock at a meeting at which all shares
entitled to vote on the action were present and voted.
CLASS VOTING
New Davel. The Delaware Law requires voting by separate classes only with
respect to amendments to a corporation's certificate of incorporation that
adversely affect the holders of those classes or that increase or decrease the
aggregate number of authorized shares or the par value of the shares of any of
those classes.
Old Davel. The Illinois Law provides that holders of shares of a particular
class are entitled to vote as a class upon a proposed amendment to a
corporation's articles of incorporation that would increase or decrease the
aggregate number of authorized shares of such class, would limit or deny the
voting rights of the shares of such class, would otherwise change the
designations, preferences, qualifications, limitations, restrictions or
special or relative rights of the shares of such class, or would effect
certain other specified changes that may adversely affect the holders of such
class.
Peoples. The New York Law requires voting by separate classes only with
respect to amendments to a corporation's certificate of incorporation which
(i) limit the right to vote on any matter (except that an amendment may limit
the voting rights of newly issued shares), (ii) change the par value of the
class, change the number of authorized shares in the class, or change the
rights and obligations of the class, or (iii) subordinate the rights of the
class by authorizing preferential shares.
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CUMULATIVE VOTING
New Davel. Under the Delaware Law, stockholders do not have the right to
cumulate their votes in the election of directors unless such right is granted
in the certificate of incorporation. The New Davel Certificate does not grant
such rights.
Old Davel. The Illinois Law provides that, unless the articles of
incorporation of the corporation otherwise specify, in all elections for
directors, every shareholder has the right to vote cumulatively. The Old Davel
Articles do not otherwise specify; therefore, Old Davel shareholders have the
right to vote cumulatively.
Peoples. The New York Law provides that the certificate of incorporation may
provide for cumulative voting. The Peoples Certificate does not provide for
cumulative voting.
PROVISIONS AFFECTING CONTROL SHARE ACQUISITIONS AND BUSINESS COMBINATIONS
New Davel. Section 203 of the Delaware Law provides generally that any
person who acquires 15% or more of a corporation's voting stock (thereby
becoming an "interested stockholder") may not engage in a wide range of
"business combinations" with the corporation for a period of three years
following the date the person became an interested stockholder, unless (i) the
board of directors of the corporation has approved, prior to that acquisition
date, either the business combination or the transaction that resulted in the
person becoming an interested stockholder, (ii) upon consummation of the
transaction that resulted in the person becoming an interested stockholder,
that person owns at least 85% of the corporation's voting stock outstanding at
the time the transaction commenced (excluding shares owned by persons who are
directors and also officers and shares owned by employee stock plans in which
participants do not have the right to determine confidentially whether shares
will be tendered in a tender or exchange offer), or (iii) the business
combination is approved by the board of directors and authorized by the
affirmative vote (at an annual or special meeting and not by written consent)
of at least 66 2/3% of the outstanding voting stock not owned by the
interested stockholder.
These restrictions on interested stockholders do not apply under certain
circumstances, including, but not limited to, the following: (i) where the
corporation's original certificate of incorporation contains a provision
expressly electing not to be governed by Section 203 of the Delaware Law, or
(ii) where the corporation, by action of its stockholders, adopts an amendment
to its bylaws or certificate of incorporation expressly electing not to be
governed by such section, with such amendment to be effective twelve months
thereafter. The New Davel Certificate contains a provision expressly electing
not to be governed by such section.
Old Davel. Section 11.75 of the Illinois Law is similar to Section 203 of
the Delaware Law and prohibits an "interested shareholder" (generally a person
holding 15% or more of the outstanding voting shares of the corporation) from
engaging in a wide range of "business combinations" similar to those
prohibited by Section 203 of the Delaware Law. Section 11.75 restrictions do
not apply under those circumstances described above in which the restrictions
of Section 203 of the Delaware law do not apply. No amendment to the Old Davel
Articles to elect out of the applicability of Section 11.75 has been adopted.
In addition, Section 7.85 of the Illinois Law provides that any business
combination (as defined therein, generally involving an interested
shareholder) to which an Illinois corporation that is a "reporting company"
under the Exchange Act, as amended, is a party requires the approval of
holders of at least 80% of the combined voting power of the then outstanding
shares of all classes of the corporation's capital stock entitled to vote in
the election of directors and the approval of a majority of the voting shares
held by persons who are not (or otherwise associated with) interested
shareholders (generally a person holding 15% or more of the outstanding voting
shares of the corporation).
The approvals described in the preceding paragraph are not required to
effect a business combination if at least two-thirds of the corporation's
directors who are not associated with the interested shareholder have approved
the business combination or if certain procedural requirements are complied
with and all shareholders
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of the corporation receive an amount of consideration in connection with the
business combination that equals or exceeds certain thresholds described in
Section 7.85. The restrictions on business combinations also do not apply
under certain other circumstances, including, but not limited to, the
following: (i) where the corporation's articles of incorporation as in effect
immediately prior to the corporation becoming a reporting company contain a
provision expressly electing not to be governed by Section 7.85 of the
Illinois Law, or (ii) where the corporation, by action of the holders of a
majority of the outstanding voting shares, adopts an amendment to its bylaws
or articles of incorporation expressly electing not to be governed by such
section, with such amendment to be effective twelve months thereafter. The Old
Davel Articles do not contain a provision expressly electing not to be
governed by Section 7.85.
Peoples. Section 912 of the New York Law generally prohibits a domestic
corporation from engaging in a wide range of "business combinations" with an
"interested shareholder" (defined as the beneficial owner of 20% or more of
the corporation's stock) for a period of five years from the time the
shareholder acquired the stock in such resident domestic corporation, unless
the following conditions are met. The resident domestic corporation may engage
in a business combination with the interested shareholder within the five-year
period if the interested shareholder's stock purchase was approved by the
corporation's board of directors prior to the purchase. The business
combination is also permitted if any of the following criteria are met: (1)
the business combination was approved by the board of directors prior to the
interested shareholder's stock acquisition date; (2) the combination was
approved by the majority of disinterested shareholders at a meeting called no
earlier than five years after the interested shareholder's stock acquisition
date; or (3) the price paid to all the shareholders meets statutory criteria
establishing a formula price. The formula price is the higher of the price
paid by the interested shareholder or the market value of the stock, computed
as the higher of the value when acquired or when the announcement of the
business combination was made.
These restrictions on interested shareholders do not apply in certain
circumstances, including, but not limited to, the following: (i) where the
corporation does not have a class of voting stock registered with the
Commission pursuant to Section 12 of the Exchange Act, unless the certificate
of incorporation provides otherwise, (ii) where the corporation's original
certificate of incorporation contains a provision electing to opt out of
Section 912 of the New York Law or (iii) where the shareholders of a
corporation, by majority vote excluding the vote of any interested
shareholders, adopt an amendment to the bylaws electing not to be governed by
Section 912 of the New York Law, provided that such amendment shall not be
effective until 18 months after its adoption and shall not apply to any
business combination with an interested shareholder whose stock acquisition
date is prior to the effective date of the amendment. The Peoples bylaws do
not contain any amendment electing to opt out of Section 912 of the New York
Law.
MERGERS, ACQUISITIONS AND CERTAIN OTHER TRANSACTIONS
New Davel. The Delaware Law requires approval of mergers, consolidations and
dispositions of all or substantially all of a corporation's assets (other than
so-called parent-subsidiary mergers) by a majority of the voting power of the
corporation, unless the certificate of incorporation specifies a different
percentage. The New Davel Certificate does not provide for a different
percentage. The Delaware Law does not require stockholder approval for
majority share acquisitions or for combinations involving the issuance of less
than 20% of the voting power of the corporation, except for "business
combinations" subject to Section 203 of the Delaware Law.
Old Davel. Under the Illinois Law, approval of at least two-thirds of the
votes entitled to vote thereon (unless any class or series is entitled to vote
thereon, in which case the additional approval of at least two-thirds of the
votes of such class or series) is required for mergers (other than certain so-
called parent-subsidiary mergers), consolidations, share exchanges and sales,
leases, exchanges or other dispositions of all or substantially all of the
property and assets, with or without goodwill, of a corporation, unless the
articles of incorporation specifies a different approval threshold (not to be
reduced below a majority of the vote entitled to vote thereon). The Old Davel
Articles do not provide for a different approval threshold.
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Peoples. The New York Law requires that a plan of merger be adopted (i) by a
majority of shareholders for corporations in existence on February 22, 1998
which have a clause in the certificate of incorporation providing for such
majority approval, (ii) by a majority of shareholders for corporations
incorporated after February 22, 1998, and (iii) by two-thirds vote of
shareholders for other corporations.
RIGHTS OF DISSENTING SHAREHOLDERS
New Davel. Under the Delaware Law, appraisal rights are available to
dissenting stockholders in connection with certain mergers or consolidations.
However, unless the certificate of incorporation otherwise provides, the
Delaware Law does not provide for appraisal rights (i) if the shares of the
corporation are listed on a national securities exchange or designated as a
national market systems security on an interdealer quotations system by the
National Association of Securities Dealers, Inc. or are held of record by more
than 2,000 stockholders (as long as the stockholders receive in the merger
shares of the surviving corporation or of any other corporation the shares of
which are listed on a national securities exchange or designated as a national
market systems security on an interdealer quotations system by the National
Association of Securities Dealers, Inc. or are held of record by more than
2,000 stockholders) or (ii) if the corporation is the surviving corporation
and no vote of its stockholders is required for the merger. The New Davel
Certificate does not provide otherwise. The Delaware Law does not provide
appraisal rights to stockholders who dissent from the sale of all or
substantially all of a corporation's assets or an amendment to the
corporation's certificate of incorporation, although a corporation's
certificate of incorporation may so provide. The New Davel Certificate does
not so provide. Under the Delaware Law, among other procedural requirements, a
stockholder's written demand for appraisal of shares must be received before
the taking of the vote on the matter giving rise to appraisal rights.
Old Davel. The Illinois Law provides shareholders the right to dissent from,
and obtain payment of the fair value of their respective shares in connection
with, the lease, sale or exchange of all or substantially all of the property
and assets of an Illinois corporation other than in the usual and regular
course of business, in connection with certain amendments to the corporation's
articles of incorporation that materially and adversely affect rights with
respect to the shares of a dissenting shareholder and in connection with any
other matters specified by the corporation's articles of incorporation or
bylaws or a resolution of the corporation's board of directors. Neither the
Old Davel articles of incorporation nor the Old Davel Bylaws grant any
additional dissenters' rights and there exists no resolution of the Old Davel
Board of Directors providing for other dissenters' rights. Under the Illinois
Law, shareholders of an Illinois corporation being merged into, consolidated
with or subject to a share exchange with another corporation are also entitled
to dissenters' rights. To exercise such rights, among other procedural
requirements, a shareholder must submit a written demand to the corporation
prior to the taking of the vote on the matter giving rise to dissenters'
rights. For further information regarding the procedural requirements, see
"Dissenters' Rights--Dissenters' Rights of Old Davel Shareholders."
Peoples. The New York Law provides that, upon strict compliance with the
applicable statutory requirements and procedures, a dissenting shareholder has
the right to receive payment of the fair value of such shareholder's shares if
such shareholder objects to: (i) a merger or consolidation; (ii) a disposition
of assets which requires shareholder approval; or (iii) certain share
exchanges. Such right to receive payment does not apply (i) to a shareholder
of the parent corporation in a parent-subsidiary "short form" merger, (ii) to
a shareholder of the surviving corporation in a merger unless the merger
adversely affects such shareholder's preference rights, redemption or sinking
fund rights, preemptive rights or voting rights, or (iii) to a shareholder of
a corporation which is party to a merger or share exchange for shares which
were listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc.
DIVIDENDS
The Delaware Law and the New York Law provide that dividends may be paid in
cash, property or shares of a corporation's capital stock. The Delaware Law
provides that a corporation may pay dividends out of any surplus and, if it
has no surplus, out of any net profits for the fiscal year in which the
dividend was declared or
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for the preceding fiscal year (provided that such payment will not reduce
capital below the amount of capital represented by all classes of shares
having a preference upon the distribution of assets). The New York Law
provides that a corporation may pay dividends out of surplus only. The Peoples
bylaws provide that the Peoples Board of Directors may from time to time
declare, and the company may pay, dividends on its shares in cash, property or
its own shares, except when the company is insolvent or when the payment of
dividends would render the company insolvent, or when the declaration, payment
or distribution would be contrary to any restriction contained in the Peoples
Certificate. The Peoples Certificate does not contain any such restriction.
Under the Illinois Law, an Illinois corporation may make distributions to its
shareholders, except when, after giving effect to the distribution, the
corporation would be insolvent or the net assets of the corporation would be
less than zero or less than the maximum amount then payable to shareholders
having preferential rights in liquidation if the corporation were then
liquidated.
PREEMPTIVE RIGHTS OF SHAREHOLDERS
New Davel. The Delaware Law provides that no stockholder shall have any
preemptive rights to purchase additional securities of the corporation unless
the certificate of incorporation expressly grants such rights. The New Davel
Certificate does not provide for preemptive rights.
Old Davel. The Illinois Law provides that the shareholders of a corporation
organized on or after January 1, 1982 shall not have preemptive rights unless
such right is provided in the articles of incorporation. The articles of
incorporation may limit preemptive rights for corporations organized before
January 1, 1982. Old Davel was incorporated on April 2, 1979. Since the Old
Davel Articles are silent with respect to preemptive rights, Old Davel
shareholders have preemptive rights.
Peoples. The New York Law provides that the shareholders of a corporation
incorporated on or after February 22, 1998 shall not have preemptive rights
unless such right is provided in the certificate of incorporation. The
certificate of incorporation may limit preemptive rights for corporations
incorporated before February 22, 1998. The Peoples Certificate provides that
except as provided by resolution of the board of directors or in a written
agreement (including, without limitation, an amendment to the Peoples
Certificate designating the rights, preferences and other terms of a series of
preferred stock of Peoples) approved by the board of directors, no shareholder
of the company of any class, now or hereafter authorized, shall have any
preferential or preemptive right to subscribe for, purchase or receive any
shares of the company of any class, now or hereafter authorized, or any
options or warrants for such shares, or any securities convertible into or
exchangeable for such shares, which may at any time be issued, or offered for
sale by the company.
DUTIES OF DIRECTORS
New Davel. The Delaware Law does not contain a specific provision
elaborating on the duties of a board of directors with respect to the best
interests of a corporation. Delaware courts have permitted directors to
consider various constituencies provided that there be some rationally related
benefit to stockholders.
Old Davel. In discharging their duties as directors of an Illinois
corporation, directors may, in considering the best long-term and short-term
interests of the corporation, consider the effects of any action (including
without limitation actions which may involve or relate to a change or
potential change in control of the corporation) upon employees, suppliers and
customers of the corporation or its subsidiaries, communities in which offices
or other establishments of the corporation or its subsidiaries are located,
and all other pertinent factors.
Peoples. The New York Law requires directors to discharge their duties in
good faith and with that degree of care which an ordinarily prudent person in
a like position would use under similar circumstances. A director is entitled
to rely on certain experts and other persons when performing his or her
duties. A director may also consider, in addition to the long-term and short-
term interests of the corporation and its shareholders, the future prospects
of the corporation, the corporations's current and retired employees, the
corporation's customers and creditors, and community interests.
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LIMITATION ON DIRECTORS' LIABILITY
New Davel. The Delaware Law allows a Delaware corporation to include in its
certificate of incorporation, and the New Davel Certificate contains, a
provision eliminating the liability of a director to New Davel or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except liability for any breach of the director's duty of loyalty to New Davel
or its stockholders, for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law, under Section 174 of the
Delaware Law (which deals generally with unlawful payments of dividends, stock
repurchases and redemptions), and for any transaction from which the director
derived an improper personal benefit.
Old Davel. The Illinois Law does not expressly provide that the liability of
directors may be limited by an Illinois corporation. The Old Davel articles of
incorporation, however, include a provision to limit the personal liability
for breach of fiduciary duty by directors for acts or omissions occurring
after July 27, 1993, except with respect to breaches of a director's duty of
loyalty to the corporation or its shareholders, acts or omissions not in good
faith or that involve intentional misconduct or a knowing violation of the
law, certain enumerated liabilities expressly imposed by the Illinois Law and
any transaction from which the director derived an improper personal benefit.
Notwithstanding the express foregoing limitation of liability, the Illinois
Law imposes a treble damages liability (together with attorneys' fees) on
directors and officers that make or receive commercial bribes.
Peoples. The New York Law and the Peoples Certificate provide that a
director shall not be liable to Peoples or its shareholders for damages for
any breach of duty in his capacity as director unless (i) a judgment or other
final adjudication adverse to the director establishes that his acts or
omissions were in bad faith or involved intentional misconduct or a knowing
violation of law or that he personally gained in fact a financial profit or
other advantage to which he was not legally entitled or that he committed
certain other acts set forth in the New York Law or (ii) the liability of any
director for any act or omission occurred prior to December 10, 1987.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
New Davel. The Delaware Law permits a Delaware corporation to indemnify
directors, officers, employees, and agents under certain circumstances and
mandates indemnification under certain circumstances. The Delaware Law permits
a corporation to indemnify an officer, director, employee or agent for fines,
judgments or settlements, as well as expenses in the context of actions other
than derivative actions, if such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation or, in the case of a criminal proceeding, if such person had no
reasonable cause to believe that his or her conduct was unlawful.
Indemnification against expenses incurred by a director, officer, employee, or
agent in connection with a proceeding against such person for actions in such
capacity is mandatory to the extent that such person has been successful on
the merits. If a director, officer, employee, or agent is determined to be
liable to the corporation, indemnification for expenses is not allowable,
subject to limited exceptions when a court deems the award of expenses
appropriate. The Delaware Law grants express power to a Delaware corporation
to purchase liability insurance for its directors, officers, employees, and
agents, regardless of whether any such person is otherwise eligible for
indemnification by the corporation. Advancement of expenses is permitted, but
a person receiving such advances must repay those expenses if it is ultimately
determined that he is not entitled to indemnification.
The New Davel Bylaws provide that any person who was or is a party, or is
threatened to be made a party to, or is involved in any action, suit or
proceeding, by reason of the fact that he, or a person to whom he is legal
representative, is or was a director or officer of New Davel, or is or was a
director, officer, employee, fiduciary or agent of any corporation,
partnership, joint venture or other enterprise in which he served as such at
the request of New Davel, shall be indemnified by New Davel to the fullest
extent of the Delaware Law against all expense, liability and loss, including
the reasonable attorney's fees actually incurred by him in connection with
such proceeding.
Old Davel. Under the Illinois Law, a corporation is permitted to indemnify
directors, officers, employees, and agents under certain circumstances and is
required to indemnify such persons under certain circumstances.
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The Illinois Law generally permits a corporation to indemnify an officer,
director, employee or agent for judgments, fines or amounts paid in
settlement, as well as reasonable expenses, in actions, suits and proceedings
against such person (other than derivative actions), if such person acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation and, in the case of a criminal
proceeding, if such person had no reasonable cause to believe that his or her
conduct was unlawful. Indemnification against expenses actually and reasonably
incurred by a director, officer, employee, or agent in connection with a
proceeding against such person for actions, suits or proceedings is mandatory
to the extent that such person has been successful on the merits or otherwise.
If a director, officer, employee, or agent is determined to be liable to the
corporation, indemnification for expenses is not allowable, subject to limited
exceptions when a court deems the award of expenses appropriate. The Illinois
Law grants express power to a corporation to purchase and maintain insurance
for its directors, officers, employees, and agents, and for other persons
serving at the request of the corporation, as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against any liability asserted against such person and incurred by
such person in any such capacity, or arising out of his status as such,
regardless of the corporation's power to indemnify such person for such
liabilities. Advancement of expenses is permitted, but a person receiving such
advances must repay those expenses if it is ultimately determined that he is
not entitled to indemnification.
The Old Davel Bylaws provide that any person who is a party to any action,
suit or proceeding, by reason of the fact that he, his testator or intestate
representative is or was a director, officer or employee of Old Davel, or of
any corporation in which he served as such at the request of Old Davel, shall
be indemnified by Old Davel to the fullest extent of the applicable law
against the reasonable expenses, including attorney's fees, actually and
necessarily incurred by him in connection with the defense of such action,
suit or proceedings, or in connection with any appeal therefrom, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceedings, or in connection with any appeal therefrom, that such officer,
director or employee has been adjudged to be liable to Old Davel unless
indemnification shall be otherwise allowed upon application to the
adjudicating court.
Peoples. The New York Law provides that a corporation may indemnify any
person who is a party or is threatened to be made a party to any action or
proceeding by reason of the fact that such person is or was a director,
officer, employee or agent of the corporation, if such person acted in good
faith and in a manner he or she reasonably believed to be in, or not opposed
to, the best interests of the corporation, and, with respect to any criminal
actions or proceedings, had no reasonable cause to believe his or her actions
were unlawful. The New York Law also provides for indemnification by a court
in the event a corporation fails to provide indemnification. The Peoples
Certificate provides that the officers and directors of the company shall be
indemnified to the fullest extent provided by the law. The right to
indemnification and advancement of expenses as otherwise provided by the New
York Law shall not be exclusive of any other right which any director or
officer may have or acquire under any provisions of the Peoples Certificate or
the Peoples Bylaws, or by any agreement or vote of shareholders or
disinterested directors of the company. However, no indemnification may be
made to or on behalf of any officer or director if a judgment or other final
adjudication adverse to the officer or director establishes that his acts were
committed in bad faith or were the result of active and deliberate dishonesty
and were material to the cause of action so adjudicated, or that he personally
gained in fact a financial profit or other advantage to which he was not
legally entitled. The New York Law expressly permits a corporation to purchase
insurance to indemnify directors and officers whether or not they may be
otherwise indemnified by the corporation. No insurance may provide for any
payment (i) if a final adjudication adverse to such insured director or
officer establishes that his or her acts of active and deliberate dishonesty
were material to such adjudicated cause of action or that he or she gained an
illegal financial profit or other advantage or (ii) if prohibited by the
insurance laws of New York. The New York Law allows for the advance payment of
expenses prior to the final disposition of an action upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount
if it shall ultimately be determined that such executive is not entitled to be
indemnified by the company.
With respect to the advance payment of attorneys' expenses, the New York
Law, unlike the Delaware Law, does not refer expressly to administrative and
investigative proceedings. Furthermore, the New York Law refers specifically
to indemnification of attorneys' fees only in the context of indemnification
by court action.
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DISSENTERS' RIGHTS
DISSENTERS' RIGHTS OF OLD DAVEL SHAREHOLDERS
Section 11.65 of the Illinois Law provides all shareholders of Old Davel
entitled to vote on the Old Davel/New Davel Merger the right to exercise
dissenters' rights with respect to the Old Davel/New Davel Merger. The
following is a summary of the principal steps an Old Davel shareholder must
take to perfect dissenters' rights under Section 11.70 of the Illinois Law.
This summary does not purport to be complete and is qualified in its entirety
by reference to Sections 11.65 and 11.70 of the Illinois Law, a copy of which
is attached as Appendix VI to this Joint Proxy Statement/Prospectus. The
provisions of Sections 11.65 and 11.70 are technical in nature and complex.
Any Old Davel shareholder contemplating the exercise of dissenters' rights is
urged to review carefully such provisions and to consult an attorney, as
dissenters' rights may be lost if the procedural requirements under Section
11.70 of the Illinois Law are not fully and precisely satisfied. To perfect
dissenters' rights, an Old Davel shareholder must satisfy each of the
following conditions:
1. No Vote in Favor of the Old Davel/New Davel Merger. Dissenter's Davel
Shares held by the Dissenting Davel shareholder must not be voted at the
Davel Annual Meeting in favor of the Old Davel/New Davel Merger. See
"Meetings, Voting and Proxies--Davel Annual Meeting of Shareholders." This
requirement will be satisfied if a proxy is signed and returned with
instructions to vote against the Old Davel/New Davel Merger or to abstain
from such vote, if no proxy is returned and no vote is cast at the Davel
Annual Meeting in favor of the Old Davel/New Davel Merger, or if the
Dissenting Davel shareholder revokes a proxy and thereafter abstains from
voting with respect to the Old Davel/New Davel Merger or votes against the
Old Davel/New Davel Merger at the Davel Annual Meeting. A VOTE IN FAVOR OF
THE OLD DAVEL/NEW DAVEL MERGER AT THE DAVEL ANNUAL MEETING CONSTITUTES A
WAIVER OF DISSENTERS' RIGHTS. A PROXY THAT IS RETURNED SIGNED BUT ON WHICH
NO VOTING PREFERENCE IS INDICATED WILL BE VOTED IN FAVOR OF THE OLD
DAVEL/NEW DAVEL MERGER AND WILL CONSTITUTE A WAIVER OF DISSENTERS' RIGHTS.
A Dissenting Davel shareholder may revoke his proxy at any time before its
exercise by (i) filing with the Secretary of Old Davel at or before the
taking of the vote at the Davel Annual Meeting a notice of revocation
bearing a later date than the proxy or a later-dated proxy relating to the
same shares, (ii) giving notice of revocation in an open meeting or (iii)
attending the Davel Annual Meeting and voting against the Old Davel/New
Davel Merger in person. See "Meetings, Voting and Proxies--Davel Annual
Meeting of Shareholders."
2. Filing Written Demand. Shareholders wishing to assert dissenters' rights
must, prior to the date on which the vote is taken at the Davel Annual
Meeting, deliver a written demand for payment for their shares of Old Davel
Common Stock to Old Davel at the address set forth below. It is
recommended, although not required, that any written demand be sent by
registered or certified mail, return receipt requested. Voting against the
Old Davel/New Davel Merger will not itself constitute a demand. Old Davel
does not intend to send any further notice to Old Davel shareholders as to
the date on which the Davel Annual Meeting will occur.
For purposes of making a demand, the address of Old Davel is:
Davel Communications Group, Inc.
1429 Massaro Boulevard
Tampa, Florida 33619
Attention: Secretary
Only a shareholder of record, or a beneficial owner who submits to Old
Davel the record holder's written consent to the dissent before or at the
same time as the beneficial owner asserts dissenters' rights, is entitled
to assert a dissenters' right with respect to the shares of Old Davel
Common Stock registered in the record holder's name. Beneficial owners who
are not record holders and who wish to assert dissenters' rights are
advised to consult promptly with the appropriate record holders as to the
timely assertion of dissenters' rights. A record holder, such as a broker,
who holds shares of Old Davel Common Stock as a nominee for others may
exercise dissenters' rights with respect to the shares of Old Davel Common
Stock held for one or more beneficial owners, while not exercising such
rights for other beneficial owners, but only if such record holder dissents
with respect to all shares owned by any one beneficial owner. In such a
case, the
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written demand should set forth the name and address of the beneficial
owner on whose behalf the demand is made.
A demand for payment for shares of Old Davel Common Stock owned of record
by more than one person, as in a joint tenancy or a tenancy in common, must
be executed by or for all joint owners. An authorized agent, including one
or more joint owners, may execute the demand for a former record owner;
however, the agent must identify the former record owner or owners and
expressly disclose the fact that, in executing the demand, such person is
acting as agent for the former record owner. A demand signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity
must so identify the persons signing the demand and state that the demand
is made in such capacity.
A beneficial owner of shares of Old Davel Common Stock whose shares were
held in "street name" and who asserts dissenters' rights should take such
actions as may be necessary to ensure that a timely and proper written
demand is made by the record holder of such shares or obtain and submit a
written consent from the record holder at or prior to the time the demand
is made, as described above. Shares held through brokerage firms, banks and
other financial institutions are frequently deposited with and held of
record in the name of a nominee of a central security depositary, such as
The Depositary Trust Company, Midwest Securities Trust Company,
Philadelphia Depositary Trust Company, and others. Any beneficial owner
desiring to assert dissenters' rights who holds his shares through a
brokerage firm, bank or other financial institution is responsible for
ensuring that either the written demand is made by the record holder or
that a written consent from the record holder is obtained and timely
submitted.
3. Response by Davel; Court Proceedings. Within 10 days after the date on
which the Old Davel/New Davel Merger occurs or 30 days after the Dissenting
Davel shareholder delivers the written demand for payment, whichever is
later, Davel is required to send to the Dissenting Davel shareholder its
opinion as to the estimated fair value of the Dissenter's Davel Shares,
together with certain financial information regarding Davel, and either a
commitment to pay for the Dissenter's Davel Shares at their fair value or
instructions to the Dissenting Davel shareholder to sell his shares on the
market within 10 days.
If the shareholder disagrees with Davel's opinion as to the estimated
fair value of the shares or the amount of interest due, he has 30 days to
notify Davel of his own opinion as to the estimated fair value of the
shares and/or interest due and demand payment for the difference between
the Dissenting Davel shareholder's estimated fair value and/or interest due
and the amount of payment by Davel or proceeds of sale. If Davel and the
Dissenting Davel shareholder cannot agree as to fair value and/or interest
due within 60 days thereafter, Davel must either pay the amount requested
by the shareholder or file a petition in the Morgan County Court requesting
judicial determination of the fair value of and interest due on the shares
held by the Dissenting Davel shareholder. If such a petition is filed, all
dissenting shareholders whose demands remain unsettled will be made parties
to the proceeding.
The Dissenting Davel shareholder's shares will be appraised by the Morgan
County Court at their fair value immediately before the Davel Effective
Time, excluding any appreciation or depreciation in anticipation of the Old
Davel/New Davel Merger, unless such exclusion would be inequitable. The
value so determined for the Dissenter's Davel Shares could be the same as
or more than the Old Davel Merger Consideration, and could be based upon
considerations other than, or in addition to, the price paid in the Old
Davel/New Davel Merger, the market value of the shares, asset value and
earning capacity.
In Taxy v. Worden, 536 N.E.2d 901 (Ill. App. 1989), the Illinois
Appellate Court noted that case law establishes that no precise and exact
rules for determining the fair market value of stock exist. The court went
on to say that "fair value" is determined by an exercise of the court's
judgment after consideration of all relevant factors, which may include the
nature of the business and the history of the enterprise from its
inception, the economic outlook in general and the condition and outlook of
the specific industry in particular, the book value of the stock and the
financial condition of the business, the earning capacity of the company,
the dividend-paying capacity of the company, whether or not the enterprise
has goodwill or other intangible value, sales of the stock and the size of
the company to be valued, and the market price (on an exchange or over the
counter) of stocks of corporations in the same or a similar line of
business. It should
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<PAGE>
also be noted that Section 5/11.65(b) of the Illinois Law provides that "a
shareholder entitled to dissent and obtain payment for his or her shares
under this Section [5/11.65] may not challenge the corporate action
creating his or her entitlement unless the action is fraudulent with
respect to the shareholder or the corporation or constitutes a breach of
fiduciary duty owed to the shareholder."
The Court will determine all costs of the proceeding, exclusive of fees
and expenses of counsel and experts for the parties, and may assess some or
all of such costs against Old Davel or any dissenter if it finds that such
party's estimation of the fair value of the shares was materially above or
below the fair value as determined by the Court. The Court may also assess
the fees and expenses of counsel against Old Davel if it fails to comply
with the requirements of the Illinois Law with respect to dissenters'
rights, or against any party who abuses the rights accorded to it under the
Illinois Law. In addition, some portion of counsel's fees of a Dissenting
Davel shareholder may be awarded to such party, out of the expected awards
of other dissenters, if the services of such party's counsel were of
substantial benefit to other dissenters.
A Dissenting Davel shareholder will retain all other rights of a
shareholder until those rights are cancelled or modified by the occurrence
of the Old Davel/New Davel Merger. Upon consummation of the Old Davel/New
Davel Merger, Old Davel will be required to pay to each Dissenting Davel
shareholder who surrenders the certificate representing the shares of Old
Davel Common Stock held by such person the amount Old Davel estimates to be
the fair value of such shares, plus accrued interest, accompanied by a
written explanation of how the interest was calculated.
The Merger Agreement provides that if, as a result of the exercise of
dissenters' rights by shareholders of Old Davel, it is not possible to
satisfy the conditions to consummation of the Transaction (see "The Merger
Agreement--Conditions to Obligations to Effect the Transaction") relating
to receipt of Financing, receipt of required letters regarding the
accounting treatment for the Transaction or receipt of required opinions
regarding the tax treatment of the Transaction (see "The Transaction--
Federal Income Tax Considerations"), then the parties will amend the Merger
Agreement to provide for a structure similar to the one contemplated by the
Original Merger Agreement. Under that structure, Peoples would have become
a subsidiary of Old Davel and Old Davel would not have been merged with any
other entity and, accordingly, no dissenters' rights would have been
available to shareholders of Old Davel. If the alternative structure were
to be implemented, the parties would take the necessary steps to seek the
approval of their respective shareholders for that transaction and would
resolicit proxies.
NO DISSENTERS' RIGHTS FOR PEOPLES SHAREHOLDERS
Dissenters' rights are not available to Peoples shareholders under the New
York Law because Peoples Common Stock is listed on a national securities
exchange and because the holder of the outstanding Peoples Series C Preferred
Stock has assented to the Davel/Peoples Merger. See "Merger Agreement--Voting
Agreements."
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ELECTION OF DIRECTORS
Old Davel currently has seven directors. On June 30, 1998, Samuel Zell and
F. Philip Handy were elected to the Old Davel Board of Directors after Messrs.
Paul B. Demirdjian, Michael G. Kouri, Theodore C. Rammelkamp, Jr. and Glen E.
Barber resigned as directors of Old Davel in connection with arrangements
entered into as part of the EGI Investment. The elections of Mr. Zell and Mr.
Handy occurred pursuant to the terms of an Investment Agreement, dated as of
June 29, 1998, by and among Samstock, David R. Hill and Old Davel. Each member
of the Old Davel Board of Directors will serve until the next annual meeting
of Old Davel's shareholders or until their successors have been elected and
qualified. The persons named in the enclosed form of proxy intend to vote the
proxies in favor of the election of the nominees listed below to serve as
directors of Old Davel for terms expiring at the next annual meeting of
shareholders or until the election and qualification of their successors,
unless the shareholder indicates on the form of proxy that the vote should be
withheld or contrary directions are indicated. If one or more nominees shall
become unavailable for any reason, the Old Davel Board of Directors, in its
discretion, may designate one or more substitute nominees, in which case such
proxies will be voted for such substituted nominees. The Old Davel Board of
Directors has no reason to doubt the availability of any of the nominees, and
each has indicated his willingness to serve if elected. Cumulative voting will
be applicable to the election of these nominees. Cumulative voting means that
each shareholder entitled to vote may cast votes equal to the number of shares
of Old Davel Common Stock eligible to be voted by that shareholder multiplied
by the number of directors to be elected; a shareholder may cast all of his,
her or its votes for a single nominee or may allocate them among nominees. For
example, a holder of 100 shares may cast 700 votes for a single nominee,
allocate 100 votes to each of the seven nominees or allocate 700 votes in any
other manner. If a shareholder who signs and returns a proxy fails to
designate an allocation of votes or to withhold authority to vote, the persons
acting under the proxy will allocate that shareholder's votes evenly among the
seven nominees.
The following table sets forth certain information for each nominee for
director.
<TABLE>
<CAPTION>
DIRECTOR
CONTINUOUSLY
NAME SINCE AGE
---- ------------- ---
<S> <C> <C>
F. Philip Handy......................................... June 1998 54
Michael E. Hayes........................................ December 1994 40
David R. Hill........................................... April 1979 67
Robert D. Hill.......................................... August 1993 47
Thomas M. Vitale........................................ July 1994 41
A. Jones Yorke.......................................... August 1993 67
Samuel Zell............................................. June 1998 57
</TABLE>
Biographies of each nominee may be found under "Management of Old Davel."
For further information, also see "Old Davel Executive Officer Compensation
and Benefits."
If the Transaction is consummated, the Old Davel Board of Directors intends
to appoint Justin S. Maccarone to fill one of the two vacancies on the Old
Davel Board of Directors.
THE OLD DAVEL BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF EACH
NOMINEE NAMED ABOVE.
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EXECUTIVE OFFICERS
The following table sets forth the names and ages of Old Davel's executive
officers and their positions with Old Davel.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
David R. Hill........... 67 Chairman of the Board
Robert D. Hill.......... 47 President, Chief Executive Office and Director
Paul B. Demirdjian...... 38 Senior Vice President and Chief Information Officer
Michael E. Hayes........ 40 Senior Vice President, Chief Financial Officer and Director
Michael G. Kouri........ 54 Senior Vice President of Business Development
Theodore C. Rammelkamp, 53 Senior Vice President, General Counsel and Secretary
Jr.....................
Marlin E. Turnipseed.... 45 Senior Vice President of Sales and Marketing
</TABLE>
COMMITTEES AND MEETINGS OF THE OLD DAVEL BOARD OF DIRECTORS
The business of Old Davel is under the general management of the Old Davel
Board of Directors as provided by the laws of Illinois, Old Davel's state of
incorporation. The Old Davel Board of Directors held seven meetings during
1997. All members of the Old Davel Board of Directors were present at all
meetings held in 1997. Between Board meetings, Board responsibilities are
delegated to the Executive Committee, which in 1997 was comprised of Messrs.
David Hill, Robert Hill and Rammelkamp. The Executive Committee held no
meetings during 1997. Beginning at the 1998 Annual Meeting, if the directors
nominated herein are elected, the Executive Committee will be comprised of
Messrs. David Hill, Robert Hill, and Handy.
Compensation for all senior executives, including officers of Old Davel, is
determined by the Compensation Committee. The Compensation Committee also
administers Old Davel's stock option plans. The Compensation Committee held
four meetings in 1997. In 1997, Messrs. Glen E. Barber, Thomas M. Vitale and
A. Jones Yorke constituted the Compensation Committee. Beginning at the 1998
Annual Meeting, if the directors nominated herein are elected, the
Compensation Committee will be comprised of Messrs. Vitale, Yorke and Handy.
In 1997, the Audit Committee consisted of Messrs. David Hill, Vitale and
Yorke. The Audit Committee held two meetings during 1997. The Audit Committee
performs the following principal functions: (i) reviews the year-end financial
statements with the outside auditors, internal accounting staff and
management; (ii) reviews the scope of the external audit and internal reports
with the outside auditors, internal accounting staff and management; (iii)
reviews the results of Old Davel's outside audit with its auditors; (iv)
recommends the selection of outside auditors; and (v) reviews and approves the
rendering of audit and nonaudit services by the outside auditors. The Old
Davel Board of Directors has not established a nominating committee or a
committee serving a similar function. Nominations are made by the full Old
Davel Board of Directors. There are at present no mandatory retirement ages
stipulated either for officers or members of the Old Davel Board of Directors.
COMPENSATION OF DIRECTORS
In 1997, Old Davel paid cash compensation to directors who were not
employees of Old Davel in the amount of $2,500 per meeting of the Old Davel
Board of Directors or of any committee thereof. Directors of Old Davel who are
not employees of Old Davel are also reimbursed for their out-of-pocket
expenses associated with attending meetings of the Old Davel Board of
Directors and committees and are eligible to receive options granted pursuant
to the Old Davel Directors' Stock Option Plan. In April 1998, the Old Davel
Board of Directors approved a resolution to eliminate the per-meeting payment
and begin paying (effective as of the date of the 1998 Annual Meeting) an
annual cash retainer to directors who are not employees of Old Davel in the
amount of $20,000.
Old Davel provides Mr. Yorke with individual health insurance coverage.
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SHAREHOLDER PROPOSALS FOR 1999 ANNUAL MEETING
OLD DAVEL
Any shareholder proposals to be presented at the 1999 Annual Meeting of Old
Davel or, if applicable, New Davel must be received by Old Davel no later than
July 15, 1999 at its principal executive offices at 1429 Massaro Boulevard,
Tampa, Florida 33619 in order to be considered for inclusion in Old Davel's
proxy statement and proxy relating to that meeting. Any proxy received by Old
Davel in connection with the 1999 Annual Meeting may confer discretionary
authority to vote on any shareholder proposal not received by Old Davel by
September 27, 1999. If the date of the 1999 Annual Meeting of Old Davel is
changed by more than 30 days from the date of the 1998 Annual Meeting, then
this change will be disclosed in the earliest possible Form 10-Q of Old Davel
and any shareholder proposal to be presented at the 1999 Annual Meeting must
be received by a reasonable time before Old Davel mails its proxy materials
for the 1999 Annual Meeting.
PEOPLES
If the Transaction is not completed, Peoples will hold a 1999 Annual
Meeting. A shareholder proposal intended to be presented to the 1999 Annual
Meeting of Peoples must be received by Peoples on or before January 15, 1999
to be considered for inclusion in Peoples' proxy statement and form of proxy
relating to that meeting. Any proxy received by Peoples in connection with the
1999 Annual Meeting may confer discretionary authority to vote on any
shareholder proposal not received by Peoples by March 31, 1999. Any such
proposal should be addressed to E. Craig Sanders, President, Peoples Telephone
Company, Inc., 2300 N.W. 89th Place, Miami, Florida 33172.
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LEGAL MATTERS
Certain legal matters with respect to the New Davel Common Stock will be
passed upon for New Davel by Kirkland & Ellis, Chicago, Illinois. Certain
United States federal income tax matters related to the Old Davel/New Davel
Merger and the Davel/Peoples Merger will be passed upon for Old Davel by
Kirkland & Ellis, Chicago, Illinois. Certain United States federal income tax
matters related to the Davel/Peoples Merger will be passed upon by Shearman &
Sterling, New York, New York. See "The Transaction--Federal Income Tax
Considerations."
EXPERTS
The consolidated financial statements of Old Davel as of and for the year
ended December 31, 1997 included in this Joint Proxy Statement/Prospectus have
been audited by Arthur Andersen LLP, independent public accountants, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports. Representatives of Arthur Andersen LLP will be present
at the Davel Annual Meeting to make a statement, if they desire, and to
respond to appropriate questions of Old Davel shareholders. The consolidated
financial statements of Old Davel as of and for the years ended December 31,
1996 and 1995 included in this Joint Proxy Statement/Prospectus have been
audited by Kerber, Eck & Braeckel LLP, independent public accountants, as set
forth in their reports thereon appearing elsewhere herein, and are included in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
Effective January 26, 1998, Old Davel engaged Arthur Andersen LLP as its
independent public accountants for the fiscal year ended December 31, 1997.
Old Davel informed its previous independent public accountants, Kerber, Eck &
Braeckel LLP, of its dismissal on January 26, 1998. In connection with the
audits of the two fiscal years ending December 31, 1996 and during subsequent
interim periods, there have been no disagreements on any matters of accounting
principles or practices, financial statement disclosure, or auditing scope and
procedures which, if not resolved to the satisfaction of Kerber, Eck &
Braeckel LLP, would have caused Kerber, Eck & Braeckel LLP to make reference
to the matter in their report. The reports of Kerber, Eck & Braeckel LLP on
Old Davel's consolidated financial statements for the 1995 and 1996 fiscal
years did not contain an adverse opinion or a disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope or accounting
principles. On January 30, 1998, Old Davel filed a Current Report on Form 8-K
disclosing these facts. Kerber, Eck & Braeckel LLP furnished Old Davel a
letter, dated January 26, 1998 and filed as Exhibit 16.1 to the Form 8-K,
confirming that it agreed with the statements contained in the Form 8-K.
The consolidated financial statements of CCI at June 30, 1997 and 1996, and
for each of the three years in the period ended June 30, 1997, included in
this Joint Proxy Statement/Prospectus of Davel Communications Group, Inc. and
Peoples Telephone Company, Inc., which is referred to and made a part of this
Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The consolidated financial statements of Peoples at December 31, 1997 and
1996, and for each of the three years in the period ended December 31, 1997,
included in this Joint Proxy Statement/Prospectus, which is referred to and
made a part of this Registration Statement, have been audited by Ernst & Young
LLP, independent certified public accountants, as set forth in their report
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
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WHERE YOU CAN FIND INFORMATION
Old Davel and Peoples file annual, quarterly and special reports, proxy
statements and other information with the Commission. You may read and copy
any reports, statements or other information we file at the Commission's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the Commission at 1-800-SEC-0330 for further information
on the public reference rooms. Our Commission filings are also available to
the public from commercial document retrieval services and at the web site
maintained by the Commission at http://www.sec.gov.
New Davel has filed a Registration Statement on Form S-4 to register with
the Commission the New Davel Common Stock to be issued to Old Davel
shareholders and Peoples shareholders in the Transactions. This Joint Proxy
Statement/Prospectus is a part of that Registration Statement and constitutes
the prospectus of New Davel as well as the proxy statements of Old Davel and
Peoples for the Davel Annual Meeting and the Peoples Special Meeting. As
allowed by Commission rules, this Joint Proxy Statement/Prospectus does not
contain all the information you can find in the Registration Statement or the
exhibits to the Registration Statement.
The Commission allows us to "incorporate by reference" information into this
Joint Proxy Statement/Prospectus, which means that we can disclose important
information to you by referring you to another document filed separately with
the Commission. The information incorporated by reference is deemed to be part
of this Joint Proxy Statement/Prospectus, except for any information
superseded by information in this Joint Proxy Statement/Prospectus. This Joint
Proxy Statement/Prospectus incorporates by reference the documents set forth
below that we have previously filed with the Commission. These documents
contain important information about our companies and their finances.
<TABLE>
<CAPTION>
OLD DAVEL COMMISSION FILINGS (FILE NO. 0-22610) PERIOD
----------------------------------------------- ------
<S> <C>
Annual Report on Form 10-K Year ended December 31, 1997
Annual Report on Form 10-K/A Year ended December 31, 1997 (filed on April 30, 1998,
November 9, 1998 and November 18, 1998)
Quarterly Reports on Form 10-Q Quarters ended March 31, June 30 and September 30,
1998
Quarterly Reports on Form 10-Q/A Quarters ended March 31 (filed on November 9, 1998),
June 30 (filed on November 9, 1998 and
November 18, 1998) and September 30, 1998
(filed on November 18, 1998)
Current Reports on Form 8-K Filed on January 30, February 18, April 20, April 21,
April 30, June 23, and July 22, 1998
<CAPTION>
PEOPLES COMMISSION FILINGS (FILE NO. 0001-12443) PERIOD
------------------------------------------------ ------
<S> <C>
Annual Report on Form 10-K Year ended December 31, 1997
Annual Report on Form 10-K/A Year ended December 31, 1997 (filed on November 9,
1998)
Quarterly Reports on Form 10-Q Quarters ended March 31, June 30, and September 30,
1998
Quarterly Reports on Form 10-Q/A Quarters ended March 31 (filed on November 9, 1998)
and June 30, 1998 (filed on November 9, 1998)
Current Report on Form 8-K Filed on July 15, 1998
1998 Proxy Statement Dated May 15, 1998
</TABLE>
We are also incorporating by reference additional documents that we file
with the Commission between the dates of this Joint Proxy Statement/Prospectus
and the date of the Davel Annual Meeting and the Peoples Special Meeting.
Old Davel has supplied all information contained or incorporated by
reference in this Joint Proxy Statement/Prospectus relating to Old Davel and
New Davel and Peoples has supplied all such information relating to Peoples.
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GLOSSARY
"1996 Payphone Order" means the orders issued by the FCC in September and
November 1996 implementing Section 276, adopted in a docket entitled In the
Matter of Implementation of the Pay Telephone Reclassification and
Compensation Provisions of the Telecommunications Act of 1996, FCC 96-388,
which 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
(equivalent to 131 calls multiplied by $0.35 per call).
"1997 Payphone Order" means the payphone order implementing Section 276
issued by the FCC in October 1997 in response to the Court's removal and
vacation of the 1996 Payphone Order, which adjusted the per-call rate for
dial-around compensation to $0.284 per call.
"1996 Credit Agreement" means Old Davel's $25 million revolving line of
credit with NationsBank, N.A., entered into as of September 30, 1996.
"1998 Credit Agreement" means Old Davel's credit agreement, dated as of
February 3, 1998, with NationsBank, N.A., as Administrative Agent, SunTrust
Bank, Tampa Bay, as Documentation Agent, LaSalle National Bank, as Co-Agent,
and other lenders under which the lenders made available to Old Davel an
initial revolving loan commitment of $15.0 million.
"ABN AMRO" means ABN AMRO Incorporated.
"Acquisition Proposal" means a proposal made by a third party, other than
Old Davel or New Davel or its merger subsidiary, to acquire, directly or
indirectly, (i) more than 25% of the shares and/or voting power of the Peoples
Common Stock then outstanding pursuant to a merger, consolidation or other
business combination, purchase of shares, tender offer or exchange offer or
similar transaction or (ii) all or a substantial portion of the business or
assets of Peoples and its subsidiaries.
"Affected Employee" means any officer or employee of Peoples at the time the
Davel/Peoples Merger becomes effective.
"Appian" means Appian Capital Partners, L.L.C.
"AT&T Divestiture" means the 1984 court-approved divestiture by American
Telephone & Telegraph Company of the RBOCs.
"Bank Holding Act" means the Bank Holding Company Act of 1956.
"Billed Party Preference" means a plan that would automatically route "0+"
dialed non-coin calls from payphones to the billed party's (i.e., a cardholder
or the called party of a collect call) preferred carrier, thereby bypassing
the opportunity for the pre-subscribed carrier of the payphone provider to
handle and receive revenues from such calls.
"Carrier Access Code" means a code dialed by a payphone user to place a call
directly through a given IXC.
"CBR" means Corporate Base Rate.
"CCI" means Communications Central Inc., a wholly owned subsidiary of Old
Davel.
"CCI Acquisition" means Old Davel's acquisition of CCI on February 3, 1998.
"CEO" means Chief Executive Officer.
"ChoiceTel" means ChoiceTel Communications, Inc.
154
<PAGE>
"CLECs" means local exchange telephone services providers offering local
exchange telephone services on a basis competitive with the traditional
incumbent landline local telephone companies.
"Closing Date" means the date of the closing of the Transaction.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Companies" means Old Davel and Peoples.
"ComTel" means ComTel Computer Corp.
"Court" means the United States Court of Appeals for the District of
Columbia Circuit.
"Creditanstalt" means Creditanstalt Corporate Finance, Inc.
"D Subsidiary, Inc." means D Subsidiary, Inc., an Illinois corporation and
an indirect, wholly owned subsidiary of New Davel, formed for the purpose of
merging with and into Old Davel.
"Davel Annual Meeting" means the 1998 Annual Meeting of Shareholders of Old
Davel to be held on December 22, 1998.
"Davel Effective Time" means such time as the Davel Articles of Merger are
duly filed with the Secretaries of State of the States of Illinois and
Delaware and any additional requirements of the Illinois Law and Delaware Law
are complied with, thereby causing the Old Davel/New Davel Merger to become
effective.
"Davel/Peoples Merger" means the merger, pursuant to the Merger Agreement,
of Miami Merger Corp., an indirect, wholly owned subsidiary of New Davel, with
and into Peoples, with Peoples as the surviving corporation.
"Davel/PhoneTel Merger Agreement" means the Agreement and Plan of Merger and
Reorganization, dated as of July 11, 1998, among Old Davel, New Davel, D
Subsidiary, Inc., PT Merger Corp. and PhoneTel, which agreement was terminated
by Old Davel on September 29, 1998.
"Davel Record Date" means November 11, 1998.
"Davel Surviving Corporation" means Old Davel as the surviving corporation
of the merger of Old Davel with and into D Subsidiary, Inc.
"DavelTel" means DavelTel, Inc., a wholly owned subsidiary of Old Davel.
"DCF" means discounted cash flow.
"Delaware Law" means the Delaware General Corporation Law.
"Demand for Payment" means a written demand by a dissenting shareholder for
payment of the fair cash value of the dissenter's shares.
"dial-around calls" means non-coin calls placed by payphone users using
Carrier Access Codes or "toll-free" subscriber access codes (e.g., 1-800, 1-
888, 950, 10XXX or 1010XXX access codes), which permit a payphone user to
"dial around" the operator service provided by the payphone provider.
"dial-around compensation" means the FCC-prescribed payment made by IXCs and
other carriers to payphone providers for use of their payphones for callers to
(a) access OSPs other than the primary OSPs selected by the owner of the
payphone (carrier access code calls) and (b) originate toll free "1-800" or
"1-888" dialed calls.
155
<PAGE>
"Dissenter's Davel Shares" means Old Davel Common Stock held by a Dissenting
Davel Shareholder.
"Dissenting Davel Shareholder" means an Old Davel shareholder who has chosen
to exercise dissenters' rights under the Illinois Law with respect to the Old
Davel/New Davel Merger.
"EBIT" means earnings before interest and taxes.
"EBITDA" means earnings before interest, taxes, depreciation, amortization
and unusual charges.
"EGI" means Equity Group Investments, Inc., a private investment company
controlled by Sam Zell.
"EGI Investment" means (i) the sale by Davel to EGI of 1,000,000 newly
issued shares of Old Davel Common Stock and the issuance by Davel to EGI of
warrants (expiring June 29, 2002) to purchase an additional 215,531 shares of
Old Davel Common Stock at $32.00 per share, for total consideration of
$28,000,000, (ii) the sale to EGI of 500,000 shares of Old Davel Common Stock
by Mr. David R. Hill and the issuance by him to EGI of warrants (expiring June
29, 2002) to purchase an additional 107,785 shares of Old Davel Common Stock
at $32.00 per share, for total consideration of $14,000,000, and (iii) the
sale to EGI of 123,900 shares of Old Davel Common Stock by certain other
selling shareholders and the issuance by them to EGI of warrants (expiring
June 29, 2002) to purchase in the aggregate 26,684 shares of Old Davel Common
Stock at $32.00 per share, for total consideration of $3,469,200.
"Engagement Letter" means a letter agreement between Peoples and Goldman
Sachs, dated December 18, 1997.
"EPS" means earnings per share.
"evergreen" means a provision for an automatic renewal of the term of a
contract.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" means ChaseMellon Shareholder Services, L.L.C.
"Exchange Ratio" means a fixed exchange ratio of 0.235 shares of New Davel
Common Stock per share of Peoples Common Stock.
"FCC" means the Federal Communications Commission, the agency which
regulates the interstate, international and, in certain circumstances,
intrastate provision of telecommunications facilities and services originating
or terminating in the United States.
"FCC Rules" means the rules under Section 276 which directed the FCC to
implement FCC Rules by November 1996 which would:
. create a standard regulatory scheme for all public payphone
providers;
. 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;
. terminate subsidies for LEC payphones from LEC-regulated base
operations;
. prescribe, at a minimum, nonstructural safeguards to eliminate
discrimination between LEC and independent payphone providers and
remove the LEC payphones from the LEC's regulated asset base;
. 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;
156
<PAGE>
. provide for the right of all PSPs to choose the local, intraLATA and
interLATA carriers subject to the requirements of, and contractual
rights negotiated with, Location Owners;
. 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 that they are required;
and
. preempt any state requirements which are inconsistent with the FCC's
regulations implementing Section 276.
"Financing" means the borrowings by New Davel under the New Credit Facility.
"Forward EBITDA" means estimated next calendar year EBITDA.
"GAAP" means United States generally accepted accounting principles.
"Global Link" means Global Link Teleco Corporation.
"Goldman Sachs" means Goldman, Sachs & Co.
"Hospitality Division" means ComTel during such time that ComTel was the
hospitality division of Old Davel.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
"IBES" means Institutional Broker Estimate Service.
"Illinois Law" means the Illinois Business Corporation Act.
"interLATA" means telecommunications services originating and terminating in
different LATAs.
"intraLATA" means telephone service that both originates and terminates
within the same LATA.
"IPPs" means independent payphone providers, i.e., those operators of
payphones that are not affiliated with the RBOCs, AT&T Corporation, other LECs
or other long distance carriers.
"IRS" means the Internal Revenue Service.
"IXCs" means telecommunications providers of transmission services
originating and terminating between local exchanges, typically referred to as
long distance or toll telephone service.
"Joint Board " means the Federal-State Joint Board on Universal Services.
"LATAs" means geographic areas designed to differentiate between
local/short-haul telecommunications transmission service and long distance
telephone service.
"LEC" means the incumbent local exchange carrier, which is a company
providing local telephone services.
"Location Owner" means the owner of the property on which a payphone is
located.
"LTM" means the latest twelve months.
"MCI" means MCI Communications Corporation.
"Merger Agreement" means the Amended and Restated Agreement and Plan of
Merger and Reorganization dated as of July 5, 1998, and amended and restated
as of October 22, 1998, by and among New Davel, Old Davel, Davel Merger Sub,
Peoples Merger Sub and Peoples.
"Morgan County Court" means the circuit court of Morgan County, Illinois.
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<PAGE>
"Named Executive Officers" means, with respect to any Company, the CEO and
each of the four remaining most highly compensated executive officers of such
Company for the fiscal year ended December 31, 1997.
"Nasdaq Composite Index" means the Total Return Index for the Nasdaq Stock
Market (U.S. Companies).
"New Credit Facility" means the credit facility not to exceed $260 million
to be entered into between New Davel and certain lenders, which will be used,
among other things, to repay the majority of the outstanding indebtedness of
Old Davel and Peoples.
"New Davel" means Davel Holdings, Inc., a Delaware corporation, which, no
later than the Davel Effective Time, will be renamed Davel Communications,
Inc.
"New Davel Board of Directors" means the board of directors of New Davel as
it may be constituted from time to time.
"New Davel Bylaws" means the by-laws of New Davel.
"New Davel Certificate" means the Certificate of Incorporation of New Davel.
"New Davel Common Stock" means the common stock of New Davel, par value $.01
per share.
"New Davel Preferred Stock" means the preferred stock of New Davel, par
value $.01 per share.
"New Davel Series A Preferred Stock" means the New Davel Junior
Participating Preferred Stock, Series A, par value $.01 per share.
"New Peoples Credit Facility" means Peoples' revolving credit facility with
Creditanstalt originally entered into in 1995, as amended.
"New Right" means the preferred share purchase right entitling the
registered holder under certain circumstances to purchase from New Davel one
one-thousandth of a share of New Davel Series A Preferred Stock at the
Purchase Price.
"New Right Purchase Price" means, with respect to the New Rights, $100 per
one one-thousandth share of New Davel Series A Preferred Stock, subject to
adjustment.
"New York Law" means the New York Business Corporation Law.
"Non-coin calls" means calling card, credit card, collect and third-party
billed calls. Such calls include those dialed using "0+" the number or "0-"
dialing patterns ("0+/0-") and dial-around calls.
"Old Davel" means Davel Communications Group, Inc., an Illinois corporation.
"Old Davel Acquiring Person" means a person or group other than an exempt
person.
"Old Davel Articles" means the Articles of Incorporation of Old Davel.
"Old Davel Board of Directors" means the board of directors of Old Davel as
it may be constituted from time to time.
"Old Davel Bylaws" means the bylaws of Old Davel.
"Old Davel Certificate" means a certificate representing Old Davel Common
Stock.
"Old Davel Common Stock" means the common stock of Old Davel, no par value
per share.
"Old Davel Merger Consideration" means one share of New Davel Common Stock.
"Old Davel/New Davel Merger" means the merger, pursuant to the Merger
Agreement, of Old Davel with and into D Subsidiary, Inc., with Old Davel
surviving as an indirect, wholly owned subsidiary of New Davel.
"Old Davel Purchase Price" means $100 per one one-thousandth share of Old
Davel Series A Preferred Stock, subject to adjustment.
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<PAGE>
"Old Davel Series A Preferred Stock" means Old Davel Junior Participating
Preferred Stock, Series A, par value $.01 per share.
"Old Right" means the preferred share purchase right entitling the
registered holder under certain circumstances to purchase from Old Davel one
one-thousandth of a share of Old Davel Series A Preferred Stock at the
Purchase Price.
"Original Merger Agreement" means the Agreement and Plan of Merger and
Reorganization, dated as of July 5, 1998, among Old Davel, New Davel and
Peoples, prior to its amendment and restatement on October 22, 1998.
"OSP," or operator service provider, means a company providing automated
and/or live operator services in conjunction with calls placed from payphones
and other transient locations.
"Payphone Companies" means ChoiceTel, Peoples, Davel and PhoneTel.
"Peoples" means Peoples Telephone Company, Inc., a New York corporation.
"Peoples Acquisition Committee" means a committee of the Peoples Board of
Directors comprised of Messrs. Robert E. Lund and Justin S. Maccarone.
"Peoples Board of Directors" means the board of directors of Peoples as it
may be constituted from time to time.
"Peoples Bylaws" means the Bylaws of Peoples.
"Peoples Certificate" means the Amended and Restated Certificate of
Incorporation of Peoples, as amended.
"Peoples Certificates" means certificates representing Peoples Common Stock.
"Peoples Common Stock" means the common stock, par value $.01 per share, of
Peoples.
"Peoples Debt Tender" means the tender offer for all of the Peoples Notes.
"Peoples Effective Time" means such time as the Peoples Certificate of
Merger is filed by the New York Department of State and any additional
requirements of New York Law are complied with, thereby causing the
Davel/Peoples Merger to become effective.
"Peoples Merger Consideration" means the New Davel Common Stock issued to
holders of Peoples Common Stock, plus cash paid in lieu of fractional shares.
"Peoples Notes" means Peoples' outstanding 12 1/4% Senior Notes due 2002.
"Peoples Preferred Stock" means any series of Preferred Stock, par value
$.01 per share, of Peoples.
"Peoples Record Date" means November 11, 1998.
"Peoples Series B Preferred Stock" means the 600,000 shares of Peoples
Preferred Stock which have been designated as Series B Preferred Stock.
"Peoples Series C Preferred Stock" means the Series C Cumulative Convertible
Preferred Stock of Peoples.
"Peoples Special Meeting" means the special meeting of Peoples shareholders
to be held on December 22, 1998 for the purpose of voting on the Transaction.
159
<PAGE>
"Peoples Surviving Corporation" means Peoples as the surviving corporation
of the merger of Peoples and an indirect, wholly owned subsidiary of New
Davel.
"PhoneTel" means PhoneTel Technologies, Inc.
"PhoneTel Transaction" means the transactions contemplated by the
Davel/PhoneTel Merger Agreement, which was terminated on September 29, 1998.
"Placement Agreements" means agreements with Location Owners to install
payphones.
"Platform Acquisitions" means acquisitions of companies with more than
10,000 payphones, which serve to substantially increase the payphone base of
the acquiror.
"Pooling Affiliate" means each person who is an affiliate of Davel or
Peoples, as applicable, within the meaning of Rule 145 under the Securities
Act or otherwise applicable SEC accounting releases with respect to pooling of
interests accounting treatment.
"Presubscribed Interexchange Carrier Charge" means the flat charge of up to
$2.75 per line per month charged by LECs to IXCs, which was intended to
partially offset the FCC's reduction in the per-minute interstate access
charge by LECs to IXCs.
"PSPs" means payphone services providers, which classification includes
Davel, Peoples, PhoneTel, other IPPs and LEC payphone providers.
"Public Interest Payphones" means payphones which (1) fulfill a public
policy objective in health, safety, or public welfare, (2) are not provided
for a Location Owner with an existing contract for the provision of a payphone
and (3) would not otherwise exist as a result of the operation of the
competitive marketplace.
"public switched network" means the traditional domestic landline public
telecommunications network, comprised of local, intraLATA and interLATA
facilities, used to carry, switch and connect telephone calls between the
calling and called parties.
"Purchase Price" means, with respect to the Old Rights, $100 per one one-
thousandth share of Old Davel Series A Preferred Stock, subject to adjustment.
"RBOCs" means the Regional Bell Operating Companies, which were formed to
provide local and intraLATA telephone services in connection with the AT&T
Divestiture.
"SEC" means the Securities and Exchange Commission.
"Section 276" means the section of the Telecommunications Act regulating the
provision of payphone services.
"Securities Act" means the Securities Act of 1933, as amended.
"SG&A" means selling, general and administrative expenses.
"Small Acquisitions" means acquisitions of small (less than 5,000) payphone
routes or businesses by the larger independent payphone operators.
"STC" means Shared Technologies Cellular, Inc.
"Talton" means Talton Holdings, Inc. of Dallas, Texas.
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<PAGE>
"Telecommunications Act" means the comprehensive 1996 federal legislative
enactment amending the Communications Act of 1934, which includes Section 276.
"Termination Option" means the irrevocable option granted by Peoples to Old
Davel to purchase up to 3,226,274 shares of Peoples Common Stock, or such
other number of shares of Peoples Common Stock as equals 19.9% of the issued
and outstanding shares of Peoples Common Stock at the time of exercise of the
Termination Option, at an exercise price of $5.86 per share.
"TOCSIA" means The Telephone Operator Consumer Services Improvement Act of
1990.
"total enterprise value" means the aggregate market value of common stock,
plus total debt, less cash and cash equivalents. Total enterprise value is
essentially the value of a company assuming an unleveraged capital structure.
"Trading Day" means any day on which the Nasdaq National Market is open for
trading.
"Transaction" means the Davel/Peoples Merger, the Old Davel/New Davel Merger
and the other transactions contemplated by the Merger Agreement.
"UBS Capital" means UBS Capital II LLC, a wholly owned subsidiary of Union
Bank of Switzerland.
"UBS Designee" means Charles J. Delaney or Justin S. Maccarone (as
determined by UBS Capital), each of whom is currently a director of Peoples
and an employee of UBS Capital.
"UBS Voting Agreement" means the Corporate Governance, Liquidity and Voting
Agreement, dated as of July 5, 1998, among UBS Capital, Old Davel, New Davel
and Peoples.
"Universal Services Funding Charge" means the monthly assessment charged to
telecommunications providers for the purpose of providing funding for (1)
access to advanced telecommunications services in rural, insular and high-cost
areas at the same cost as similar services are provided in urban areas, (2)
access to advanced telecommunications services for health care providers in
rural areas and (3) below-cost access to advanced telecommunications services
for schools and libraries.
"Universal Services Order" means a Joint Board Report and Order affirmed by
the FCC which requires all telecommunications providers, including payphone
service providers such as the Companies, to contribute to universal services
support beginning in January 1998.
161
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
DAVEL COMMUNICATIONS GROUP, INC.
Report of Arthur Andersen LLP......................................... F-2
Report of Kerber, Eck & Braeckel LLP.................................. F-3
Consolidated Balance Sheets as of December 31, 1997 and December 31,
1996................................................................. F-4
Consolidated Statements of Income for the fiscal years ended December
31, 1997, 1996 and 1995.............................................. F-5
Consolidated Statements of Shareholders' Equity for the fiscal years
ended December 31, 1997, 1996 and 1995............................... F-6
Consolidated Statements of Cash Flows for the fiscal years ended
December 31, 1997, 1996 and 1995..................................... F-7
Notes to Consolidated Financial Statements............................ F-8
Consolidated Balance Sheets (Unaudited) as of September 30, 1998 and
December 31, 1997.................................................... F-20
Consolidated Statements of Operations (Unaudited) for the nine months
ended September 30, 1998 and September 30, 1997...................... F-21
Consolidated Statements of Cash Flows (Unaudited) for the nine months
ended September 30, 1998 and September 30, 1997...................... F-22
Notes to Consolidated Financial Statements (Unaudited)................ F-23
COMMUNICATIONS CENTRAL INC.
Report of Ernst & Young LLP........................................... F-31
Consolidated Balance Sheets as of June 30, 1997 and June 30, 1996..... F-32
Consolidated Statements of Operations for the fiscal years ended June
30, 1997, 1996 and 1995.............................................. F-33
Consolidated Statements of Shareholders' Equity for the fiscal years
ended June 30, 1997, 1996, 1995 and 1994............................. F-34
Consolidated Statements of Cash Flows for the fiscal years ended June
30, 1997, 1996 and 1995.............................................. F-35
Notes to Consolidated Financial Statements............................ F-36
Consolidated Balance Sheets (Unaudited) as of December 31, 1997 and
June 30, 1997........................................................ F-47
Consolidated Statements of Operations (Unaudited) for the six months
ended December 31, 1997 and 1996..................................... F-48
Consolidated Statements of Cash Flows (Unaudited) for the six months
ended December 31, 1997 and 1996..................................... F-49
Notes to Consolidated Financial Statements (Unaudited)................ F-50
PEOPLES TELEPHONE COMPANY, INC.
Report of Ernst & Young LLP........................................... F-52
Consolidated Balance Sheets as of December 31, 1997 and 1996.......... F-53
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995.................................................. F-54
Consolidated Statements of Shareholders' Equity (Deficit) for the
period from January 1, 1995 through December 31, 1997................ F-55
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995.................................................. F-56
Notes to Consolidated Financial Statements............................ F-57
Consolidated Balance Sheets as of September 30, 1998 (Unaudited) and
December 31, 1997.................................................... F-72
Consolidated Statements of Operations (Unaudited) for the three months
ended September 30, 1998 and September 30, 1997...................... F-73
Consolidated Statements of Operations (Unaudited) for the nine months
ended September 30, 1998 and September 30, 1997...................... F-74
Consolidated Statements of Cash Flows (Unaudited) for the nine months
ended September 30, 1998 and September 30, 1997...................... F-75
Notes to Consolidated Financial Statements (Unaudited) ............... F-76
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Davel Communications Group, Inc.:
We have audited the accompanying consolidated balance sheet of Davel
Communications Group, Inc. (an Illinois corporation) and Subsidiaries as of
December 31, 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 Group, Inc. and Subsidiaries as of December 31, 1997, and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
St. Louis, Missouri,
March 6, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Davel Communications Group, Inc.
We have audited the accompanying consolidated balance sheet of Davel
Communications Group, Inc. (an Illinois corporation) and Subsidiaries as of
December 31, 1996, and the related consolidated statements of income,
shareholders' equity, and cash flows for years ended December 31, 1996 and
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 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 Group, Inc. and Subsidiaries as of December 31, 1996, and the
consolidated results of their operations and their consolidated cash flows for
years ended December 31, 1996 and 1995, in conformity with generally accepted
accounting principles.
Kerber, Eck & Braeckel LLP
Springfield, Illinois
March 14, 1997
F-3
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ------- -------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.................................... $ 2,567 $ 4,630
Trade accounts receivable, net of allowance for doubtful
accounts of $185 and $154, respectively..................... 9,105 6,079
Note receivable.............................................. 2,536 2,301
Other current assets......................................... 702 1,745
------- -------
Total current assets....................................... 14,910 14,755
Property and Equipment......................................... 34,528 26,888
Other Assets, net.............................................. 3,520 2,219
------- -------
Total assets............................................... $52,958 $43,862
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Current maturities of long-term debt......................... $ 1,501 $ 69
Accounts payable............................................. 1,257 1,044
Accrued liabilities.......................................... 1,832 1,512
------- -------
Total current liabilities.................................. 4,590 2,625
------- -------
Long-term Debt................................................. 6,801 5,726
Deferred Income Taxes.......................................... 3,597 2,576
------- -------
Shareholders' Equity:
Preferred stock--$.01 par value, 1,000,000 shares authorized
but unissued................................................ -- --
Common stock--$.01 par value, 10,000,000 shares authorized,
4,629,323 and 4,581,269 shares issued and outstanding,
respectively................................................ 46 46
Additional paid-in capital................................... 20,685 19,912
Retained earnings............................................ 17,239 12,977
------- -------
Total shareholders' equity................................. 37,970 32,935
------- -------
Total liabilities and shareholders' equity................. $52,958 $43,862
======= =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-4
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Coin calls.................................. $ 25,211 $ 18,560 $ 14,357
Non-coin calls, net of 1997 dial-around
compensation adjustment--Note 16........... 21,797 15,471 15,249
Switching services provided to Hospitality
Division--Note 8........................... -- 2,359 1,751
Administrative support provided to
discontinued subsidiaries--Note 8.......... -- 583 473
--------- --------- ---------
Total revenues............................ 47,008 36,973 31,830
--------- --------- ---------
Costs and Expenses:
Telephone charges........................... 9,576 7,501 6,076
Commissions................................. 6,202 4,605 3,852
Service, maintenance and network costs...... 10,685 8,546 7,371
Selling, general and administrative......... 13,846 9,388 7,269
Commissions paid to Hospitality Division--
Note 8..................................... -- 1,681 1,116
--------- --------- ---------
Total operating costs and expenses........ 40,309 31,721 25,684
--------- --------- ---------
Operating profit.......................... 6,699 5,252 6,146
Interest Expense.............................. (475) (289) (48)
Other......................................... 497 100 125
--------- --------- ---------
Income from continuing operations before
income taxes............................. 6,721 5,063 6,223
Provision for Income Taxes.................... 2,459 1,868 2,403
--------- --------- ---------
Net income from continuing operations..... 4,262 3,195 3,820
Discontinued Operations....................... -- 610 (2,508)
--------- --------- ---------
Net income................................ $ 4,262 $ 3,805 $ 1,312
========= ========= =========
Basic Earnings per Share:
Continuing operations....................... $ .93 $ .70 $ .85
--------- --------- ---------
Discontinued operations..................... -- .14 (.56)
--------- --------- ---------
Basic earnings per share.................... $ .93 $ .84 $ .29
========= ========= =========
Diluted Earnings per Share:
Continuing operations....................... $ .90 $ .70 $ .85
--------- --------- ---------
Discontinued operations..................... -- .13 (.56)
--------- --------- ---------
Diluted earnings per share.................. $ .90 $ .83 $ .29
========= ========= =========
Weighted Average Shares Outstanding........... 4,600,725 4,513,035 4,455,000
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994........ 4,455,000 $ 45 $18,773 $ 7,860 $26,678
Net income for the year ended
December 31, 1995.............. -- -- -- 1,312 1,312
--------- ---- ------- ------- -------
Balance, December 31, 1995........ 4,455,000 45 18,773 9,172 27,990
Stock options and warrants
exercised...................... 126,269 1 1,139 -- 1,140
Net income for the year ended
December 31, 1996.............. -- -- -- 3,805 3,805
--------- ---- ------- ------- -------
Balance, December 31, 1996........ 4,581,269 46 19,912 12,977 32,935
Stock options exercised and
grants of common stock......... 48,054 -- 773 -- 773
Net income for the year ended
December 31, 1997.............. -- -- -- 4,262 4,262
--------- ---- ------- ------- -------
Balance, December 31, 1997........ 4,629,323 $ 46 $20,685 $17,239 $37,970
========= ==== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income...................................... $ 4,262 $ 3,805 $ 1,312
Adjustments to reconcile net income to cash
flows from operating
activities--
Gain on sale of discontinued operations....... -- (644) --
Losses from discontinued operations........... -- 35 2,508
Depreciation and amortization................. 4,316 2,986 2,136
Gain on sale of property and equipment........ (156) (1) (6)
Deferred income taxes......................... 1,021 833 45
Nonrecurring charge........................... -- -- 215
Changes in assets and liabilities, net of
effects from acquisition--
Accounts receivable........................... (3,026) 447 (1,658)
Note receivable............................... (235) -- --
Other assets.................................. (1,102) (929) (81)
Accounts payable.............................. 213 (1,104) 392
Accrued liabilities........................... 320 471 (364)
-------- -------- -------
Net cash from operating activities.......... 5,613 5,899 4,499
Net cash from discontinued operations....... -- 671 355
-------- -------- -------
Net cash flows from operating activities.... 5,613 6,570 4,854
-------- -------- -------
Cash Flows from Investing Activities:
Capital expenditures............................ (4,092) (5,092) (5,585)
Proceeds from sale of property and equipment.... 26 -- 31
Proceeds from sale of discontinued operations... -- 2,654 --
(Increase) decrease in cash value of life
insurance...................................... 93 (9) (6)
Purchase of payphone assets, net of cash........ (7,131) (8,570) (1,688)
-------- -------- -------
Net cash flows from investing activities.... (11,104) (11,017) (7,248)
-------- -------- -------
Cash Flows from Financing Activities:
Proceeds from long-term debt.................... 13,660 7,411 --
Payments on long-term debt...................... (11,005) (1,906) (73)
Issuance of common stock through stock options
and warrants................................... 773 1,139 --
-------- -------- -------
Net cash flows from financing activities.... 3,428 6,644 (73)
-------- -------- -------
Net (decrease) increase in cash and cash
equivalents................................ (2,063) 2,197 (2,467)
Cash and Cash Equivalents, beginning of period.... 4,630 2,433 4,900
-------- -------- -------
Cash and Cash Equivalents, end of period.......... $ 2,567 $ 4,630 $ 2,433
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
1. DESCRIPTION OF BUSINESS:
Davel Communications Group, Inc. and Subsidiaries (the Company) operates,
services and maintains a system of approximately 19,000 payphones in 36 states
and provides operator services to these payphones. The Company's headquarters
is located in Tampa, Florida, with divisional and administrative facilities in
19 dispersed geographic locations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation, except as noted in Note 8.
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 22% 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 straight-line and accelerated methods.
Installed payphones and related equipment includes installation and other
costs which are capitalized and amortized over the estimated useful lives of
the equipment. The costs associated with maintenance, repair and refurbishment
of telephone equipment are charged to expense as incurred.
Other Assets
Other assets include costs associated with obtaining written and signed
location contracts, goodwill and other intangibles. Costs associated with
obtaining location contracts are amortized on a straight-line basis over the
life of the contract, based on contract terms, generally 5 years. Goodwill and
other intangibles are amortized on a straight-line basis over periods
estimated to be benefited, generally 10 years. Accumulated amortization as of
December 31, 1997 and 1996 was approximately $1,113 and $646, respectively.
F-8
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
The Company periodically evaluates the carrying amount of intangible and
long-lived assets, considering whether the undiscounted cash flows from
related operations will be sufficient to recover recorded asset amounts.
Recognition of Revenue
Revenues from coin calls and non-coin calls are recognized as calls are
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.
Earnings Per Share
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128 (SFAS 128) during the year ended December 31, 1997, and all
prior period earnings per share data has been presented on this basis.
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 conform to the 1997
presentation.
3. DISCONTINUED OPERATIONS:
Sale of Hospitality Division
On December 31, 1996, the Company sold its Hospitality Division, ComTel
Computer Corp. (ComTel), in a stock sale agreement for approximately $5,000
(cash proceeds of $2,700 and a note receivable of $2,300). The note receivable
was amended as of December 31, 1997, and has a maturity date of November 30,
1998, with a stated interest rate of 9.75% per annum. The Company holds a
first security interest in the assets and common stock of ComTel. The sale
resulted in a gain of $746, after tax expense of $439 and added $.16 to the
1996 net earnings per share. The Company recorded a gain from operations of
$334 and a loss of $2,043, net of income taxes of $115 and $243, respectively,
in 1996 and 1995.
The disposal of this division is being accounted for as a discontinued
operation and its operating results are segregated and reported as
discontinued operations in the accompanying consolidated statements of income
and cash flows for all periods presented.
Remanufacturing Division
During the fourth quarter of 1996, the Company committed to discontinue its
remanufacturing operations. This disposition has been reported as a
discontinued operation and, accordingly, results of its Remanufacturing
F-9
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
Division have been excluded from continuing operations in the consolidated
statements of income and cash flows for all periods presented. The net assets
of $599 have been separately classified in other current assets in the
accompanying balance sheet at December 31, 1996, related to the disposal of
this division. The sale resulted in a loss of $102, after a tax benefit of
$63. The Company recorded losses from operations of $369 and $465, net of
income tax benefits of $192 and $268, respectively in 1996 and 1995.
4. NONRECURRING CHARGE:
In 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". A nonrecurring
charge of $2,700 related to intangible assets purchased in the April 1994
acquisition of ComTel has been included in discontinued operations. Acquired
contracts with hotel and motel properties for operator services represent
$2,500 of the charge, and acquired research and development costs represent
the remaining $200. The Company determined the future cash flows from these
impaired assets to be negligible and considered a complete write-down of the
remaining intangible balances to be appropriate.
5. ACQUISITIONS:
During the years ended December 31, 1997 and 1996, the Company made
acquisitions, each of which has been accounted for as a purchase. 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 2,861 and 2,767 payphones
in 1997 and 1996, respectively, for purchase prices totaling $7,131 and
$8,570, respectively.
6. OTHER CURRENT ASSETS:
Other assets consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ------
<S> <C> <C>
Prepaid income taxes......................................... $126 $ 805
Discontinued operations...................................... -- 599
Other........................................................ 576 341
---- ------
Total other current assets............................... $702 $1,745
==== ======
</TABLE>
7. PROPERTY AND EQUIPMENT:
Property and equipment is summarized as follows at December 31:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
1997 1996 IN YEARS
------- ------- -----------
<S> <C> <C> <C>
Installed payphones and
related equipment...... $41,561 $30,849 10
Vehicles and other
equipment.............. 1,654 1,679 5-39
------- -------
43,215 32,528
Less--Accumulated
depreciation........... (11,943) (8,567)
------- -------
31,272 23,961
Uninstalled payphone
equipment.............. 3,256 2,927
------- -------
$34,528 $26,888
======= =======
</TABLE>
F-10
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
8. RELATED-PARTY NOTES AND TRANSACTIONS:
Transactions With Shareholder
The Company engaged in the following transactions with a shareholder.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Payments made for rent of commercial real estate and
lease of long distance switching equipment.............. $196 $239 $232
==== ==== ====
Payments received for providing administrative services.. $107 $122 $127
==== ==== ====
</TABLE>
During 1997, the Company sold a life insurance policy, a house and an
airplane to Mr. David Hill (the Shareholder) who owns 50.2% of the Company's
outstanding common stock. 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 is being recognized
ratably over the term of the lease. During 1997, the Company recognized $128
of the deferred gain.
In September 1997, the Company purchased the long distance switching
equipment that had previously been leased from the Shareholder. The price of
$378 was the estimated fair market of the equipment based upon independent
appraisals.
Intercompany Profits and Losses
As the Hospitality and Remanufacturing Divisions' results of operations have
been excluded from continuing operations in the consolidated statements of
income for the years ended December 31, 1996 and 1995, certain intercompany
transactions were not eliminated. These transactions include: a) revenue from
directing call traffic from the Hospitality Division to the Company's
switching equipment, b) income from providing administrative support to the
discontinued subsidiaries and c) commissions paid to the Company's Hospitality
Division for directing call traffic through the Company's switching equipment.
The Stock Purchase Agreement for the sale of the Hospitality Division
provided for a contractual relationship between the Company and the buyer for
continuing use of the Company's switching equipment through December 31, 1997,
at a rate structure substantially as provided during 1996.
F-11
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
9. LONG-TERM DEBT:
Following is a summary of long-term debt as of December 31:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Term note payable to the bank at the bank's adjusted
LIBOR rate (7.66% at December 31, 1997), principal
payments of $375 plus interest due quarterly beginning
October 1, 1997, collateralized by the Company's assets. $7,125 $ --
Revolving Advance on bank's line of credit at the bank's
corporate base rate (8.50% and 8.25% at December 1997
and 1996, respectively), interest due monthly with the
principal due September 30, 2001, collateralized by the
Company's assets........................................ 1,176 5,590
Notes payable to banks and others with interest rates
ranging from 5.90% to 9.95% due at various dates ending
March 1998.............................................. 1 205
------ ------
8,302 5,795
Less--Current maturities................................. 1,501 69
------ ------
$6,801 $5,726
====== ======
</TABLE>
Annual maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Year ended December 31:
1998............................ $1,501
1999............................ 1,500
2000............................ 1,500
2001............................ 2,676
2002............................ 1,125
</TABLE>
Effective September 30, 1996, the Company expanded the size of its revolving
bank line of credit from $15 million to $25 million. This line of credit
provides for the conversion of up to $17.5 million of the line of credit to
term loans. The terms of the agreement call for the Company to pay interest on
a graduated scale based on the bank's Corporate Base Rate (CBR). The maturity
date of the revolving portion of the credit facility is September 30, 2001.
Principal outstanding on each term loan under the convertible portion of the
credit facility shall be payable in 12 to 20 quarterly installments with the
last installment due no later than September 30, 2003.
The line of credit agreement requires, among other things, that the Company
meet minimum net worth and current ratio requirements and contains certain
other restrictions related to use of proceeds, compensating balances, types of
investments and the assumption of additional debt.
10. OPERATING LEASE COMMITMENTS:
The Company conducts a portion of its operations in leased facilities under
noncancelable operating leases expiring at various dates through 2004. Some of
the operating leases provide that the Company pay taxes, maintenance,
insurance and other occupancy expenses applicable to leased premises.
F-12
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
The annual minimum rental commitments under operating leases are as follows:
<TABLE>
<S> <C>
Year ended December 31:
1998.............................. $345
1999.............................. 230
2000.............................. 127
2001.............................. 103
2002.............................. 103
Thereafter........................ 52
----
Total minimum payments required. $960
====
</TABLE>
Rent expense for operating leases from continuing operations for the year
ended December 31, 1997, 1996 and 1995 was $364, $213 and $169, respectively.
11. CAPITAL STOCK TRANSACTIONS:
Preferred Stock
The Company's articles 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.
Stock Options and Warrants
The Company maintains a Stock Option Plan and a Directors' Stock Option
Plan, accounted for under APB Opinion 25. The plans provide for the grant of
nonqualified options to purchase shares of common stock and outright grants of
common stock. For the year 1997, 25,004 outright stock grants were issued. The
Company has 55,000 warrants outstanding with an exercise price of $15.60
issued in connection with the Company's initial public offering in 1993 that
are scheduled to expire in 1998.
The maximum number of shares of common stock reserved for issuance under the
Stock Option Plan and the Directors' Stock Option Plan are 1,000,000 and
150,000 shares, respectively, and the maximum term of the options is five
years. Generally, key employee options vest in three equal installments.
Nonemployee Directors' options become fully vested upon receipt. 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 Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123), the Company's net
earnings and earnings per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net Earnings
As reported....................................... $4,262 $3,805 $1,312
Pro forma......................................... $4,150 $3,206 $1,283
Basic earnings per common share
As reported....................................... $ .93 $ .84 $ .29
Pro forma......................................... $ .90 $ .71 $ .29
</TABLE>
F-13
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
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 1997, 1996 and 1995: dividend yield of 0% for
all years; expected volatility of 54.0%, 32.9% and 43.4%, respectively, risk-
free interest rates of 5.7%, 6.2% and 5.9%, respectively, and expected life of
approximately five years.
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:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ------------------ -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 501,900 $14.07 420,774 $12.63 414,674 $12.67
Granted................. 33,700 16.02 255,000 14.66 12,000 11.88
Exercised............... (23,050) 13.60 (173,874) 12.36 -- --
Expired................. (1,000) 12.38 -- -- (5,900) 13.42
------- ------ -------- ------ ------- ------
Outstanding at end of
year................... 511,550 $14.22 501,900 $14.07 420,774 $12.63
======= ====== ======== ====== ======= ======
Options exercisable at
year-end............... 511,550 $14.22 276,566 $13.44 344,672 $12.61
Weighted-average fair
value of options
granted during the
year................... $ 6.04 $ 3.98 $ 3.85
</TABLE>
The following information applies to options outstanding at December 31,
1997:
<TABLE>
<S> <C>
Number outstanding........................................... 511,550
Range of exercise prices..................................... $9.25-$17.00
Weighted-average exercise price.............................. $14.22
Weighted-average remaining contractual life.................. 2.57 years
</TABLE>
12. EARNINGS PER SHARE:
In accordance with SFAS 128, the following tables reconcile net income and
weighted average shares outstanding to the amounts used to calculate the basic
and diluted earnings per share for each of the years ended December 31, 1997,
1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Weighted average shares outstanding........ 4,600,725 4,513,035 4,455,000
Assumed exercise of options and warrants
(treasury stock method)................... 126,016 50,557 --
--------- --------- ---------
Diluted shares outstanding................. 4,726,741 4,563,592 4,455,000
========= ========= =========
</TABLE>
Options to purchase 420,774 shares of common stock at a weighted average
purchase price of $12.63 per share were outstanding during 1995 but were not
included in the computation of diluted Earnings Per Share because the options'
exercise price was greater than the average market price of the common shares.
F-14
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
13. 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 provision for income taxes is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Currently payable:
Federal.......................................... $1,323 $ 828 $1,968
State............................................ 115 207 299
------ ------ ------
1,438 1,035 2,267
Deferred........................................... 1,021 833 136
------ ------ ------
Income tax from continuing operations.......... 2,459 1,868 2,403
Income tax expense (benefit) from discontinued
operations........................................ -- 300 (25)
------ ------ ------
Total income tax expense....................... $2,459 $2,168 $2,378
====== ====== ======
</TABLE>
Deferred tax assets and liabilities consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
NET NET NET NET
CURRENT NONCURRENT CURRENT NONCURRENT
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Assets:
Capital loss carryforward........ $-- $ 561 $-- $ 561
State net operating loss and AMT
carryforwards................... -- 135 -- --
Other............................ 82 63 79 27
---- ------- ---- -------
82 759 79 588
Liabilities:
Depreciation..................... -- (3,795) -- (2,603)
---- ------- ---- -------
Subtotals...................... 82 (3,036) 79 (2,015)
Valuation allowance................ -- (561) -- (561)
---- ------- ---- -------
Deferred taxes................. $ 82 $(3,597) $ 79 $(2,576)
==== ======= ==== =======
</TABLE>
A deferred tax asset of $561,123 has been provided for the $1.5 million of
tax-basis capital loss carryover on the sale of ComTel. A valuation allowance
for 100% of this deferred tax asset has been provided to reduce the asset to
the amount of tax benefit management believes it will most likely realize. As
time passes, management believes it will be able to better assess the amount
of tax benefit it will realize from applying this capital loss. The capital
loss carryover expires December 31, 2001.
F-15
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
A reconciliation of federal statutory income taxes to the Company's
effective tax provision is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Provision for federal income tax at the
statutory rate (34%)........................... $2,285 $1,722 $2,116
State income taxes, net of federal benefit...... 218 167 205
Capital losses.................................. -- 152 (49)
Other, net...................................... (44) (173) 131
------ ------ ------
Income taxes from continuing operations..... 2,459 1,868 2,403
Income tax expense (benefit) from discontinued
operations..................................... -- 300 (25)
------ ------ ------
Total income tax expense.................... $2,459 $2,168 $2,378
====== ====== ======
</TABLE>
14. 401(K) PROFIT SHARING PLAN:
The Company maintains a 401(k) profit sharing plan which covers all full-
time employees who meet the eligibility requirements as to age and length of
service. The Company will match 50% of the participants' elective deferrals
not exceeding 3% of the participants' compensation. Profit sharing expense was
$53, $46 and $35 for 1997, 1996 and 1995, respectively.
15. STATEMENT OF CASH FLOWS:
Cash paid during the years ended December 31 for interest and income taxes
was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ------ ------
<S> <C> <C> <C>
Interest............................................... $196 $ 367 $ 142
==== ====== ======
Income tax payments.................................... $312 $2,129 $2,433
==== ====== ======
</TABLE>
In 1997, noncash investing and financing transactions included the sale of
certain fixed assets and a life insurance policy to the Shareholder in
exchange for phone switching equipment and the assumption of two corporate
loans totaling $148.
In 1996, noncash investing activities included a note receivable of $2.3
million for the sale of the Hospitality Division.
16. 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
F-16
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
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
(PSPs). 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.
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
deregulated 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 are required to pay this per-call amount to PSPs, including
the Company, beginning October 7, 1997. After the first two years of per-call
compensation, the market-based local coin rate, adjusted for certain costs
defined by the FCC as $0.066 per call, is the surrogate for the per-call rate
for 800 subscriber and access code calls. These new rule provisions were made
effective as of October 7, 1997. For the period October 7, 1997 through
December 31, 1997, the Company has recorded dial-around compensation at a rate
of $0.284 multiplied by 131 calls or $37.20 per payphone per month. The
Company has calculated dial-around compensation on a per-call basis, at a rate
of $0.284 per call, based on an estimated number of calls per payphone per
month. While the 1997 Payphone Order required long distance carriers to pay
dial-around compensation at a rate of $0.284 per call to payphone providers,
certain long distance carriers were unable or unwilling to provide accurate
call count reporting for the period due to the alleged lack of reliable
payphone-specific coding from the local exchange carriers. As a result of the
lack of availability of payphone-specific coding, certain long distance
carriers, including AT&T (and only in the absence of a contractual commitment
to the contrary), were granted a waiver during the period by the FCC to pay
dial-around compensation at a flat rate surrogate based on the average monthly
number of dial-around calls generated by payphones operated by RBOCs whose
payphone lines already generate the necessary coding digits to enable per-call
tracking. The Company believes that 131 calls per payphone per month
represents the best estimate of the number of dial-around calls for which it
is entitled to payment during the period October 7, 1997 through December 31,
1997. In addition, the 1997 Payphone Order tentatively concluded that the same
$0.284 per-call rate adopted on a going-forward basis should also govern
compensation obligations during the period from November 7, 1996 through
October 6, 1997, and that PSPs are entitled to compensation for all access
code and 800 subscriber calls during the period. The FCC stated that the
manner in which the payment obligation of the IXCs for the period from
November 7, 1996 through October 6, 1997 will be allocated among the IXCs will
be addressed in a subsequent order.
Based on the FCC's tentative conclusion in the 1997 Payphone Order, the
Company has 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 $1.2 million ($0.7 million net of applicable commissions and
income taxes). The Company previously reported this provision as a separate
component of costs and expenses. In the third quarter
F-17
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
of 1998, the Company reclassified the provision as a reduction in non-coin
revenue. For the period from July 1, 1997 through October 6, 1997, the Company
has recorded dial-around compensation at the rate of $37.20 per payphone per
month. The amount of dial-around revenue recognized in the period from July 1,
1997 through October 6, 1997 is approximately $2.2 million and such amount
will be billed after final resolution of the allocation obligations of the
IXCs as determined by the FCC.
The Company recorded dial-around compensation revenue, net of the provision
for dial-around compensation, of approximately $1.2 million for the period
from November 7, 1996 through December 31, 1996 and approximately $7.7 million
for the period from January 1, 1997 through December 31, 1997.
The Company's counsel, Rammelkamp, Bradney, Kuster, Fritsche & Lindsay,
P.C., 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 $37.20 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 $37.20 per payphone per month. While the amount of $0.284
per call 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 $0.284 per call. In a letter to the FCC
dated August 15, 1997, AT&T stated its intention to make dial-around payments
to PSPs based on its imputed rate of $0.12 per call until the FCC issues a new
order setting the level of fair compensation. If the level of fair
compensation is ultimately determined to be an amount less than $0.284 per
call, such determination could result in a material adverse impact on the
Company's results of operations and financial position.
17. COMMITMENTS AND CONTINGENCIES:
The Company is involved in a number of lawsuits which are incidental to its
business. Management does not believe that the resolution of these lawsuits
will have a material impact on the Company's financial position and results of
operations.
18. SUBSEQUENT EVENT:
On February 3, 1998, the Company acquired all the issued and outstanding
shares of common stock, $.01 par value per share (the Common Stock) of
Communications Central Inc. (CCI) (including the associated rights to purchase
shares of Common Stock) at a price of $10.50 per share in cash, or
approximately $70.2 million in the aggregate, and assumed CCI's outstanding
debt of $36.7 million.
In order to finance the acquisition of CCI, the Company entered into a
credit agreement dated as of February 3, 1998, with NationsBank, N.A., as
Administrative Agent, SunTrust Bank, Tampa Bay, as Documentation Agent,
LaSalle National Bank, as Co-Agent, and other lenders (Lenders), pursuant to
which the Lenders made available to the Company an initial revolving loan
commitment of $15 million and a term loan commitment of $110 million.
F-18
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
DECEMBER 31, 1997, 1996 AND 1995
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Certain unaudited quarterly financial information for the year ended December
31, 1997 is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------- FULL
1997 MARCH JUNE SEPTEMBER DECEMBER YEAR
---- ------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
Total revenues................ $10,680 $ 11,969 $11,923 $12,436 $47,008
Operating profit.............. 1,813 2,614 308 1,964 6,699
Net income.................... 1,122 1,613 245 1,282 4,262
Net earnings per share:
Basic....................... $ 0.25 $ 0.35 $ 0.05 $ 0.28 $ 0.93
Diluted..................... $ 0.24 $ 0.34 $ 0.05 $ 0.27 $ 0.90
</TABLE>
F-19
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER
30, 1998 DECEMBER 31,
ASSETS (UNAUDITED) 1997
------ ----------- ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents........................... $ 4,247 $ 2,567
Trade accounts receivables, net of allowance for
doubtful accounts of $5,366 and $185, respectively. 22,707 9,105
Note receivable..................................... 2,404 2,536
Other current assets................................ 3,890 702
-------- -------
Total current assets.............................. 33,248 14,910
Property and Equipment................................ 87,434 34,528
Other Assets.......................................... 62,556 3,520
-------- -------
Total assets...................................... $183,238 $52,958
======== =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities
Current maturities of long-term debt................ $ 20,833 $ 1,501
Accounts payable.................................... 4,550 1,257
Accrued liabilities................................. 8,784 1,832
-------- -------
Total current liabilities......................... 34,167 4,590
Long-Term Debt........................................ 74,927 6,801
Deferred Income Taxes................................. 10,189 3,597
Shareholders' Equity
Preferred stock--$.01 par value, 1,000,000 shares
authorized but unissued............................ -- --
Common stock--$.01 par value, 10,000,000 shares
authorized, 5,784,209 and 4,629,323 shares issued
and outstanding, respectively...................... 58 46
Additional paid-in capital.......................... 49,382 20,685
Retained earnings................................... 14,515 17,239
-------- -------
Total shareholders' equity........................ 63,955 37,970
-------- -------
Total liabilities and shareholders' equity........ $183,238 $52,958
======== =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-20
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDING SEPTEMBER 30
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Revenues
Coin calls............................................. $ 41,430 $ 18,218
Non-coin calls, net of 1997 dial-around compensation
adjustment--Note 7.................................... 27,753 16,239
--------- ---------
Total revenues....................................... 69,183 34,457
Costs and expenses
Telephone charges...................................... 15,019 7,187
Commissions............................................ 10,943 4,641
Service, maintenance and network costs................. 14,344 7,792
Restructuring costs.................................... 825 --
Selling, general and administrative.................... 26,088 10,127
--------- ---------
Total operating costs and expenses................... 67,219 29,747
--------- ---------
Operating profit..................................... 1,964 4,710
Interest expense......................................... (6,295) (319)
Other.................................................... 152 395
--------- ---------
Income (loss) from operations before income taxes.... (4,179) 4,786
Provision for income taxes............................... (1,455) 1,806
--------- ---------
Net income (loss).................................... $ (2,724) $ 2,980
========= =========
Basic earnings (loss) per share.......................... $ (.54) $ .65
========= =========
Diluted earnings (loss) per share........................ $ (.54) $ .63
========= =========
Weighted average shares outstanding...................... 5,031,652 4,591,713
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Cash flows from operating activities
Net income (loss)....................................... $ (2,724) $ 2,980
Adjustments to reconcile net income (loss) to cash flows
from operating activities:
Gain on sale of property and equipment................ (36) (138)
Depreciation and amortization......................... 11,683 3,044
Deferred income taxes................................. 192 579
Deferred gain on sale of assets....................... -- 139
Restructuring charge.................................. 825 --
Changes in assets and liabilities, net of effects from
acquisitions
Accounts receivable................................... (7,715) (2,390)
Note receivable....................................... 132 --
Other assets.......................................... (3,350) 156
Accounts payable...................................... 2,630 316
Accrued liabilities................................... 1,902 57
--------- --------
Net cash flows from operating activities............ 3,539 4,743
Cash flows from investing activities
Capital expenditures.................................... (7,143) (4,375)
Proceeds from sale of property and equipment............ 51 19
Decrease in net assets of discontinued operations....... -- 599
(Increase) decrease in cash value of life insurance..... -- (6)
Increase in other investing assets...................... (1,597) (164)
Purchase of pay telephones.............................. (2,990) (6,674)
Purchase of Communications Central Inc., net of cash
acquired............................................... (103,946) --
--------- --------
Net cash flows from investing activities............ (115,625) (10,601)
Cash flows from financing activities
Long-term debt financing................................ 129,000 6,160
Payments on long-term debt.............................. (43,942) (3,502)
Increase in other financing assets...................... 28,708 681
--------- --------
Net cash flows from financing activities............ 113,766 3,339
--------- --------
Net (decrease) increase in cash and cash
equivalents........................................ 1,680 (2,519)
Cash and cash equivalents, beginning of period............ 2,567 4,630
--------- --------
Cash and cash equivalents, end of period.................. $ 4,247 $ 2,111
========= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(UNAUDITED)
SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
The accompanying unaudited consolidated financial statements have been
prepared by the Company and include the accounts of its subsidiaries. These
statements reflect all adjustments, consisting of only normal recurring
adjustments which are, in the opinion of management, necessary for a fair
presentation of financial results for the three- and nine-month periods ended
September 30, 1998 and 1997, in accordance with generally accepted accounting
principles for interim financial reporting. Certain information and footnote
disclosures normally included in audited financial statements have been
omitted pursuant to such rules and regulations. These interim consolidated
financial statements should be read in conjunction with the Company's audited
consolidated financial statements and the notes thereto for the years ended
December 31, 1997 and 1996 and Management's Discussion and Analysis of
Financial Condition and Results of Operations appearing elsewhere in this Form
10-Q and in the Company's Form 10-K for the year ended December 31, 1997. The
results of operations for the nine month periods ended September 30, 1998 and
1997 are not necessarily indicative of the results for the full year.
1. DESCRIPTION OF BUSINESS
Davel Communications Group, Inc. and its Subsidiaries taken as a whole (the
"Company") owns and operates a network of approximately 40,000 payphones in 36
states and the District of Columbia and provides operator services to these
payphones through its long-distance switching equipment and through
contractual relationships with various long-distance companies. The Company's
payphones can accept coins as payment for local and long-distance calls and
process non-coin calls, including calling card, credit card and third-party
billed calls. The Company's payphones are located at convenience stores, truck
stops, service stations, grocery stores and other locations which typically
have a high demand for payphone service.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Earnings Per Share
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128 (SFAS 128) during the period ended December 31, 1997, and
all prior period earnings per share data have been presented on this basis.
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 conform to the 1997
presentation.
F-23
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
SEPTEMBER 30, 1998
3. ACQUISITION
On February 3, 1998, Davel 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 $6.9 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 will be amortized over fifteen years using straight-line
amortization. The following summarizes unaudited pro forma consolidated
results of operations for the nine months ended September 30, 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.
<TABLE>
<S> <C>
Nine Months Ended September 30, 1997:
Total revenues................................................. $76,809
=======
Loss from continuing operations................................ $ (911)
=======
Basic and Diluted Loss from continuing operations per share.... $ (.18)
=======
</TABLE>
The allocation of the purchase price of the CCI Acquisition is summarized as
follows:
<TABLE>
<S> <C>
Working capital................................................. $ 7,955
Property and equipment, net..................................... 48,578
Goodwill........................................................ 45,700
Identifiable intangible assets.................................. 11,583
--------
$113,816
========
</TABLE>
4. LINE-OF-CREDIT
In connection with the CCI Acquisition on February 3, 1998, the Company
entered into a credit agreement dated as of February 3, 1998 with NationsBank,
N.A., as Administrative Agent, SunTrust Bank, Tampa Bay, as Documentation
Agent, LaSalle National Bank, as Co-Agent, and other lenders (the "Lenders"),
pursuant to which the Lenders made available to the Company an initial
revolving loan commitment (the "Revolving Credit Facility") of $15 million,
including a $5.0 million sublimit available for the issuance of letters of
credit, and a term commitment (the "Term Loan Facility") of $110 million (the
"1998 Credit Agreement"). The balance of $8.7 million outstanding on the 1996
Credit Agreement was refinanced simultaneously with the signing of the 1998
Credit Agreement and is included as part of the balances outstanding on the
1998 Credit Agreement.
The loans outstanding under the Term Loan Facility and the Revolving Credit
Facility bear interest, at the Company's option, equal to (i) the Base Rate
(as defined in the 1998 Credit Agreement) plus a margin of 1.25% or (ii) LIBOR
(as defined in the 1998 Credit Agreement), based on one, two, three or six
month periods, plus a margin of 2.75%, with the applicable margins for the
Term Loan Facility and the Revolving Credit Facility being subject to
reductions based on the Company's ratio of Funded Debt (as defined in the 1998
Credit Agreement) to EBITDA (as defined in the 1998 Credit Agreement) at given
times. As of November 16, 1998, the interest rates on the balance of $76.8
million outstanding under the Term Loan Facility and on a $8.0 million, a $5.0
million, and a $1.8 million note outstanding under the Revolving Credit
Facility were 8.07%, 8.35%, 8.13% and 7.98%, respectively.
F-24
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
SEPTEMBER 30, 1998
Amounts outstanding under the Term Loan Facility are required to be repaid
in consecutive quarterly installments; the first two were paid on June 30 and
September 30, respectively. The third installment (in the aggregate principal
amount of approximately $3.33 million) is due on the last day of the calendar
quarter ending December 31, 1998. The next 20 installments in the aggregate
principal amount of $5.0 million each will be due on the last day of each
calendar quarter commencing with the quarter ending March 31, 1999. The final
installment under the Term Loan Facility will be payable on February 3, 2004.
The Revolving Credit Facility will mature on February 3, 2004. As of November
16, 1998, $76.8 million in outstanding principal amount had been borrowed
under the Term Loan Facility and $14.8 million in outstanding principal amount
had been borrowed under the Revolving Credit Facility.
Loans under the Term Loan Facility and the Revolving Credit Facility may be
prepaid at any time and are subject to certain mandatory prepayments in an
amount equal to (i) 100% of the net proceeds in excess of $1.0 million
received from the issuance of equity by the Company or its subsidiaries, (ii)
100% of the net proceeds from certain asset sales in excess of $0.5 million in
any calendar year and (iii) 50% (75% for the Company's 1998 fiscal year) of
the Company's Excess Cash Flow (as defined in the 1998 Credit Agreement) if
the ratio of its Funded Debt to EBITDA as of the last day of the fiscal year
is less than 2.5 to 1.0. Prepayments under the Revolving Loan Facility will be
applied first to reduce Base Rate loans until they are reduced to zero and
then to reduce LIBOR loans. On June 30, 1998 and August 6, 1998, pursuant to
the terms of the 1998 Credit Agreement, the Company reduced the principal
amounts outstanding under the Term Loan Facility by $24.3 million and $5.5
million, respectively.
The Term Loan Facility and the Revolving Credit Facility are guaranteed, on
a joint and several basis, by the Company and certain of the direct and
indirect subsidiaries of the Company. The 1998 Credit Agreement contains
representations and warranties, affirmative and negative covenants and events
of default customary for similar financings.
On September 30, 1998, the Company and the Lenders agreed to the fifth
amendment to the 1998 Credit Agreement which revised the definition of the
borrowing base to include the entire amount of the Revolving Loan Facility
through January 1, 1999. As of June 30, 1998, the Company was in violation of
the covenant contained in the 1998 Credit Agreement which required the ratio
of funded debt to EBITDA for the trailing twelve month period to be at or
below 4.25 to 1. The Company and the Lenders have agreed to waive this
requirement by entering into the fourth amendment to the 1998 Credit Agreement
to increase the maximum allowable ratio of funded debt to EBITDA to 5.00 to
1.00 for each of the fiscal quarters ended June 30, 1998 and September 30,
1998. The fourth amendment also increases the amount of capital expenditures
allowed from $6.0 million in the fiscal year ended December 31, 1998, to $10.0
million to allow the Company to pursue additional payphone acquisitions. The
Company prepaid a portion of the Term Loan Facility in August 1998 to a level
within the required ratio of funded debt to EBITDA as of June 30, 1998. 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 1998 Credit Agreement as current liabilities.
On September 30, 1998, the Company entered into an additional revolving loan
commitment of $5 million with NationsBank, N.A., under the same terms as the
1998 Credit Agreement. The principal of this revolving loan commitment and all
accrued interest thereon will be payable on January 15, 1999. As of November
16, 1998, $2.5 million was outstanding under this revolving loan commitment.
5. RESTRUCTURING COSTS
In connection with the CCI Acquisition, the Company plans to close the
Atlanta office of CCI and close field offices where CCI and the Company have
duplicate facilities. The office closings are expected to be
F-25
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
SEPTEMBER 30, 1998
completed by the end of the third quarter of 1998. In connection with this,
the Company recognized restructuring costs of $825. These costs are composed
of payments incurred in connection with early lease terminations, facility
closing costs and employee termination benefits for 53 excess field operations
and administrative personnel. Costs of $570 were incurred in the nine months
ended September 30, 1998 and taken against the reserve.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes for the nine month periods ended
September 30, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
------ ----
<S> <C> <C>
Interest...................................................... $6,452 $319
Income taxes.................................................. $ 192 $286
</TABLE>
7. 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 (PSPs). 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.
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
deregulated 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 are required to pay this per-call amount to PSPs,
including the Company, beginning October 7, 1997. After the first two years of
per-call compensation, the market-based local coin rate, adjusted for certain
costs defined by the FCC as $0.066 per call, is the surrogate for the per-call
rate for 800 subscriber
F-26
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
SEPTEMBER 30, 1998
and access code calls. These new rule provisions were made effective as of
October 7, 1997. For the period October 7, 1997 through June 30, 1998, the
Company has recorded dial-around compensation at a rate of $0.284 multiplied
by 131 calls or $37.20 per payphone per month. In addition, the 1997 Payphone
Order tentatively concluded that the same $0.284 per-call rate adopted on a
going-forward basis should also govern compensation obligations during the
period from November 7, 1996 through October 6, 1997, and that PSPs are
entitled to compensation for all access code and 800 subscriber calls during
the period. The FCC stated that the manner in which the payment obligation of
the IXCs for the period from November 7, 1996 through October 6, 1997 will be
allocated among the IXCs will be addressed in a subsequent order.
Based on the FCC's tentative conclusion in the 1997 Payphone Order, the
Company has 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 $1.2 million ($0.7 million net of applicable commissions and
income taxes). The Company previously reported this provision as a separate
component of costs and expenses. In the third quarter of 1998, the Company
reclassified the provision as a reduction in non-coin revenue. Beginning on
July 1, 1997, the Company has recorded dial-around compensation at the rate of
$37.20 per payphone per month.
The Company recorded dial-around compensation revenue of approximately $4.5
million, $12.4 million, $3.2 million and $7.8 million for the three month and
nine month periods ended September 30, 1998 and 1997, respectively.
The Company's counsel, Rammelkamp, Bradney, Kuster, Fritsche & Lindsay,
P.C., 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 $37.20 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 $37.20 per payphone per month.
While the amount of $0.284 per call 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 $0.284 per call.
Various parties have appealed certain aspects of the 1997 Payphone Order to
the Court of Appeals for the District of Columbia. The issues being appealed
include, but are not limited to, the costs included or excluded in the FCC's
determination of the appropriate per-call dial-around compensation rate.
On May 15, 1998, the Court remanded the per-call compensation rate to the
FCC for further explanation without vacating the $0.284 per call 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. Based on the information available
to it, the Company does not believe that it is reasonably possible that the
amount of compensation for dial-around calls will be materially reduced from
the amount recorded as dial-around compensation. While the amount of $0.284
per call constitutes the Company's position on the minimum appropriate level
of fair compensation, certain IXCs have challenged this rate level, asserting
that the appropriate level of fair compensation should be lower than $0.284
per call. If the level of fair compensation is ultimately determined to be an
amount less than $0.284 per call, such determination could have a material
adverse impact on the Company's results of operations and financial position.
F-27
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
SEPTEMBER 30, 1998
On April 3, 1998, the FCC issued a Memorandum Opinion and Order (the "1998
Payphone Order") which was made immediately effective. The 1998 Payphone Order
granted IXCs a waiver of dial-around compensation requirements to enable them
to pay per-phone compensation in lieu of per-call payments for dial-around
calls when payphone-specific coding digits are not available to track the
calls as being generated from a payphone. Payphones that are capable of
providing such digits were determined to receive compensation at a rate of
$0.284 per call. For payphones that cannot provide specific coding digits, the
FCC stated that a flat-rate, per-phone payment must be made by calculating the
average monthly number of dial-around calls received from Regional Bell
Operating Company ("RBOC") payphones that can provide the coding digits. The
average number of RBOC payphones providing coding digits as of the first of
each month will be added together for the months of October 1997 through March
1998 and divided by six to calculate an average number of RBOC payphones. The
average number of calls per month is then divided by the average number of
phones per month to arrive at an average call volume from RBOC payphones. This
average multiplied by $0.284 determines the amount of monthly flat-rate, per-
phone compensation for payphones that cannot supply payphone-specific coding
digits. A six-month average will be used to calculate such compensation
amounts for the fourth quarter of 1997 and first quarter 1998 payments.
Beginning in the second quarter of 1998, the individual monthly average will
be used for the month in which compensation is payable.
The FCC further determined that this weighted call average for per-phone
compensation was too high for payphones in non-equal access areas or small- to
mid-sized LEC territories where payphone-specific coding digits are not
currently available and the LEC is precluded recovery of the upgrade cost. In
these areas, payers were ordered to compensate PSPs based on the weighted
average of call volumes submitted on the record. Based on data from only two
companies, the FCC found that 16 calls per payphone per month was the
appropriate compensation level. However, the FCC invited parties to submit
additional information to enable it to further evaluate its tentative
conclusions.
At this time, the Company is not able to quantify either the amount of per-
phone compensation where digits are not provided, the number of its payphones
served by non-equal access switches, or the number of equal access switches in
small- and mid-sized LEC territories. Under the 1998 Payphone Order, for each
such payphone served by a non-equal access switch or in a small- or mid-sized
LEC territory, the Company could experience a reduction in dial-around
compensation. Based on currently available information, the Company believes
that the number of such payphones is less than 3% of its payphone base and any
related reduction would not have a material adverse effect on its financial
condition. Further, upon the FCC's review of additional data and
reconsideration of the 1998 Payphone Order, the compensation methodologies
described above could be revised.
The FCC provided that the 1998 Payphone Order was applicable only to the
period beginning October 7, 1997 and not to the period from November 6, 1996
to October 6, 1997. The FCC indicated that issues related to this period would
be addressed in a subsequent order.
8. COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
which establishes standards for reporting and disclosure of comprehensive
income and its components. For the three and nine month periods ended
September 30, 1998 and 1997, comprehensive income equals net income.
F-28
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONTINUED)
SEPTEMBER 30, 1998
9. EARNINGS PER SHARE:
In accordance with SFAS 128, the following tables reconcile net income and
weighted average shares outstanding to the amounts used to calculate the basic
and diluted earnings per share for the three and nine month periods ended
September 30, 1998 and 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Weighted average shares outstanding.... 5,780,427 4,612,260
Assumed exercise of options and
warrants
(treasury stock method)............... 95,482 128,630
---------------- ----------------
Diluted shares outstanding............. 5,875,909 4,740,890
================ ================
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Weighted average shares outstanding.... 5,031,652 4,591,713
Assumed exercise of options and
warrants
(treasury stock method)............... 183,620 126,110
---------------- ----------------
Diluted shares outstanding............. 5,215,272 4,717,823
================ ================
</TABLE>
10. OTHER EVENTS
On June 12, 1998, the Company announced the signing of a definitive
agreement (the "Davel/PhoneTel Merger Agreement") to merge with PhoneTel
Technologies, Inc. ("PhoneTel"), based in Cleveland, Ohio. Under the terms of
the agreement, shareholders of PhoneTel will receive Company common stock
equal to $3.08 per share based on the Company's average closing price for the
30 consecutive trading days ending on the second trading day prior to
shareholders' approval; provided, however, that, in no event, will PhoneTel
shareholders receive greater than 0.13765 shares of Company common stock for
each share of PhoneTel stock.
On June 30, 1998, the Company announced the closing of an investment by an
affiliate of Equity Group Investments, Inc., a privately-held investment
company controlled by Sam Zell. In the transaction, the Equity Group
Investments affiliate invested $28 million 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 to reduce amounts outstanding under the
Company's term loan facility.
On July 6, 1998, the Company announced the signing of a definitive agreement
to merge with Peoples Telephone Company, Inc. ("Peoples Telephone"), based in
Miami, Florida. Under the terms of the agreement, holders of common stock of
Peoples Telephone will receive 0.235 of a share of Company common stock for
each outstanding share of Peoples Telephone common stock. The exchange ratio
is fixed and not subject to adjustment. The transaction, which is intended to
close in the fall of 1998, is subject to the approval of the shareholders of
both companies, receipt of required regulatory approvals and other customary
conditions. Consummation of the merger is conditioned on its eligibility for
pooling-of-interests accounting treatment. The transaction is also subject to
conversion of Peoples Telephone's convertible preferred stock into common
stock and receipt by Davel of financing for, and successful consummation of, a
cash tender offer for Peoples Telephone's 12 1/4% Senior Notes due 2002,
pursuant to which a minimum of 85% of the aggregate outstanding principal
amount of $100 million shall have been tendered. Peoples Telephone has
received irrevocable tenders
F-29
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(CONCLUDED)
SEPTEMBER 30, 1998
of approximately $99.9 million principal amount of such notes out of $100
million principal amount outstanding. The refinancing of the combined
companies' indebtedness will be achieved through a senior credit facility.
On September 29, 1998, the Company announced that it was exercising its
contractual rights to terminate the Davel/PhoneTel Merger Agreement, 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
judgement 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, and also filed
a claim against Peoples Telephone alleging that Peoples Telephone wrongfully
caused the termination of the Davel/PhoneTel Merger Agreement. The
counterclaim seeks specific performance of the transactions contemplated by
the Davel/PhoneTel Merger Agreement and damages and other equitable relief
from the Company and Peoples Telephone. The Company believes that it has
meritorious claims against PhoneTel and intends to defend vigorously against
the counterclaim initiated by PhoneTel.
11. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) adopted SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item in
the income statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting. SFAS No. 133 is effective for fiscal years beginning after June
15, 1999. The Company has not yet quantified the impacts of adopting SFAS No.
133 on its consolidated financial statements nor has it determined the timing
or method of its adoption of SFAS No. 133. However, SFAS No. 133 could
increase volatility in earnings and other comprehensive income.
In April 1998, the FASB adopted Statement of Position (SOP) 98-5, "Reporting
on the Costs of Start-Up Activities," which requires costs of start-up
activities and organization costs to be expenses as incurred. SOP 98-5 is
effective for financial statements for fiscal years beginning after December
15, 1998. The Company will adopt SOP 98-5 in fiscal 1999 and does not expect
adoption to have a material impact on its consolidated financial statements.
In February 1998, the FASB adopted SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits," which establishes reporting
requirements related to a business's pensions and other postretirement
benefits. SFAS No. 132 is effective for fiscal years beginning after December
15, 1997, and does not apply to interim financial statements in the year of
adoption. The Company will adopt SFAS No. 132 for the fiscal year ended
December 31, 1998. The Company does not expect adoption to have a material
impact on its consolidated financial statements.
In June 1997, the FASB adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes reporting
requirements related to a business's operating segments, products and
services, geographic areas of operations and major customers. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997, and does not
apply to interim financial statements in the year of adoption. The Company
will adopt SFAS No. 131 for the fiscal year ended December 31, 1998. The
Company does not expect SFAS No. 131 to have a significant impact on its
consolidated financial statements and the related disclosures.
F-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Communications Central Inc.
We have audited the accompanying consolidated balance sheets of
Communications Central Inc. as of June 30, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for each of the three years in the period ended June 30, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Communications Central Inc. at June 30, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended June 30, 1997, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming
Communications Central Inc. will continue as a going concern. As more fully
described in Note 2, the Company has incurred operating losses and has a
working capital deficiency. In addition, the Company is not in compliance with
certain terms of the loan agreement with its bank. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
Ernst & Young LLP
Atlanta, Georgia
September 19, 1997
F-31
<PAGE>
COMMUNICATIONS CENTRAL INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................. $ 5,403,731 $ 2,266,327
Accounts receivable, less allowance for doubtful
accounts of $3,586,000 and $2,140,000 at June
30, 1997 and 1996, respectively................. 9,275,643 10,612,382
Prepaid expenses................................. 1,180,487 707,699
Assets held for sale............................. 38,791,285 --
Other current assets............................. 1,961,522 870,815
------------ ------------
Total current assets........................... 56,612,668 14,457,223
Operating equipment:
Telecommunication equipment...................... 63,776,675 73,262,895
Uninstalled equipment............................ 552,721 665,415
------------ ------------
64,329,396 73,928,310
Less accumulated depreciation and amortization... (33,418,171) (29,922,368)
------------ ------------
30,911,225 44,005,942
Leasehold improvement, computer equipment and
software and office furniture and equipment, net
of accumulated depreciation and amortization of
approximately $3,172,000 and $2,162,000 at June
30, 1997 and 1996, respectively................... 2,183,441 2,367,534
Deferred loan costs, net of accumulated
amortization of $243,000 at June 30, 1996......... -- 260,153
Intangible assets
Site license contracts, net...................... 3,345,221 7,053,568
Agreements not to compete, net................... 513,284 1,046,450
Goodwill, net.................................... 8,680,937 36,555,441
Other assets, net.................................. 2,086,523 3,981,290
------------ ------------
Total assets..................................... $104,333,299 $109,727,601
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to shareholders.................... $ -- $ 8,333
Note payable..................................... -- 79,650
Accounts payable................................. 4,674,064 3,324,204
Accrued expenses................................. 4,799,916 2,878,447
Current portion of long-term debt................ 71,697,389 3,000,000
Accrued commissions.............................. 2,009,907 2,637,010
Accrued interest................................. 880,172 634,295
Accrued compensation............................. 142,822 102,351
Accrued income taxes payable..................... 578,984 328,984
------------ ------------
Total current liabilities...................... 84,783,254 12,993,274
Long-term debt..................................... -- 70,197,389
Commitments and contingencies...................... -- --
Shareholders' equity
Common Stock, $.01 par value:
Authorized shares - 50,000,000; issued and
outstanding shares--6,284,222 and 6,054,556 at
June 30, 1997 and 1996, respectively........... 62,842 60,545
Additional paid-in capital....................... 51,483,958 50,067,383
Accumulated deficit.............................. (31,996,755) (23,590,990)
------------ ------------
Total shareholders' equity..................... 19,550,045 26,536,938
------------ ------------
Total liabilities and shareholders' equity..... $104,333,299 $109,727,601
============ ============
</TABLE>
See accompanying notes.
F-32
<PAGE>
COMMUNICATIONS CENTRAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Revenue:
Coin calls.......................... $ 34,575,398 $ 35,509,110 $33,326,399
Non-coin calls...................... 65,894,619 66,644,945 47,951,407
Other............................... 3,377,759 3,185,516 144,433
------------ ------------ -----------
103,847,776 105,339,571 81,422,239
Costs and expenses:
Line access charges................. 31,532,544 35,923,596 27,411,215
Commissions......................... 20,839,017 22,299,044 15,111,992
Service and collection.............. 19,218,670 19,362,209 12,001,623
Selling, general and administrative. 5,868,275 4,778,522 4,633,821
Bad debt expense.................... 17,208,408 8,575,422 4,640,610
Depreciation and amortization....... 12,374,243 11,741,785 9,795,025
Impairment loss..................... -- 14,183,996 --
Impairment loss on assets held for
sale............................... 2,400,000 -- --
------------ ------------ -----------
Total costs and expenses.......... 109,441,157 116,864,574 73,594,286
------------ ------------ -----------
Operating income (loss)............... (5,593,381) (11,525,003) 7,827,953
Other income, net..................... 5,473,408 -- --
Impairment loss of loan origination
fees................................. (1,155,652) -- --
Interest expense...................... (7,130,140) (6,343,142) (3,527,644)
------------ ------------ -----------
Income (loss) before income tax
expense.............................. (8,405,765) (17,868,145) 4,300,309
Income tax expense.................... -- 78,352 1,127,896
------------ ------------ -----------
Net income (loss)..................... $ (8,405,765) $(17,946,497) $ 3,172,413
============ ============ ===========
Net income (loss) per common share.... $ (1.38) $ (2.96) $ 0.52
============ ============ ===========
Weighted average shares outstanding... 6,101,451 6,054,556 6,064,447
============ ============ ===========
</TABLE>
See accompanying notes.
F-33
<PAGE>
COMMUNICATIONS CENTRAL INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
----------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance of June 30,
1994................... 5,424,021 $54,240 $48,799,468 $ (8,816,906) $40,036,802
Issuance of Common
Stock in acquisition. 46,809 468 549,538 -- 550,006
Issuance of Common
Stock upon exercise
of options........... 180,335 1,803 301,153 -- 302,956
Issuance of Common
Stock upon exercise
of warrants.......... 226,891 2,269 (2,281) -- (12)
Tax benefit from
employees' stock
option plans......... -- -- 213,000 -- 213,000
Net income............ -- -- -- 3,172,413 3,172,413
--------- ------- ----------- ------------ -----------
Balance at June 30,
1995................... 5,878,056 $58,780 $49,860,878 $ (5,644,493) $44,275,165
Issuance of Common
Stock upon exercise
of options........... 176,500 1,765 206,505 -- 208,270
Net loss.............. -- -- -- (17,946,497) (17,946,497)
--------- ------- ----------- ------------ -----------
Balance at June 30,
1996................... 6,054,556 $60,545 $50,067,383 $(23,590,990) $26,536,938
Issuance of warrants.. -- -- 1,378,125 -- 1,378,125
Issuance of Common
Stock upon exercise
of options........... 666 7 3,490 -- 3,497
Issuance of Common
Stock upon exercise
of warrants.......... 229,000 2,290 34,960 -- 37,250
Net loss.............. -- -- -- (8,405,765) (8,405,765)
--------- ------- ----------- ------------ -----------
Balance at June 30,
1997................... 6,284,222 $62,842 $51,483,958 $(31,996,755) $19,550,045
========= ======= =========== ============ ===========
</TABLE>
See accompanying notes.
F-34
<PAGE>
COMMUNICATIONS CENTRAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Operating activities
Net income (loss)................... $(8,405,765) $(17,946,497) $ 3,172,413
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization..... 12,374,243 11,741,785 9,795,025
Other............................. (7,463) -- (16,336)
Impairment loss................... -- 14,183,996 --
Impairment loss on assets held for
sale............................. 2,400,000 -- --
Impairment loss of loan
origination fees................. 1,155,652 -- --
Changes in operating assets and
liabilities:
Accounts receivable............. 1,336,739 23,923 (6,690,852)
Prepaid expenses, other current
assets and other assets........ (1,778,607) (2,136,962) (2,506,920)
Accounts payable................ 1,349,860 2,459,091 (1,611,327)
Accrued expenses................ 1,830,713 1,119,946 1,325,688
Other liabilities............... -- -- 2,261,656
----------- ------------ ------------
Net cash provided by operating
activities................... 10,255,372 9,445,282 5,729,347
Investing activities
Purchase of telecommunication
equipment, leasehold improvements
and office furniture and equipment,
net................................ (3,373,207) (7,496,323) (11,402,674)
Acquisitions of telecommunication
equipment, site licenses,
agreements not to compete and
goodwill........................... -- (462,000) (41,187,892)
Purchases of site licenses, net..... (2,230,825) (2,294,360) (1,957,274)
Proceeds from sale of equipment..... 33,300 285,000 115,526
----------- ------------ ------------
Net cash used in investing
activities................... (5,570,732) (9,967,683) (54,432,314)
Financing activities
Payments on notes payable........... (1,587,983) (423,583) (7,678,146)
Proceeds from long-term debt........ -- 3,000,000 51,640,463
Issuance of Common Stock............ 40,747 208,270 302,944
----------- ------------ ------------
Net cash provided by (used in) fi-
nancing activities................. (1,547,236) 2,784,687 44,265,261
----------- ------------ ------------
(Decrease) increase in cash......... 3,137,404 2,262,286 (4,437,706)
----------- ------------ ------------
Cash at beginning of year..... 2,266,327 4,041 4,441,747
----------- ------------ ------------
Cash at end of year........... $ 5,403,731 $ 2,266,327 $ 4,041
=========== ============ ============
Supplemental disclosure
Cash paid for interest........ $ 6,388,854 $ 6,725,240 $ 2,591,138
=========== ============ ============
Cash paid for income taxes.... $ -- $ -- $ 1,170,900
=========== ============ ============
</TABLE>
See accompanying notes.
F-35
<PAGE>
COMMUNICATIONS CENTRAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Communications Central Inc. (the "Company") is an independent payphone and
inmate phone operator operating in 42 states and the District of Columbia.
Revenues from the operation of payphones and inmate phones are recorded based
on equipment usage and from routing calls to operator service companies and
long distance carriers.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Communications Central of Georgia, Inc.,
InVision Telecom, Inc. and Central Payphone Services, Inc. Significant
intercompany accounts and transactions have been eliminated in consolidation.
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. Actual results could differ from those estimates.
Investments
At June 30, 1997 and 1996, the Company held warrants to purchase common
stock of a vendor. The Company has classified this investment as trading.
Trading investments are held for resale in anticipation of short-term market
movements. Trading investments are stated at fair value. Gains or losses, both
realized and unrealized, are included in Other Revenue. The Company recognized
a realized gain of $1.2 million and an unrealized gain of $1.4 million in
fiscal 1997.
Operating Equipment
Operating equipment is stated at cost. Depreciation is computed on the
straight-line method over the estimated useful life of the assets. The
estimated useful life of all telecommunication equipment is 10 years. The
Company capitalizes the cost of initial installation as part of the cost of
telecommunication equipment. Repairs and maintenance are expensed as incurred.
Concentrations of Credit Risk and Major Customers
The Company derives a majority of its operating revenues from commercial
customers in the United States and large long distance telecommunications
companies. Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable.
Accounts receivable are unsecured and the Company is at risk to the extent
such amounts become uncollectible. The Company's allowance for doubtful
accounts is based upon management's estimates and historical experience.
Intangible Assets
Intangible assets consist of costs allocated to agreements not to compete,
site license contracts relating to installed and acquired equipment, and
goodwill, which represents the excess of the purchase price paid for acquired
equipment over the fair value of the acquired equipment.
Amortization for agreements not to compete is computed using the straight-
line method over the life of the agreements, ranging from 3 to 7 years.
Accumulated amortization on agreements not to compete at June 30, 1997 and
1996 was approximately $1,359,000 and $1,019,000, respectively. In the case of
the site licenses acquired in an acquisition, the estimated fair value of the
site license is capitalized. Amortization for site license contracts is
computed using the straight-line method over the estimated life of the
contracts, ranging from 6 to 7 years.
F-36
<PAGE>
COMMUNICATIONS CENTRAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
Accumulated amortization on site license contracts at June 30, 1997 and 1996
was approximately $4,891,000 and $2,683,000, respectively. Amortization for
goodwill is computed using the straight-line method over lives of 15 and 40
years. Accumulated amortization on goodwill at June 30, 1997 and 1996 was
approximately $3,844,000 and $2,298,000, respectively.
Impairment of Long-Lived Assets
In March 1995, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for Impairment of Long-Lived Assets and Long-
Lived Assets to Be Disposed Of", which requires impairment losses to be
recorded on long-lived assets used in operations when indications of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. SFAS No.
121 also addresses the accounting for long-lived assets that are expected to
be disposed of. The Company adopted SFAS No. 121 in the third quarter of
fiscal 1996.
Periodically, the Company assesses the appropriateness of the carrying
amounts of long-lived assets and related amortization periods based on the
undiscounted value of the current and anticipated future cash flows generated
by the business. If there are indicated impairments, a write-down is recorded
to the extent the carrying amount exceeds fair value. Fair value is based on
either a quoted value, if available, or the estimated future cash flows of the
business discounted at a market rate of interest.
An impairment loss of $14.2 million during the third quarter of fiscal 1996
was recognized in accordance with SFAS No. 121. Cash flow generation by
payphones and inmate lines, on an acquisition-by-acquisition basis, was
calculated based on the Company's best estimate of future income and expenses
including the impact of a continued reduction in operator service provider
revenue as a result of "dial around." Where the sums of future undiscounted
cash flows of these long-lived assets were less than their recorded book
values, an impairment loss was recognized. Such losses consisted of
approximately $12.4 million for operating equipment and approximately $1.8
million for related intangible assets.
An impairment loss on assets held for sale of $2.4 million was recognized
during the fourth quarter of fiscal 1997 in accordance with SFAS No. 121. The
impairment loss was determined based on the estimated fair value to be
received for long-lived assets to be disposed of under an August 21, 1997
Asset Purchase Agreement with Talton Holdings, Inc. ("Talton") to purchase
substantially all of the assets of the Company's inmate division. (See Note
16). All of the long-lived assets of the Company's inmate division have been
classified as assets held for sale in current assets. The results of
operations for the inmate division were (millions):
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Revenue............................................... $46.2 $47.9 $21.1
Income/(Loss) Before Income Taxes.................... (13.4) 1.5 3.3
</TABLE>
Recognition of Revenue
Revenues from coin calls and non-coin calls are recognized as calls are
made. When revenue on a telephone call is recorded, an expense is also
recorded for fees associated with the call.
Income Taxes
The Company uses the liability method to account for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and
F-37
<PAGE>
COMMUNICATIONS CENTRAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number of
common shares and, if dilutive, common equivalent shares outstanding during
the period.
Stock Based Compensation
During 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", which provides an alternative to APB Opinion No. 25,
"Accounting for Stock Issued to Employees" in accounting for stock-based
compensation to employees. As permitted by SFAS 123, the Company continues to
account for stock option grants in accordance with APB Opinion No. 25 and has
elected the pro forma disclosure alternative of the effect of SFAS No. 123.
Accordingly, adoption of the standard in fiscal 1997 did not affect the
Company's results of operations or financial position.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued a new
accounting pronouncement, SFAS No. 128, "Earnings Per Share", which will
change the current method of computing earnings per share. The new standard
requires presentation of "basic earnings per share" and "diluted earnings per
share" amounts, as defined. SFAS No. 128 will be effective for the Company's
quarter ending December 31, 1997, and, upon adoption, all prior period
earnings per share data presented shall be restated to conform with the
provisions of the new pronouncement. Application earlier than the Company's
quarter ending December 31, 1997 is not permitted. The Company does not expect
that the adoption of the new pronouncement will have a material impact on the
Company's results of operations.
Reclassifications
Certain changes in the presentation of the June 30, 1996 amounts have been
made to conform to the June 30, 1997 presentation.
2. GOING CONCERN AND MANAGEMENT'S PLAN
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern; they do not
include adjustments relating to the recoverability of recorded asset amounts
and classification of recorded assets and liabilities to reflect the possible
future effects if the Company is not able to continue as a going concern.
The Company reported a net loss of $8.4 million for the year ended June 30,
1997, and reported a net loss of $17.9 million for the preceding year. The
Company violated certain terms and conditions of the Credit Agreement,
resulting in the outstanding balance of $71.7 million as of June 30, 1997
being classified a current liability. At June 30, 1997 there was a working
capital deficiency of $28.2 million. These conditions raise substantial doubt
about the Company's ability to continue as a going concern.
Management's plan for addressing these conditions is as follows:
Sale of the Company's inmate operations. Pursuant to the Asset Purchase
Agreement between the Company and Talton Holdings, Inc., the Company has
agreed to sell certain assets of the inmate operations to Talton for
approximately $42 million. (See Note 16) The sale is scheduled to be
consummated on or about October 31, 1997, and is contingent upon a number
of items. The cash from the sale of these assets is planned to reduce a
portion of the outstanding debt and provide working capital.
F-38
<PAGE>
COMMUNICATIONS CENTRAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
Take advantage of deregulated local coin rates. In appropriate markets,
the Company intends to increase the coin rate charged on or about October
7, 1997.
Aggressively pursue "fair compensation" as mandated in the
Telecommunications Act of 1996 for dial-around calls. Through participation
in industry groups and individually, the Company will pursue compensation
for dial-around calls from appropriate interexchange providers.
Renegotiate or replace the 1996 Credit Agreement. Management intends to
renegotiate the terms of the 1996 Credit Agreement with its existing lender
or replace the agreement with a new secured lender.
Although the results of these actions cannot be predicted, the Company
believes that the above steps are appropriate and, if successful, will help
improve operating results and cash flow.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable and accounts payable approximate fair values
due to the short maturities of these instruments. The carrying amounts
reported in the balance sheet for notes payable and long-term debt approximate
fair values. Fair values for notes payable and long-term debt are estimated
based on the present value of expected cash flows.
4. ACCOUNTS RECEIVABLE AND BAD DEBT EXPENSE
At June 30, 1997, the accounts receivable balance was $12.9 million with an
allowance for doubtful accounts of $3.6 million. Of that amount, $6.4 million
represents receivables generated from inmate calling along with an allowance
of $3.4 million. The remaining $6.5 million represents receivables generated
from the Company's pay telephones which includes $5.7 million due from
interexchange carrier's for "dial-around compensation". In the fourth quarter
of fiscal 1997, the Company changed its estimate of bad debt expenses by
recording expenses of $6.8 million related to its inmate calling business
primarily to reflect its experience with increased levels of chargebacks for
prior periods reported by LECs primarily in the second and third quarters of
fiscal 1997.
At June 30, 1996, the accounts receivable balance was $12.7 million with an
allowance for doubtful accounts of $2.1 million. Of that amount, $9.9 million
represents receivables generated from inmate calling along with an allowance
of $2.0 million. The remaining $2.8 million represents receivables from the
Company's pay telephones which includes $1.2 million due from interexchange
carriers for "dial-around compensation".
5. NOTES PAYABLE
<TABLE>
<CAPTION>
JUNE 30,
-------------
1997 1996
----- -------
<S> <C> <C>
Unsecured notes payable to shareholders.................... $ -- $ 8,333
Note payable............................................... -- 79,650
----- -------
87,983
Less current portion....................................... -- 87,983
----- -------
$ -- $ --
===== =======
</TABLE>
F-39
<PAGE>
COMMUNICATIONS CENTRAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
6. BANK DEBT
In July 1995, the Company entered into an agreement (the "1995 Loan") with a
bank that amended and restated the terms of a previous agreement. The 1995
Loan contains affirmative and negative covenants including provisions for
maintaining minimum consolidated net worth, interest coverage ratios, and
fixed charge coverage. In addition, it provided that the Company could not
declare or pay dividends and it restricted capital expenditures, indebtedness,
third party guarantees and asset dispositions.
In August 1996, the Company entered into a Credit Agreement (the "1996
Credit Agreement") that amended and restated the 1995 Loan. The 1996 Credit
Agreement permitted borrowing of up to $75,000,000 until November 30, 1996. It
required a payment of $12,000,000 on or before July 1, 1997. The 1996 Credit
Agreement is secured by essentially all of the assets of the Company including
the stock of its operating subsidiaries. The 1996 Credit Agreement further
requires principal payments of $500,000 per month beginning January 1997, and
$750,000 per month beginning in January 1998, through the 1996 Credit
Agreement's maturity in July 1999. In conjunction with the 1996 Credit
Agreement, the Company incurred loan origination costs of approximately
$257,000. These costs, which include loan closing fees, legal and professional
fees, are being amortized over the life of the 1996 Credit Agreement.
On October 8, 1996, the Company's lender agreed to amend the 1996 Credit
Agreement to extend the maturity of the $12,000,000 payment due on November
30, 1996 to July 1, 1997, and to adjust the financial covenants accordingly.
In consideration for the amendments during fiscal year 1997, the lender
received warrant agreements to purchase up to 225,000 shares of the Company's
Common Stock at a nominal price. The cost of approximately $1.4 million
associated with these warrants will be amortized over the life of the 1996
Credit Agreement.
In June 1997, the above terms were modified by the Second Amendment to the
1996 Credit Agreement which extended the timing of the July 1, 1997 payment to
September 1, 1997 upon the payment of a principal amount of $1,500,000. The
Company was not able to repay the remaining payment due of $10,500,000 on
September 1, 1997. As a result, the Company is in default under the 1996
Credit Agreement. In addition, the Company was not in compliance with the
financial covenants under the 1996 Credit Agreement, as amended, as of June
30, 1997. Because of this default, the Company has recognized the impairment
of deferred loan costs of $1.2 million at June 30, 1997.
As a result of the above, all of the debt under the 1996 Credit Agreement,
as amended, is shown as current.
7. LEASE COMMITMENTS
The Company leases office space and certain equipment under operating
leases. Total rent expense for the years ended June 30, 1997, 1996, and 1995
was approximately $668,000, $587,000, and $899,000, respectively.
Future minimum payments, by year and in the aggregate, under the
noncancellable operating leases with initial or remaining terms of one year or
more consist of the following at June 30, 1997:
<TABLE>
<S> <C>
Year ending June 30,
1998........................ $1,295,000
1999........................ 1,067,000
2000........................ 89,000
----------
$2,451,000
==========
</TABLE>
F-40
<PAGE>
COMMUNICATIONS CENTRAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
8. PREFERRED STOCK
As of June 30, 1997 the Company had 2,000,000 shares of Preferred Stock
authorized and none issued and outstanding.
9. COMMON STOCK
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123, "Accounting for Stock-Based Compensation", requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, the Company recognizes compensation expense to the
extent the exercise price of the Company's employee stock options is less than
the market price of the underlying stock on the date of grant.
Stock Options
During fiscal 1992, the Board of Directors issued 348,500 options to
purchase Common Stock at an exercise price of $1.18 per share. These options
are exercisable and became fully vested upon consummation of the Company's
initial public offering on December 16, 1993. The option holders exercised the
remaining 176,500 of the vested options during fiscal 1996.
On October 19, 1993, the Board of Directors approved the establishment of
the 1993 Stock Option Plan. The 1993 Stock Option Plan was amended and
restated as of October 11, 1995 (the "1993 Plan") to increase the shares for
issuance upon exercise of options granted to 850,000 shares. Options are to be
granted at an exercise price per share that is not less than the fair market
value on the date of the grant. All Options granted under the 1993 Plan must
be exercised no later than the tenth anniversary of the date of the grant.
Options may be granted with different vesting terms, but generally provide for
vesting over a three year period. During 1996, the Company repriced 65,000
options, with exercise prices which ranged from $11.88 to $15.00, to fair
market value on the date of the repricing.
On October 19, 1993, the Board of Directors established the Stock Option
Plan for Directors (the "Directors' Plan"), which provides for the grant of
non-qualified stock options to purchase up to 50,000 shares of Common Stock to
directors who are not also employees of the Company. Under the Directors'
Plan, eligible directors could elect to receive stock options in lieu of
annual director compensation. The option exercise price is defined as 50% of
the fair market value of a share on the date of grant. During fiscal 1995 and
1996, 7,997 and 25,402 options were granted under the Directors' Plan,
respectively. Under the Directors' Plan, on the date of the grant of options
at less than fair market value, the Company will, to the extent compensation
expense has not already been recorded, recognize compensation expense ratably
over the vesting period in an amount equal to the difference between the fair
market value on the date of grant and the option exercise price.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to June 30, 1995 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1997, respectively; risk-free interest rates of 5.54%
and 6.48%; a dividend yield of 0%; volatility factors of the expected market
price of the Company's common stock of 0.555; and a weighted-average expected
life of the options of 3 years.
F-41
<PAGE>
COMMUNICATIONS CENTRAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands except for earnings per
share information):
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Pro forma net loss............................ $(8,818,000) $(18,386,000)
Pro forma loss per share...................... $ (1.45) $ (3.04)
</TABLE>
Because SFAS No. 123 is applicable only to options granted subsequent to
June 30, 1995, its pro forma effect will not be fully reflected until fiscal
year 1998.
A summary of the Company's stock option activity under the 1993 Stock Option
Plan, for the years ended June 30 follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------------------------------------
1997 1996 1995
----------------------- ------------------------ -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- -------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year................ 735,000 $6.45 287,584 $12.60 204,750 $11.12
Granted................. 85,000 6.86 660,000 6.11 183,500 14.30
Exercised............... (666) 5.25 -- -- (8,333) 12.00
Canceled................ (2,334) 5.25 (212,584) 5.30 (92,333) 12.76
------- ----- -------- ------ ------- ------
Outstanding, end of
year................... 817,000 $6.49 735,000 $ 6.45 287,584 12.60
======= ===== ======== ====== ======= ======
Exercisable, end of the
year................... 333,207 $7.53 67,999 $ 8.48 46,166 $12.08
======= ===== ======== ====== ======= ======
Weighted-average fair
value of options
granted during the
year................... $3.76 $ 2.61
===== ======
</TABLE>
Options outstanding at June 30, 1997 have a weighted average remaining
contractual life of approximately 8.17 years and are exercisable at prices
ranging from $5.25 to $15.00.
Warrants
In fiscal 1991, the Company issued stock purchase warrants to its bank to
purchase up to 316,188 shares of Common Stock at an exercise price of $.01 per
share, subject to adjustment in certain events. All of the warrants expire on
May 1, 2001. The warrant holders had the right to put the warrants to the
Company; however, termination of these put rights occurred automatically upon
the closing of the Company's initial public offering on December 16, 1993, and
the Company therefore transferred $1,204,117 from redeemable warrants to
additional paid-in capital on Common Stock. Upon the closing of the Company's
initial public offering, the warrant was partially exercised and converted
into 79,047 shares of Common Stock (see above). During fiscal 1994, the
warrant was further exercised and converted into an additional 10,114 shares
of Common Stock. During fiscal 1995, 226,891 warrants were exercised and
converted into an additional 226,891 shares of Common Stock. An additional 136
warrants were recovered, but not converted into Common Stock.
F-42
<PAGE>
COMMUNICATIONS CENTRAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
In September 1996, the Company issued stock purchase warrants to its lender
to purchase 225,000 shares of Common Stock at an exercise price of $.01 per
share. (See Note 4) The warrants were exercised and converted into 225,000
shares of Common Stock on March 17, 1997. As of June 30, 1997 no warrants to
purchase shares of Common Stock remain outstanding.
In July 1995, the Company issued warrants to purchase 44,500 shares of
Common Stock at $8.75 per share to a vendor. During fiscal 1997, warrants to
purchase 4,000 shares were exercised.
On June 30, 1997, the Company had reserved a total of 882,902 shares of
Common Stock for future issuance upon exercise of the stock options and
warrants.
10. OTHER INCOME
In March 1997, the Company announced an Agreement and Plan of Merger
("Merger Agreement") with PhoneTel Technologies, Inc. ("PhoneTel"). On August
21, 1997, the Company announced that its Merger Agreement had been terminated
without any shares of the Company's stock being purchased. In the fourth
quarter of fiscal 1997, the Company received payments totaling $6 million from
PhoneTel. As a result of the amendment and then termination of the agreement,
PhoneTel forfeited these payments to the Company. The payments were recorded
as "Other Income", net of related expenses.
11. INCOME TAXES
The components of income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------
1997 1996 1995
----- ------- ----------
<S> <C> <C> <C>
Current:
Federal........................................ $ -- $78,352 $1,127,896
State.......................................... -- -- --
----- ------- ----------
-- 78,352 1,127,896
Deferred:
Federal........................................ -- -- --
State.......................................... -- -- --
----- ------- ----------
$ -- $78,352 $1,127,896
===== ======= ==========
</TABLE>
At June 30, 1997, the Company had net operating loss carryforwards ("NOLs")
of approximately $32.9 million for federal income tax purposes. These NOLs
expire in varying amounts beginning in 2002 as follows:
<TABLE>
<S> <C>
Year ended June 30,
2002....................... $ 185,000
2003....................... 944,000
2004....................... 3,475,000
2005....................... 2,052,000
2006....................... 889,000
2007....................... 2,735,000
2008....................... 2,285,000
2009....................... 579,000
2010....................... 806,000
2011....................... 11,751,000
2012....................... 7,212,000
-----------
$32,913,000
===========
</TABLE>
F-43
<PAGE>
COMMUNICATIONS CENTRAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
Section 382 of the Internal Revenue Code, as amended ("Section 382"), limits
the amount of federal taxable income that may be offset by the preexisting
NOL's of a corporation following a change in ownership ("Ownership Change") of
the corporation. Approximately $12.9 million of the Company's NOL's are
currently subject to limitation under Section 382 because the Company
experienced an Ownership Change in fiscal 1991 due to the issuance of
convertible preferred stock and in fiscal 1994 due to the issuance of common
stock in the Company's initial public offering. Based upon the Ownership
Change that occurred in fiscal 1991 and 1994, the Company has estimated the
NOL's subject to the Section 382 limitation will not exceed $469,000 per year.
The remaining NOL of $20.0 million can offset future taxable income without
limitation.
Income tax expense differs from the amount computed by applying the
statutory Federal income tax rates for the following reasons:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Income tax expense at statutory federal
income tax rate applied to income before
income taxes............................ $(2,857,960) $(6,075,169) $1,462,105
Increase (decrease) resulting from:
State tax expense, less federal tax
benefit............................... (336,230) (626,339) 192,870
Change in valuation allowance.......... 3,086,504 6,694,557 (612,903)
Other.................................. 107,686 85,303 85,824
----------- ----------- ----------
$ -- $ 78,352 $1,127,896
=========== =========== ==========
</TABLE>
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1997 1996
----------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $13,641,425 $9,766,394
Reserves and vacation pay............................. 1,095,360 1,212,897
AMT credit............................................ 1,117,135 1,117,135
Book over tax amortization............................ 6,409,097 5,126,872
----------- ----------
Gross deferred tax assets............................. 22,263,017 17,223,298
Valuation allowance................................... 10,749,143 7,662,639
----------- ----------
Total deferred tax assets........................... 11,513,874 9,560,659
Deferred tax liabilities:
Tax over book depreciation............................ 10,481,678 8,601,976
Deferred bonus expense................................ 1,032,196 958,683
----------- ----------
Total deferred tax liabilities...................... 11,513,874 9,560,659
----------- ----------
Net deferred tax balance............................ $ -- $ --
=========== ==========
</TABLE>
F-44
<PAGE>
COMMUNICATIONS CENTRAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
12. ACQUISITIONS
During the year ended June 30, 1995 the Company acquired certain assets of
various independent payphone and inmate phone operators including:
<TABLE>
<CAPTION>
AMOUNT
ALLOCATED TO
ACQUISITION PURCHASE INTANGIBLES
DATE SELLING COMPANY PRICE ACQUIRED
----------- --------------- -------- ------------
<S> <C> <C> <C>
July 1994 Pay-Tel of Illinois $ 4,162,000 $ 778,000
July 1994 InVision Telecommunications, Inc. 4,246,000 3,770,000
August 1994 Pay Phones Plus, Inc. 5,899,000 3,358,000
November 1994 Telso, Inc. 12,590,000 7,303,000
April 1995 Robert Cefail & Associates 18,905,000 13,025,000
</TABLE>
The purchase method of accounting was used to record each of the above
acquisitions. Accordingly, the purchase price was allocated to the assets
acquired based on estimated fair values at the purchase dates. Operating
results for the respective companies have been included in the Company's
results of operations from the respective purchase dates.
The following represents the unaudited pro forma results of operations for
the year ended June 30, 1995, assuming the above acquisitions has occurred at
the beginning of the year preceding the year of acquisition:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1995
------------
<S> <C>
Net revenues................................................ $104,929,000
Income before extraordinary item............................ 9,158,000
Net Income.................................................. 9,158,000
Net income per share........................................ 1.51
</TABLE>
13. EMPLOYEE SAVINGS PLAN
Effective January 1, 1993, the Company formed a contributory savings plan
(the "Plan"), which qualifies under Section 401(k) of the Internal Revenue
Code, covering substantially all of its employees. The Company matches 50% of
employee contributions to a maximum of 6% of employee earnings each Plan year.
Company contributions to the Plan were approximately $83,500 and $84,000 for
the years ended June 30, 1997 and 1996, respectively.
14. CONTINGENCIES AND UNCERTAINTIES OF DIAL AROUND COMPENSATION
The Company is from time to time subject to claims and suits arising in the
ordinary course of its business. In the opinion of management, the ultimate
resolution of any such pending matters will not have a material effect on the
Company's financial position.
The Federal Communications Commission ("FCC") issued an order on "dial-
around" compensation ("FCC Order"), which provided an interim plan by which
the interexchange carriers ("IXC's") paid an aggregate monthly amount of
$45.85 per phone to the owners of each payphone. The Company received $1.7
million for the partial month of November 1996 and the full month of December
1996. For the months of January 1997, February 1997 and March 1997 the Company
received an amount of approximately $36.12 per phone per month as several of
the IXCs refused to pay while the FCC Order was being appealed. The Company
has accrued at the rate of $45.85 per phone per month through June 30, 1997.
The receivable owing from all of the IXCs at June 30, 1997 was approximately
$5,700,000. Of that amount, approximately $1,800,000 was collected in July
1997, leaving a balance of approximately $3,900,000 remaining to be collected.
F-45
<PAGE>
COMMUNICATIONS CENTRAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
In a July 1, 1997 decision, the U.S. Court of Appeals for the District of
Columbia Circuit ("Court") reviewed certain Orders of the FCC related to the
implementation of the payphone-specific provisions of the Telecommunications
Act of 1996. Among other things, the Court remanded the issue of rates for
compensation for 800 and access code calls to independent payphone providers
("dial-around compensation") back to the FCC for further consideration.
Further, in a supplemental opinion dated September 16, 1997, the Court
clarified its opinion on dial-around compensation by stating that it was
vacating, rather than remanding, the FCC's previous dial-around compensation
rates while the FCC further reviews the issue. The Company is continuing to
analyze these complex rulings, and attempting to determine the effect, if any,
that they may have on the Company's financial statements and results of
operations.
If the FCC fails to implement a dial around compensation amount that
approximates at least the $45.85 per phone per month or 35 cents per call,
then the impact of such a ruling could have a material adverse effect on the
Company's financial position. For every dollar that the FCC changes its
compensation plan from $45.85 per phone per month, the Company's revenue from
non-coin calls could be impacted positively or negatively by approximately
$155,000 for the period from November 8, 1996 through June 30, 1997.
15. RELATED PARTIES
During the year ended June 30, 1995 the Company paid consulting fees of
approximately $25,000 per year to a shareholder who also holds a position on
the Board of Directors of the Company.
16. SUBSEQUENT EVENTS
On August 21, 1997, the Company, InVision Telecom, Inc. (a wholly owned
subsidiary of the Company) and Talton Holdings, Inc. ("Talton") entered into
an Asset Purchase Agreement (the "Purchase Agreement") whereby Talton agreed
to purchase substantially all of the assets of the Company's inmate phone
business for approximately $42 million (subject to adjustment as provided in
the Purchase Agreement). The Purchase Agreement is scheduled to close on or
about October 31, 1997 and is subject to certain closing conditions including
the consent of the Company's principal lender and the execution of
satisfactory employment agreements with certain members of InVision's
management team. Upon consummation of the Purchase Agreement and the
transactions contemplated thereby, the Company will not own any inmate phones
or have any inmate phone operations.
F-46
<PAGE>
COMMUNICATIONS CENTRAL INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Current assets:
Cash............................................. $ 4,890,771 $ 5,403,731
Accounts receivable, less allowance for doubtful
accounts of $5,247,000 and $3,586,000 at
December 31, 1997 and June 30, 1997,
respectively.................................... 8,567,943 9,275,643
Prepaid expenses................................. 1,114,457 1,180,487
Assets held for sale............................. -- 38,791,285
Other current assets............................. 3,848,159 1,961,522
------------ ------------
Total current assets........................... 18,421,330 56,612,668
Operating equipment:
Telecommunications equipment..................... 64,486,433 63,776,675
Uninstalled equipment............................ 552,721 552,721
------------ ------------
65,039,154 64,329,396
Less accumulated depreciation and amortization... (36,134,080) (33,418,171)
------------ ------------
28,905,074 30,911,225
Leasehold improvements and office furniture and
equipment, net of accumulated depreciation and
amortization of approximately $2,909,000 and
$3,172,000 at December 31, 1997 and June 30, 1997,
respectively...................................... 2,374,971 2,183,441
Intangible assets:
Site license contracts, net...................... 3,957,063 3,345,221
Agreements not to compete, net................... 402,979 513,284
Goodwill, net.................................... 8,328,638 8,680,937
Other assets, net.................................. 2,222,635 2,086,523
------------ ------------
Total assets................................... $ 64,612,690 $104,333,299
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable................................. $ 4,415,383 $ 4,674,064
Accrued expenses................................. 3,899,216 4,799,916
Current portion of long-term debt................ 36,400,000 71,697,389
Accrued commissions.............................. 1,357,519 2,009,907
Accrued interest................................. 244,617 880,172
Accrued compensation............................. 162,117 142,822
Accrued income taxes payable..................... 578,984 578,984
------------ ------------
Total current liabilities...................... 47,057,836 84,783,254
Shareholders' equity:
Common Stock, $.01 par value:
Authorized shares--50,000,000; issued and
outstanding shares--6,286,209 at December 31,
1997 and 6,284,222 at June 30, 1997............. 62,967 62,842
Additional paid-in capital....................... 51,549,274 51,483,958
Accumulated deficit.............................. (34,057,387) (31,996,755)
------------ ------------
Total shareholders' equity..................... 17,554,854 19,550,045
------------ ------------
Total liabilities and shareholders' equity..... $ 64,612,690 $104,333,299
============ ============
</TABLE>
See notes to consolidated financial statements.
F-47
<PAGE>
COMMUNICATIONS CENTRAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Coin calls......................................... $16,444,176 $18,019,392
Non-coin calls..................................... 18,634,380 34,080,813
Other.............................................. 2,629,395 1,058,465
----------- -----------
Total revenues................................... 37,707,951 53,158,670
Cost and expenses:
Line access charges................................ 10,640,187 15,782,323
Commissions........................................ 7,254,072 10,545,201
Service and collection............................. 6,588,302 7,947,290
Bad debt expense................................... 3,230,243 5,887,237
Selling, general and administrative................ 5,182,296 4,006,459
Depreciation and amortization...................... 4,291,683 6,047,556
----------- -----------
Total cost and expense........................... 37,186,783 50,216,066
----------- -----------
Operating income (loss).............................. 521,168 2,942,604
Interest expense..................................... 2,581,799 3,305,877
----------- -----------
Income (loss) before income tax expense.............. (2,060,631) (363,273)
Income tax expense (benefit) ........................ -- --
----------- -----------
Net income (loss)................................ $(2,060,631) $ (363,273)
=========== ===========
Net income (loss) per share...................... $ (0.33) $ (0.06)
=========== ===========
Weighted average number of shares outstanding........ 6,286,209 6,054,556
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-48
<PAGE>
COMMUNICATIONS CENTRAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-------------------------
1997 1996
------------ -----------
<S> <C> <C>
Operating activities
Net loss.......................................... $ (2,060,631) $ (363,273)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization................... 4,648,926 6,047,556
Changes in operating assets and liabilities:
Accounts receivable........................... 707,700 (2,009,169)
Prepaid expenses, other current assets and
other assets................................. (1,820,606) (1,359,750)
Accounts payable and other accrued expenses... (2,428,035) 640,399
------------ -----------
Net cash (used in) provided by operating
activities................................. (952,646) 2,955,763
Investing activities
Purchases of telecommunications equipment,
leasehold improvements, office furniture and
equipment........................................ (1,379,312) (1,247,113)
Acquisitions of telecommunications equipment, site
licenses, agreements not to compete and goodwill. -- (27,526)
Additions of site licenses, net................... (1,540,339) (865,106)
Proceeds from sale of inmate operations........... 38,791,285 --
------------ -----------
Net cash provided by (used in) investing
activities................................. 35,871,634 (2,139,745)
Financing activities
Payments on notes payable......................... (35,297,389) (65,600)
Payment of loan origination cost.................. (200,000) (215,210)
Issuance of Common Stock.......................... 65,441 --
------------ -----------
Net cash (used in) financing activities..... (35,431,948) (280,810)
------------ -----------
Increase (decrease) in cash......................... (512,960) 535,208
Cash at beginning of period....................... 5,403,731 2,266,327
------------ -----------
Cash at end of period............................. $ 4,890,771 $ 2,801,535
============ ===========
Supplemental disclosure
Cash paid for interest............................ $ 3,131,672 $ 3,159,625
============ ===========
Cash paid for income taxes........................ $ -- $ --
============ ===========
</TABLE>
See notes to consolidated financial statements.
F-49
<PAGE>
COMMUNICATIONS CENTRAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
These financial statements should be read in conjunction with the Company's
audited financial statements included in the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission for the fiscal year
ended June 30, 1997. Operating results for the six-month period ended December
31, 1997 are not necessarily indicative of the results that may be expected in
future periods.
2. SALE OF INMATE ASSETS
Pursuant to an August 21, 1997 Asset Purchase Agreement between the Company
and Talton Holdings, Inc. ("Talton"), the Company agreed to sell certain
assets of its inmate operations to Talton for approximately $42 million. The
sale was consummated as of October 1, 1997, and approximately $34 million of
the proceeds were used to reduce the Company's bank debt.
3. 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 Pay
Telephone 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 ("Telecom Act"). The 1996 Payphone Order, which became effective
November 7, 1996, initially mandated dial-around compensation for both access
code calls and subscriber 800 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 subscriber 800
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 ("PSPs").
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 subscriber 800 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
subscriber 800 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.
F-50
<PAGE>
COMMUNICATIONS CENTRAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1997
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 subscriber 800 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 subscriber 800 and access code calls from payphones is the
deregulated local coin rate adjusted for certain cost differences.
Accordingly, the FCC established a rate of $0.284 ($0.350 minus $0.066) per
call for the first two years of per-call compensation (October 7, 1997 through
October 6, 1999). The IXCs are required to pay this per-call amount to PSPs,
including the Company, beginning October 7, 1997. After the first two years of
per-call compensation, the market-based local coin rate, adjusted for certain
costs defined by the FCC as $0.066 per call, is the surrogate for the per-call
rate for subscriber 800 and access code calls. These new rule provisions were
made effective as of October 7, 1997.
In addition, the 1997 Payphone Order tentatively concluded that the same
$0.284 per call rate adopted on a going-forward basis should also govern
compensation obligations during the period from November 7, 1996 through
October 6, 1997, and that PSPs are entitled to compensation for all access
code and subscriber 800 calls during this period. The FCC stated that the
manner in which the payment obligation of the IXCs for the period from
November 7, 1996 through October 6, 1997 will be allocated among the IXCs will
be addressed in a subsequent order.
Based on the FCC's tentative conclusion in the 1997 Payphone Order, the
Company has 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, net of applicable
commissions, recorded in the quarter ended September 30, 1997 for reduced
dial-around compensation is approximately $1,162,510 ($.18 per share). This
provision is recorded as a reduction of non-coin call revenue. For the period
from October 1, 1997 through December 31, 1997, the Company has recorded dial-
around compensation at the rate of $37.20 per payphone per month. The amount
of dial-around revenue recognized in the period from July 1, 1997 through
October 6, 1997 is $2,221,302 and such amount will be billed after final
resolution of the allocation obligations of the IXCs as determined by the FCC.
The Company's outside federal regulatory counsel, Dickstein, Shapiro, Morin
& Oshinsky LLP, is of the opinion that the Company is legally entitled to fair
compensation under the Telecom 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 Telecom Act
for the period from November 7, 1996 through October 6, 1997 is $37.20 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 $37.20 per payphone per month. While the amount of $0.284
per call 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 $0.284 per call.
F-51
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
Peoples Telephone Company, Inc.
We have audited the consolidated balance sheets of Peoples Telephone
Company, Inc. and subsidiaries as of December 31, 1997 and 1996, 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,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Peoples Telephone Company, Inc. and subsidiaries at December 31, 1997 and
1996, and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
As discussed in Note 1, the Company previously presented replacement parts
as inventory and has restated the 1997, 1996 and 1995 consolidated financial
statements to include replacement parts as a component of property and
equipment.
Ernst & Young LLP
Miami, Florida
February 27, 1998, except for
the second and third
paragraphs of Note 20, as to
which the date is October 27,
1998, and the fourth paragraph
of Note 1, as to which the
date is November 6, 1998
F-52
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
ASSETS 1997 1996
------ -------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 22,834 $ 12,556
Restricted cash.......................................... 920 --
Accounts receivable, net of allowance for doubtful
accounts of $4,936 in 1997 and $4,361 in 1996........... 17,061 11,598
Prepaid expenses and other current assets................ 2,631 2,547
Net assets of discontinued operations.................... -- 8,196
-------- --------
Total current assets................................... 43,446 34,897
Property and equipment, net................................ 50,362 61,541
Location contracts, net.................................... 23,936 26,498
Intangible assets, net..................................... 824 1,475
Goodwill, net.............................................. 4,084 4,788
Deferred income taxes...................................... 3,407 3,407
Other assets, net.......................................... 5,258 8,264
-------- --------
Total assets........................................... $131,317 $140,870
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Notes payable and current maturities of long-term debt... $ 634 $ 548
Current portion of obligations under capital leases...... 536 952
Accounts payable and accrued expenses.................... 22,722 19,240
Accrued interest payable................................. 5,702 5,697
Income and other taxes payable........................... 2,844 2,418
-------- --------
Total current liabilities.............................. 32,438 28,855
Notes payable and long-term debt........................... 100,000 100,657
Obligations under capital leases........................... 275 573
-------- --------
Total liabilities...................................... 132,713 130,085
-------- --------
Commitments and contingencies (Notes 14 and 15)............ -- --
Redeemable Preferred Stock:
Cumulative convertible preferred stock, Series C, $.01
par value; 160 shares authorized; 150 shares issued and
outstanding; $100 per share liquidation value........... 13,711 13,556
Preferred stock dividends payable........................ 2,573 1,523
-------- --------
Total preferred stock.................................. 16,284 15,079
-------- --------
Common shareholders' deficit:
Preferred stock; $.01 par value, 4,240 shares authorized
in 1997 and 4,140 shares authorized in 1996; none issued
and outstanding......................................... -- --
Convertible preferred stock; Series B, $.01 par value;
600 shares authorized; none issued and outstanding...... -- --
Common stock; $.01 par value, 75,000 shares authorized in
1997 and 25,000 shares authorized in 1996; 16,209 shares
in 1997 and 16,195 shares in 1996 issued and
outstanding............................................. 162 162
Capital in excess of par value........................... 59,291 60,453
Accumulated deficit...................................... (75,108) (63,438)
Unrealized loss on investments........................... (2,025) (1,471)
-------- --------
Total common shareholders' deficit..................... (17,680) (4,294)
-------- --------
Total liabilities less shareholders' deficit........... $131,317 $140,870
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-53
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Coin calls..................................... $ 76,449 $ 77,389 $ 78,353
Non-coin calls, including 1997 dial-around
compensation adjustment (see Note 19)......... 35,786 29,617 33,887
Service and other.............................. -- -- 122
-------- -------- --------
Total revenues............................... 112,235 107,006 112,362
Costs and expenses:
Telephone charges.............................. 29,310 30,107 35,582
Commissions.................................... 29,656 28,250 27,599
Field service and collection................... 19,598 19,130 21,134
Depreciation and amortization.................. 21,304 20,466 19,180
Selling, general and administrative............ 13,023 12,491 11,160
Other operating (income) expense............... -- (1,500) 6,177
-------- -------- --------
Total costs and expenses..................... 112,891 108,944 120,832
-------- -------- --------
Operating loss................................. (656) (1,938) (8,470)
Other (income) and expenses:
Interest expense, net.......................... 13,106 12,875 10,355
(Gain) loss on disposal of prepaid calling card
and international telephone centers........... -- (545) 566
-------- -------- --------
Total other (income) and expenses, net....... 13,106 12,330 10,921
-------- -------- --------
Loss from continuing operations before income
taxes and extraordinary item.................... (13,762) (14,268) (19,391)
Benefit from income taxes........................ -- -- 217
-------- -------- --------
Loss from continuing operations before
extraordinary item.............................. (13,762) (14,268) (19,174)
Discontinued operations:
Loss from operations........................... (2,418) (1,724) (19)
Gain (loss) on dispositions.................... 4,510 -- (15,340)
-------- -------- --------
Gain (loss) from discontinued operations....... 2,092 (1,724) (15,359)
-------- -------- --------
Loss before extraordinary item................... (11,670) (15,992) (34,533)
Extraordinary loss from extinguishment of debt,
net of income tax benefit of $1,737............. -- -- (3,327)
-------- -------- --------
Net loss..................................... $(11,670) $(15,992) $(37,860)
======== ======== ========
Earnings per share (basic and diluted):
Loss from continuing operations................ $ (0.92) $ (0.96) $ (1.23)
Income (loss) from discontinued operations..... 0.13 (0.10) (0.95)
Extraordinary loss, net........................ -- -- (0.20)
-------- -------- --------
Net loss..................................... $ (0.79) $ (1.06) $ (2.38)
======== ======== ========
Weighted average common shares outstanding....... 16,198 16,188 16,091
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-54
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM JANUARY 1, 1995 THROUGH DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CAPITAL
IN EXCESS UNREALIZED
COMMON OF ACCUMULATED LOSS ON
STOCK PAR VALUE DEFICIT INVESTMENTS TOTAL
------ --------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995.. $158 $58,143 $ (9,586) $ -- $ 48,715
Exercise of 93 options at
$2.00-$3.59 per share...... 1 306 -- -- 307
Issuance of 224 shares for
prior acquisitions......... 2 1,302 -- -- 1,304
Peoples Series C preferred
stock dividends accrued.... -- (473) -- -- (473)
Preferred stock issuance
cost accretion............. -- (69) -- -- (69)
Issuance of 275 preferred
stock warrants............. -- 558 -- -- 558
Write-off of officer and
director notes receivable
previously charged to
Capital in Excess of Par
Value...................... -- 1,806 -- -- 1,806
Net loss.................... -- -- (37,860) -- (37,860)
---- ------- -------- ------- --------
Balance at December 31,
1995....................... 161 61,573 (47,446) -- 14,288
Issuance of 22 shares for
prior acquisitions......... 1 74 -- -- 75
Peoples Series C preferred
stock dividends accrued.... -- (1,050) -- -- (1,050)
Preferred stock issuance
cost accretion............. -- (144) -- -- (144)
Unrealized loss on
investments................ -- -- -- (1,471) (1,471)
Net loss.................... -- -- (15,992) -- (15,992)
---- ------- -------- ------- --------
Balance at December 31,
1996....................... 162 60,453 (63,438) (1,471) (4,294)
Exercise of 18 options at
$2.19-$3.44 per share...... -- 44 -- -- 44
Peoples Series C preferred
stock dividends accrued.... -- (1,050) -- -- (1,050)
Preferred stock issuance
cost accretion............. -- (156) -- -- (156)
Unrealized loss on
investments................ -- -- -- (554) (554)
Net loss.................... -- -- (11,670) -- (11,670)
---- ------- -------- ------- --------
Balance at December 31,
1997....................... $162 $59,291 $(75,108) $(2,025) $(17,680)
==== ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-55
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss....................................... $(11,670) $(15,992) $(37,860)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization................ 21,304 20,466 19,180
Amortization of deferred financing costs..... 611 906 390
Deferred income taxes........................ -- -- (1,954)
Extraordinary loss on debt extinguishment.... -- -- 5,064
(Gain) loss on disposition of assets, net.... -- (545) 956
(Gain) loss on sale of discontinued
operations, net............................. (4,510) -- 15,340
Write-off of officer and director
receivables................................. -- -- 3,555
Changes in operating assets and liabilities:
Accounts receivable........................ (6,906) (4,381) 7,335
Prepaid expenses and other current assets.. (84) 1,101 1,156
Other assets............................... 809 (470) 4,828
Accounts payable and accrued expenses...... 5,363 (478) (3,092)
Accrued interest payable................... 5 94 4,542
Income and other taxes payable............. 45 (34) (239)
Net effect of discontinued operations and
assets held for sale...................... 2,081 5,304 (7,210)
-------- -------- --------
Net cash provided by operating
activities.............................. 7,048 5,971 11,991
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment additions............... (2,181) (2,932) (5,637)
Proceeds from sale of assets................... 1,208 1,383 3,295
Proceeds from sale of discontinued operations.. 10,625 848 895
Payments for certain contracts................. (3,163) (3,347) (2,806)
Restricted cash................................ (920) -- --
Other.......................................... -- -- 127
-------- -------- --------
Net cash provided by (used in) investing
activities.............................. 5,569 (4,048) (4,126)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under long-term debt................ -- -- 101,600
Principal payments on long-term debt........... (571) (560) (110,487)
Principal payments under capital lease
obligations................................... (1,594) (1,173) (3,384)
Debt issuance costs............................ (218) -- (5,100)
Exercise of stock options and warrants......... 44 -- 307
Proceeds from Peoples Series C preferred stock. -- -- 15,000
Issuance costs associated with stock offerings. -- -- (1,198)
Proceeds from the issuance of stock warrants... -- -- 100
-------- -------- --------
Net cash used in financing activities.... (2,339) (1,733) (3,162)
-------- -------- --------
Net increase in cash and cash equivalents........ 10,278 190 4,703
Cash and cash equivalents at beginning of year... 12,556 12,366 7,663
-------- -------- --------
Cash and cash equivalents at end of year......... $ 22,834 $ 12,556 $ 12,366
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest..................................... $ 13,541 $ 12,643 $ 7,357
======== ======== ========
Income taxes................................. $ 135 $ 158 $ 242
======== ======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Fixed assets acquired under capital lease
obligations................................... $ 325 $ 224 $ 1,185
======== ======== ========
Fair value of common stock issued for
acquisition................................... $ -- $ 75 $ 1,304
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-56
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--GENERAL
Description of business
Peoples Telephone Company, Inc. (the "Company") owns, operates, services and
maintains public pay telephone systems connected to the network of regulated
telephone companies at various third party property owner locations throughout
the United States. The Company also derives commission revenue from routing
calls to operator service companies and from FCC-mandated payments by
interexchange carriers for access code ("10xxx") and subscriber access toll-
free calls ("Dial-Around Compensation").
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
The divestitures of the Company's 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 (see Note 17).
Restatement
The Company maintains replacement parts to service its base of payphones.
The Company previously reported replacement parts as inventory in its
consolidated balance sheets. On November 6, 1998, replacement parts were
reclassified to property and equipment for all periods presented.
Changes in business
During 1995, the Company sold its prepaid calling card business and
international telephone center operations for $6.3 million and $2.0 million,
respectively (see Note 16). Operations for these business for the year ended
December 31, 1995 were not significant.
On November 13, 1995, the Company sold its cellular telephone operations for
approximately $6.0 million (see Note 17).
On October 9, 1995, the Company sold a portion of its inmate telephone
operations for approximately $1.7 million. Included in discontinued operations
in the accompanying consolidated statement of operations in 1995 are
approximately $0.3 million of impairment losses and a $0.4 million loss on the
sale of these inmate telephone operations (see Note 17).
On December 19, 1997, the Company sold its remaining inmate telephone
operations for approximately $10.6 million. The Company recognized a net gain
of approximately $4.2 million as a result of this sale (see Note 17).
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Recognition of revenue
Revenue is recognized when earned. Coin call and non-coin call revenues are
recognized at the time the call is made. Revenue from service contracts is
recognized on a straight-line basis over the term of the contract.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
F-57
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Cash and cash equivalents
The Company considers cash and cash equivalents to be those highly liquid
investments purchased with an original maturity of three months or less. The
credit risk associated with cash and cash equivalents in banks is considered
low due to the credit quality of the financial institutions.
Restricted cash
Approximately $0.9 million of cash on the accompanying consolidated balance
sheet at December 31, 1997 is restricted and serves as collateral for the
Company's performance under an inmate payphone agreement and a letter of
credit.
Property and equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets
commencing when the equipment is installed or placed in service. Installed
telephones and related equipment includes installation and other costs which
are capitalized and amortized over the estimated useful lives of the
equipment. The costs associated with 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 and Other Intangible Assets
Location contracts and other intangible assets primarily result from
business combinations and signing bonuses paid to property owners and include
acquisition costs allocated to location owner contracts, agreements not to
compete, and other identifiable intangible assets. These assets are amortized
on a straight-line basis over their estimated lives (3 to 10 years).
Accumulated amortization at December 31, 1997 and 1996 was approximately $26.3
million and $20.0 million, respectively.
Goodwill arising from acquisitions is amortized on a straight-line basis
over the periods to be benefited or 20 years, whichever is less. Accumulated
amortization at December 31, 1997 and 1996 was approximately $3.0 million and
$2.3 million, respectively.
The carrying value of intangible assets is periodically reviewed by the
Company and impairments, if any, are recognized when the expected future
undiscounted cash flows derived from such intangible assets are less than
their carrying value.
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 of 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 assets may
be impaired. The Company, based on current circumstances, does not believe
that any long-lived assets are impaired at December 31, 1997.
Other assets
Other assets primarily include deferred financing costs and long-term
deposits. Deferred financing costs are amortized over the term of the debt on
a straight-line basis. At December 31, 1997 and 1996, accumulated amortization
of the deferred financing costs was approximately $1.8 million and $1.2
million, respectively.
F-58
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's investment in Global Telecommunications Solutions, Inc.
("GTS") is accounted for in accordance with Statement No. 115, Accounting for
Certain Investments in Debt and Equity Securities, and is reported at fair
value with unrealized gains or losses, net of tax, recorded as a separate
component of Shareholders' Equity (Deficit) (see Note 16). The Company's
investment in GTS is included in "other assets, net" in the accompanying
consolidated balance sheet.
Other operating (income) expense
Other operating (income) expense is comprised of amounts recorded in
connection with settlements of loans and employment contracts with former
officers, the Company's former equity interest in the operating results of an
unconsolidated affiliate and amounts related to the resolution of outstanding
litigation.
Income taxes
Deferred income taxes are recognized for temporary differences between the
tax and financial reporting bases of the Company's assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to reverse. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not the tax assets
will not be realized.
Stock Options
The Company adopted the provisions of Statement No. 123 ("SFAS 123"),
Accounting for Stock-Based Compensation, on January 1, 1996, but as permitted
by SFAS 123 will continue to account for options issued to employees or
directors under the Company's stock option plans in accordance with Accounting
Principles Board Opinion No. 25 ("APB 25"), Accounting for Stock Issued to
Employees. The exercise price of the Company's employee stock options equals
or exceeds the market price of the underlying stock on the date of grant;
therefore, no compensation expense is recognized under APB 25.
Earnings per share
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 128 ("SFAS 128"), Earnings per Share. SFAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts for all periods
have been presented, and where appropriate, restated to conform to the SFAS
128 requirements. Diluted earnings per share amounts are computed based upon
the weighted average number of common and common equivalent shares
outstanding. Earnings per share on a diluted basis were equal to basic
earnings per share for all periods presented, since exercise of outstanding
options and warrants, and the conversion of convertible preferred stock would
be anti-dilutive.
Reclassification
Certain amounts for the prior years have been reclassified to conform with
the current year presentation.
New Accounting Standards
In 1997, the FASB issued Statement No. 130 ("SFAS 130"),"Reporting
Comprehensive Income" and Statement No. 131 ("SFAS 131"), "Disclosures about
Segments of an Enterprise and Related Information." These statements are
effective beginning in 1998. SFAS 130 establishes standards for reporting and
displaying comprehensive income, while SFAS 131 abandons the "industry segment
approach" in favor of the "managing approach" for disclosure purposes.
Adoption of SFAS 130 is not expected to result in a significant change from
the current required disclosures and the adoption of SFAS 131 is not expected
to result in additional disclosures.
F-59
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1997 and 1996 consist primarily of
amounts currently due from long distance carriers for Dial-Around Compensation
(as defined in Note 19) and commissions from various operator service
companies which handle non-coin calls.
The balance due from one collection clearinghouse for Dial-Around
Compensation was approximately $4.1 million and $2.7 million at December 31,
1997 and 1996, respectively. The balance due from one operator service company
for commissions was $4.3 million and $3.5 million at December 31, 1997 and
1996, respectively.
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, ESTIMATED
------------------ USEFUL LIVES
1997 1996 (IN YEARS)
-------- -------- ------------
<S> <C> <C> <C>
Installed telephones and related
equipment.............................. $106,903 $103,060 10
Telephones and related equipment pending
installation........................... 5,146 7,704
Land.................................... 950 950
Building and improvements............... 4,366 4,360 25
Furniture, fixtures and office
equipment.............................. 7,086 6,190 5-7
Vehicles and equipment under capital
leases................................. 3,027 3,906 4
Other................................... 1,022 1,019 5
-------- --------
128,500 127,189
Less accumulated depreciation and
amortization, including $2,042 and
$2,198 for capital leases.............. (78,138) (65,648)
-------- --------
$ 50,362 $ 61,541
======== ========
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
was approximately $14.2 million, $13.8 million and $12.9 million,
respectively.
During 1995, the Company recorded obsolescence reserves of approximately
$1.7 million for telephone and related equipment pending installation, which
is included in field service and collection expenses in the accompanying 1995
consolidated statement of operations.
The majority of the Company's assets are security for long-term bank debt
(see Note 6).
The Company has entered into various noncancellable leases which are
classified as capital leases. Future minimum lease payments, including imputed
interest, are as follows (in thousands):
<TABLE>
<S> <C>
For the year ending December 31:
1998............................................................. $ 603
1999............................................................. 188
2000............................................................. 102
2001............................................................. 18
2002............................................................. 1
-----
912
Less amount representing interest.................................. (93)
-----
Present value of obligations under capital leases.................. 819
Less current interest payable...................................... (8)
Less current portion............................................... (536)
-----
$ 275
=====
</TABLE>
F-60
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------- -------
<S> <C> <C>
Telecommunication charges................................ $ 2,676 $ 3,473
Commissions.............................................. 10,343 7,879
Employee costs........................................... 3,282 2,023
Unearned revenue......................................... 3,258 314
Other.................................................... 3,163 5,551
------- -------
$22,722 $19,240
======= =======
</TABLE>
NOTE 6--NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
$100 million Senior Notes due 2002 with a stated
interest
rate of 12 1/4%.................................... $100,000 $100,000
$20 million revolving line of credit with interest
rates ranging from the Bank's prime rate plus 1.5%
to LIBOR plus 3.0%................................. -- --
Various notes payable with interest rates ranging
from prime plus 1.25% to prime plus 1.5% and
maturity dates ranging from due on demand to
October 1998....................................... 634 1,205
-------- --------
100,634 101,205
Less current maturities............................. (634) (548)
-------- --------
$100,000 $100,657
======== ========
</TABLE>
During July 1995, the Company completed the sale of $100.0 million of Senior
Notes due 2002 (the "Senior Notes") and the issuance of $15.0 million of
Series C Cumulative Convertible Preferred Stock (the "Preferred Stock") (see
Note 7). The Senior Notes bear interest at 12 1/4% per annum, payable
semiannually beginning January 15, 1996. The Senior Notes are senior unsecured
obligations of the Company and are redeemable at the option of the Company, in
whole or in part, on or after July 15, 2000, at pre-established redemption
prices together with accrued and unpaid interest to the redemption date. The
Company paid approximately $5.1 million in issuance costs, which was deferred
and is being amortized over the term of the Senior Notes.
Simultaneously with the sale of the Senior Notes and issuance of the
Preferred Stock, the Company executed the Fourth Amended and Restated Loan and
Security Agreement (the "Loan Agreement") with Creditanstalt Corporate
Finance, Inc. (the "Bank"). The Loan Agreement provided for a new $40.0
million credit facility bearing interest at rates ranging from the Bank's
prime rate plus 1 1/2% to LIBOR plus 3%. During April 1996, the Company
amended the Fourth Amended Loan and Security Agreement (the "Amendment") with
the Bank. The Amendment, among other things, decreased the facility to $10.0
million and reduced the requirements of the financial covenants. During March
1997, the Company executed an amendment increasing the credit facility to
$20.0 million.
The interest rate on balances outstanding under the $20.0 million credit
facility varies based upon the leverage ratio maintained by the Company. All
outstanding principal balances are due in full in 2000, and interest
F-61
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
is payable monthly for loans based on the prime rate and quarterly for loans
based on the LIBOR rate. A commitment fee of 1/2 of 1% is charged on the
aggregate daily unused balance of the credit facility under the Loan
Agreement. The Loan Agreement is secured by substantially all of the Company's
assets and contains certain restrictive covenants which, among other things,
require the Company to maintain certain cash flow levels and interest coverage
ratios and places certain restrictions on the payment of dividends. At
December 31, 1997, there were no amounts outstanding under the credit
facility.
As a result of various 1995 amendments to its credit facilities, the Company
recorded extraordinary losses of $5.0 million for the write-off of deferred
financing costs associated with the early extinguishment of debt, before an
income tax benefit of approximately $1.7 million.
NOTE 7--PREFERRED STOCK
In March 1997, the Company's shareholders approved an increase of the
Company's authorized Preferred Stock to 5 million shares.
During 1995, the Company 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 cumulates dividends at an annual rate of 7%. The dividends are payable
in cash or, at the Company's option during the first three years, will
cumulate. The Preferred Stock is immediately convertible into shares of Common
Stock of the Company at an initial conversion price of $5.25 per share and is
mandatorily redeemable by the Company in July 2005. The liquidation value and
annual dividends are $100 per share and $7 per share, respectively. Pursuant
to the terms of the Preferred Stock, the holders are entitled to elect two of
the six members of the Company's Board of Directors and have voting rights
equal to those of Common Shareholders. The Company paid issuance costs of
approximately $1.2 million.
In connection with the sale of the Preferred Stock, the Company issued
warrants to purchase 275,000 shares of Common Stock of the Company to a third
party which assisted with the transaction, for approximately $100,000. The
warrants are exercisable at $5.25 per share through the year 2005.
The net proceeds were allocated to the preferred stock and warrants based on
their respective fair values. The preferred stock is being accreted to its
redemption value, using the effective interest method through retained
earnings, or in the case of an accumulated deficit, capital in excess of par
value over the term of the Preferred Stock.
NOTE 8--SHAREHOLDERS' EQUITY
In March 1997, the Company's shareholders approved an increase to the number
of authorized shares of the Company's Common Stock to 75 million shares. The
Company has a sufficient number of authorized common shares available to issue
upon the conversion of the outstanding preferred stock, warrants and stock
options.
Under the terms of the Company's loan agreement, as amended, the Company
granted its lender warrants to purchase 1,600,000 shares of Common Stock. The
exercise price of 900,000 of these shares is $3.17 per share and the remaining
700,000 shares is $5.25 per share. From 1992 through 1994, the Company's
lender exercised its right to purchase 900,000 shares of Common Stock at $3.17
per share. All warrants expire in the year 2000.
The Company's preferred stock may be issued from time to time at the
discretion of the Board of Directors without shareholder approval. The Board
of Directors is authorized to issue these shares in different series and, with
respect to each series, to determine the dividend rate, provisions regarding
redemption, conversion, liquidation preference and other rights and
privileges.
F-62
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1997, common shares reserved for issuance are as follows:
<TABLE>
<S> <C>
Peoples Series C Preferred Stock................................ 2,857,143
Employee stock options outstanding.............................. 2,657,408
Warrants........................................................ 975,000
---------
Total....................................................... 6,489,551
=========
</TABLE>
NOTE 9--STOCK OPTION PLANS
The Company maintains five non-qualified stock option plans covering
primarily employees and directors. The Company continues to account for its
stock options issued under APB 25. Under APB 25, because the exercise price of
the underlying stock option equals or exceeds the market price of the common
stock on the date of grant, no compensation expense is recognized.
The 1987 Non Qualified Stock Option Plan and 1994 Stock Incentive Plan cover
substantially all employees and provide for the issuance of options to
purchase up to 2,100,000 shares and 100,000 shares of the Company's Common
Stock, respectively. The 1987 and 1993 Non-Employee Director Stock Option
Plans allow for the issuance of options for the purchase of 750,000 shares and
315,000 shares, respectively. Options are issued to non-employee members of
the Company's Board of Directors for their service. In addition, prior to
February of 1995, the Company, from time to time, issued options to purchase
shares of the Company's Common Stock outside of the established stock option
plans. The grants of these options have been approved by the Company's
shareholders. The 1997 Incentive Plan allows for the issuance of options for
the purchase of 1,350,000 shares.
Options to purchase shares of the Company's Common Stock are issuable at the
discretion of committees appointed by the Board of Directors which determine
the specific terms of options granted. Currently, options generally vest at
rates of 10%, 20%, 33% and 100% per year from the date of issuance and
generally expire after 5 to 10 years of continued employment or within periods
of up to 90 days of the termination or resignation of the employee or
director.
The following table summarizes information related to the Company's stock
option activity (in thousands, except for per share data):
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -------------------
NUMBER WTD. AVG. NUMBER WTD. AVG. NUMBER WTD. AVG.
OF SHARES EX. PRICE OF SHARES EX. PRICE OF SHARES EX. PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 1,709 $6.05 2,272 $6.42 2,794 $6.33
Granted................. 1,206 5.61 283 2.92 200 3.68
Exercised............... (18) 2.82 -- -- (93) 3.27
Expired................. (95) 5.75 (29) 3.45 (629) 5.59
Canceled................ (145) 5.37 (817) 5.85 -- --
----- ----- -----
Outstanding at end of
year................... 2,657 5.96 1,709 6.05 2,272 6.42
===== ===== =====
Exercisable at end of
year................... 1,946 6.86 1,645 6.09 2,055 6.39
===== ===== =====
</TABLE>
The exercise prices for options outstanding as of December 31, 1997 ranged
from $2.00 to $11.38. The weighted average remaining contractual life of those
options is approximately 2.7 years.
F-63
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of options granted during 1997, 1996 and 1995 were estimated
using a binomial valuation model. The following weighted-average assumptions
were used in calculating the fair value of options granted in 1997, 1996 and
1995, respectively: risk free interest rates of 5.6%, 6.3% and 6.1%; dividend
yields of 0%; volatility factors of 0.669, 0.706 and 0.846; and weighted
average expected life of the options of 2.7, 4.0 and 3.3 years.
Pro forma net loss and loss per share information is provided in accordance
with SFAS 123 as if the Company's stock options were accounted for under the
fair value method.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
following table sets forth pro forma net loss and loss per share (in
thousands, except for per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Pro forma net loss......................... $(13,071) $(16,311) $(38,213)
Pro forma loss per share, basic and
diluted................................... $ (0.87) $ (1.07) $ (2.40)
</TABLE>
The effect on pro forma net loss and loss per share of applying SFAS 123 is
not necessarily indicative of pro forma net loss and loss per share for future
periods until the new fair value method is applied to all non-vested awards.
NOTE 10--EMPLOYEE SAVINGS PLAN
During November 1990, the Company established a savings plan under the
provisions of section 401(k) of the Internal Revenue Code (the "Plan"), which
covers substantially all employees. The Company's contributions to the Plan
are discretionary. Employees participating in the Plan vest in amounts
contributed by the Company over a period of 5 years. The Company matches 25%
of employee contributions. Employees may contribute up to 15% of their
earnings each plan year. The Company's contributions totaled approximately
$0.1 million in each of the years ended December 31, 1997, 1996 and 1995.
NOTE 11--INCOME TAXES
The components of the benefit from income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1997 1996 1995
---- ---- -----
<S> <C> <C> <C>
Currently payable:
Federal.................................................. $-- $-- $ --
State.................................................... -- -- 107
Deferred................................................. -- -- (324)
---- ---- -----
$-- $-- $(217)
==== ==== =====
</TABLE>
A reconciliation between the Company's effective income tax rate and federal
income tax statutory rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Statutory tax rate...... (34.0)% (34.0)% (34.0)%
Change in valuation
allowance.............. 37.5 37.5 35.4
Non-deductible expenses. -- -- 1.0
State taxes and other,
net.................... (3.5) (3.5) (3.5)
----- ----- -----
0% 0% (1.1)%
===== ===== =====
</TABLE>
F-64
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Significant temporary differences included in the net deferred tax asset are
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward...................... $21,854 $18,721
Alternative minimum tax credit carryforward.......... 30 218
Other................................................ 8,626 6,012
------- -------
Total gross deferred tax assets.................... 30,510 24,951
Less--valuation allowance.............................. 18,364 15,017
------- -------
Total deferred tax assets.......................... 12,146 9,934
------- -------
Deferred tax liabilities:
Difference between book and tax bases of fixed
assets.............................................. (7,322) (5,105)
Other................................................ (1,417) (1,422)
------- -------
Total deferred tax liabilities..................... (8,739) (6,527)
------- -------
Net deferred tax assets............................ $ 3,407 $ 3,407
======= =======
</TABLE>
At December 31, 1997, the Company has tax net operating loss carryforwards
of approximately $80.8 million, which expire in various amounts in the years
2002 to 2012. Approximately $3.2 million of these net operating loss
carryforwards relate to business acquisitions for which annual utilization
will be limited to approximately $0.3 million, with further limitation 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.
During 1997, the Company generated a capital loss of approximately $0.7
million, which expires in the year 2002.
During 1997, the deferred tax asset valuation allowance against net
operating losses increased to approximately $18.4 million. 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. Based upon past earnings history, trends,
regulatory changes, expiration dates of net operating loss carryforwards and
tax planning strategies that could be implemented, if necessary, the Company
believes it will be able to realize its $3.4 million in net deferred tax
assets. In addition, 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 carryforwards.
NOTE 12--EARNINGS PER SHARE
For the years ended December 31, 1997, 1996 and 1995, 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 thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net loss from continuing operations........... $(13,762) $(14,268) $(19,174)
Deduct:
Cumulative preferred stock dividend
requirement................................ 1,050 1,050 473
Preferred stock issuance cost accretion..... 156 144 69
-------- -------- --------
Net loss applicable to common
shareholders............................. $(14,968) $(15,462) $(19,716)
======== ======== ========
Weighted average common shares outstanding.... 16,198 16,188 16,091
======== ======== ========
Basic and diluted loss per share.............. $ (0.92) $ (0.96) $ (1.23)
======== ======== ========
</TABLE>
F-65
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Diluted earnings per share is equal to basic earnings per share since the
conversion of preferred shares and the exercise of outstanding options and
warrants would be anti-dilutive for all periods presented.
NOTE 13--FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair market values of financial instruments held by the Company at
December 31, 1997 and 1996 are based on a variety of factors and assumptions,
may not necessarily be representative of the actual gains or losses that will
be realized in the future, and do not include expenses that could be incurred
in an actual sale or settlement.
Long-Term Debt
The fair value of the Company's Senior Notes was estimated by obtaining
quoted market prices. The fair value of the Company's Senior Notes at December
31, 1997 and 1996 was approximately $106.5 million and $105.0 million,
respectively.
The fair value of the Company's credit facility is assumed to be equal to
its carrying value. At December 31, 1997 and 1996 there were no amounts
outstanding under the credit facility.
Preferred Stock
The Company's Preferred Stock does not have a quoted market price and the
Company does not believe it is practicable to estimate a fair value different
from the security's carrying value of approximately $13.7 million because of
features unique to this security including, but not limited to, the right to
appoint two directors and super majority voting requirements. The amount due
upon redemption equals $15.0 million plus accrued dividends.
NOTE 14--LEASES
The Company leases office and warehouse space under various operating lease
agreements expiring through 2000. Rental expense under such leases aggregated
approximately $0.5 million, $0.5 million and $0.7 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
As of December 31, 1997, future minimum payments under noncancellable
operating leases with remaining terms in excess of one year are as follows (in
thousands):
<TABLE>
<S> <C>
Year ended:
1998.............................. $308
1999.............................. 174
2000.............................. 41
----
$523
====
</TABLE>
NOTE 15--COMMITMENTS AND CONTINGENCIES
In March, 1997, the Company and WorldCom Network Services, Inc. amicably
settled and resolved litigation to the satisfaction of both parties involved.
In connection with that settlement, the Company paid approximately $240,000 to
WorldCom in full settlement and satisfaction of all claims raised, or which
could have been raised, by WorldCom against the Company arising from the
parties' prior business relationship.
During July 1995, the Company reached an agreement in principle for the
settlement (the "Settlement") of a lawsuit seeking class action certification
brought by two shareholders against the Company and certain of its officers
and directors in the United States District Court, Southern District of
Florida, alleging the violation of certain federal securities laws. The
Company's share of the Settlement of approximately $0.9 million was recorded
in the accompanying consolidated statement of operations for the year ended
December 31, 1995. The Settlement was approved by the United States District
Court during January 1996.
F-66
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During April 1995, the Company settled a dispute with one of its vendors
which resulted in a reduction of the amounts owed. Accounts payable and
telephone charges were reduced during the first quarter of 1995 by
approximately $1.3 million to reflect this settlement.
In December 1995, Cellular World, Inc. filed a complaint in Dade County
Circuit Court against the Company 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 is seeking damages alleged to
exceed $10 million. Formal discovery has not been completed. Trial has been
set for July 1998. Based on the discovery conducted to date, the Company
continues to believe that it has several meritorious legal and factual
defenses. Based upon the incomplete status of discovery, the Company is unable
to predict the final outcome of the litigation.
In addition to the aforementioned litigation, the Company is a party to
certain legal actions arising in the normal course of business. In the opinion
of management, the ultimate outcome of such litigation will not have a
material effect on the financial position, results of operations or cash flows
of the Company.
The Company has employment contracts with certain officers which expire
through December 31, 1999. The contracts provide for increases in annual base
salary, contingent upon the profitability of the Company, as well as bonus and
stock option provisions.
NOTE 16--PREPAID CALLING CARD AND INTERNATIONAL TELEPHONE CENTERS
During February 1995, the Company sold its prepaid calling card business to
Global Link Teleco Corporation ("Global Link") for approximately $6.3 million
of cash, promissory notes and shares of common stock of Global Link. The
operations of the prepaid calling card business for the year ended December
31, 1995 were not significant.
On March 1, 1996, Global Link consummated a merger transaction (the
"Merger") with Global Telecommunications Solutions, Inc. ("GTS"). The Company
exchanged its outstanding notes and other receivables, including accrued
interest, for shares of GTS Common stock, $0.6 million in cash and $1.5
million of notes receivable.
Included in other assets in the accompanying 1997 and 1996 consolidated
balance sheets is the fair value of the Company's investment in GTS common
stock of approximately $1.1 million and $1.7 million, net of approximately
$2.0 million and $1.5 million of unrealized investment losses, respectively.
Prior to the Merger, the Company's investment in Global Link was accounted
for using the equity method. The Company's share of the results of operations
of Global Link from the divestiture date through December 31, 1995 are
included in "Other operating (income) expenses" in the accompanying
consolidated statements of operations.
On September 28, 1995, the Company sold its international telephone center
operations for $0.5 million in cash and a $1.5 million promissory note. The
operations of the international telephone center business for the year ended
December 31, 1995 were not significant. For financial accounting purposes, the
recovery of $2.0 million previously written off will be recognized as the cash
is received. Accordingly, a gain of approximately $0.3 million and $0.5
million has been included in other income and expenses in the accompanying
consolidated statements of operations during the years ended December 31, 1996
and 1995, respectively.
F-67
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17--DISCONTINUED OPERATIONS
On November 13, 1995, the Company sold its cellular telephone operations to
Shared Technologies Cellular, Inc. ("STC") for approximately $6.0 million. The
proceeds from the sale were $0.3 million in cash, a $2.0 million promissory
note bearing interest at 8.0%, with principal and interest payable semi-
annually through 2000, shares of STC Common Stock, and payment of
approximately $1.2 million of the Company's liabilities. This transaction
resulted in a loss of $14.6 million. The loss on disposal in the accompanying
December 31, 1995 statement of operations includes a valuation allowance of
approximately $5.5 million to reduce the deferred tax assets generated by this
transaction to a level which, more likely than not, will be realized.
For the period from January 1, 1995 through the divestiture date, the
cellular telephone operations had net operating losses of $3.7 million which
were previously accrued for in 1994.
On October 9, 1995, the Company sold a portion of its inmate telephone
operations for approximately $1.7 million. Included in discontinued operations
in the accompanying consolidated statement of operations in 1995 are
approximately $0.3 million of impairment losses and a $0.4 million loss on the
sale of these inmate telephone operations.
On December 19, 1997, the Company sold the remaining operating assets of the
Company's inmate phone division to Talton Holdings, Inc. ("Talton") for $10.6
million in cash plus additional contingent consideration. This transaction
resulted in a gain of approximately $4.2 million. 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 following tables set forth the results of operations and gain (loss) on
disposal of the cellular and inmate telephone operations as they are included
in the consolidated financial statements (in thousands):
CELLULAR TELEPHONE OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------
1997 1996 1995
---- ---- --------
<S> <C> <C> <C>
Revenues................................................... $-- $-- $ --
Income (loss) from discontinued operations before income
taxes..................................................... -- -- --
Gain (loss) on disposal.................................... 268 -- (14,600)
---- ---- --------
Gain (loss) on discontinued operations before income taxes. 268 -- (14,600)
Provision for income taxes................................. -- -- --
---- ---- --------
Gain (loss) from discontinued operations................... $268 $-- $(14,600)
==== ==== ========
</TABLE>
INMATE TELEPHONE OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Revenues............................................ $11,931 $17,952 $26,029
Income (loss) from discontinued operations before
income taxes....................................... (2,418) (1,724) (19)
Gain (loss) on disposal............................. 4,242 -- (740)
------- ------- -------
Gain (loss) on discontinued operations before income
taxes.............................................. 1,824 (1,724) (759)
Provision for income taxes.......................... -- -- --
------- ------- -------
Gain (loss) from discontinued operations............ $ 1,824 $(1,724) $ (759)
======= ======= =======
</TABLE>
F-68
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--RELATED PARTY TRANSACTIONS
During February 1995, the Company sold its prepaid calling card business to
Global Link for approximately $6.3 million. At the time of the transactions, a
former officer and director of the Company and two directors of the Company
were also directors of Global Link. Mr. Jeffrey Hanft, a former officer and
director of the Company, resigned as a director of Global Link in October
1995, and Mr. Jody Frank, a former director of the Company, resigned as a
director of Global Link prior to the March 1996 transaction with GTS (see Note
16).
During 1994 and 1995, the Company made loans of approximately $3.6 million
to certain officers and directors for, among other things, the repayment of
debt previously incurred by them in connection with the exercise of stock
options and payment of related income taxes. The officers and directors
exercised the stock options in December 1993 to purchase the Company's Common
Stock for purposes of increasing the Company's shareholders' equity without
accessing external capital markets. The officers and directors executed
promissory notes for a portion of the amounts due which became payable on
March 28, 1996. In addition, during 1994 and 1995, under the terms of
employment contracts with certain officers, the Company paid approximately
$0.6 million in life insurance policy premiums. Such premiums are required to
be reimbursed by such officers upon termination. During the fourth quarter of
1995, the Company recorded a reserve for potential uncollectible loan and
insurance amounts of approximately $3.2 million which is included in "Other
operating (income) and expenses" in the accompanying consolidated statements
of operations. During 1997, the Company recorded an additional reserve for
potential uncollectible loan amounts of approximately $0.2 million which is
included in "Selling, general and administrative expense" in the accompanying
1997 statements of operations.
During December 1995, the Company entered into a settlement agreement in
connection with the termination of an employment contract and settlement of a
claim made by Robert D. Rubin, the Company's former president. As part of the
settlement agreement, approximately $1.4 million of severance costs were
incurred by the Company and have been recorded in "Other operating (income)
and expenses" in the accompanying 1995 consolidated statement of operations.
Mr. Rubin repaid approximately $0.4 million of amounts owed the Company as
part of the settlement agreement.
In February 1996, the Company restructured approximately $0.2 million of
outstanding loans to Jody Frank, a director of the Company. In connection with
the restructuring, the Company received from Mr. Frank promissory notes with
various due dates through 2007 and a stock pledge agreement encumbering 35,000
shares of the Company's Common Stock held by Mr. Frank.
During April 1996, the Company terminated Richard F. Militello, the
Company's former Chief Operating Officer, without cause. Pursuant to terms of
his employment agreement, Mr. Militello was due a severance payment of
approximately $0.5 million. The after tax portion of this amount was offset
against certain outstanding loans owed to the Company by Mr. Militello.
Approximately $0.2 million of severance costs incurred by the Company in
connection with Mr. Militello's termination have been recorded in "Selling,
general and administrative expense" in the accompanying 1996 consolidated
statement of operations.
During October 1996, the Company entered into a separation agreement with
Jeffrey Hanft, the Company's former Chairman and Chief Executive Officer. As
part of the separation agreement, the Company received a promissory note for
amounts owed by Mr. Hanft, which becomes due and payable in 2001. In addition,
the Company received from Mr. Hanft a stock pledge agreement encumbering 0.3
million shares of the Company's Common Stock issuable upon exercise of certain
employment agreement options. Approximately $0.3 million of severance costs
incurred by the Company in connection with the separation agreement have been
recorded in "Selling, general and administrative expense" in the accompanying
1996 consolidated statement of operations.
During July 1997, the Company terminated Bonnie S. Biumi, the Company's
former Chief Financial Officer, without cause. Approximately $0.3 million of
severance costs incurred by the Company in connection
F-69
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
with Ms. Biumi's termination have been recorded in "Selling, general and
administrative expense" in the accompanying 1997 consolidated statement of
operations.
NOTE 19--PROVISION FOR DIAL-AROUND COMPENSATION ADJUSTMENT
On September 20, 1996, the Federal Communications Commission ("FCC") adopted
rules in a docket entitled In the Matter of Implementation of the Pay
Telephone 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 ("Telecom 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 ("Dial-Around Compensation") 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 ("PSPs"). The Court remanded the issues 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 subscriber 800 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 subscriber 800 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.
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
"Remand Order"). This order addressed the per-call compensation rate for
subscriber 800 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 subscriber 800 and access code calls from payphones is the
deregulated 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 are required to pay this per-call amount to PSPs, including
the Company, beginning October 7, 1997. After the first two years of per-call
compensation, the market-based local coin rate, adjusted for certain costs
defined by the FCC as $0.066 per call, is the surrogate for the per-call rate
for subscriber 800 and access code calls. These new regulations were made
effective as of October 7, 1997; however, they are still subject to challenge.
In addition, the Remand Order tentatively concluded that the same $0.284 per
call rate adopted on a going-forward basis should also govern compensation
obligations during the period from November 7, 1996 through October 6, 1997,
and that PSPs are entitled to compensation for all access code and subscriber
800 calls during this period. The FCC stated that the manner in which the
payment obligation of the IXCs for the period from November 7, 1996 through
October 6, 1997 will be allocated among the IXCs will be addressed in a
subsequent order.
Based on the FCC's tentative conclusion in the Remand Order, the Company has
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
F-70
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
adjustment, the Company recorded a provision in the third quarter of 1997 for
reduced Dial-Around Compensation of approximately $2.1 million ($0.13 per
share). The Company previously reported this provision as a separate component
of costs and expenses. In the third quarter of 1998, the Company reclassified
the provision as a reduction in non-coin revenue of approximately $2.6 million
and a reduction in commissions expense of approximately $0.5 million. For the
period from July 1, 1997 through October 6, 1997, the Company has recorded
Dial-Around Compensation at the rate of $37.20 per payphone per month. The
amount of dial-around revenue recognized in the period from July 1, 1997
through October 6, 1997 is approximately $4.7 million and such amount will be
billed after final resolution of the allocation obligations of the IXCs as
determined by the FCC.
The Company's counsel, Latham & Watkins, is of the opinion that the Company
is legally entitled to fair compensation under the Telecom 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 Telecom Act for the period from November 7, 1996 through October 6, 1997
is $37.20 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 $37.20 per payphone per month. While the
amount of $0.284 per call constitutes the Company's position of the
appropriate level of fair compensation, certain IXCs have asserted in the
past, have asserted in petitions for reconsideration now pending before the
FCC and in appeals pending before the U.S. Court of Appeals for the District
of Columbia Circuit, and are expected to assert in the future that the
appropriate level of fair compensation should be lower than $0.284 per call.
For example, in a letter to the FCC dated August 15, 1997, AT&T stated its
intention to make dial-around payments to PSPs based on its imputed rate of
$0.12 per call until the FCC issues a new order setting the level of fair
compensation.
NOTE 20--SUBSEQUENT EVENTS
On January 12, 1998, the Company acquired the operating assets of Indiana
Telcom Corporation for approximately $11.3 million in cash. This transaction
added approximately 2,600 public pay telephones, located primarily in Indiana
and adjacent midwestern states.
On July 5, 1998, the Company entered into a definitive merger agreement with
Davel Communications Group, Inc. and Davel Holdings, Inc. (collectively
"Davel"). Under the terms of the agreement, which has been approved by the
Board of Directors of each company, holders of common stock of the Company
will receive 0.235 of a share of Davel common stock for each outstanding share
of Company common stock and the Company will become a wholly owned subsidiary
of Davel (the "Merger"). The transaction, which is intended to close in the
fourth quarter of 1998, is subject to the approval of the shareholders of both
companies, receipt of required regulatory approvals and other customary
conditions. Consummation of the Merger is conditioned on its eligibility for
pooling-of-interests accounting treatment. The transaction is also subject to
conversion of the Company's Series C Cumulative Convertible Preferred Stock
into common stock and receipt by Davel of financing for, and successful
consummation of, a cash tender offer for the Company's 12 1/4% Senior Notes
due 2002 (the "Senior Notes"), pursuant to which a minimum of 85% of the
aggregate outstanding principal amount of $100 million shall have been
tendered. Davel plans to refinance the Senior Notes through a new senior
credit facility. No assurance can be given that all of the conditions for the
consummation of the proposed Merger will be satisfied.
On June 12, 1998, Davel signed a definitive agreement to merge with PhoneTel
Technologies, Inc. ("PhoneTel"). On September 29, 1998, Davel announced that
it was exercising its contractual rights to terminate the Davel/PhoneTel
merger agreement based on breaches of representations, warranties and
covenants by PhoneTel. On October 1, 1998, Davel 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
Davel alleging that the Davel/PhoneTel merger agreement had been wrongfully
terminated, and also filed a third party claim against the Company alleging
that the Company wrongfully caused the termination of the Davel/PhoneTel
merger agreement. The counterclaim and third party claim seek specific
performance by Davel of the transactions contemplated by the Davel/PhoneTel
merger agreement and damages and other equitable relief from Davel and the
Company. The Company believes that the third party claim is without merit and
intends to defend against it vigorously.
F-71
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
------ ------------- ------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 5,817 $ 22,834
Restricted cash................................... 929 920
Accounts receivable, net of allowance for doubtful
accounts of $3,898 in 1998 and $4,936 in 1997.... 18,579 17,061
Prepaid expenses and other current assets......... 2,149 2,631
-------- --------
Total current assets............................ 27,474 43,446
Property and equipment, net......................... 49,809 50,362
Location contracts, net............................. 22,215 23,936
Intangible assets, net.............................. 451 824
Goodwill, net....................................... 8,442 4,084
Deferred income taxes............................... 3,407 3,407
Other assets, net................................... 4,637 5,258
-------- --------
Total assets.................................... $116,435 $131,317
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Notes payable and current maturities of long-term
debt............................................. $ 54 $ 634
Current portion of obligations under capital
leases........................................... 604 536
Accounts payable and accrued expenses............. 21,754 22,722
Accrued interest payable.......................... 2,578 5,702
Income and other taxes payable.................... 2,772 2,844
-------- --------
Total current liabilities....................... 27,762 32,438
Notes payable and long-term debt.................... 100,000 100,000
Obligations under capital leases.................... 1,488 275
-------- --------
Total liabilities............................... 129,250 132,713
-------- --------
Commitments and contingencies....................... -- --
Redeemable Preferred Stock:
Cumulative convertible preferred stock; Series C,
$.01 par value; 160 shares
authorized; 150 shares issued and outstanding,
$100 per share liquidation value................. 13,823 13,711
Preferred stock dividends payable................. 3,756 2,573
-------- --------
Total preferred stock........................... 17,579 16,284
-------- --------
Common shareholders' deficit:
Preferred stock; $.01 par value; 4,240 shares au-
thorized; none issued and
outstanding...................................... -- --
Convertible preferred stock; Series B, $.01 par
value; 600 shares authorized; none issued and
outstanding...................................... -- --
Common stock; $.01 par value; 75,000 shares autho-
rized; 16,213 shares in 1998 and 16,209 shares in
1997 issued and outstanding...................... 162 162
Capital in excess of par value.................... 58,004 59,291
Accumulated deficit............................... (85,671) (75,108)
Accumulated other comprehensive loss.............. (2,889) (2,025)
-------- --------
Total common shareholders' deficit.............. (30,394) (17,680)
-------- --------
Total liabilities less shareholders' deficit.... $116,435 $131,317
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-72
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Revenues:
Coin calls..................................... $ 19,694 $ 19,796
Non-coin calls................................. 9,323 6,640
------------- -------------
Total revenues............................... 29,017 26,436
Costs and expenses:
Telephone charges.............................. 6,877 7,484
Commissions.................................... 8,248 6,029
Field service and collection................... 5,361 4,960
Depreciation and amortization.................. 5,539 5,376
Selling, general and administrative............ 2,933 3,592
------------- -------------
Total costs and expenses..................... 28,958 27,441
------------- -------------
Operating (loss) income........................ 59 (1,005)
Other expenses:
Interest expense, net.......................... 3,208 3,192
------------- -------------
Loss from continuing operations before income
taxes........................................... (3,149) (4,197)
Income taxes..................................... -- --
------------- -------------
Loss from continuing operations.................. (3,149) (4,197)
Loss from discontinued operations................ -- (713)
------------- -------------
Net loss......................................... (3,149) (4,910)
Dividends and accretion on preferred stock....... (363) (301)
------------- -------------
Net loss applicable to common shareholders....... $ (3,512) $ (5,211)
============= =============
Loss per common share (basic and diluted):
Loss from continuing operations................ $ (0.22) $ (0.28)
Loss from discontinued operations.............. -- (0.04)
------------- -------------
Net loss..................................... $ (0.22) $ (0.32)
============= =============
Weighted average common shares outstanding....... 16,213 16,195
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-73
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Revenues:
Coin calls..................................... $ 59,222 $ 57,029
Non-coin calls................................. 27,043 26,924
------------- -------------
Total revenues............................... 86,265 83,953
Costs and expenses:
Telephone charges.............................. 21,024 22,224
Commissions.................................... 24,535 21,593
Field service and collection................... 15,929 14,620
Depreciation and amortization.................. 16,641 15,984
Selling, general and administrative............ 8,996 9,453
------------- -------------
Total costs and expenses..................... 87,125 83,874
------------- -------------
Operating (loss) income........................ (860) 79
Other expenses:
Interest expense, net.......................... 9,703 9,820
------------- -------------
Loss from continuing operations before income
taxes........................................... (10,563) (9,741)
Income taxes..................................... -- --
------------- -------------
Loss from continuing operations.................. (10,563) (9,741)
Loss from discontinued operations................ -- (2,018)
------------- -------------
Net loss......................................... (10,563) (11,759)
Dividends and accretion on preferred stock....... (1,300) (904)
------------- -------------
Net loss applicable to common shareholders....... $ (11,863) $ (12,663)
============= =============
Loss per common share (basic and diluted):
Loss from continuing operations................ $ (0.73) $ (0.66)
Loss from discontinued operations.............. -- (0.12)
------------- -------------
Net loss..................................... $ (0.73) $ (0.78)
============= =============
Weighted average common shares outstanding....... 16,212 16,195
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-74
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................. $(10,563) $(11,759)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization............................ 16,641 15,984
Amortization of deferred financing costs................. 590 667
Changes in operating assets and liabilities:
Accounts receivable.................................... (1,518) (4,240)
Prepaid expenses and other current assets.............. 482 23
Other assets........................................... (832) 2,876
Accounts payable and accrued expenses.................. (968) (982)
Accrued interest payable............................... (3,124) (3,083)
Income and other taxes payable......................... (72) 335
Net effect of discontinued operations and assets held
for sale.............................................. -- 2,115
-------- --------
Net cash provided by operating activities............ 636 1,936
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment additions......................... (2,886) (2,156)
Proceeds from sale of assets............................. -- 233
Payments for acquisition of Indiana Telcom assets........ (11,317) --
Payments for certain contracts........................... (2,292) (2,939)
Restricted cash.......................................... (9) (898)
-------- --------
Net cash used in investing activities................ (16,504) (5,760)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt..................... (580) (426)
Principal payments under capital lease obligations....... (577) (758)
Debt issuance costs...................................... -- (218)
Exercise of stock options and warrants................... 8 --
-------- --------
Net cash used in financing activities................ (1,149) (1,402)
-------- --------
Net decrease in cash and cash equivalents.................. (17,017) (5,226)
Cash and cash equivalents at beginning of period........... 22,834 12,556
-------- --------
Cash and cash equivalents at end of period................. $ 5,817 $ 7,330
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-75
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 1--UNAUDITED INTERIM INFORMATION
The accompanying interim consolidated financial data for Peoples Telephone
Company, Inc. (the "Company") and subsidiaries, are unaudited; however, in the
opinion of management, the interim data include all adjustments necessary for
a fair presentation of the results for the interim periods. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
The results of operations for the three months and nine months ended
September 30, 1998 are not necessarily indicative of the results to be
expected for the year ending December 31, 1998.
The interim unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto for the year ended December 31, 1997 as set forth in the Company's
1997 Annual Report on Form 10-K as amended by Form 10-K/A No. 1 ("Form 10-K").
NOTE 2--INVESTMENTS AND OTHER COMPREHENSIVE LOSS
Investments in debt and equity securities are accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting
for Certain Investments in Debt and Equity Securities ("SFAS 115"). The
Company's investment in Global Telecommunications Solutions, Inc. ("GTS") is
classified as "available for sale", and reported at fair value with unrealized
gains or losses, net of tax, recorded as a separate component of shareholders'
deficit. The Company's investment in GTS common stock at September 30, 1998
was approximately $0.2 million, net of approximately $2.9 million of
unrealized losses.
As of January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income ("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components; however, the
adoption of SFAS 130 had no impact on the Company's net loss or shareholders'
deficit. SFAS 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which, prior to adoption, were reported
separately in shareholders' deficit, to be included in other comprehensive
loss. Prior year financial statements have been reclassified to conform to the
requirements of SFAS 130.
The components of the comprehensive loss are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Net loss......................................... $ (3,149) $ (4,910)
Unrealized (loss) gain on investment............. (373) 320
---------- ----------
Comprehensive loss............................... $ (3,522) $ (4,590)
========== ==========
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Net loss......................................... $ (10,563) $ (11,759)
Unrealized (loss) gain on investment............. (863) 874
---------- ----------
Comprehensive loss............................... $ (11,426) $ (10,885)
========== ==========
</TABLE>
F-76
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 3--EARNINGS PER SHARE
For the quarter and nine months ended September 30, 1998 and 1997, the
treasury stock method was used to determine the dilutive effect of options and
warrants on earnings per share data. The following table summarizes the loss
from continuing operations and the weighted average number of shares
outstanding used in the computation of loss from continuing operations per
common share in accordance with SFAS No. 128, Earnings Per Share (in
thousands, except per share data).
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS
ENDED SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Loss from continuing operations.................... $ (3,149) $ (4,197)
Deduct:
Cumulative preferred stock dividend
requirement................................... (324) (262)
Preferred stock issuance cost accretion........ (39) (39)
--------- ---------
Loss from continuing operations applicable to
common shareholders......................... $ (3,512) $ (4,498)
========= =========
Weighted average common shares outstanding... 16,213 16,195
========= =========
Basic and diluted loss per share from
continuing operations....................... $ (0.22) $ (0.28)
========= =========
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Loss from continuing operations.................... $ (10,563) $ (9,741)
Deduct:
Cumulative preferred stock dividend
requirement................................... (849) (787)
Cumulative adjustment for preferred stock
dividend compounding.......................... (334) --
Preferred stock issuance cost accretion........ (117) (117)
--------- ---------
Loss from continuing operations applicable to
common shareholders......................... $ (11,863) $ (10,645)
========= =========
Weighted average common shares outstanding... 16,212 16,195
========= =========
Basic and diluted loss per share from
continuing operations....................... $ (0.73) $ (0.66)
========= =========
</TABLE>
Diluted loss per share is equal to basic loss per share since the conversion
of preferred shares and the exercise of outstanding options and warrants would
be anti-dilutive for all periods presented.
F-77
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 4--LONG-TERM DEBT
During June 1998, the Company executed an amendment to the Fourth Amended
and Restated Loan and Security Agreement which modified the Company's
financial covenants in the Company's $20 million credit facility with Bank
Austria Creditanstalt Corporate Finance, Inc., formerly known as
"Creditanstalt-Bankverein" (the "Credit Facility"), as of June 30, 1998. The
interest rate on balances outstanding under the Credit Facility varies based
upon the leverage ratio maintained by the Company. Outstanding principal
balances are due in full in the year 2000. Interest is payable monthly for
loans based on the prime rate and quarterly for loans based on the LIBOR rate.
A commitment fee of 1/2 of 1% is charged on the aggregate daily available
balance of the Credit Facility. The Credit Facility is secured by
substantially all of the Company's assets and contains certain covenants
which, among other things, require the Company to maintain certain cash flow
levels and interest coverage ratios and places certain restrictions on the
payment of dividends. At September 30, 1998, the Company had no amounts
borrowed under the Credit Facility and was in compliance with the financial
covenants.
NOTE 5--INCOME TAXES
For the three and nine months ended September 30, 1998, the Company recorded
deferred tax assets and deferred tax asset valuation allowances of
approximately $1.2 million and $4.0 million, respectively. Valuation
allowances were provided to reduce the deferred tax assets to a level which,
more likely than not, will be realized.
NOTE 6--LOSS FROM DISCONTINUED OPERATIONS
In the fourth quarter of 1997, the Company sold the operating assets of its
inmate telephone division. The accompanying Consolidated Statement of
Operations for the three and nine months ended September 30, 1997 and the
Consolidated Statement of Cash Flows for the nine months ended September 30,
1997 have been restated to present results of the former inmate telephone
division as discontinued operations. For the three months and nine months
ended September 30, 1997, the Company reported approximately $0.7 million and
$2.0 million in losses from discontinued operations, respectively.
NOTE 7--ACQUISITION OF INDIANA TELCOM CORPORATION
On January 12, 1998, the Company acquired the operating assets of Indiana
Telcom Corporation for approximately $11.3 million in cash. The results of
operations for the Company include the operations of Indiana Telcom from
January 12, 1998 forward. The acquisition was accounted for as a purchase,
and, accordingly, the purchase price was allocated to the assets acquired
based on appraisals and other estimates of their underlying fair values. The
allocation of the purchase price is preliminary, pending finalization of
appraisals and other estimates. The fair value of the assets acquired included
$5.4 million of installed payphones and related equipment and $0.3 million in
location contracts. No liabilities were assumed in the transaction. The excess
of the purchase price over the fair value of net assets acquired of $5.6
million was recorded as goodwill and is being amortized over 5 years.
F-78
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
The following summarizes unaudited pro forma consolidated results of
operations for the nine months ending September 30, 1997 assuming the Indiana
Telcom 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 that would have been obtained if this acquisition had been
effected on the date indicated or which may be obtained in the future (in
thousands, except per share data).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997
------------------
<S> <C>
Total revenues......................................... $87,760
Loss from continuing operations........................ (10,494)
Loss from continuing operations per common share....... (0.70)
</TABLE>
NOTE 8--MERGER AGREEMENT WITH DAVEL COMMUNICATIONS GROUP
The Company has entered into an amended and restated merger agreement with
Davel Communications Group, Inc. ("Old Davel") and Davel Holdings, Inc. ("New
Davel"). Under the terms of the agreement, which has been approved by the
Board of Directors of each company, holders of common stock of the Company
will receive 0.235 of a share of New Davel common stock for each outstanding
share of Company common stock and the Company and Old Davel will become a
wholly owned subsidiary of New Davel (the "Merger").
The transaction, which is intended to close in the fourth quarter of 1998,
is subject to the approval of the shareholders of both Old Davel and the
Company, receipt of required regulatory approvals and other customary
conditions. Consummation of the Merger is conditioned on its eligibility for
pooling-of-interests accounting treatment. The transaction is also subject to
conversion of the Company's Series C Cumulative Convertible Preferred Stock
into common stock and receipt by Davel of financing for, and successful
consummation of, a cash tender offer for the Company's 12 1/4% Senior Notes
due 2002 (the "Senior Notes"), pursuant to which a minimum of 85% of the
aggregate outstanding principal amount of $100 million shall have been
tendered. As of November 11, 1998, substantially all of the principal amount
had been tendered, thereby satisfying that condition. Old Davel plans to
refinance the Senior Notes through a new senior credit facility. No assurance
can be given that all of the conditions for the consummation of the proposed
Merger will be satisfied.
As of September 30, 1998, the Company had incurred approximately $0.9
million in accounting, legal and advisory costs relating to the pending
business combination. These costs have been recorded in other assets on the
Company's Consolidated Balance Sheet and will be recognized in results of
operations upon the consummation of the Merger.
NOTE 9--DIAL-AROUND COMPENSATION
Effective November 6, 1996, pursuant to FCC regulations, the Company derived
additional revenues from dial-around calls placed from its public payphones.
Under the 1996 Payphone Order, from November 6, 1996 to June 30, 1997, the
Company recorded gross dial-around revenue at the then-mandated rate of $45.85
per payphone per month, as compared with the flat fee of $6.00 per payphone
per month in place prior to November 6, 1996. Pursuant to the Remand Order, in
the period from July 1 to October 6 of 1997 the Company recorded gross dial-
around compensation revenue at a rate of $37.20 per payphone per month and
recorded a charge of approximately $2.1 million, consisting of a reduction in
non-coin revenue of approximately $2.6 million and a reduction in commissions
expense of approximately $0.5 million, in the third quarter of 1997 for the
retroactive reduction in the dial-around compensation rate from $45.85 to
$37.20 per payphone per month, applicable to the November 6, 1996 to June 30,
1997 period.
F-79
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
From October 7, 1997 to October 6, 1999, the Company is entitled to receive
dial-around compensation at a per-call rate of $0.284 based on the actual
number of dial-around calls placed from each of its payphones (or such other
number of calls as may be ultimately permitted by the FCC or the courts).
Thereafter, the dial-around compensation rate is anticipated to be at a per-
call rate equal to the local coin call rate less $0.066. For the period from
October 7, 1997 to September 30, 1998, the Company recorded dial-around
compensation revenue using an estimated 131 calls per month per payphone. The
Company has based its compensation on an estimated number of calls (i.e., 131)
per payphone per month because actual call counts are not available from the
IXCs until four to nine months after the calls are made. From October 7, 1997
forward, the estimated amount may be adjusted for actual call counts provided
by the IXCs.
The FCC, in its Order issued April 3, 1998, left in place the requirement
for payment of per-call compensation for payphones 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 local exchange carrier
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 and 888 subscriber and access code
calls placed from regional Bell operating company 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.
Based on the information available to it, including actual payments from IXCs
for the fourth quarter of 1997, the Company does not believe application of
this order will result in any material adjustment to the dial-around
compensation revenues recorded for the period from October 7, 1997 forward.
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 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. The Company believes that the FCC
will issue its ruling in the current proceeding within the six-month period
established by the Court. Based on the information available to it, the
Company does not believe that it is reasonably possible that the amount of
compensation for dial-around calls will be materially reduced from the amount
recorded as dial-around compensation. While the amount of $0.284 per call
constitutes the Company's position on the minimum appropriate level of fair
compensation, certain IXCs have challenged this rate level, asserting that the
appropriate level of fair compensation should be lower than $0.284 per call.
NOTE 10--COMMITMENTS AND CONTINGENCIES
In December 1995, Cellular World filed a complaint in Dade County Circuit
Court against the Company 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 is seeking damages alleged to exceed $10
million. The Company successfully obtained dismissal of one count of the
complaint early in the proceedings, but the court allowed the remaining two
counts to proceed through discovery. Formal discovery is nearly completed. On
July 31, 1998, the court granted a summary judgment in the Company's favor,
dismissing one of the two remaining counts. Trial has been reset for February
1999. Based on the discovery conducted to date, the Company continues to
believe that it has several meritorious legal and factual defenses. Based upon
the incomplete status of discovery, the Company is unable to predict the final
outcome of the litigation.
F-80
<PAGE>
PEOPLES TELEPHONE COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(UNAUDITED)
NOTE 11--SUBSEQUENT EVENTS
On June 12, 1998, Old Davel (see Note 8) signed a definitive agreement (the
"Davel/PhoneTel Merger Agreement") to merge with PhoneTel Technologies, Inc.
("PhoneTel"). On September 29, 1998, Old Davel announced that it was
exercising its contractual rights to terminate the Davel/PhoneTel Merger
Agreement, based on breaches of representations, warranties and covenants by
PhoneTel. On October 1, 1998, Old Davel 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 Old Davel
alleging that the Davel/PhoneTel Merger Agreement had been wrongfully
terminated, and also filed a third-party claim against the Company alleging
that the Company wrongfully caused the termination of the Davel/PhoneTel
Merger Agreement. The counterclaim and third party claim seek specific
performance by Old Davel of the transactions contemplated by the
Davel/PhoneTel Merger Agreement and damages and other equitable relief from
Old Davel and the Company. The Company believes that the third party claim is
without merit and intends to defend against it vigorously.
F-81
<PAGE>
APPENDICES
<TABLE>
<S> <C>
Appendix I............ Fairness Opinion of ABN AMRO with respect to the
Transaction
Appendix II........... Fairness Opinion of Goldman Sachs with respect to the
Transaction
Appendix III.......... Davel/Peoples Merger Agreement
Appendix IV........... New Davel's Certificate of Incorporation
Appendix V............ New Davel's Bylaws
Appendix VI........... Statutory Provisions under the Illinois Law with Respect
to Dissenters' Rights
</TABLE>
<PAGE>
APPENDIX I
FAIRNESS OPINION OF ABN AMRO WITH RESPECT TO THE TRANSACTION
July 5, 1998
Board of Directors
Davel Communications Group, Inc.
1429 Massaro Boulevard
Tampa, Florida 33619
Members of the Board:
You have asked us to advise you with respect to the fairness to Davel
Communications Group, Inc. ("Davel") and its shareholders, from a financial
point of view, of the consideration to be paid in connection with the proposed
acquisition (the "Transaction") of Peoples Telephone Company, Inc. ("PTCI") as
set forth in, and pursuant to the terms of the Agreement and Plan of Merger,
dated as of July 5, 1998, (the "Merger Agreement"), by and among Davel, Davel
Holdings, Inc. ("Holdings"), a Delaware Corporation and PTCI.
The Merger Agreement provides that PTCI will be merged with and into Miami
Merger Corporation, a New York Corporation to be formed as a wholly owned
subsidiary of Davel (or, if the Davel Merger (as defined in the Merger
Agreement) is consummated prior to the Effective Time, of Holdings) with PTCI
surviving as a wholly owned subsidiary of Davel, or if applicable, of Holdings
(the "Transaction"). In order to effect the Transaction, each share ("Share")
of PTCI common stock, $0.01 par value per share (the "Common Stock"), issued
and outstanding immediately prior to the Effective Time (as defined in the
Merger Agreement) shall be converted into the right to receive .235 (the
"Exchange Ratio") fully paid and nonassessable shares of Davel Common Stock
or, if applicable, Holdings Common Stock (the "Merger Consideration").
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to Davel and PTCI. In addition to
the Merger Agreement, we have also reviewed certain other information,
including financial forecasts provided to us by the Company and PTCI. We have
met with the management of Davel and PTCI and have discussed the past and
current operations, financial conditions and prospects of, and regulatory
environment affecting, Davel and PTCI. In addition, we have considered certain
financial and stock market data for Davel and PTCI. We compared that data with
similar data for other publicly held companies in businesses we deemed
relevant and have considered the financial terms of certain other business
combinations which have recently been effected. We have also analyzed the pro
forma impact of the Transaction on Davel's financial position and performance
and considered such other information, financial studies, analyses and
investigations and financial, economic and market criteria which we deemed
relevant. We have also considered the potential impact on Davel of this
transaction in conjunction with other contemplated transactions involving
Davel, including achieving greater scale from consolidation and enhancing
Davel's position to participate in additional industry consolidation.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied
on its being complete and accurate in all material respects. With respect to
the financial forecasts, we have assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of each of: (i) Davel and PTCI as to the future financial
performance of Davel and PTCI, respectively, on a stand-alone basis; and (ii)
Davel as to the future financial performance of Davel after giving effect to
the Transaction contemplated by the Merger Agreement, including Davel
management's estimates of cost savings and operating synergies to potentially
be realized in the proposed business combination. We assume no responsibility
for and express no view as to such forecasts or the assumptions on which they
are based. In addition, we have not made an independent evaluation or
appraisal of the assets of Davel or PTCI, nor have we been furnished with any
such evaluations or appraisals. Our opinion is based on economic, monetary and
market conditions existing on the date of this opinion.
ABN AMRO Incorporated will receive a fee for rendering this opinion, which
is not contingent upon the consummation of the Transaction.
I-1
<PAGE>
In the past, ABN AMRO Incorporated has separately performed certain
investment banking services for the Company and received customary fees for
such services. In the ordinary course of our business, ABN AMRO Incorporated
and its affiliates may actively trade securities of both Davel and PTCI for
their own account and for the accounts of customers and, accordingly, may at
any time hold a long or short position in such securities.
It is understood that this letter is for the benefit and use of the Board of
Directors of Davel in its consideration of the Transaction, and may not be
used for any other purpose or reproduced, disseminated, quoted or referred to
at any time, in any manner or for any purpose without our prior written
consent except that ABN AMRO authorizes Davel to use and to include this
letter in its entirety in any Proxy Statement required by the Merger
Agreement. In addition, we may not be otherwise publicly referred to without
our prior written consent which will not be unreasonably withheld. This letter
does not constitute a recommendation to any shareholder with respect to
whether to vote their shares in favor of the Transaction.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Merger Consideration to be paid by Davel in connection with
the Transaction is fair to Davel and its shareholders from a financial point
of view.
Very truly yours,
ABN AMRO Incorporated
I-2
<PAGE>
APPENDIX II
[GOLDMAN SACHS LETTERHEAD]
PERSONAL AND CONFIDENTIAL
July 5, 1998
Board of Directors
Peoples Telephone Company, Inc.
2300 N.W. 89th Place
Miami, Florida 33172
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to the holders of the outstanding shares of Common Stock, par value $0.01
per share (the "Shares"), of Peoples Telephone Company, Inc. (the "Company")
of the exchange ratio of 0.235 shares of Common Stock, par value $0.01 per
share (the "Davel Shares"), of Davel Communications Group, Inc. ("Davel"), to
be received for each Share (the "Exchange Ratio") by such holders pursuant to
the Agreement and Plan of Merger, dated as of July 5, 1998, by and among Davel
Holdings, Inc. ("Holdings"), Davel and the Company (the "Agreement"), pursuant
to which Miami Merger Corp., a corporation to be formed as a wholly owned
subsidiary of Davel or Holdings (as described in the Agreement) will be merged
with and into the Company (the "Merger"). Pursuant to the terms of the
Agreement, in the event that the merger (the "PhoneTel Merger") contemplated
by the Agreement and Plan of Merger and Reorganization (the "PhoneTel
Agreement"), dated June 11, 1998, by and among Davel, Holdings, D Subsidiary,
Inc., PT Merger Corp. and PhoneTel Technologies, Inc. ("PhoneTel") occurs
prior to or simultaneously with the Merger, then 0.235 shares of Common Stock,
par value $0.01 per share ("Holdings Shares"), of Holdings will be issued to
holders of Shares for each Share in lieu of Davel Shares. We understand that
pursuant to the Agreement, the PhoneTel Merger is not a condition to the
completion of the Merger.
Goldman, Sachs & Co. ("Goldman Sachs"), as part of its investment banking
business, is continually engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate
and other purposes. We are familiar with the Company, having acted as its
financial advisor in connection with, and having participated in certain of
the negotiations leading to, the Agreement. Goldman, Sachs & Co. has also
provided certain investment banking services to Equity Group Investments, Inc.
("EGI", a company which we understand recently became an affiliate of Davel)
and certain companies affiliated with EGI. Goldman, Sachs & Co. may provide
investment banking services to EGI and its affiliates in the future, and is
currently serving as a Co-Manager of a secondary offering of equity securities
for an affiliate of EGI. Goldman, Sachs & Co. provides a full range of
financial advisory and securities services and, in the course of its normal
trading activities, may from time to time effect transactions and hold
securities, including derivative securities of the Company, Davel and PhoneTel
for its own account and for the accounts of customers. As of the date hereof,
Goldman, Sachs & Co., through Goldman Sachs Asset Management, holds long
positions of 554,700 Davel Shares and 1,684,900 Shares. In addition, Goldman,
Sachs & Co., through its Credit Arbitrage Investment department, holds long
positions of $9,880,000 of PhoneTel's 12% Senior Notes due 2006.
In connection with this opinion, we have reviewed, among other things, the
Agreement; the PhoneTel Agreement; Annual Reports to Stockholders and Annual
Reports on Form 10-K of the Company, Davel and PhoneTel for the five years
ended December 31, 1997; certain interim reports to stockholders and Quarterly
Reports on Form 10-Q of the Company, Davel and PhoneTel; certain other
communications from the Company, Davel and PhoneTel to their respective
stockholders; certain internal financial analyses and forecasts for the
Company, Davel and PhoneTel prepared by their respective managements; and
certain internal financial analyses and pro forma consolidated forecasts
(including certain projected cost savings and operating synergies) reflecting
II-1
<PAGE>
the combination of Davel and PhoneTel, Davel and the Company, and Davel,
PhoneTel and the Company, prepared by EGI. We have also held discussions with
members of the senior managements of the Company, Davel and EGI regarding the
strategic rationale for, and potential benefits of, the Merger and the
PhoneTel Merger and the past and current business operations, financial
condition and future prospects of the Company, Davel and PhoneTel. In
addition, we have reviewed the reported price and trading activity for the
Shares and the Davel Shares; compared certain financial and stock market
information for the Company and Davel with similar information for certain
other companies, the securities of which are publicly traded; reviewed the
financial terms of certain recent business combinations in the independent
payphone industry specifically and in other industries generally; and
performed such other studies and analyses as we considered appropriate.
We have relied upon the accuracy and completeness of all of the financial
and other information reviewed by us and have assumed such accuracy and
completeness for purposes of rendering this opinion. In that regard, we have
assumed with your consent that the financial analyses, forecasts and pro forma
consolidated forecasts, including the underlying assumptions, provided to us
with respect to Davel, PhoneTel, the Company, the Merger and the PhoneTel
Merger, including, without limitation, the projected cost savings and
operating synergies expected to result from the Merger and the PhoneTel
Merger, have been reasonably prepared on a basis reflecting the best currently
available judgements and estimates of the management of the Company, Davel,
PhoneTel and EGI. In addition, we have not made an independent evaluation or
appraisal of the assets or liabilities of the Company, Davel or PhoneTel or
any of their subsidiaries and we have not been furnished with any such
evaluation or appraisal. We have also assumed, with your consent, that the
Merger will be accounted for as a pooling of interests under generally
accepted accounting principles. Our opinion as expressed below does not imply
any conclusion as to the likely trading range of Davel Shares or Holdings
Shares following consummation of the Merger (if such shares are issued), which
may vary depending upon, among other factors, changes in interest rates,
dividend rates, market conditions, general economic conditions and other
factors that generally influence the price of securities. Our advisory
services and the opinion expressed herein are provided for the information and
assistance of the Board of Directors of the Company in connection with its
consideration of the Merger and such opinion does not constitute a
recommendation as to how any holder of Shares should vote with respect to such
transaction.
Based upon and subject to the foregoing and based upon such other matters as
we consider relevant, it is our opinion that as of the date hereof the
Exchange Ratio pursuant to the Agreement is fair from a financial point of
view to the holders of Shares.
Very truly yours,
/s/ Goldman, Sachs & Co.
Goldman, Sachs & Co.
II-2
<PAGE>
APPENDIX III
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AND REORGANIZATION
DATED AS OF
JULY 5, 1998
AND AMENDED AND RESTATED AS OF
OCTOBER 22, 1998
BY AND AMONG
DAVEL HOLDINGS, INC.,
DAVEL COMMUNICATIONS GROUP, INC.,
D SUBSIDIARY, INC.,
MIAMI MERGER CORP.
AND
PEOPLES TELEPHONE COMPANY, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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ARTICLE 1 THE PEOPLES MERGER....................................... 2
Section 1.01 Effectuation of Peoples Merger........................... 2
Section 1.02 Conversion of Peoples Shares............................. 2
Section 1.03 Exchange of Peoples Shares............................... 3
Section 1.04 Certain Peoples Adjustments.............................. 5
Section 1.05 Peoples Stock Options, Warrants and Restricted Stock..... 6
Section 1.06 Articles of Incorporation................................ 7
Section 1.07 Bylaws................................................... 7
Section 1.08 Directors and Officers................................... 7
ARTICLE 2 THE DAVEL MERGER......................................... 7
Section 2.01 Effectuation of Davel Merger............................. 7
Section 2.02 Conversion of Davel Shares............................... 8
Section 2.03 Exchange of Davel Shares................................. 8
Section 2.04 Davel Stock Options and Warrants......................... 10
Section 2.05 Dissenters' Rights....................................... 11
Section 2.06 Davel Articles of Incorporation.......................... 11
Section 2.07 Davel Bylaw.............................................. 11
Section 2.08 Davel Directors and Officers............................. 11
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF PEOPLES................ 11
Section 3.01 Corporate Organization................................... 11
Section 3.02 Authorization............................................ 12
Section 3.03 Capital Stock............................................ 12
Section 3.04 Peoples Subsidiaries..................................... 12
Section 3.05 Consents and Approvals; No Violation..................... 13
Section 3.06 SEC Reports and Financial Statements..................... 13
Section 3.07 Absence of Undisclosed Liabilities....................... 14
Section 3.08 Changes.................................................. 14
Section 3.09 Investigations; Litigation............................... 14
Section 3.10 Contracts and Commitments................................ 15
Section 3.11 Environmental and Safety Matters......................... 15
Section 3.12 Taxes.................................................... 16
Section 3.13 Employment Agreements.................................... 16
Section 3.14 Change of Control Provisions............................. 16
Section 3.15 Employee Benefit Plans................................... 16
Section 3.16 Licenses................................................. 17
Section 3.17 Real Estate Leases....................................... 18
Section 3.18 Real Property............................................ 18
Section 3.19 Intellectual Property.................................... 18
Section 3.20 Compliance with Other Instruments and Laws............... 18
Section 3.21 Employees................................................ 19
Section 3.22 Information Supplied..................................... 19
Section 3.23 Certain Fees............................................. 19
Section 3.24 Opinion of Financial Advisor............................. 19
Section 3.25 Voting Requirements...................................... 19
Section 3.26 State Takeover Statutes.................................. 19
Section 3.27 Payphones................................................ 20
Section 3.28 Average Net Revenue...................................... 20
</TABLE>
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ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF DAVEL................. 20
Section 4.01 Corporate Organization.................................. 20
Section 4.02 Authorization........................................... 20
Section 4.03 Capital Stock........................................... 21
Section 4.04 Subsidiaries............................................ 21
Section 4.05 Consents and Approvals; No Violations................... 21
Section 4.06 SEC Reports and Financial Statements.................... 22
Section 4.07 Absence of Undisclosed Liabilities...................... 22
Section 4.08 Changes................................................. 23
Section 4.09 Investigations; Litigation.............................. 23
Section 4.10 Environmental and Safety Matters........................ 24
Section 4.11 Certain Fees............................................ 24
Section 4.12 Taxes................................................... 24
Section 4.13 Change of Control Provisions............................ 24
Section 4.14 Licenses................................................ 25
Section 4.15 Compliance with Other Instruments and Laws.............. 25
Section 4.16 Employees............................................... 25
Section 4.17 Information Supplied.................................... 25
Section 4.18 Opinion of Financial Advisor............................ 25
Section 4.19 Voting Requirements..................................... 25
Section 4.20 State Takeover Statutes................................. 26
Section 4.21 No Peoples Shares....................................... 26
Section 4.22 Rights.................................................. 26
Section 4.23 Financing............................................... 26
ARTICLE 5 COVENANTS OF PEOPLES.................................... 26
Conduct of Business by Peoples Pending Consummation of
Section 5.01 the Transaction......................................... 26
Section 5.02 Stockholders' Meeting................................... 27
Section 5.03 Access to Information................................... 27
Section 5.04 No Solicitation......................................... 28
Section 5.05 Corporate Organization.................................. 28
Section 5.06 Termination Option Agreement............................ 28
Section 5.07 Preferred Stock and Senior Notes........................ 28
ARTICLE 6 COVENANTS OF DAVEL AND HOLDINGS......................... 29
Section 6.01 Access to Information................................... 29
Section 6.02 Newco Incorporation; Obligations of Newco............... 29
Section 6.03 Indemnification......................................... 29
Section 6.04 Stockholders' Meeting................................... 30
Section 6.05 Davel Financing......................................... 30
Section 6.06 Employee Matters........................................ 30
Section 6.07 Financial Disclosure.................................... 30
Conduct of Business of Davel Pending Consummation of the
Section 6.08 Transaction............................................. 31
ARTICLE 7 COVENANTS OF THE PARTIES................................ 31
Section 7.01 Reasonable Best Efforts................................. 31
Section 7.02 Certain Filings......................................... 32
Section 7.03 Public Announcements.................................... 32
Section 7.04 Further Assurances...................................... 32
Section 7.05 Notices of Certain Events............................... 32
Section 7.06 Preparation of the Form S-4 and the Proxy Statement..... 32
Section 7.07 Letters of Accountants.................................. 33
</TABLE>
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Section 7.08 Affiliates............................................. 33
Section 7.09 Nasdaq Listing......................................... 34
Section 7.10 Tax Treatment.......................................... 34
Section 7.11 Pooling of Interests................................... 34
Section 7.12 Representations........................................ 34
Section 7.13 Confidentiality........................................ 34
ARTICLE 8 CONDITIONS TO THE MERGER............................... 34
Section 8.01 Conditions to the Obligations of Each Party............ 34
Conditions to the Obligations of Davel, Holdings, Newco
Section 8.02 and D Sub.............................................. 35
Section 8.03 Conditions to the Obligations of Peoples............... 35
ARTICLE 9 TERMINATION............................................ 36
Section 9.01 Termination............................................ 36
Section 9.02 Waiver................................................. 37
Section 9.03 Closing................................................ 37
Section 9.04 Effect of Termination; Termination Fee................. 37
ARTICLE 10 MISCELLANEOUS.......................................... 38
Section 10.01 Notices................................................ 38
Section 10.02 Survival of Representations and Warranties............. 38
Section 10.03 Amendments; No Waivers................................. 39
Section 10.04 Expenses............................................... 39
Section 10.05 Successors and Assigns................................. 39
Section 10.06 Governing Law.......................................... 39
Section 10.07 Counterparts; Effectiveness............................ 39
Section 10.08 Headings; Schedules.................................... 39
Section 10.09 Obligations of Davel and Holdings...................... 39
Section 10.10 No Third Party Beneficiaries........................... 40
</TABLE>
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DEFINED TERMS
<TABLE>
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TERM NUMBER
- ---- ------
<S> <C>
Acquisition Proposal..................................................... 39
Adjusted Davel Option.................................................... 14
Adjusted Davel Warrant................................................... 14
Adjusted Peoples Option.................................................. 8
Adjusted Peoples Warrant................................................. 8
Affected Employee........................................................ 42
Agreement................................................................ 1
Average Net Revenue...................................................... 28
Closing.................................................................. 52
Closing Date............................................................. 52
Closing Time............................................................. 2
Code..................................................................... 2
D Sub.................................................................... 1
Davel.................................................................... 1
Davel Articles of Merger................................................. 10
Davel Certificates....................................................... 12
Davel Common Stock....................................................... 11
Davel Dissenting Shares.................................................. 15
Davel Effective Time..................................................... 10
Davel Exchange Fund...................................................... 12
Davel Investigation...................................................... 32
Davel Material Adverse Effect............................................ 28
Davel Merger............................................................. 1
Davel Merger Consideration............................................... 11
Davel Options............................................................ 14
Davel Reports............................................................ 31
Davel Rights............................................................. 11, 36
Davel Stock Option Plans................................................. 9
Davel Stockholder Approval............................................... 28
Davel Stockholders Meeting............................................... 41
Davel Subsidiaries....................................................... 30
Davel Subsidiary......................................................... 30
Davel Surviving Corporation.............................................. 10
Davel Warrants........................................................... 14
Davel/PhoneTel Merger Agreement.......................................... 29
DCG, Inc................................................................. 16
Disclosure Document...................................................... 44
Disparate Adverse Effect................................................. 43
Environmental Laws....................................................... 22
ERISA.................................................................... 24
Excess Shares............................................................ 5
Exchange Act............................................................. 18
Exchange Agent........................................................... 3
Financing................................................................ 36
Form S-4................................................................. 27
GAAP..................................................................... 19
Governmental Entity...................................................... 18
Holdings................................................................. 1
</TABLE>
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TERM NUMBER
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<S> <C>
Holdings Common Stock.................................................... 3
HSR Act.................................................................. 18
Illinois Law............................................................. 10
Indemnified Parties...................................................... 41
Intellectual Property.................................................... 25
Investigation............................................................ 20
knowledge of Davel....................................................... 33
knowledge of Peoples..................................................... 20
Licenses................................................................. 25
Location Owners.......................................................... 22
New York Law............................................................. 2
Newco.................................................................... 1
Notes.................................................................... 40
Original Agreement....................................................... 1
Peoples.................................................................. 1
Peoples Award............................................................ 9
Peoples Certificate of Merger............................................ 2
Peoples Certificates..................................................... 4
Peoples Common Stock..................................................... 3
Peoples Common Stock Trust............................................... 6
Peoples Effective Time................................................... 2
Peoples Exchange Fund.................................................... 4
Peoples Exchange Ratio................................................... 3
Peoples Material Adverse Effect.......................................... 16
Peoples Merger........................................................... 1, 2
Peoples Merger Consideration............................................. 3
Peoples Reports.......................................................... 19
Peoples Share............................................................ 3
Peoples Stock Option Plans............................................... 8
Peoples Stockholder Approval............................................. 27
Peoples Stockholders Meeting............................................. 38
Peoples Subsidiaries..................................................... 17
Peoples Subsidiary....................................................... 17
Peoples Surviving Corporation............................................ 2
Peoples Transaction...................................................... 2
Peoples Warrants......................................................... 8
Plans.................................................................... 24
Pooling Affiliate........................................................ 46
Proxy Statement.......................................................... 18
SEC...................................................................... 18
Securities Act........................................................... 18
Site Location Agreements................................................. 25
Term Sheet............................................................... 36
Termination Option Agreement............................................. 2
Transaction.............................................................. 1
</TABLE>
-v-
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
This AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
(this "Agreement") is made and entered into as of July 5, 1998, and is amended
and restated as of October 22, 1998, by and among Davel Communications Group,
Inc., an Illinois corporation ("Davel"), Davel Holdings, Inc., a Delaware
corporation and a wholly owned subsidiary of Davel ("Holdings"), Miami Merger
Corp., a New York corporation and an indirect, wholly owned subsidiary of
Holdings ("Newco"), D Subsidiary, Inc., an Illinois corporation and an
indirect, wholly owned subsidiary of Holdings ("D Sub"), and Peoples Telephone
Company, Inc., a New York corporation (the "Peoples").
RECITALS
WHEREAS, Holdings, Davel and Peoples are parties to an Agreement and Plan of
Merger and Reorganization, dated as of July 5, 1998 (the "Original
Agreement"), and such parties desire to amend and restate the Original
Agreement in its entirety as set forth herein and to add Newco and D Sub as
parties to this Agreement;
WHEREAS, reference herein "to the date of this Agreement" or to "the date
hereof" shall refer to the date of the Original Agreement, and reference
herein to "this Agreement" shall refer to the Original Agreement as hereby
amended and restated;
WHEREAS, the Boards of Directors of Davel and Peoples deem it advisable and
in the best interests of the stockholders of such corporations to effect a
business combination of Davel and Peoples through the transactions provided
for herein (collectively, the "Transaction"), as a result of which each of
Davel and Peoples shall become an indirect, wholly-owned subsidiary of
Holdings;
WHEREAS, in order to effect the Transaction, (a) D Sub shall be merged with
and into Davel with Davel surviving as an indirect, wholly owned subsidiary of
Holdings (the "Davel Merger"), and (b) Newco shall be merged with and into
Peoples with Peoples surviving as an indirect, wholly-owned subsidiary of
Holdings (the "Peoples Merger"), in each case pursuant to this Agreement;
WHEREAS, the respective Boards of Directors of Davel, Newco and D Sub have
approved and adopted this Agreement, and the Board of Directors of Davel has
unanimously resolved to recommend that this Agreement be approved and adopted
by the shareholders of Davel;
WHEREAS, the Board of Directors of Peoples has approved and adopted this
Agreement, and the Peoples Board of Directors has unanimously resolved to
recommend that this Agreement be approved and adopted by the shareholders of
Peoples;
WHEREAS, for Federal income tax purposes, it is intended that each of the
Peoples Merger and the Davel Merger shall qualify as a tax-free reorganization
pursuant to Section 368(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), and that the shareholders of Peoples and Davel will recognize no
gain or loss for Federal income tax purposes as a result of the consummation
of the Peoples Merger or the Davel Merger, except with respect to any cash
received;
WHEREAS, for accounting purposes, it is intended that the Transaction be
accounted for as a "pooling of interests"; and
WHEREAS, as of the date of this Agreement and as a condition and inducement
to Davel's willingness to enter into the Original Agreement, Davel and Peoples
have entered into a Termination Option Agreement dated as of the date of this
Agreement (the "Termination Option Agreement"), pursuant to which Peoples has
granted Davel an option to purchase shares of common stock of Peoples under
certain circumstances;
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and of the mutual
representations, warranties, covenants and agreements set forth herein, the
parties agree as follows:
ARTICLE 1
THE PEOPLES MERGER
Section 1.01 Effectuation of Peoples Merger.
(a) At the Peoples Effective Time (as defined in Section 1.01(b) hereof),
Newco shall be merged (the "Peoples Merger") with and into Peoples in
accordance with the New York Business Corporation Law ("New York Law"),
whereupon the separate existence of Newco shall cease, and Peoples shall be
the surviving corporation (the "Peoples Surviving Corporation"). The Peoples
Merger and the other transactions contemplated by this Article 1 are sometimes
hereinafter referred to as the "Peoples Transaction."
(b) As soon as practicable after satisfaction or, to the extent permitted
hereunder, waiver of all conditions to the Transaction (the time of such
satisfaction or waiver being referred to herein as the "Closing Time"),
Peoples and Newco will cause a certificate of merger to be executed, verified
and delivered for filing by the New York Department of State (the "Peoples
Certificate of Merger") and make all other filings or recordings required by
New York Law in connection with the Peoples Merger. The Peoples Merger shall
become effective at such time as the Peoples Certificate of Merger is duly
filed by the New York Department of State and any additional requirements of
New York Law are complied with or at such later time as is specified in the
Peoples Certificate of Merger (the "Peoples Effective Time").
(c) From and after the Effective Time, the Peoples Surviving Corporation
shall possess all the assets, rights, privileges, powers and franchises and be
subject to all of the liabilities, restrictions, disabilities and duties of
Peoples and Newco, all as provided under New York Law.
Section 1.02 Conversion of Peoples Shares.
(a) At the Peoples Effective Time and by virtue of the Peoples Merger and
without any action on the part of the holders thereof:
(i) each share of common stock of Peoples held by Peoples as treasury
stock or owned by Davel, Holdings, Newco or any subsidiary of any of them
immediately prior to the Peoples Effective Time shall be canceled, and no
payment shall be made with respect thereto; provided, however, that any
shares of common stock of Peoples as to which Peoples, Holdings or Davel is
or may be required to act as a fiduciary or in a similar capacity shall not
be canceled but, instead, shall be treated as set forth in Section
1.02(a)(iii) below;
(ii) each share of capital stock of Newco outstanding immediately prior
to the Peoples Effective Time shall be converted into and become one share
of capital stock of the Peoples Surviving Corporation with the same rights
and privileges as the shares so converted and shall constitute the only
outstanding shares of capital stock of the Peoples Surviving Corporation;
and
(iii) subject to Section 1.03(e) and Section 1.04 hereof, each share (a
"Peoples Share") of common stock of Peoples, $0.01 par value per share (the
"Peoples Common Stock"), outstanding immediately prior to the Effective
Time shall, except as otherwise provided in clause (i) of this subsection,
be converted into the right to receive .235 (the "Peoples Exchange Ratio")
fully paid and nonassessable shares of common stock, par value $0.01 per
share (the "Holdings Common Stock"), of Holdings (the "Peoples Merger
Consideration"). As of the Peoples Effective Time, all such Peoples Shares
shall no longer be outstanding and shall automatically be canceled and
retired and shall cease to exist, and each holder of a certificate
representing any such Peoples Common Stock shall cease to have any rights
with respect thereto, except the right to receive the Peoples Merger
Consideration and any cash in lieu of fractional shares of Holdings Common
Stock to be issued or paid in consideration therefor upon surrender of such
certificate in accordance with Section 1.03 hereof, without interest.
2
<PAGE>
Section 1.03 Exchange of Peoples Shares.
(a) As of the Peoples Effective Time, Holdings shall enter into an agreement
with ChaseMellon Shareholder Services, L.L.C., as exchange agent for the
Merger (the "Exchange Agent"), which shall provide that Holdings shall deposit
with the Exchange Agent as of the Peoples Effective Time, for the benefit of
the holders of shares of Peoples Common Stock, for exchange in accordance with
this Article 1, through the Exchange Agent, certificates representing the
shares of Holdings Common Stock (as defined below) (such shares of Holdings
Common Stock, together with any dividends or distributions with respect
thereto with a record date after the Effective Time, any Excess Shares (as
defined in Section 1.03(e) hereof) and any cash (including cash proceeds from
the sale of the Excess Shares) payable in lieu of any fractional shares of
Holdings Common Stock being hereinafter referred to as the "Peoples Exchange
Fund") issuable pursuant to Section 1.02 hereof in exchange for outstanding
shares of Peoples Common Stock.
(b) As soon as reasonably practicable after the Peoples Effective Time, the
Exchange Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding Peoples Common Stock (the "Peoples Certificates") whose shares
were converted into the right to receive the Peoples Merger Consideration,
pursuant to Section 1.02 hereof, (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Peoples Certificates shall pass, only upon delivery of the Peoples
Certificates to the Exchange Agent and shall be in such form and have such
other provisions as Holdings may reasonably specify) and (ii) instructions for
use in surrendering the Peoples Certificates in exchange for certificates
representing the Peoples Merger Consideration, as applicable. Upon surrender
of a Peoples Certificate for cancellation to the Exchange Agent, together with
such letter of transmittal, duly executed, and such other documents as may
reasonably be required by the Exchange Agent, the holder of such Certificate
shall be entitled to receive in exchange therefor a certificate representing
that number of whole shares of Holdings Common Stock which such holder has the
right to receive pursuant to the provisions of this Article 1, certain
dividends or other distributions in accordance with Section 1.03(c) hereof and
cash in lieu of any fractional share of Holdings Common Stock in accordance
with Section 1.03(e) hereof, and the Peoples Certificate so surrendered shall
forthwith be canceled. In the event of a transfer of ownership of shares of
Peoples Common Stock which is not registered in the transfer records of
Peoples, a certificate representing the proper number of shares of Holdings
Common Stock may be issued to a person other than the person in whose name the
Peoples Certificate so surrendered is registered if such Peoples Certificate
is properly endorsed or otherwise in proper form for transfer and the person
requesting such issuance pays any transfer or other taxes required by reason
of the issuance of shares of Holdings Common Stock to a person other than the
registered holder of such Peoples Certificate or establishes to the
satisfaction of Davel that such tax has been paid or is not applicable. Until
surrendered as contemplated by this Section 1.03, each Peoples Certificate
shall be deemed at any time after the Peoples Effective Time to represent only
the right to receive upon such surrender the Peoples Merger Consideration,
which the holder thereof has the right to receive in respect of such Peoples
Certificate pursuant to the provisions of this Article 1, certain dividends or
other distributions in accordance with Section 1.03(c) hereof and cash in lieu
of any fractional share of Holdings Common Stock in accordance with Section
1.03(e) hereof. No interest shall be paid or will accrue on any cash payable
to holders of Peoples Certificates pursuant to the provisions of this Article
1.
(c) No dividends or other distributions with respect to Holdings Common
Stock with a record date after the Peoples Effective Time shall be paid to the
holder of any unsurrendered Peoples Certificate with respect to the shares of
Holdings Common Stock represented thereby, and, in the case of Peoples
Certificates representing Peoples Common Stock, no cash payment in lieu of
fractional shares shall be paid to any such holder pursuant to Section 1.03(e)
hereof, and all such dividends, other distributions and cash in lieu of
fractional shares of Holdings Common Stock shall be paid by Holdings to the
Exchange Agent and shall be included in the Peoples Exchange Fund, in each
case until the surrender of such Peoples Certificate in accordance with this
Article 1. Subject to the effect of applicable escheat or similar laws,
following surrender of any such Peoples Certificate there shall be paid to the
holder of the certificate representing whole shares of Holdings Common Stock
issued in exchange therefor, without interest, (i) at the time of such
surrender, the amount of dividends or other
3
<PAGE>
distributions with a record date after the Peoples Effective Time theretofore
paid with respect to such whole shares of Holdings Common Stock, and, in the
case of Peoples Certificates representing Peoples Common Stock, the amount of
any cash payable in lieu of a fractional share of Holdings Common Stock to
which such holder is entitled pursuant to Section 1.03(e) hereof, and (ii) at
the appropriate payment date, the amount of dividends or other distributions
with a record date after the Peoples Effective Time but prior to such
surrender and with a payment date subsequent to such surrender payable with
respect to such whole shares of Holdings Common Stock.
(d) All shares of Holdings Common Stock issued upon the surrender for
exchange of Peoples Certificates in accordance with the terms of this Article
1 (including any cash paid pursuant to this Article 1) shall be deemed to have
been issued (and paid) in full satisfaction of all rights pertaining to the
Peoples Common Stock theretofore represented by such Peoples Certificates,
subject, however, to the Peoples Surviving Corporation's obligation to pay any
dividends or make any other distributions with a record date prior to the
Peoples Effective Time which may have been declared or made by Peoples on such
shares of Peoples Common Stock which remain unpaid at the Peoples Effective
Time, and there shall be no further registration of transfers on the stock
transfer books of the Peoples Surviving Corporation of the shares of Peoples
Common Stock which were outstanding immediately prior to the Peoples Effective
Time. If, after the Peoples Effective Time, Peoples Certificates are presented
to the Peoples Surviving Corporation or the Exchange Agent for any reason,
they shall be canceled and exchanged as provided in this Article 1, except as
otherwise provided by law.
(e) (i) No certificates or scrip representing fractional shares of Holdings
Common Stock shall be issued upon the surrender for exchange of Peoples
Certificates, no dividend or distribution of Holdings shall relate to such
fractional share interests and such fractional share interests will not
entitle the owner thereof to vote or to any rights of a stockholder of
Holdings.
(ii) As promptly as practicable following the Peoples Effective Time, the
Exchange Agent shall determine the excess of (A) the number of whole shares of
Holdings Common Stock delivered to the Exchange Agent by Holdings pursuant to
Section 1.03(a) hereof over (B) the aggregate number of whole shares of
Holdings Common Stock to be distributed to former holders of Peoples Common
Stock pursuant to Section 1.03(b) hereof (such excess being herein called the
"Excess Shares"). Following the Peoples Effective Time, the Exchange Agent
shall, on behalf of former holders of Peoples Certificates representing
Peoples Common Stock, sell the Excess Shares at then-prevailing prices on the
Nasdaq National Market, all in the manner provided in Section 1.03(e)(iii)
hereof.
(iii) The sale of the Excess Shares by the Exchange Agent shall be executed
on the Nasdaq National Market in round lots to the extent practicable. The
Exchange Agent shall use reasonable efforts to complete the sale of the Excess
Shares as promptly following the Peoples Effective Time as, in the Exchange
Agent's sole judgment, is practicable consistent with obtaining the best
execution of such sales in light of prevailing market conditions. Until the
net proceeds of such sale or sales have been distributed to the holders of
Peoples Certificates formerly representing Peoples Common Stock, the Exchange
Agent shall hold such proceeds in trust for such holders (the "Peoples Common
Stock Trust"). The Peoples Surviving Corporation shall pay all commissions,
transfer taxes and other out-of-pocket transaction costs, including the
expenses and compensation of the Exchange Agent incurred in connection with
such sale of the Excess Shares. The Exchange Agent shall determine the portion
of the Peoples Common Stock Trust to which each former holder of Peoples
Common Stock is entitled, if any, by multiplying the amount of the aggregate
net proceeds comprising the Peoples Common Stock Trust by a fraction, the
numerator of which is the amount of the fractional share interest to which
such former holder of Peoples Common Stock is entitled (after taking into
account all shares of Peoples Common Stock held at the Peoples Effective Time
by such holder) and the denominator of which is the aggregate amount of
fractional share interests to which all former holders of Peoples Common Stock
are entitled.
(iv) Notwithstanding the provisions of Section 1.03(e)(ii) and (iii) hereof,
the Peoples Surviving Corporation may elect at its option, exercised prior to
the Peoples Effective Time, in lieu of the issuance and sale of Excess Shares
and the making of the payments hereinabove contemplated, to pay each former
holder of Peoples
4
<PAGE>
Common Stock an amount in cash equal to the product obtained by multiplying
(A) the fractional share interest to which such former holder (after taking
into account all shares of Peoples Common Stock held at the Peoples Effective
Time by such holder) would otherwise be entitled by (B) the closing price for
a share of Holdings Common Stock as reported on the Nasdaq National Market (as
reported in The Wall Street Journal, or, if not reported thereby, any other
authoritative source) on the Closing Date, and, in such case, all references
herein to the cash proceeds of the sale of the Excess Shares and similar
references shall be deemed to mean and refer to the payments calculated as set
forth in this Section 1.03(e)(iv).
(v) As soon as practicable after the determination of the amount of cash, if
any, to be paid to holders of Peoples Certificates formerly representing
Peoples Common Stock with respect to any fractional share interests, the
Exchange Agent shall make available such amounts to such holders of Peoples
Certificates formerly representing Peoples Common Stock subject to and in
accordance with the terms of Section 1.03(c) hereof.
(f) Any portion of the Exchange Fund which remains undistributed to the
holders of the Peoples Certificates for six months after the Peoples Effective
Time shall be delivered to Holdings, upon demand, and any holders of the
Peoples Certificates who have not theretofore complied with this Article 1
shall thereafter look only to Holdings for payment of their claims for Merger
Consideration, any dividends or distributions with respect to Holdings Common
Stock and any cash in lieu of fractional shares of Holdings Common Stock.
(g) None of Holdings, Peoples nor the Exchange Agent shall be liable to any
person in respect of any shares of Holdings Common Stock, any dividends or
distributions with respect thereto, any cash in lieu of fractional shares of
Holdings Common Stock or any cash from the Peoples Exchange Fund, in each
case, delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law. If any Peoples Certificate shall not have
been surrendered prior to two years after the Peoples Effective Time (or
immediately prior to such earlier date on which any Peoples Merger
Consideration, any dividends or distributions payable to the holder of such
Peoples Certificate or any cash payable to the holder of such Peoples
Certificate formerly representing Peoples Common Stock pursuant to this
Article 1, would otherwise escheat to or become the property of any
Governmental Entity (as defined in Section 3.05 hereof)), any such Peoples
Merger Consideration, dividends or distributions in respect of such Peoples
Certificate or such cash shall, to the extent permitted by applicable law,
become the property of the Peoples Surviving Corporation, free and clear of
all claims or interest of any person previously entitled thereto.
(h) The Exchange Agent shall invest any cash included in the Peoples
Exchange Fund, as directed by Holdings, on a daily basis. Any interest and
other income resulting from such investments shall be paid to Holdings.
(i) If any Peoples Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Peoples Certificate to be lost, stolen or destroyed and, if required by the
Peoples Surviving Corporation, the posting by such person of a bond in such
reasonable amount as the Peoples Surviving Corporation may direct as indemnity
against any claim that may be made against it with respect to such Peoples
Certificate, the Exchange Agent shall issue in exchange for such lost, stolen
or destroyed Peoples Certificate the Peoples Merger Consideration and, if
applicable, any unpaid dividends and distributions on shares of Holdings
Common Stock deliverable in respect thereof and any cash in lieu of fractional
shares, in each case, due to such person pursuant to this Agreement.
Section 1.04 Certain Peoples Adjustments. If after the date hereof and on or
prior to the Peoples Effective Time the outstanding shares of Peoples Common
Stock (or the outstanding shares of Davel Common Stock or Holdings Common
Stock, other than a result of the Davel Merger) shall be changed into a
different number, class or series of shares or any other security by reason of
any reclassification, recapitalization, reorganization, merger, business
combination, split-up, stock split, combination or exchange of shares, or any
dividend payable in stock or other securities shall be declared thereon with a
record date within such period, or any similar event shall occur, the Peoples
Exchange Ratio (and/or the security or securities to be issued to the holders
of Peoples Common Stock) shall be appropriately adjusted to provide the
effects contemplated by this Agreement prior to such reclassification,
recapitalization, reorganization, merger, business combination, split-up,
stock split, combination, exchange or dividend or similar event.
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Section 1.05 Peoples Stock Options, Warrants and Restricted Stock.
(a) As of the Peoples Effective Time, (i) each outstanding employee stock
option to purchase Peoples Common Stock granted under Peoples' incentive and
stock option plans (collectively, the "Peoples Stock Option Plans") or
otherwise, shall be converted into an option (an "Adjusted Peoples Option") to
purchase the number of shares of Holdings Common Stock equal to the number of
shares of Peoples Common Stock subject to such options immediately prior to
the Peoples Effective Time multiplied by the Peoples Exchange Ratio (rounded
to the nearest whole number of shares of Holdings Common Stock, at an exercise
price per share equal to the exercise price for each such share of Peoples
Common Stock subject to such option divided by the Peoples Exchange Ratio
(rounded down to the nearest whole cent), and all references in each such
option to Peoples shall be deemed to refer to Holdings; provided, however,
that the adjustments provided in this clause (i) with respect to any options
which are "incentive stock options" (as defined in Section 422 of the Code) or
which are described in Section 423 of the Code shall be effected in a manner
consistent with the requirements of Section 424(a) of the Code, (ii) Holdings
shall assume the obligations of Peoples under the Peoples Stock Option Plans
and (iii) each outstanding warrant to purchase Peoples Common Stock (the
"Peoples Warrants") shall be converted into a warrant (an "Adjusted Peoples
Warrant") to purchase the number of shares of Holdings Common Stock equal to
the number of Peoples Common Stock shares subject to such Peoples Warrants
immediately prior to the Peoples Effective Time multiplied by the Peoples
Exchange Ratio (rounded to the nearest whole number of shares of Holdings
Common Stock, at an exercise price per share equal to the exercise price for
each such share of Peoples Common Stock subject to such Peoples Warrant
divided by the Peoples Exchange Ratio (rounded down to the nearest whole
cent), and all references in each such Peoples Warrant to Peoples shall be
deemed to refer to Holdings. The other terms of each Adjusted Peoples Option
and Adjusted Peoples Warrant, and the plans or agreements under which they
were issued (including accelerated vesting of options which shall occur by
virtue of the consummation of the Peoples Merger, to the extent required by
the terms of the Peoples Stock Option Plans, the agreements under which the
options were granted, or employment agreements), shall continue to apply in
accordance with their terms. The date of grant of each Adjusted Peoples Option
and Adjusted Peoples Warrant shall be the date on which the corresponding
option or warrant was granted. Prior to the Peoples Effective Time, Peoples
shall use its reasonable best efforts, subject to Section 7.11, to obtain any
consents from holders of options or warrants to purchase Shares that are
necessary to give effect to the transactions contemplated by this Section
1.05(a).
(b) As of the Peoples Effective Time, (i) each outstanding award (including
restricted stock, deferred stock, phantom stock, stock equivalents and stock
units) (each a "Peoples Award") under the Peoples Stock Option Plans shall be
converted into the same instrument of Holdings, in each case with such
adjustments (and no other adjustments) to the terms of such Peoples Awards as
are necessary to preserve the value inherent in such Peoples Awards without
any detrimental effect to the holder thereof and (ii) Holdings shall assume
the obligations of Peoples under the Peoples Awards. The other terms of each
Peoples Award, and the plans or agreements under which they were issued, shall
continue to apply in accordance with their terms.
(c) Peoples, Davel and Holdings agree that each of the Peoples Stock Option
Plans and each of the Davel stock option plans (the "Davel Stock Option
Plans") shall be amended, to the extent necessary, to reflect the transactions
contemplated by this Agreement, including, but not limited to, the conversion
of each share of Peoples Common Stock held or to be awarded or paid pursuant
to such benefit plans, programs or arrangements into shares of Holdings Common
Stock on a basis consistent with the transactions contemplated by this
Agreement. Peoples, Davel and Holdings agree to submit the amendments to the
Davel Stock Option Plans or the Peoples Stock Option Plans to their respective
stockholders, if such submission is determined to be necessary by counsel to
Peoples, Davel or Holdings after consultation with one another; provided,
however, that such approval shall not be a condition to the consummation of
the Transaction.
(d) Holdings shall (i) reserve for issuance the number of shares of Holdings
Common Stock that will become subject to the benefit plans, programs and
arrangements referred to in this Section 1.05 and (ii) issue or cause to be
issued the appropriate number of shares of Holdings Common Stock pursuant to
applicable plans,
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programs and arrangements, upon the exercise or maturation of rights existing
thereunder on the Peoples Effective Time or thereafter granted or awarded. No
later than the Peoples Effective Time, Holdings shall prepare and file with
the SEC an effective registration statement on Form S-8 (or other appropriate
form) registering a number of shares of Holdings Common Stock necessary to
fulfill its obligations under this Section 1.05. Such registration statement
shall be kept effective (and the current status of the prospectus required
thereby shall be maintained), if then required by the SEC, for at least as
long as Adjusted Peoples Options, Adjusted Peoples Warrants or Peoples Awards
remain outstanding.
(e) As soon as practicable after the Peoples Effective Time, Holdings shall
deliver to the holders of the options granted under the Peoples Stock Option
Plans, Peoples Warrants and Peoples Awards appropriate notices setting forth
such holders' rights pursuant to the respective Peoples Stock Option Plans and
the agreements evidencing the grants of such options, Peoples Warrants and
Peoples Awards and that such options, Peoples Warrants and Peoples Awards and
the related agreements shall be assumed by Holdings and shall continue in
effect on the same terms and conditions (subject to the adjustments required
by this Section 1.05 after giving effect to the Peoples Merger).
Section 1.06 Articles of Incorporation. At the Peoples Effective Time, the
articles of incorporation of Newco as in effect immediately prior to the
Effective Time shall be the articles of incorporation of the Peoples Surviving
Corporation until amended in accordance with applicable law, except that the
name of the Peoples Surviving Corporation shall be "Peoples Telephone Company,
Inc."
Section 1.07 Bylaws. At the Peoples Effective Time, the bylaws of Newco as
in effect immediately prior to the Peoples Effective Time shall be the bylaws
of the Peoples Surviving Corporation until amended in accordance with
applicable law.
Section 1.08 Directors and Officers. From and after the Peoples Effective
Time, until successors are duly elected or appointed in accordance with
applicable law, (a) the directors of Newco immediately prior to the Peoples
Effective Time shall constitute all of the directors of the Peoples Surviving
Corporation, and (b) the officers of Peoples immediately prior to the
Effective Time shall be the officers of the Peoples Surviving Corporation.
ARTICLE 2
THE DAVEL MERGER
Section 2.01 Effectuation of Davel Merger.
(a) On the terms and subject to the conditions hereof, on the Closing Date,
the parties shall effect the Davel Merger, pursuant to which D Sub shall be
merged with and into Davel in accordance with the Illinois Business
Corporation Act ("Illinois Law"), whereupon the separate corporate existence
of D Sub shall cease, and Davel shall be the surviving corporation (the "Davel
Surviving Corporation").
(b) As soon as practicable after the Closing Time, in order to effectuate
the Davel Merger, Davel and D Sub shall file articles of merger with the
Secretary of State of the State of Illinois (the "Davel Articles of Merger")
and make all other filings or recordings required by Illinois Law in
connection with the Davel Merger. The Davel Merger shall become effective at
such time as the Davel Articles of Merger are duly filed with the Secretary of
State of the State of Illinois and any additional requirements of Illinois Law
are complied with (the "Davel Effective Time") (it being understood that the
Davel Effective Time shall occur no later than immediately prior to the
Peoples Effective Time).
(c) From and after the Davel Effective Time, the Davel Surviving Corporation
shall possess all the assets, rights, privileges, powers and franchises and be
subject to all of the liabilities, restrictions, disabilities and duties of
Davel and D Sub, all as provided under Illinois Law.
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Section 2.02 Conversion of Davel Shares.
(a) At the Davel Effective Time and by virtue of the Davel Merger and
without any action on the part of the holders thereof:
(i) each share of common stock, no par value per share, of Davel
(including each attached Davel Right, the "Davel Common Stock") held by
Davel as treasury stock, or owned by Peoples or any Peoples Subsidiary
immediately prior to the Davel Effective Time shall be canceled, and no
payment shall be made with respect thereto; provided, however, that any
shares of Davel Common Stock as to which Davel or any subsidiary of Davel
is or may be required to act as a fiduciary or in a similar capacity shall
not be canceled but, instead, shall be treated as set forth in Section
2.02(a)(iv) below;
(ii) each share of capital stock of D Sub outstanding immediately prior
to the Davel Effective Time shall be converted into and become one share of
capital stock of the Davel Surviving Corporation with the same rights and
privileges as the shares so converted and shall constitute the only
outstanding shares of capital stock of the Davel Surviving Corporation;
(iii) each share of capital stock of Holdings outstanding and owned by
Old Davel or any of its subsidiaries immediately prior to the Davel
Effective Time shall be canceled and cease to exist, and no payment shall
be made with respect thereto; and
(iv) subject to Section 2.05 hereof, each share of Davel Common Stock,
outstanding immediately prior to the Davel Effective Time shall, except as
otherwise provided in clause (i) of this subsection, be converted into the
right to receive one fully paid and nonassessable share of Holdings Common
Stock (the "Davel Merger Consideration"). As of the Davel Effective Time,
all such shares of Davel Common Stock shall no longer be outstanding and
shall automatically be canceled and retired and shall cease to exist, and
each holder of a certificate representing any such Davel Common Stock shall
cease to have any rights with respect thereto, except the right to receive
the Davel Merger Consideration to be issued or paid in consideration
therefor upon surrender of such certificate in accordance with Section 2.03
hereof, without interest. As used herein, "Davel Rights" shall mean the
common stock purchase rights issued pursuant to the Rights Agreement, dated
as of April 22, 1998, between Davel and ChaseMellon Shareholder Services,
L.L.C.
Section 2.03 Exchange of Davel Shares.
(a) Prior to the Davel Effective Time, Holdings shall enter into an
agreement with the Exchange Agent, which shall provide that Holdings shall
deposit with the Exchange Agent prior to the Davel Effective Time, for the
benefit of the holders of shares of Davel Common Stock, for exchange in
accordance with this Article II, through the Exchange Agent, certificates
representing the shares of Holdings Common Stock issuable pursuant to Section
2.02 hereof in exchange for outstanding shares of Davel Common Stock (such
shares of Holdings Common Stock, together with any dividends or distributions
with respect thereto payable to such holder in accordance with Section 2.03(c)
hereof being herein referred to as the "Davel Exchange Fund").
(b) As soon as reasonably practicable after the Davel Effective Time, the
Exchange Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Davel Effective Time represented
outstanding shares of Davel Common Stock (the "Davel Certificates") whose
shares of Davel Common Stock were converted into the right to receive the
Davel Merger Consideration pursuant to Section 2.02 hereof, (i) a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Davel Certificates shall pass, only upon delivery of the
Davel Certificates to the Exchange Agent and shall be in such form and have
such other provisions typical in transactions of this type as Holdings may
reasonably specify) and (ii) instructions for use in surrendering the Davel
Certificates in exchange for the Davel Merger Consideration, as applicable.
Upon surrender of a Davel Certificate for cancellation to the Exchange Agent,
together with such letter of transmittal, duly executed, and such other
documents as may reasonably be required by the Exchange Agent, the holder of
such Davel Certificate shall be entitled to receive in exchange therefor a
certificate representing that number of shares of Holdings Common Stock which
such holder has the right to
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receive pursuant to the provisions of this Article II, any dividends or other
distributions with respect thereto payable to such holder in accordance with
Section 2.03(c) hereof, and the Davel Certificate so surrendered shall
forthwith be canceled. In the event of a transfer of ownership of shares of
Davel Common Stock which is not registered in the transfer records of Davel, a
certificate representing the proper number of shares of Holdings Common Stock
may be issued to a person other than the person in whose name the Davel
Certificate so surrendered is registered if such Davel Certificate is properly
endorsed or otherwise in proper form for transfer and the person requesting
such issuance pays any transfer or other taxes required by reason of the
issuance of shares of Holdings Common Stock to a person other than the
registered holder of such Davel Certificate or establishes to the satisfaction
of Holdings that such tax has been paid or is not applicable. Until
surrendered as contemplated by this Section 2.03, each Davel Certificate shall
be deemed at any time after the Davel Effective Time to represent only the
right to receive upon such surrender that number of shares of Holdings Common
Stock which the holder thereof has the right to receive pursuant to the
provisions of this Article II and any dividends or other distributions payable
to the holder thereof in accordance with Section 2.03(c) hereof. No interest
shall be paid or shall accrue on any cash payable to holders of Davel
Certificates pursuant to the provisions of this Article II.
(c) No dividends or other distributions with respect to Davel Common Stock
with a record date after the Davel Effective Time shall be paid to the holder
of any unsurrendered Davel Certificate with respect to the shares of Davel
Common Stock represented thereby, and all such dividends and other
distributions shall be paid by Holdings to the Exchange Agent and shall be
included in the Davel Exchange Fund, in each case, until the surrender of such
Davel Certificate in accordance with this Article II. Subject to the effect of
applicable escheat or similar laws, following surrender of any such Davel
Certificate, there shall be paid to the holder of the certificate representing
shares of Holdings Common Stock issued in exchange therefor, without interest,
(i) at the time of such surrender, the amount of dividends or other
distributions with a record date after the Davel Effective Time theretofore
paid with respect to such whole shares of Holdings Common Stock, and (ii) at
the appropriate payment date, the amount of dividends or other distributions
with a record date after the Davel Effective Time but prior to such surrender
and with a payment date subsequent to such surrender payable with respect to
such whole shares of Holdings Common Stock.
(d) All shares of Holdings Common Stock issued upon the surrender for
exchange of Davel Certificates in accordance with the terms of this Article II
shall be deemed to have been issued (and paid) in full satisfaction of all
rights pertaining to the Davel Common Stock theretofore represented by such
Davel Certificates, subject, however, to the Davel Surviving Corporation's
obligation to pay any dividends or make any other distributions with a record
date prior to the Davel Effective Time which may have been declared or made by
Holdings on such shares of Davel Common Stock which remain unpaid at the Davel
Effective Time, and there shall be no further registration of transfers on the
stock transfer books of the Davel Surviving Corporation of the shares of Davel
Common Stock which were outstanding immediately prior to the Davel Effective
Time. If, after the Davel Effective Time, Davel Certificates are presented to
the Davel Surviving Corporation or the Exchange Agent for any reason, they
shall be canceled and exchanged as provided in this Article II, except as
otherwise provided by law.
(e) Any portion of the Davel Exchange Fund which remains undistributed to
the holders of the Davel Certificates six months after the Closing Date shall
be delivered to Holdings, upon demand, and any holders of the Davel
Certificates who have not theretofore surrendered their Davel Certificates in
accordance with this Article II shall thereafter look only to Holdings for
payment of their claims for Davel Merger Consideration and any dividends or
distributions with respect to Holdings Common Stock.
(f) None of Holdings, D Sub or the Exchange Agent shall be liable to any
person in respect of any shares of Holdings Common Stock, any dividends or
distributions with respect thereto, in each case, delivered to a public
official pursuant to any applicable abandoned property, escheat or similar
law. If any Davel Certificate shall not have been surrendered prior to the
date on which any Davel Merger Consideration, any dividends or distributions
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payable to the holder of such Davel Certificate or any cash payable to the
holder of such Davel Certificate formerly representing Davel Common Stock
pursuant to this Article II would otherwise escheat to or become the property
of any Governmental Entity, any such Davel Merger Consideration, dividends or
distributions in respect of such Davel Certificate or such cash shall, to the
extent permitted by applicable law, become the property of the Davel Surviving
Corporation, free and clear of all claims or interest of any person previously
entitled thereto.
(g) The Exchange Agent shall invest any cash included in the Davel Exchange
Fund, as directed by Holdings, on a daily basis. Any interest and other income
resulting from such investments shall be paid to Holdings.
(h) If any Davel Certificate shall have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the person claiming such Davel
Certificate to be lost, stolen or destroyed and, if required by the Davel
Surviving Corporation, the posting by such person of a bond in such reasonable
amount as the Davel Surviving Corporation may direct as indemnity against any
claim that may be made against it with respect to such Davel Certificate, the
Exchange Agent shall issue in exchange for such lost, stolen or destroyed
Davel Certificate the Davel Merger Consideration and, if applicable, any
unpaid dividends and distributions on shares of Holdings Common Stock
deliverable in respect thereof, in each case, due to such person pursuant to
this Agreement.
Section 2.04 Davel Stock Options and Warrants.
(a) As of the Davel Effective Time, (i) each outstanding option to purchase
Davel Common Stock (collectively, the "Davel Options"), shall be converted
into an option (an "Adjusted Davel Option") to purchase the same number of
shares of Holdings Common Stock at an exercise price per share equal to the
exercise price for each such share of Davel Common Stock subject to such
option, and all references in each such option to Davel shall be deemed to
refer to Holdings, where appropriate, (ii) Holdings shall assume the
obligations of Davel under the Davel Options, (iii) each outstanding warrant
to purchase Davel Common Stock (the "Davel Warrants") shall be converted into
a warrant (an "Adjusted Davel Warrant") to purchase the same number of shares
of Holdings Common Stock, at an exercise price per share equal to the exercise
price for each such share of Davel Common Stock subject to such Davel Warrant,
and all references in each such Davel Warrant to Davel shall be deemed to
refer to Holdings, where appropriate, and (iv) Holdings shall assume the
obligations of Davel under the Davel Warrants. The other terms of each
Adjusted Davel Option and Adjusted Davel Warrant, and the plans or agreements
under which they were issued, shall continue to apply in accordance with their
terms. The date of grant of each Adjusted Davel Option and Adjusted Davel
Warrant shall be the date on which the corresponding option or warrant was
granted.
(b) Davel and Holdings agree that each of the applicable Davel Stock Option
Plans shall be amended, to the extent necessary, to reflect the transactions
contemplated by this Agreement, including, but not limited to, the conversion
of each share of Davel Common Stock held or to be awarded or paid pursuant to
such plans, programs or agreements into shares of Holdings Common Stock on a
basis consistent with the transactions contemplated by this Agreement. Davel
and Holdings agree to submit such amendments to the Holdings Stock Option
Plans or such Davel plans, programs or agreements to their respective
stockholders, if such submission is determined to be necessary by counsel to
Davel or Holdings after consultation with one another; provided, however, that
such approval shall not be a condition to the consummation of the Transaction.
(c) Holdings shall (i) reserve for issuance the number of shares of Holdings
Common Stock that shall become subject to the plans, programs and agreements
referred to in this Section 2.04 and (ii) issue or cause to be issued the
appropriate number of shares of Holdings Common Stock pursuant to applicable
plans, programs and agreements, upon the exercise or maturation of rights
existing thereunder on the Davel Effective Time or thereafter granted or
awarded. No later than the Davel Effective Time, Holdings shall prepare and
file with the SEC a registration statement on Form S-8 (or other appropriate
form) registering a number of shares of Holdings Common Stock necessary to
fulfill Holdings's obligations under this Section 2.04. Such registration
statement shall be kept effective (and the current status of the prospectus
required thereby shall be maintained), if then required by the SEC, for at
least as long as any Adjusted Davel Options remain outstanding.
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(d) As soon as practicable after the Davel Effective Time, Holdings shall
deliver to the holders of Davel Options and Davel Warrants appropriate notices
setting forth (i) such holders' rights pursuant to the respective plans and
agreements evidencing the grants of the related Davel Options and Davel
Warrants, (ii) the number of shares of Holdings Common Stock for which such
holder's Adjusted Davel Options or Adjusted Davel Warrants are then
exercisable and the exercise price therefor and (iii) that such Davel Options
and Davel Warrants and the related plans, programs and agreements shall be
assumed by Holdings and shall continue in effect on the same terms and
conditions (subject to the adjustments required by this Section 2.04 after
giving effect to the Davel Merger).
Section 2.05 Dissenters' Rights.
(a) Any Davel Common Stock as to which rights are perfected under Sections
5/11.65 and 5/11.70 of the Illinois Law ("Davel Dissenting Shares") shall not
be converted into or represent a right to receive the Davel Merger
Consideration. Holders of Davel Dissenting Shares shall be entitled only to
the rights of a dissenting shareholder under Section 5/11.70 of the Illinois
Law, and such Davel Common Stock shall be canceled and retired and shall cease
to exist.
(b) If the rights of any holder who has made a demand for dissenters' rights
under Section 5/11.70 of the Illinois Law are terminated for any reason other
than the purchase by the Davel Surviving Corporation or Holdings of the Davel
Common Stock subject to the demand, the shares subject to the demand shall be
converted into and represent only the right to receive the Davel Merger
Consideration, without interest thereon, upon surrender of the certificates
representing the shares, and such shares shall be canceled and retired and
shall cease to exist.
Section 2.06 Davel Articles of Incorporation. The articles of incorporation
of D Sub in effect at the Davel Effective Time shall be the articles of
incorporation of the Davel Surviving Corporation until amended in accordance
with applicable law, except that the name of the Davel Surviving Corporation
shall be "DCG, Inc." or such other name as Holdings shall determine.
Section 2.07 Davel Bylaws. The bylaws of D Sub in effect at the Davel
Effective Time shall be the bylaws of the Davel Surviving Corporation until
amended in accordance with applicable law.
Section 3.01 Davel Directors and Officers. From and after the Davel
Effective Time, until successors are duly elected or appointed in accordance
with applicable law, (a) the directors of D Sub at the Davel Effective Time
shall constitute all of the directors of the Davel Surviving Corporation, and
(b) the officers of D Sub at the Davel Effective Time shall be the officers of
the Davel Surviving Corporation.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF PEOPLES
Peoples represents and warrants to Davel and Holdings that as of July 5,
1998 (except where a certain date is specified with respect to matters
addressed in any representation or warranty, in which case such representation
or warranty shall be made as of such certain date):
Section 3.01 Corporate Organization. Peoples is a corporation duly
organized, validly existing and in good standing under the laws of the State
of New York, and has all requisite corporate power and authority to own,
operate and lease its properties and assets and to carry on its business as it
is now being conducted. Except as set forth on Schedule 3.01 hereto, Peoples
is duly qualified to do business and is in good standing in each jurisdiction
in which the character of its properties owned or held under lease or the
nature of its activities makes such qualification necessary, except where the
failure to be so qualified or to be in good standing will not, individually or
in the aggregate, have a material adverse effect on the business, assets,
condition (financial or otherwise) or results of operations of Peoples and the
Peoples Subsidiaries taken as a whole, except for the impact of any order or
determination by the Federal Communications Commission or Federal appellate
court concerning
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compensation paid by interexchange carriers and local exchange carriers to
payphone service providers as provided in the Federal Communications
Commission CC Docket No. 96-128, Implementation of the Pay Telephone
Reclassification and Compensation Provisions of the Telecommunications Act of
1996 (a "Peoples Material Adverse Effect").
Section 3.02 Authorization.
(a) Peoples has the necessary corporate power and authority to enter into
this Agreement and the Termination Option Agreement and, subject to Peoples
Stockholder Approval (as defined below), to carry out its obligations
hereunder and thereunder. The execution and delivery of this Agreement and the
Termination Option Agreement by Peoples, the performance by Peoples of its
obligations hereunder and thereunder and the consummation by Peoples of the
transactions contemplated hereby and thereby have been duly and validly
authorized by the Peoples Board of Directors, have been unanimously approved
by the Board of Directors prior to either Davel, Holdings or Newco becoming an
"interested shareholder" as defined in Section 912(a)(10) of New York Law and
have been approved as otherwise required by Peoples' certificate of
incorporation, as amended. Except for the approval of this Agreement and the
Peoples Merger by Peoples' stockholders, no other corporate proceeding on the
part of Peoples is necessary for the execution and delivery of this Agreement
and the Termination Option Agreement by Peoples, the performance of Peoples'
obligations hereunder and thereunder or the consummation by Peoples of the
transactions contemplated hereby and thereby. This Agreement and the
Termination Option Agreement have been duly and validly executed and delivered
by Peoples and are legal, valid and binding obligations of Peoples,
enforceable against Peoples in accordance with their terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
moratorium, reorganization or other laws affecting creditors' rights generally
or by the availability of equitable remedies generally.
(b) As of October 22, 1998, in connection with the amendment and restatement
of the Original Agreement, Peoples has taken the necessary steps to cause
Section 3.02(a) to continue to be true.
Section 3.03 Capital Stock. As of June 29, 1998, the authorized capital
stock of Peoples consisted of: (a) 75,000,000 shares of Peoples Common Stock,
of which there were 16,212,434 shares issued and outstanding (and no shares
held in Peoples' treasury) and (b) 5,000,000 shares of preferred stock, $.01
par value per share, consisting of (i) 600,000 shares designated as Series B
Preferred Stock, of which no shares are issued and outstanding, (ii) 160,000
shares designated as Series C Cumulative Convertible Preferred Stock, of which
150,000 shares are issued and outstanding, and (iii) 4,240,000 shares
undesignated as to series, of which no shares are issued and outstanding. All
of the outstanding capital stock of Peoples and all of the outstanding shares
of capital stock of the Peoples Subsidiaries (as defined in Section 3.04
hereof) have been validly issued and are fully paid, nonassessable and free of
preemptive rights with no personal liability attaching to the ownership
thereof. As of June 12, 1998, except for options to acquire not more than
2,599,908 shares of Peoples Common Stock pursuant to stock options and
warrants to acquire not more than 975,000 shares of Peoples Common Stock or
700,000 shares of Series B Convertible Preferred Stock and except for
2,857,143 shares of Peoples Common Stock issuable upon the conversion of the
outstanding shares of Series C Cumulative Convertible Preferred Stock, there
were no outstanding subscriptions, options, warrants, rights, contracts or
other arrangements or commitments obligating Peoples to issue any shares of
its capital stock or any securities convertible into or exchangeable for
shares of its capital stock.
Section 3.04 Peoples Subsidiaries. Schedule 3.04 hereto lists all direct and
indirect subsidiaries of Peoples (each, a "Peoples Subsidiary" and
collectively, the "Peoples Subsidiaries"). Except as listed in Schedule 3.04
hereto, Peoples does not directly or indirectly own any interest in any other
corporation, partnership, joint venture or other business association or
entity. Each Peoples Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation and has all requisite corporate power and authority to own,
operate and lease its properties and assets and to carry on its business as it
is now being conducted. Except as set forth on Schedule 3.04 hereto, each
Peoples Subsidiary is duly qualified to do business and is in good standing in
each jurisdiction in which the character of its properties owned or held under
lease or
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the nature of its activities makes such qualification necessary, except where
the failure to be so qualified or to be in good standing would not,
individually or in the aggregate, be reasonably expected to have a Peoples
Material Adverse Effect. Except as set forth on Schedule 3.04 hereto, all
outstanding shares of capital stock of each Peoples Subsidiary are validly
issued, fully paid and nonassessable and are owned by Peoples or another
Peoples Subsidiary free and clear of any liens, claims or encumbrances.
Section 3.05 Consents and Approvals; No Violation. Except as set forth on
Schedule 3.05 hereto and except for (a) applicable requirements of the
Securities Act of 1933, as amended, and the rules and regulations thereunder
(the "Securities Act") and the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder (the "Exchange Act"), including the
filing with and clearing by the United States Securities and Exchange
Commission (the "SEC") of a proxy statement relating to the Peoples
Stockholders Meeting (as defined in Section 5.02 hereof) and the Davel
Stockholders Meeting (as defined in Section 6.04 hereof), as amended or
supplemented from time to time (the "Proxy Statement"), (b) the filing of a
Pre-Merger Notification and Report Form by Peoples and the expiration or
termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), (c) the filing of the
Peoples Certificate of Merger as required by New York Law, (d) such filings
and consents as may be required under any environmental law pertaining to any
notification, disclosure or required approval triggered by the Peoples Merger,
(e) filing with the American Stock Exchange and the SEC with respect to the
delisting and deregistration of the shares of Peoples Common Stock and (f)
such consents, approvals, orders, authorizations, notifications,
registrations, declarations and filings as may be required under public
utility, telecommunication or payphone laws, rules or regulations of any state
or municipality or under the corporation, takeover or blue sky laws of various
states, no filing with or prior notice to, and no permit, authorization,
consent or approval of, any federal, state, local, foreign or other
governmental department, commission, board, bureau, agency or instrumentality
(each, a "Governmental Entity") is necessary for the consummation by Peoples
of the Peoples Merger. Neither the execution and delivery of this Agreement by
Peoples nor the consummation by Peoples of the transactions contemplated
hereby nor compliance by Peoples with any of the provisions hereof will (i)
conflict with or result in any violation of any provision of the certificate
of incorporation, as amended, or bylaws of Peoples or any Peoples Subsidiary,
(ii) except as set forth on Schedule 3.05, result in a violation or breach of,
or constitute (with or without due notice or lapse of time or both) a default
(or give rise to any right of termination, cancellation or acceleration)
under, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, license, agreement or other instrument or obligation to which
Peoples or any Peoples Subsidiary is a party or by which any of them or any of
their properties or assets may be bound, or, (iii) assuming that all filings,
consents and approvals contemplated by the first sentence of this Section 3.05
have been or shall have been made or obtained, violate any federal, state,
local or foreign order, writ, injunction, decree, statute, rule or regulation
applicable to Peoples, any Peoples Subsidiary or any of their properties or
assets, excluding from the foregoing clauses (ii) and (iii) violations,
breaches or defaults which, either individually or in the aggregate, would not
reasonably be expected to have a Peoples Material Adverse Effect or impair
materially the ability of Peoples to perform its obligations hereunder or
prevent or materially delay the consummation of the Peoples Merger. The New
York Security Takeover Disclosure Act (Section 1600 et seq. of the New York
Law) does not apply to the execution and delivery of this Agreement or the
consummation of the Peoples Merger and the other transactions contemplated
hereby to which Peoples is a party.
Section 3.06 SEC Reports and Financial Statements.
(a) Since December 31, 1994, Peoples has filed all required forms, reports
and documents with the SEC required to be filed by it pursuant to the
Securities Act and the Exchange Act (hereinafter collectively referred to as
the "Peoples Reports"), all of which have complied in all material respects
with all applicable requirements of the Securities Act and the Exchange Act.
Peoples has previously made available to Davel copies of all such Peoples
Reports.
(b) None of the Peoples Reports, including, without limitation, any
financial statements or schedules included therein, at the time filed,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
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(c) Except as set forth on Schedule 3.06 hereto, the consolidated balance
sheets and the related consolidated statements of operations, stockholders'
equity and changes in financial position (including, without limitation, the
related notes thereto) of Peoples and the Peoples Subsidiaries included in the
financial statements contained in Peoples' Annual Report on Form 10-K for the
year ended December 31, 1997 and in Peoples' Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998 present fairly, in all material respects, the
consolidated financial position of Peoples and the Peoples Subsidiaries as of
their respective dates, and the results of consolidated operations and changes
in consolidated financial position for the periods then ended, all in
conformity with generally accepted accounting principles ("GAAP") applied on a
consistent basis, except as otherwise noted therein, and subject in the case
of unaudited interim financial statements to normal year-end audit adjustments
and the absence of notes thereto.
Section 3.07 Absence of Undisclosed Liabilities. Neither Peoples nor any
Peoples Subsidiary has any liabilities (whether absolute, accrued or
contingent), except: (a) liabilities, obligations or contingencies that are
accrued or for which adequate reserves have been provided in the consolidated
balance sheet of Peoples and the Peoples Subsidiaries as of March 31, 1998 or
reflected in the notes thereto or in the notes to Peoples' financial
statements as at and for the year ended December 31, 1997, (b) liabilities
incurred since December 31, 1997 in the ordinary course of business, (c)
liabilities disclosed in Schedule 3.07 hereto or (d) any liabilities which,
individually or in the aggregate, have not had and would not reasonably be
expected to have a Peoples Material Adverse Effect.
Section 3.08 Changes. Since December 31, 1997, and except as set forth in
the Peoples Reports filed prior to the date of this Agreement, and except as
otherwise disclosed in Schedule 3.08 hereto or as otherwise provided in this
Agreement:
(a) there have been no events or circumstances that would constitute a
Peoples Material Adverse Effect, provided that, for purposes of this
Section 3.08(a), any effect that could have been reasonably expected to
result from the execution of this Agreement or the transactions
contemplated hereby or the announcement thereof will not be deemed to
constitute a Peoples Material Adverse Effect;
(b) except as permitted by this Agreement, there has been no direct or
indirect redemption, purchase or other acquisition of any shares of
Peoples' capital stock, or any declaration, setting aside or payment of any
dividend or other distribution by Peoples in respect of Peoples' capital
stock, or any issuance of any shares of capital stock of Peoples, or any
granting to any person of any option to purchase or other right to acquire
shares of capital stock of Peoples or any stock split or other change in
Peoples' capitalization;
(c) neither Peoples nor any Peoples Subsidiary has entered into or agreed
to enter into any new or amended contract with any labor unions
representing employees of Peoples or any Peoples Subsidiary;
(d) neither Peoples nor any Peoples Subsidiary has entered into or agreed
to enter into any new or amended contract with any of the officers thereof
or otherwise increased the compensation payable to the officers or
directors of any such entity;
(e) neither Peoples nor any Peoples Subsidiary has (i) entered into or
amended in any material respect any bonus, incentive compensation, deferred
compensation, profit sharing, retirement, pension, group insurance or other
benefit plan except as required by law or regulations or (ii) made any
contribution to any such plan except for contributions specifically
required by law or pursuant to the terms thereof; and
(f) Peoples has not made any change in accounting methods, principles or
practices materially and adversely affecting its assets, liabilities or
business, except in accordance with GAAP.
Section 3.09 Investigations; Litigation.
(a) Except as described in Schedule 3.09(a), and other than reviews pursuant
to the HSR Act, there are no pending or, to the knowledge of Peoples,
threatened, investigations, reviews or inquiries by any Governmental Entity
with respect to Peoples or any Peoples Subsidiary or, to the knowledge of
Peoples, with respect to the activities of any officer, director or employee
of Peoples (an "Investigation"), other than Investigations which,
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if the resolution thereof were adverse, would not, individually or in the
aggregate, have a Peoples Material Adverse Effect. For the purpose of this
Agreement, "knowledge of Peoples" shall be deemed to mean the actual
knowledge, after reasonable inquiry, of any executive officer of Peoples.
(b) Except as described in Schedule 3.09(b) hereto, (i) there are no actions
or proceedings pending or, to the knowledge of Peoples, threatened against
Peoples or any Peoples Subsidiary before any court or before any
administrative agency or administrative officer or executive, whether federal,
state, local or foreign, which seek to enjoin the Peoples Merger or which, if
adversely determined, would, individually or in the aggregate, reasonably be
expected to have a Peoples Material Adverse Effect, (ii) there are no
outstanding domestic or foreign judgments, decrees or orders against Peoples
or any Peoples Subsidiary that, individually or in the aggregate, would
reasonably be expected to have a Peoples Material Adverse Effect, (iii)
neither Peoples nor any Peoples Subsidiary is in violation of, and none of
them has received any claim or notice that it is in violation of, any federal,
state, local or foreign laws, statutes, rules, regulations or orders
promulgated or judgments entered by any Governmental Entity, which violations,
individually or in the aggregate, would reasonably be expected to have a
Peoples Material Adverse Effect; and (iv) as of the date of this Agreement,
there are no actions pending, or to the knowledge of Peoples, threatened
against the directors or any director of Peoples alleging a breach of such
directors' or director's fiduciary duties that, individually or in the
aggregate, would reasonably be expected to have a Peoples Material Adverse
Effect.
Section 3.10 Contracts and Commitments.
(a) Except as set forth on the attached Schedule 3.10 or in the Peoples
Reports, Peoples is not nor is any Peoples Subsidiary, with respect to its
business, a party to any oral or written contract:
(i) that prohibits Peoples or any of the Peoples Subsidiaries from freely
engaging or competing, in any material respect, in its line of business
anywhere in the world;
(ii) that is not on arms-length terms;
(iii) that is material to Peoples and the Peoples Subsidiaries, taken as
a whole, and by its terms may be terminated upon consummation of the
Merger;
(iv) that commits Peoples or any of the Peoples Subsidiaries to purchase
or sell any properties or assets outside of the ordinary course of business
for consideration in excess of $250,000; or
(v) that, other than Site Location Agreements (as defined below),
involves an unfulfilled obligation, individually or in the aggregate, to
one party in excess of $250,000 and is not terminable by Peoples or any of
the Peoples Subsidiaries upon less than 60 calendar days' notice for a cost
of not less than $100,000.
(b) Except as specifically disclosed in the attached Schedule 3.10, (i)
since December 31, 1997, none of Peoples' or any Peoples Subsidiary's
customers, suppliers, outside service providers or sources of referral has
indicated that it will stop or materially decrease the rate of business done
with or referred to either Peoples or any such Peoples Subsidiary.
(c) Peoples has made available to Davel a true and correct copy of all
written contracts which are referred to on the attached Schedule 3.10,
together with all amendments, exhibits, attachments, waivers or other changes
thereto.
Section 3.11 Environmental and Safety Matters. Except as described in the
Peoples Reports or on Schedule 3.11 hereto, (a) Peoples and each of the
Peoples Subsidiaries are in compliance with all applicable Federal, state,
local and foreign laws and regulations and all judicial and administrative
orders and determinations relating to pollution or protection of the
environment or of human health (including, without limitation, ambient air,
surface water, ground water, land surface or subsurface strata) (collectively,
"Environmental Laws"), except for non-compliance that would not, individually
or in the aggregate, reasonably be expected to have a Peoples Material Adverse
Effect, which compliance includes, but is not limited to, the possession by
Peoples and each of the Peoples Subsidiaries of permits and other governmental
authorizations required under applicable Environmental
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Laws, and compliance with the terms and conditions thereof; (b) neither
Peoples nor any of the Peoples Subsidiaries has received written notice of,
or, to the knowledge of Peoples, is the subject of, any actions, causes of
action, claims, investigations, demands or notices by any person alleging
liability under or non-compliance with any Environmental Law that would,
individually or in the aggregate, reasonably be expected to have a Peoples
Material Adverse Effect; and (c) there has not been by Peoples or any of the
Peoples Subsidiaries any treatment, storage, disposal or release of any
hazardous or toxic material, substance or waste or of petroleum, or any
fractions or by-products thereof, at any of their current or, to the knowledge
of Peoples, former properties or facilities or any current or, to the
knowledge of Peoples, former offsite properties and facilities used in the
business of Peoples or the Peoples Subsidiaries (in each case, other than
properties or facilities where payphones are located pursuant to Site Location
Agreements with location providers ("Location Owners")) in a manner or at
levels that require or are reasonably likely to require investigation, removal
or remediation under Environmental Laws that would, either individually or in
the aggregate, reasonably be expected to have a Peoples Material Adverse
Effect.
Section 3.12 Taxes.
(a) Each of Peoples and the Peoples Subsidiaries has filed all tax returns
and reports required to be filed by it and all such returns and reports are
complete and correct in all material respects, or requests for extensions to
file such returns or reports have been timely filed, granted and have not
expired, except to the extent that such failures to file, to be complete or
correct or to have extensions granted that remain in effect individually or in
the aggregate would not reasonably be expected to have a Peoples Material
Adverse Effect. Each of Peoples and the Peoples Subsidiaries has timely paid
(or Peoples has paid on its behalf) all taxes that have become due and
payable, except to the extent the failure to pay such taxes individually or in
the aggregate would not reasonably be expected to have a Peoples Material
Adverse Effect, and the most recent financial statements contained in the
Peoples Reports reflect an adequate reserve in accordance with GAAP for all
taxes payable by Peoples and the Peoples Subsidiaries for all taxable periods
and portions thereof accrued through the date of such financial statements.
(b) Except as set forth on Schedule 3.12(b) hereto, no deficiencies for any
taxes have been proposed, asserted or assessed against Peoples or any of the
Peoples Subsidiaries that are not adequately reserved for, except for
deficiencies that individually or in the aggregate would not reasonably be
expected to have a Peoples Material Adverse Effect. Except as set forth on
Schedule 3.12(b) hereto, there is no action, suit, taxing authority proceeding
or audit now in progress, pending, or, to the knowledge of Peoples, threatened
against or with respect to Peoples or any of the Peoples Subsidiaries.
Section 3.13 Employment Agreements. Except as disclosed in Schedule 3.13
hereto, there are no employment, consulting, severance or indemnification
contracts or agreements between Peoples or any Peoples Subsidiary, on the one
hand, and any directors, officers or other employees of Peoples or any Peoples
Subsidiary, on the other hand, other than those that are terminable at will
for less than $100,000 in the aggregate.
Section 3.14 Change of Control Provisions. Except as disclosed in Schedule
3.14 hereto, none of the contracts or agreements set forth in Section 3.13
hereof and none of Peoples' or any Peoples Subsidiary's employee benefit
plans, programs or arrangements contains any provision that would become
operative as the result of the Peoples Merger or any other transactions
contemplated by this Agreement.
Section 3.15 Employee Benefit Plans.
(a) Except as set forth on Schedule 3.15 hereto, all of the (i) Plans (as
defined in subsection (b) of this Section 3.15), and (ii) other bonus,
insurance, pension, profit sharing, retirement, health, and other benefit
plans, stock option plans and stock purchase or ownership plans currently
maintained by Peoples or any of the Peoples Subsidiaries or to which Peoples
or any of the Peoples Subsidiaries is a party may be terminated by the Peoples
Surviving Corporation following the Peoples Effective Time without material
financial penalty or premium and there will be no obligation of the Peoples
Surviving Corporation or Davel following the Peoples Effective Time
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to issue any shares of their respective capital stock pursuant to any of the
foregoing or otherwise following the Effective Time. Except as set forth in
Schedule 3.15 hereto, no payment by Peoples or any of the Peoples Subsidiaries
to any person (whether payable or distributable pursuant to the foregoing
agreements and plans, this Agreement or otherwise) will be nondeductible by
Peoples or any of the Peoples Subsidiaries for federal income tax purposes
because of Section 280G of the Code.
(b) Except as set forth on Schedule 3.15 hereto, all employee benefit plans
within the meaning of Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), maintained by Peoples or any of the Peoples
Subsidiaries since December 31, 1997 (collectively, the "Plans") are in
material compliance with, and have been administered and operated in all
material respects in accordance with, the terms of such Plans and applicable
law, and the Internal Revenue Service has determined that each such Plan which
is intended to be "qualified" within the meaning of Section 401(a) of the Code
is so qualified and that each related trust is exempt from tax under Section
501(a) of the Code. No event which constitutes a "reportable event" as defined
in Section 4043 of ERISA for which the 30-day notice requirement to the
Pension Benefit Guaranty Corporation has not been waived has occurred and is
continuing with respect to any Plan subject to Title IV of ERISA. No material
liability under any statutes, orders, governmental rules or regulations
applicable to any Plan, including, without limitation, ERISA and the Code, has
been or may reasonably be expected to be incurred with respect to any Plan
(other than liabilities for premiums to the Pension Benefit Guaranty
Corporation and the payment of contributions and benefits in the ordinary
course) that has not been satisfied in full. No Plan has been terminated
pursuant to Title IV of ERISA. No event has occurred and no condition exists
with respect to any Plan which presents a material risk of termination or
partial termination of any Plan, which could reasonably be anticipated to
result in material liability on the part of Peoples or any of the Peoples
Subsidiaries. Full payment has been made, or provision has been made therefor
in Peoples' or a Peoples Subsidiary's financial statements or records, of all
amounts which Peoples or any of the Peoples Subsidiaries were required under
the terms of the Plans to have paid as contributions to such Plans on or prior
to the date hereof and no Plan which is subject to Part 3 of Subtitle B of
Title I of ERISA has incurred any "accumulated funding deficiency" (within the
meaning of Section 302 of ERISA or Section 412 of the Code), whether or not
waived. Neither Peoples nor any of the Peoples Subsidiaries nor, to the
knowledge of Peoples, any other "disqualified person" or "party in interest"
(as defined in Section 4975 of the Code and Section 3(14) of ERISA,
respectively) has engaged in any nonexempt prohibited transactions in
connection with any Plan (or its related trust) with respect to which Peoples,
any of the Peoples Subsidiaries, or any officer, director, employee of Peoples
or any of the Peoples Subsidiaries or, to the knowledge of Peoples, any
trustee, administrator or other fiduciary of any Plan, would be subject to
either a civil penalty pursuant to Section 502(i) of ERISA or a tax imposed by
Section 4975 of the Code nor, to the knowledge of Peoples, will the
consummation of the transactions contemplated by this Agreement constitute
such a transaction. Except as disclosed on Schedule 3.15 hereto, no claim,
action or litigation has been made, commenced or, to the knowledge of Peoples,
threatened with respect to any Plan (other than routine claims for benefits).
No Plan or related trust owns any securities in violation of Section 407 of
ERISA. No withdrawal by Peoples or any of the Peoples Subsidiaries, partial or
complete, within the meaning of Title IV of ERISA, has occurred or may be
reasonably expected to occur with respect to any Plan which is a multiemployer
plan which would create a material liability not adequately reserved against
by Peoples. With respect to each employee pension benefit plan (as defined in
Section 3(2) of ERISA) which is a defined benefit plan and is not a
multiemployer plan, the assets of such Plan available to meet the accrued
liabilities of such Plan would exceed such liabilities, based on the actuarial
assumptions used for plan termination. Peoples has paid, or has set up an
adequate reserve for the payment of, all liabilities under each Plan.
Section 3.16 Licenses. Except as set forth on Schedule 3.16 hereto, Peoples
and the Peoples Subsidiaries have obtained all permits, concessions, grants,
franchises, licenses and other federal, state, local or foreign governmental
authorizations and approvals (collectively, "Licenses") material, individually
or in the aggregate, to the conduct of the business of Peoples and the Peoples
Subsidiaries taken as a whole. All of such Licenses are in full force and
effect and, to the knowledge of Peoples, will not be impaired or adversely
affected by the Transaction in a manner or to a degree that would reasonably
be expected to have a Peoples Material Adverse Effect. There is not pending
or, to the knowledge of Peoples, threatened any domestic or foreign suit or
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proceeding with respect to the suspension, revocation, cancellation,
modification or non-renewal of any of such Licenses, and, except as set forth
on Schedule 3.16, no event under the control of Peoples has occurred that
(whether with notice or lapse of time, or both) would reasonably be expected
to result in a suspension or revocation of or failure to renew any of the
Licenses, the loss of which would reasonably be expected to have a Peoples
Material Adverse Effect.
Section 3.17 Real Estate Leases. Schedule 3.17 hereto sets forth a list of
(a) all leases and subleases under which Peoples or any of the Peoples
Subsidiaries is lessor or lessee of any real property, together with all
amendments, supplements, nondisturbance agreements and other agreements
pertaining thereto, (b) all options held by Peoples and the Peoples
Subsidiaries or contractual obligations on the part of Peoples and the Peoples
Subsidiaries to purchase or acquire any interest in real property and (c) all
options granted by Peoples and the Peoples Subsidiaries or contractual
obligations on the part of Peoples and the Peoples Subsidiaries to sell or
dispose of any interest in real property, in each case, other than site
location agreements between Peoples or any of the Peoples Subsidiaries and
Location Owners ("Site Location Agreements").
Section 3.18 Real Property. Schedule 3.18 hereto lists all real property
owned, as of the date of this Agreement, by Peoples and the Peoples
Subsidiaries. Each of Peoples and the Peoples Subsidiaries has good and
marketable title in fee simple to its respective real properties set forth on
Schedule 3.18 hereto, in each case, to the knowledge of Peoples, free and
clear of all liens, except for (a) liens set forth on Schedule 3.18 hereto,
(b) mechanics', construction, carriers', workmen's, repairmen's or other like
liens arising or incurred in the ordinary course of business, (c) liens for
taxes and other governmental charges that are not due and payable or which may
thereafter be paid without penalty, (d) minor survey exceptions, reciprocal
easement agreements and other customary liens on title to real property that
(i) were not incurred in connection with any indebtedness, (ii) do not render
title to the property encumbered thereby unmarketable and (iii) do not,
individually or in the aggregate, materially adversely affect the value of or
the use of such property for its present purposes, and (e) liens in favor of
Davel or Holdings.
Section 3.19 Intellectual Property.
(a) All of the patents, registered trademarks, registered service marks,
registered copyrights, application for any of the foregoing and material
unregistered trademarks, service marks, copyrights, trade names and corporate
names material to the conduct, as of the date of this Agreement, of the
business of Peoples and the Peoples Subsidiaries taken as a whole
(collectively, "Intellectual Property") are set forth on Schedule 3.19. To the
knowledge of Peoples and except as set forth on Schedule 3.19, (i) Peoples and
the Peoples Subsidiaries owns and possesses all right, title and interest in
and to, or possess the valid and enforceable right to use, the Intellectual
Property; (ii) Peoples has not received any notice of, and neither Peoples nor
any of the Peoples Subsidiaries has any knowledge of any potential claim of
any, infringement of or misappropriation from any third party with respect to
any material item of Intellectual Property; and (iii) Peoples and the Peoples
Subsidiaries are not currently infringing and, except as set forth on Schedule
3.19, have not infringed any intellectual property of any other person. To the
knowledge of Peoples, the transactions contemplated by this Agreement will not
impair in any material respect any item of Intellectual Property.
(b) Peoples has taken or is taking all commercially reasonable measures to
ensure that none of the computer software, computer firmware, computer
hardware (whether general or special purpose) or other similar or related
items of automated, computerized or software systems that are material to the
conduct of Peoples' business will malfunction, will cease to function, will
generate incorrect data or will produce incorrect results in any material
respect when processing, providing or receiving (i) date-related data from,
onto and between the twentieth and twenty-first centuries or (ii) date-related
data in connection with any valid date in the twentieth and twenty-first
centuries.
Section 3.20 Compliance with Other Instruments and Laws. Except as set forth
on Schedule 3.20, neither Peoples nor any Peoples Subsidiary is in violation
of any term of its articles of incorporation, as amended, or bylaws, or in
violation of any mortgage, indenture, instrument or agreement relating to
indebtedness for
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borrowed money or of any judgment, decree or order which names Peoples or any
Peoples Subsidiary or in violation of any term of any other material
instrument, contract or agreement to which it is a party or by which it or any
of its properties or assets is bound, except to the extent that any such
violation would not reasonably be expected to have a Peoples Material Adverse
Effect. Except as set forth on Schedule 3.20, Peoples' and each Peoples
Subsidiary's businesses are in compliance in all material respects with all
federal, state, local or foreign statutes, laws, ordinances, rules,
governmental regulations, permits, concessions, grants, franchises, licenses
or other governmental authorizations or approvals applicable to the operation
of such business, except to the extent that the failure to be in compliance
would not reasonably be expected to have a Peoples Material Adverse Effect.
Section 3.21 Employees. Except as set forth on Schedule 3.21 hereto, to the
knowledge of Peoples, as of the date of this Agreement, no key employee, or
group of employees of Peoples has any plans to terminate employment with
Peoples. Without limiting the generality of Section 3.20 hereof, Peoples has
complied in all material respects with all laws relating to the employment of
labor, including provisions thereof relating to wages, hours, equal
opportunity and collective bargaining, and it does not have any material labor
relations problems (including without limitation threatened or actual strikes
or work stoppages or material grievances).
Section 3.22 Information Supplied. None of the information supplied or to be
supplied by Peoples specifically for inclusion or incorporation by reference
in (i) the registration statement on Form S-4 to be filed with the SEC by
Davel in connection with the issuance of Holdings Common Stock in the Merger
(the "Form S-4") will, at the time the Form S-4 is filed with the SEC, at any
time it is amended or supplemented or at the time it becomes effective under
the Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading or (ii) the Proxy Statement will, at the date it is first
mailed to the stockholders of Peoples or at the time of the Peoples
Stockholders Meeting (as defined below), contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Proxy Statement
will comply as to form in all material respects with the requirements of the
Exchange Act, except that no representation or warranty is made by Peoples
with respect to statements made or incorporated by reference therein based on
information supplied by Davel specifically for inclusion or incorporation by
reference in the Proxy Statement.
Section 3.23 Certain Fees. Except in connection with the engagement of
Goldman, Sachs & Co., neither Peoples nor any Peoples Subsidiary has employed
any broker or finder or incurred any liability for any financial advisory,
brokerage or finders' fees or commissions in connection with the transactions
contemplated hereby.
Section 3.24 Opinion of Financial Advisor. Peoples has received the oral
opinion of Goldman, Sachs & Co., to be confirmed in writing, to the effect
that the Peoples Exchange Ratio pursuant to this Agreement is fair from a
financial point of view to holders of Peoples Common Stock.
Section 3.25 Voting Requirements. The affirmative vote of the holders of
two-thirds of the outstanding shares of Peoples Common Stock and the Series C
Cumulative Convertible Preferred Stock voting as a single class with each
share of such Preferred Stock entitled to one vote for each share of Peoples
Common Stock issuable upon the conversion thereof and the holders of a
majority of the outstanding shares of such Preferred Stock voting as a
separate class ("Peoples Stockholder Approval") at the Peoples Stockholders
Meeting is the only vote of the holders of any class or series of the capital
stock of Peoples necessary to approve and adopt this Agreement and the
transactions contemplated hereby. The Board of Directors of Peoples has duly
and validly approved and taken all corporate action required to be taken by
the Peoples Board of Directors for the consummation of the transactions
contemplated by this Agreement.
Section 3.26 State Takeover Statutes. The Board of Directors of Peoples has
approved this Agreement and the consummation of the Peoples Merger and the
other transactions contemplated hereby and, assuming that none of Davel,
Holdings or Newco was and is an "interested shareholder" within the meaning of
such Section 912 of New York Law, such approval constitutes approval of the
Peoples Merger and the other transactions
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contemplated by this Agreement by the Board of Directors of Peoples under the
provisions of Section 912 of New York Law such that Section 912 of New York
Law does not apply to the Peoples Merger or the other transactions
contemplated by this Agreement. No other New York takeover statute, and, to
the knowledge of Peoples, no other state takeover statute, is applicable to
the Peoples Merger or the other transactions contemplated by this Agreement.
Section 3.27 Payphones. Except as disclosed on Schedule 3.27 hereto, as of
June 26, 1998, Peoples had good and marketable title to at least 43,244
payphones in operation, subject to enforceable site location agreements. As of
June 26, 1998, such site location agreements have an average remaining term of
at least 33 months.
Section 3.28 Average Net Revenue. The Average Net Revenue is at least $70.00
per payphone in operation as of June 26, 1998. For purposes of this Agreement,
"Average Net Revenue" for such payphones shall mean the average of the monthly
gross revenues minus telephone bills and commissions (excluding dial-around
compensation) for the 3 months prior to March 31, 1998. Average Net Revenue
from operator service providers shall only include revenues received by
Peoples from such providers.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF DAVEL
Davel represents and warrants to Peoples that as of July 5, 1998 (except
where a certain date is specified with respect to matters addressed in any
representation or warranty, in which case such representation or warranty
shall be made as of such certain date):
Section 4.01 Corporate Organization. Each of Davel and Holdings is a
corporation duly organized, validly existing and in good standing under the
laws of the state of its incorporation, with all requisite corporate power and
authority to own, operate and lease its properties and assets and to carry on
its businesses as now being conducted. Except as set forth in Schedule 4.01
hereto, each of Davel and Holdings is duly qualified to do business and in
good standing in each jurisdiction in which the character of its properties
owned or held under lease or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified or to be
in good standing would not, individually or in the aggregate, have a Davel
Material Adverse Effect. As used herein, "Davel Material Adverse Effect" shall
mean a material adverse effect on the business, assets, condition (financial
or otherwise) or results of operations of Davel, Holdings and their respective
subsidiaries taken as a whole, except for the impact of any order or
determination by the Federal Communications Commission or Federal appellate
court concerning compensation paid by interexchange carriers and local
exchange carriers to payphone service providers as provided in the Federal
Communications Commission CC Docket No. 96-128, Implementation of the Pay
Telephone Reclassification and Compensation Provisions of the
Telecommunications Act of 1996.
Section 4.02 Authorization.
(a) Each of Davel and Holdings has the necessary corporate power and
authority to enter into this Agreement and, subject to the approval of this
Agreement by the affirmative vote of at least two-thirds of the outstanding
shares of Davel Common Stock ("Davel Stockholder Approval"), to carry out its
obligations hereunder. Each of D Sub and Newco has the necessary corporate
power and authority to enter into this Agreement and to carry out its
obligations hereunder. The execution and delivery of this Agreement by Davel
and Holdings, the performance by Davel and Holdings of their respective
obligations hereunder and the consummation by Davel and Holdings of the
transactions contemplated hereby have been duly and validly authorized by the
respective Boards of Directors of Davel and Holdings. Except for the Davel
Stockholder Approval, no other corporate proceeding on the part of either
Davel or Holdings is necessary for the execution and delivery of this
Agreement by such party, the performance of its obligations hereunder or the
consummation by either such party of the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by Davel and
Holdings and is a legal, valid and binding obligation of Davel and Holdings,
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enforceable against each of them in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
moratorium, reorganization or other laws affecting creditors' rights generally
or by the availability of equitable remedies generally.
(b) As of October 22, 1998, in connection with the amendment and restatement
of the Original Agreement, Davel has taken the necessary steps to cause
Section 4.02(a) to continue to be true with respect to both Davel and Holdings
and also has taken the necessary steps to cause the representations and
warranties in Section 4.02(a) to be true with respect to both of D Sub and
Newco, notwithstanding that such parties are not referenced therein.
Section 4.03 Capital Stock. As of June 26, 1998, the authorized capital
stock of Davel consisted of: (a) 10,000,000 shares of Davel Common Stock, of
which 4,647,809 shares were issued and outstanding and no shares were held in
Davel's treasury and (b) 1,000,000 shares of preferred stock, par value $.01
per share, of which, as of June 26, 1998, no shares were issued and
outstanding. All of the outstanding shares of capital stock of Davel have been
validly issued and are fully paid, nonassessable and free of preemptive rights
with no personal liability attaching to the ownership thereof. As of June 26,
1998, there were no outstanding subscriptions, options, warrants, rights,
contracts or other arrangements or commitments obligating Davel to issue any
shares of its capital stock or any securities convertible into or exchangeable
for shares of its capital stock, except pursuant to an Agreement and Plan of
Merger and Reorganization dated June 11, 1998 by and among Davel, Holdings, D
Sub, PT Merger Corp., an Ohio corporation, and PhoneTel Technologies, Inc., an
Ohio corporation (the "Davel/PhoneTel Merger Agreement"), and this Agreement
and for options to acquire not more than 500,350 shares of Davel Common Stock
pursuant to Davel's stock option plans and warrants to acquire not more than
58,000 shares of Davel Common Stock. As of June 26, 1998, the authorized
capital stock of Holdings consisted of 1,000 shares of Holdings Common Stock,
of which 1,000 shares were issued and outstanding. All of the outstanding
shares of capital stock of Holdings have been validly issued and are fully
paid, nonassessable and free of preemptive rights with no personal liability
attaching to the ownership thereof. As of June 26, 1998, there were no
outstanding subscriptions, options, warrants, rights, contracts or other
arrangements or commitments obligating Holdings to issue any shares of its
capital stock or any securities convertible into or exchangeable for shares of
its capital stock, except pursuant to the Davel/PhoneTel Merger Agreement and
this Agreement.
Section 4.04 Subsidiaries. Schedule 4.04 hereto lists all direct and
indirect subsidiaries of Davel as of the date hereof (each, a "Davel
Subsidiary" and collectively, the "Davel Subsidiaries") (it being understood
that as of October 22, 1998, Davel Financing Company, L.L.C. has been
organized as a direct, wholly owned subsidiary of Holdings, Newco has been
organized as a direct wholly owned subsidiary of Davel Financing Company,
L.L.C., and ownership of 100% of the outstanding capital stock of D Sub has
been transferred to Davel Financing Company, L.L.C.). Except for the Davel
Subsidiaries and as set forth in Schedule 4.04 hereto, Davel does not directly
or indirectly own any interest in any other corporation, partnership, joint
venture or other business association or entity. Each Davel Subsidiary is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation and has all requisite corporate
power and authority to own, operate and lease its properties and assets and to
carry on its business as it is now being conducted. Except as set forth in
Schedule 4.04, each Davel Subsidiary is duly qualified to do business and is
in good standing in each jurisdiction in which the character of its properties
owned or held under lease or the nature of its activities makes such
qualification necessary, except where the failure to be so qualified or to be
in good standing would not, individually or in the aggregate, be reasonably
expected to have a Davel Material Adverse Effect. Except as set forth in
Schedule 4.04 hereto, all outstanding shares of capital stock of each Davel
Subsidiary are validly issued, fully paid and nonassessable and are owned by
Davel or another Davel Subsidiary free and clear of any liens, claims or
encumbrances.
Section 4.05 Consents and Approvals; No Violations. Except for (a)
applicable requirements of the Securities Act and the Exchange Act, including
the filing with and clearing by the SEC of the Form S-4 and the Proxy
Statement, (b) the filing of a Pre-Merger Notification and Report Form by
Davel or Holdings and the expiration or termination of the waiting period
under the HSR Act, (c) the filing of the Certificate of Merger as required by
New York Law, (d) such filings and consents as may be required under any
environmental law
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pertaining to any notification, disclosure or required approval triggered by
the Transaction, (e) filings with the Nasdaq Stock Market to permit the shares
of Holdings Common Stock that are to be issued in the Transaction to be
approved for listing on the Nasdaq Stock Market, subject to official notice of
issuance, and to continue to be listed on the Nasdaq Stock Market following
the Closing Date (as defined below), (f) the filing of the Articles of Merger
as required by Illinois Law, and (g) such consents, approvals, orders,
authorizations, notifications, registrations, declarations and filings as may
be required under public utility, telecommunication or payphone laws, rules or
regulations of any state or municipality or under the corporation, takeover or
blue sky laws of various states, no filing with or prior notice to, and no
permit, authorization, consent or approval of any Governmental Entity is
necessary for the consummation by either Davel or Holdings of the Transaction.
Except as set forth in Schedule 4.05 hereto, neither the execution and
delivery of this Agreement by Davel and Holdings, nor the consummation by
Davel and Holdings of the transaction contemplated hereby nor compliance by
Davel and Holdings with any of the provisions hereof, will (i) conflict with
or result in any violation of any provision of the articles of incorporation
or bylaws, or comparable organizational documents, of Davel, Holdings or any
Davel Subsidiary, (ii) at the Effective Time, result in a violation or breach
of, or constitute (with or without due notice or lapse of time or both) a
default (or give rise to any right of termination, cancellation or
acceleration) under, any of the terms, conditions or provisions of any note,
bond, mortgage indenture, license, agreement or other instrument or obligation
to which Davel, Holdings or any Davel Subsidiary is a party or by which any of
them or any of their respective properties or assets may be bound, or (iii)
assuming that all filings, consents and approvals contemplated by the first
sentence of this Section 4.05 have been or shall have been made or obtained,
violate any Federal, state, local or foreign order, writ, injunction, decree,
statute, rule or regulation applicable to Davel, Holdings or any Davel
Subsidiary or any of their properties or assets, excluding from the foregoing
clauses (ii) and (iii) violations, breaches or defaults which would not,
individually or in the aggregate, be reasonably expected to have a Davel
Material Adverse Effect or impair materially Davel's ability to perform its
obligations hereunder or prevent or materially delay the consummation of the
Transaction.
Section 4.06 SEC Reports and Financial Statements.
(a) Since December 31, 1994, Davel has filed all required forms, reports and
documents with the SEC required to be filed by it pursuant to the Securities
Act and the Exchange Act (hereinafter collectively referred to as the "Davel
Reports Davel Reports"), all of which have complied in all material respects
with all applicable requirements of the Securities Act and the Exchange Act.
(b) None of the Davel Reports, including, without limitation, any financial
statements or schedules included therein, at the time filed, contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(c) The consolidated balance sheets and the related consolidated statements
of operations, stockholders' equity and changes in financial position
(including, without limitation, the related notes thereto) of Davel and its
consolidated subsidiaries included in the financial statements contained in
Davel's Annual Report on Form 10-K for the year ended December 31, 1997 and in
Davel's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998
present fairly, in all material respects, the consolidated financial position
of Davel and its consolidated subsidiaries as of their respective dates, and
the results of consolidated operations and changes in consolidated financial
position for the periods then ended, all in conformity with GAAP applied on a
consistent basis, except as otherwise noted therein, and in the case of
unaudited interim financial statements subject to normal year-end audit
adjustments and the absence of footnotes thereto.
Section 4.07 Absence of Undisclosed Liabilities. None of Davel, Holdings or
any Davel Subsidiary has any liabilities (whether absolute, accrued or
contingent), except: (a) liabilities, obligations or contingencies that are
accrued or for which adequate reserves have been provided in the consolidated
balance sheet of Davel and the Davel Subsidiaries as of March 31, 1998 or
reflected in the notes thereto or in the notes to Davel's financial statements
as at and for the year ended December 31, 1997, (b) liabilities incurred since
December 31, 1997 in
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the ordinary course of business, (c) liabilities disclosed in Schedule 4.07
hereto, or (d) any liabilities which, individually or in the aggregate, have
not had, and would not reasonably be expected to have, a Davel Material
Adverse Effect.
Section 4.08 Changes. Since December 31, 1997, and except as set forth in
the Davel Reports filed prior to the date of this Agreement, and except as
otherwise disclosed in Schedule 4.08 hereto or as otherwise provided by this
Agreement:
(a) there have been no events or circumstances that would constitute a
Davel Material Adverse Effect, provided that, for purposes of this Section
4.08(a), any effect that could have been reasonably expected to result from
the execution of this Agreement or the transactions contemplated hereby or
the announcement thereof will not be deemed to constitute a Davel Material
Adverse Effect;
(b) as of the date hereof, except as permitted or otherwise contemplated
by this Agreement, there has been no direct or indirect redemption,
purchase or other acquisition of any shares of Davel's capital stock, or
any declaration, setting aside or payment of any dividend or other
distribution by Davel in respect of Davel's capital stock, or any issuance
of any shares of capital stock of Davel, or any granting to any person of
any option to purchase or other right to acquire shares of capital stock of
Davel or any stock split or other change in Davel's capitalization;
(c) as of the date hereof, none of Davel, Holdings or any Davel
Subsidiary has entered into or agreed to enter into any new or amended
contract with any labor unions representing employees of Davel, Holdings or
such Davel Subsidiary;
(d) as of the date hereof, none of Davel, Holdings or any Davel
Subsidiary has entered into or agreed to enter into any new or amended
contract with any of the officers thereof or otherwise increased the
compensation payable to the officers or directors of any such entity;
(e) as of the date hereof, none of Davel, Holdings or any Davel
Subsidiary has (i) entered into or amended in any material respect any
bonus, incentive compensation, deferred compensation, profit sharing,
retirement, pension, group insurance or other benefit plan except as
required by law or regulations or (ii) made any contribution to any such
plan except for contributions specifically required by law or pursuant to
the terms of such plans; and
(f) none of Davel, Holdings or any Davel Subsidiary has made any change
in accounting methods, principles or practices materially and adversely
affecting its assets, liabilities or business, except in accordance with
GAAP.
Section 4.09 Investigations; Litigation.
(a) Except as described in Schedule 4.09 hereto, and other than reviews
pursuant to the HSR Act, there are no pending or, to the knowledge of Davel,
threatened investigations, reviews or inquiries by any Governmental Entity
with respect to Davel, Holdings or any Davel Subsidiary or, to the knowledge
of Davel, with respect to the activities of any officer, director or employee
of Davel (a "Davel Investigation"), other than Davel Investigations which, if
the resolution thereof were adverse, would not, individually or in the
aggregate, reasonably be expected to have a Davel Material Adverse Effect. For
the purpose of this Agreement, "knowledge of Davel" shall be deemed to mean
the actual knowledge, after reasonable inquiry, of any executive officer of
Davel.
(b) Except as described in Schedule 4.09 hereto, (i) there are no actions or
proceedings pending or, to the knowledge of Davel, threatened against Davel,
Holdings or any Davel Subsidiary before any court or before any administrative
agency or administrative officer or executive, whether federal, state, local
or foreign, which seek to enjoin the Merger or which, if adversely determined,
would, individually or in the aggregate, reasonably be expected to have a
Davel Material Adverse Effect, (ii) there are no outstanding domestic or
foreign judgments, decrees or orders against either Davel or Holdings that,
individually or in the aggregate, would reasonably be expected to have a Davel
Material Adverse Effect, (iii) none of Davel, Holdings or any Davel Subsidiary
is in
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violation of, and none of them has received any claim or notice that it is in
violation of, any federal, state, local or foreign laws, statutes, rules,
regulations or orders promulgated or judgments entered by any Governmental
Entity, which violations, individually or in the aggregate, would reasonably
be expected to have a Davel Material Adverse Effect; and (iv) as of the date
of this Agreement, there are no actions pending or, to the knowledge of Davel,
threatened against the directors or any director of Davel alleging a breach of
such directors' or director's fiduciary duties that, individually or in the
aggregate, would reasonably be expected to have a Davel Material Adverse
Effect.
Section 4.10 Environmental and Safety Matters. Except as described in the
Davel Reports, (a) Davel, Holdings and the Davel Subsidiaries are in
compliance with all applicable Environmental Laws, except for non-compliance
that would not, individually or in the aggregate, reasonably be expected to
have a Davel Material Adverse Effect, which compliance includes, but is not
limited to, the possession by Davel, Holdings and the Davel Subsidiaries of
permits and other governmental authorizations required under applicable
Environmental Laws, and compliance with the terms and conditions thereof; (b)
none of Davel, Holdings or any Davel Subsidiary has received written notice
of, or, to the knowledge of Davel, is the subject of, any actions, causes of
action, claims, investigations, demands or notices by any person alleging
liability under or non-compliance with any Environmental Law that would,
individually or in the aggregate, reasonably be expected to have a Davel
Material Adverse Effect; and (c) there has not been by either Davel or
Holdings any treatment, storage, disposal or release of any hazardous or toxic
material, substance or waste or of petroleum, or any fractions or by-products
thereof, at any of their current or, to the knowledge of Davel, former
properties or facilities or any current or, to the knowledge of Davel, former
offsite properties and facilities used in the business of Davel, Holdings or
any Davel Subsidiary (in each case, other than properties or facilities where
payphones are located pursuant to Site Location Agreements with Location
Owners) in a manner or at levels that require or are reasonably likely to
require investigation, removal or remediation under Environmental Laws that
would, either individually or in the aggregate, reasonably be expected to have
a Davel Material Adverse Effect.
Section 4.11 Certain Fees. Except as described in Schedule 4.11 hereto,
neither Davel nor Holdings has employed any broker or finder or incurred any
liability for any financial advisory, brokerage or finders' fees or
commissions in connection with the transactions contemplated hereby.
Section 4.12 Taxes.
(a) Each of Davel, Holdings and the Davel Subsidiaries has filed all tax
returns and reports required to be filed by it and all such returns and
reports are complete and correct in all material respects, or requests for
extensions to file such returns or reports have been timely filed, granted and
have not expired, except to the extent that such failures to file, to be
complete or correct or to have extensions granted that remain in effect
individually or in the aggregate would not reasonably be expected to have a
Davel Material Adverse Effect. Each of Davel, Holdings and the Davel
Subsidiaries has timely paid (or Davel has paid on its behalf) all taxes that
have become due and payable, except to the extent the failure to pay such
taxes individually or in the aggregate would not reasonably be expected to
have a Davel Material Adverse Effect, and the most recent financial statements
contained in the Davel Reports reflect an adequate reserve in accordance with
GAAP for all taxes payable by Davel, Holdings and the Davel Subsidiaries for
all taxable periods and portions thereof accrued through the date of such
financial statements.
(b) No deficiencies for any taxes have been proposed, asserted or assessed
against Davel, Holdings or any Davel Subsidiary that are not adequately
reserved for, except for deficiencies that individually or in the aggregate
would not reasonably be expected to have a Davel Material Adverse Effect.
Except as set forth in Schedule 4.12 hereto, there is no action, suit, taxing
authority proceeding or audit now in progress, pending, or, to the knowledge
of Davel, threatened against or with respect to any of Davel, Holdings or any
Davel Subsidiary.
Section 4.13 Change of Control Provisions. Except as disclosed in Schedule
4.13 hereto, none of the employment, consulting, severance or indemnification
contracts or agreements between Davel, Holdings or any Davel Subsidiary, on
the one hand, and any directors, officers or other employees of Davel,
Holdings or such
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Davel Subsidiary, on the other hand, and none of Davel's, Holdings' or any
Davel Subsidiary's employee benefit plans, programs or arrangements contains
any change-in-control provision that would become operative as a result of the
Davel Merger.
Section 4.14 Licenses. Davel, Holdings and the Davel Subsidiaries have
obtained all Licenses material, individually or in the aggregate, to the
conduct of the business of Davel, Holdings and the Davel Subsidiaries taken as
a whole. All of such Licenses are in full force and effect and, to the
knowledge of Davel, will not be impaired or adversely affected by the
Transaction in a manner or to a degree that would reasonably be expected to
have a Davel Material Adverse Effect. There is not pending or, to the
knowledge of Davel, threatened any domestic or foreign suit or proceeding with
respect to the suspension, revocation, cancellation, modification or non-
renewal of any of such Licenses, and, except as set forth in Schedule 4.14
hereto, no event under the control of Davel has occurred that (whether with
notice or lapse of time, or both) would reasonably be expected to result in a
suspension or revocation of or failure to renew any of such Licenses, the loss
of which would reasonably be expected to have a Davel Material Adverse Effect.
Section 4.15 Compliance with Other Instruments and Laws. Except as set forth
in Schedule 4.15 hereto, none of Davel, Holdings or any Davel Subsidiary is in
violation of any term of its articles of incorporation or bylaws or comparable
organizational documents, or in violation of any judgment, decree or order
which names Davel, Holdings or any Davel Subsidiary or in violation of any
term of any other material instrument, contract or agreement to which it is a
party or by which it or any of its properties or assets is bound, except to
the extent that any such violation would not reasonably be expected to have a
Davel Material Adverse Effect. Except as set forth in Schedule 4.15, the
businesses of Davel, Holdings and the Davel Subsidiaries are in compliance
with all federal, state, local and foreign statutes, laws, ordinances, rules,
governmental regulations, permits, concessions, grants, franchises, licenses
or other governmental authorizations or approvals applicable to the operation
of such business, except to the extent that the failure to be in compliance
would not reasonably be expected to have a Davel Material Adverse Effect.
Section 4.16 Employees. Without limiting the generality of Section 4.15
hereof, Davel has complied in all material respects with all laws relating to
the employment of labor, including provisions thereof relating to wages,
hours, equal opportunity and collective bargaining, and, to the knowledge of
Davel, it does not have any material labor relations problems (including,
without limitation, actual or threatened strikes or work stoppages or material
grievances).
Section 4.17 Information Supplied. None of the information supplied or to be
supplied by Davel or Holdings for inclusion or incorporation by reference in
(i) the Form S-4 shall, at the time the Form S-4 is filed with the SEC or at
the time it becomes effective under the Securities Act, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading or (ii) the Proxy
Statement shall, at the date it is first mailed to Davel's stockholders or at
the time of the Davel Stockholders Meeting (as defined below), contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The Form S-4 shall comply as to form in all material respects with
the requirements of the Securities Act, except that no representation or
warranty is made by Davel with respect to statements made or incorporated by
reference in either the Form S-4 or the Proxy Statement based on information
supplied by Peoples for inclusion or incorporation by reference therein.
Section 4.18 Opinion of Financial Advisor. Davel has received the opinion of
ABN AMRO Incorporated, dated June 28, 1998, to the effect that, as of such
date, the Merger Consideration to be paid in connection with the Transaction
is fair to Davel and its stockholders from a financial point of view.
Section 4.19 Voting Requirements. Davel Stockholder Approval is the only
vote of the holders of any class or series of Davel's capital stock necessary
to allow Davel to consummate the transactions contemplated hereby.
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Section 4.20 State Takeover Statutes. To the knowledge of Davel, assuming no
shareholder of Peoples will beneficially own 15 percent or more of the
outstanding Davel Common Stock after the Effective Time, no "fair price,"
"moratorium," "control share acquisition" or other similar anti-takeover
statute or regulation enacted under state or federal law applicable to Davel
is applicable to the Transaction.
Section 4.21 No Peoples Shares. Neither Davel nor Holdings owns any shares
of Peoples Common Stock.
Section 4.22 Rights. Assuming that no stockholder of Peoples shall, upon
consummation of the Davel Merger, become the beneficial owner of 15 percent or
more of the shares of Davel Common Stock then outstanding, the execution of
this Agreement and the consummation of the Transaction do not and will not
result in the ability of any person to exercise any rights ("Davel Rights")
pursuant to the Rights Agreement dated as of April 22, 1998, between Davel and
ChaseMellon Shareholder Services, L.L.C., or enable or require any Davel
Rights to separate from the shares of the Davel Common Stock to which they are
attached or to be triggered or become exercisable.
Section 4.23 Financing. As of October 22, 1998, (a) Davel has received a
term sheet (the "Term Sheet") from a responsible banking institution setting
forth the terms of a new senior credit facility providing for funds sufficient
in the aggregate to repay Davel's existing indebtedness and to provide the
funds necessary to effect the Debt Tender in accordance with Section 5.07
hereof and to pay the fees and expenses related to the Transaction (such
necessary funds being referred to herein as the "Financing"); (b) since such
date, the Term Sheet has not been rescinded or withdrawn or amended in a
manner adverse to Peoples; (c) a copy of the Term Sheet has been provided to
Peoples; and (d) Davel knows of no fact or circumstance that is reasonably
likely to result in the inability of Peoples, Davel, Davel Financing Company,
L.L.C. or Holdings to receive the proceeds from such Financing.
ARTICLE 5
COVENANTS OF PEOPLES
Section 5.01 Conduct of Business by Peoples Pending Consummation of the
Transaction. Peoples covenants and agrees that, from the date of this
Agreement until the Peoples Effective Time or the date, if any, on which this
Agreement is earlier terminated pursuant to Section 9.01 hereof, unless Davel
shall otherwise consent in writing or except as otherwise contemplated by this
Agreement:
(a) the businesses of Peoples and the Peoples Subsidiaries will be
conducted only in the ordinary and usual course; Peoples will use its
reasonable best efforts to preserve intact its business organization and
goodwill, keep available the services of its officers and employees and
maintain satisfactory relationships with suppliers, distributors, customers
and others having business relationships with it and the Peoples
Subsidiaries; and Peoples will promptly notify Davel of any event or
occurrence or emergency not in the ordinary and usual course of the
business of Peoples or any Peoples Subsidiary that is material to the
business of Peoples and the Peoples Subsidiaries, taken as a whole;
(b) Peoples will not (i) amend its articles of incorporation or bylaws or
(ii) split, combine or reclassify the outstanding Shares or declare, set
aside or pay any dividend payable in cash, stock or property with respect
to the Shares;
(c) neither Peoples nor any Peoples Subsidiary will issue or agree to
issue any additional shares of, or rights of any kind to acquire shares of,
its capital stock of any class other than the issuance of shares of capital
stock of a Peoples Subsidiary to Peoples or Peoples Subsidiary directly
wholly owned by Peoples or, with respect to Peoples, Peoples Shares
issuable upon (i) exercise of outstanding stock options, (ii) exercise of
outstanding Warrants or warrants exercisable for Series B Convertible
Preferred Stock or (iii) conversion of the Series C Cumulative Convertible
Preferred Stock;
(d) neither Peoples nor any Peoples Subsidiary will enter into or agree
to enter into any new or amended contract or agreement with any labor
unions representing employees of Peoples or any Peoples Subsidiary;
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(e) except as contemplated by Section 5.04 hereto, Peoples will not
authorize, recommend, propose or announce an intention to authorize,
recommend or propose, or enter into an agreement in principle or an
agreement with respect to any merger, consolidation or business combination
(other than the Transaction), any acquisition or disposition of a material
amount of assets or securities (including, without limitation, the assets
or securities of any Peoples Subsidiary) or any material change in its
capitalization, or enter, other than in the ordinary course of business
consistent with past practice, into a material contract or any release or
relinquishment of any material contract rights;
(f) except as set forth on Schedule 5.01(f) hereto, Peoples will not, and
will not permit any Peoples Subsidiary to, (i) enter into or amend any
employment, severance or change-in-control agreement, or any bonus,
incentive compensation, deferred compensation, profit sharing, retirement,
pension, group insurance or other benefit plan except as required by law or
regulations, or as expressly provided by this Agreement or (ii) make any
contribution to any such plan except for contributions specifically
required pursuant to the terms thereof;
(g) Peoples will not (i) except as set forth on Schedule 5.01(g) hereto,
create, incur or assume any long-term indebtedness for borrowed money
(including, without limitation, obligations in respect of capital leases)
or, except in the ordinary course of business or except to fund out-of-
pocket costs incurred in connection with the transactions contemplated
hereby, create, incur, assume, maintain or permit to exist any short-term
indebtedness for borrowed money in an aggregate amount for Peoples and the
Peoples Subsidiaries as a whole exceeding $250,000; (ii) except as set
forth on Schedule 5.01(g), assume, guarantee, endorse or otherwise become
liable or responsible (whether directly, contingently or otherwise) for the
obligations of any other person except wholly-owned Peoples Subsidiaries of
Peoples in the ordinary course of business and consistent with past
practices; or (iii) make any loans, advances or capital contributions to,
or investments in, any other person other than a wholly-owned Peoples
Subsidiary (other than customary advances to employees and short-term
investments pursuant to customary cash management systems of Peoples in the
ordinary course and consistent with past practice); and
(h) neither Peoples nor any Peoples Subsidiary shall agree in writing or
otherwise to take (i) any action that it is prohibited from taking by this
Section 5.01 or (ii) any action that would constitute or is likely to cause
or result in a breach in any material respect of any covenant, agreement,
or representation or warranty set forth herein.
Subject to applicable law, Peoples shall, during the period between the date
of this Agreement and the Peoples Effective Time, consult with Davel regarding
Davel's consideration of alternatives regarding the manner in which to best
organize and manage the business of Peoples and Davel after the Peoples
Effective Time and other matters relating to transition planning; provided,
however, that prior to the Peoples Effective Time, Peoples shall exercise,
consistent with the terms and conditions of this Agreement, control and
supervision over its operations and nothing contained in this Section 5.01
shall be interpreted to give Davel or Holdings, directly or indirectly, the
right to control or direct the operations of Peoples and the Peoples
Subsidiaries prior to the Peoples Effective Time.
Section 5.02 Stockholders' Meeting. Subject to Section 5.04 hereof, Peoples
shall cause a meeting of its stockholders to be duly called and held as soon
as reasonably practicable for the purpose of voting on the approval and
adoption of this Agreement and the Peoples Merger (the "Peoples Stockholders
Meeting"). Subject to Section 5.04 hereof, the Board of Directors of Peoples
will (a) unanimously recommend approval and adoption of this Agreement by the
stockholders of Peoples and (b) use reasonable best efforts to obtain the
necessary approval by Peoples' stockholders of this Agreement and the
transactions contemplated hereby.
Section 5.03 Access to Information. Subject to the terms of Section 7.13
hereof, Peoples will give Davel, its counsel, financial advisors, auditors and
other authorized representatives reasonable access during normal business
hours throughout the period prior to the Peoples Effective Time to all of the
offices, properties, business and marketing plans, books, files and records of
Peoples and the Peoples Subsidiaries, will furnish to Davel, its counsel,
financial advisors, auditors and other authorized representatives such
financial and operating data and
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other information as such persons may reasonably request and will instruct the
employees, counsel and financial advisors of Peoples to cooperate with Davel
in its investigation of the business of Peoples and the Peoples Subsidiaries.
Peoples will furnish promptly to Davel and Holdings (a) a copy of each report,
schedule and other document filed or received by it pursuant to the
requirements of Federal or state securities laws, and (b) all such other
information concerning its business, properties and personnel as Davel or
Newco may reasonably request; provided that no investigation pursuant to this
Section 5.03 shall affect any representation or warranty contained herein or
the conditions to the obligations of the parties to consummate the Merger.
Section 5.04 No Solicitation.
(a) Peoples shall not, and shall use reasonable best efforts to cause its
officers, directors, employees, investment bankers, attorneys, accountants and
other agents retained by it not to, initiate, solicit or encourage any
inquiries relating to, or the making of any, Acquisition Proposal or engage in
negotiations or discussions with, or furnish any information to, any third
party relating to any Acquisition Proposal. Notwithstanding the foregoing or
any other provision of this Agreement, Peoples (i) may participate in
discussions or negotiations (including, as a part thereof, making any
counterproposal) with, or furnish information to, any third party with respect
to any Acquisition Proposal if the Peoples Board of Directors determines in
good faith, after consultation with counsel, that the failure to participate
in such discussions or negotiations or to furnish such information may
constitute a breach of its fiduciary duties under, or otherwise violate,
applicable law, and (ii) shall be permitted to (A) take and disclose to the
stockholders of Peoples a position with respect to an Acquisition Proposal or
amend or withdraw such position or its position with respect to the
Transaction, or (B) make disclosure to the stockholders of Peoples, in each
case, if the Peoples Board of Directors determines in good faith, after
consultation with counsel, that the failure to take such action may constitute
a breach of its fiduciary duties under, or otherwise violate, applicable law.
As used herein, "Acquisition Proposal" shall mean any proposal made by a third
party, other than Davel, Holdings or Newco to acquire, directly or indirectly,
(x) more than 25% of the shares and/or voting power of the Peoples Common
Stock then outstanding pursuant to a merger, consolidation or other business
combination, purchase of shares, tender offer or exchange offer or similar
transaction, including, without limitation, any single or multi-step
transaction or series of related transactions or (y) all or a substantial
portion of the business or assets of Peoples and the Peoples Subsidiaries.
(b) Peoples shall advise Davel in writing of (i) the receipt, directly or
indirectly, of any inquiries relating to an Acquisition Proposal promptly
following such receipt, (ii) the status of any discussions or negotiations
with respect thereto, (iii) its intention to enter into any agreement relating
to an Acquisition Proposal at least 24 hours prior to executing any such
agreement, and (iv) any actions taken pursuant to Section 5.04(a) hereof
promptly following such action. Following the receipt, directly or indirectly,
of any Acquisition Proposal (or any inquiry referred to in clause (i) above),
Peoples shall furnish to Davel either a copy of such Acquisition Proposal (or
such inquiry) or a written summary of such Acquisition Proposal (or such
inquiry).
Section 5.05 Corporate Organization. Notwithstanding anything to the
contrary contained in this Agreement or in the Schedules hereto, Peoples and
each Peoples Subsidiary shall use reasonable best efforts to be duly qualified
and in good standing on the Effective Date with the Secretary of State in each
jurisdiction in which the character of its properties owned or held under
lease or the nature of its activities makes such qualification necessary.
Section 5.06 Termination Option Agreement. Peoples will fully perform its
obligations under the Termination Option Agreement.
Section 5.07 Preferred Stock and Senior Notes. Prior to the Peoples
Effective Time, Peoples shall (a) take all actions reasonably necessary to
allow all outstanding shares of preferred stock of Peoples, including, without
limitation, all outstanding shares of the Series C Cumulative Convertible
Preferred Stock, to be converted into shares of Peoples Common Stock in
accordance with the terms of such preferred stock and (b) subject to the
receipt of funds sufficient for such purposes from the proceeds of the
Financing, use reasonable best efforts to (i) consummate a tender offer for
all of Peoples' 12% Senior Notes due 2002 (the "Notes") at a price reasonably
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acceptable to Davel, pursuant to which at least 85% of the aggregate
outstanding principal amount of the Notes shall have been tendered (it being
understood and agreed that (A) Davel and Holdings will use their reasonable
best efforts to obtain the Financing and (B) any failure to receive tenders of
at least 85% of the aggregate outstanding principal amount of the Notes shall
not be a breach of the covenant set forth in this Section 5.07), (ii) procure
the consent of the requisite principal amount of the Notes to allow Peoples to
amend the indenture governing the Notes in a manner reasonably satisfactory to
Davel and (iii) enter into a supplemental indenture with respect to the Notes
reflecting such amendments.
ARTICLE 6
COVENANTS OF DAVEL AND HOLDINGS
Davel and Holdings agree that:
Section 6.01 Access to Information. Subject to the terms of Section 7.13
hereof, Davel will give Peoples, its counsel, financial advisors, auditors and
other authorized representatives reasonable access, in Davel's reasonable
discretion, during normal business hours throughout the period prior to the
Peoples Effective Time to all of the offices, properties, books, files and
records of Davel and the Davel Subsidiaries, will furnish to Peoples, its
counsel, financial advisors, auditors and other authorized representatives
such financial and operating data and other information as such persons may
reasonably request and will, in Davel's reasonable discretion, instruct
Davel's employees, counsel and financial advisors to cooperate with Peoples in
its investigation of the business of Davel and the Davel Subsidiaries. Davel
will furnish promptly to Peoples (a) a copy of each report, schedule and other
document filed or received by it pursuant to the requirements of Federal or
state securities laws, and (b) all such other information concerning its
business, properties and personnel as Peoples may reasonably request; provided
that no investigation pursuant to this Section 6.01 shall affect any
representation or warranty contained herein or the conditions to the
obligations of the parties to consummate the Transaction.
Section 6.02 Newco Incorporation; Obligations of Newco. Newco will be
incorporated for the sole purpose of acting as a vehicle for the facilitation
of the Peoples Merger and will not undertake any activities other than those
specifically contemplated by this Agreement or otherwise required for such
purpose. Newco will have no subsidiaries. Davel or, if appropriate, Holdings
will take all action necessary to cause Newco to perform their obligations
under this Agreement and to consummate the Peoples Merger on the terms and
conditions set forth in this Agreement.
Section 6.03 Indemnification.
(a) Holdings shall indemnify, or shall cause the Peoples Surviving
Corporation to indemnify, to the fullest extent permitted under New York Law,
the present and former directors or officers of Peoples and the Peoples
Subsidiaries (the "Indemnified Parties") in respect of actions taken prior to
and including the Peoples Effective Time in connection with their duties as
directors or officers of Peoples (including the transactions contemplated
hereby) for a period of not less than six years from the Peoples Effective
Time; provided that, in the event any claim or claims are asserted or made
within such six-year period, all rights to indemnification in respect of any
such claim or claims shall continue until final disposition of any and all
such claims. Without limitation of the foregoing, in the event any Indemnified
Party becomes involved in such capacity in any action, proceeding or
investigation in connection with any matter, including the transactions
contemplated hereby, occurring prior to and including the Peoples Effective
Time, the Peoples Surviving Corporation, to the fullest extent permitted and
on such conditions as may be required by applicable law, shall make advances
for or reimburse such Indemnified Party for his legal and other out-of-pocket
expenses (including the cost of any investigation and preparation) as incurred
in connection therewith. In addition, during such six-year period, the charter
and by-laws of the Peoples Surviving Corporation and its successors and
assigns shall contain provisions no less favorable to the present and former
directors and officers of Peoples than those in effect in the Certificate of
Incorporation of Peoples and the By-laws of Peoples as in effect on the date
of this Agreement.
(b) For not less than six years after the Peoples Effective Time, Davel,
Holdings or the Peoples Surviving Corporation or their respective successors
or assigns shall maintain in effect directors' and officers' liability
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insurance covering the Indemnified Parties who are currently covered by
Peoples' existing directors' and officers' liability insurance, on terms and
conditions no less favorable to such directors and officers than those in
effect on the date hereof with respect to Davel's officers and directors;
provided, however, that in no event shall Davel or the Peoples Surviving
Corporation be required to pay an amount to maintain such insurance covering
the Indemnified Parties in excess of 200% of the amount paid by Peoples as of
the date hereof for such coverage.
Section 6.04 Stockholders' Meeting. Davel shall cause a meeting of its
stockholders (the "Davel Stockholders Meeting") to be duly called and held as
soon as reasonably practicable for the purpose of obtaining Davel Stockholder
Approval. The Board of Directors of Davel will (a) unanimously recommend
approval of the Agreement and (b) use reasonable best efforts to obtain Davel
Stockholder Approval.
Section 6.05 Davel Financing. Davel shall use reasonable best efforts to, or
to enable Holdings or Davel Financing Company, L.L.C. to, secure the Financing
and to enter into appropriate indentures, loan agreements or other agreements
with respect to the Financing.
Section 6.06 Employee Matters.
(a) Davel and Holdings agree that individuals who are employed by Peoples or
any of the Peoples Subsidiaries immediately prior to the Closing Date shall
remain employees of Peoples or such Peoples Subsidiary as of the Closing Date
(each such employee, an "Affected Employee"); provided, however, that nothing
contained herein shall confer upon any Affected Employee the right to
continued employment by Peoples or any of the Peoples Subsidiaries for any
period of time after the Closing Date which is not otherwise required by law.
(b) Davel or Holdings shall, or shall cause Peoples or the Davel
Subsidiaries to, give Affected Employees full credit for purposes of
eligibility and vesting under any employee benefit plans or arrangements
maintained by Davel, Peoples or any of the Davel Subsidiaries for such
Affected Employees' service with Davel, Peoples or any affiliate thereof to
the same extent recognized immediately prior to the Closing Date.
(c) Davel or Holdings shall, or shall cause Peoples or the Davel
Subsidiaries to, (i) waive all limitations as to preexisting conditions
exclusions and waiting periods with respect to participation and coverage
requirements applicable to the Affected Employees under any welfare benefit
plans in which such employees may be eligible to participate as of the Closing
Date, other than limitations or waiting periods that are already in effect
with respect to such employees and that have not been satisfied as of the
Closing Date under any welfare plan maintained for the Affected Employees
immediately prior to the Closing Date, and (ii) provide each Affected Employee
with credit for any co-payments and deductibles paid prior to the Closing Date
in satisfying any applicable deductible or out-of-pocket requirements under
any welfare plans that such employees are eligible to participate in as of the
Closing Date.
(d) As of the Closing Date, Davel or Holdings shall, or shall cause Peoples
or the Davel Subsidiaries to, provide coverage and benefits to Affected
Employees pursuant to the employee benefit plans or arrangements (including,
without limitation, the Plans) maintained by Peoples for such Affected
Employees immediately prior to the Closing Date; provided, however, that (i)
this Section 6.06(d) shall not require Holdings or Davel to provide or
maintain any equity-based compensation plans of Peoples and (ii) except as
provided in Section 1.05 hereof, nothing contained herein shall confer upon
any Affected Employee the right to continued coverage and benefits pursuant to
such plans or arrangements after December 31, 1998.
(e) The Peoples Surviving Corporation shall continue to honor all
employment, severance, separation and other compensation agreements existing
as of the Closing Date between Peoples or any of the Peoples Subsidiaries with
any officer or employee thereof, which are set forth on Schedule 6.06(e).
Section 6.07 Financial Disclosure. Holdings shall use reasonable best
efforts to publish financial results (including combined sales and net income)
covering at least 30 days of post-Transaction operations within 45 days and,
in any event, shall publish such results within 75 days after the end of the
first full calendar month following the month in which the Closing Date
occurs.
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Section 6.08 Conduct of Business of Davel Pending Consummation of the
Transaction. Davel and Holdings covenant and agree that, from the date of this
Agreement until the Peoples Effective Time or the date, if any, on which this
Agreement is earlier terminated pursuant to Section 9.01 hereof, unless
Peoples shall otherwise consent in writing or except as otherwise contemplated
in this Agreement:
(a) Davel and Holdings shall not (i) amend their respective articles of
incorporation or bylaws in a manner that would be reasonably likely to have a
Disparate Adverse Effect (as defined below), (ii) split, combine or reclassify
the outstanding Davel Common Stock or the outstanding Holdings Common Stock in
a manner that would be reasonably likely to have a Disparate Adverse Effect or
(iii) declare, set aside or pay any dividend with respect to shares of Davel
Common Stock or Holdings Common Stock payable (A) in cash or property or (B)
in stock or otherwise in a manner that would be reasonably likely to have a
Disparate Adverse Effect;
(b) Davel, Holdings and the Davel Subsidiaries shall not enter into any new
line of business that is not substantially related to existing or past
businesses of Davel or the Davel Subsidiaries;
(c) Davel, Holdings and the Davel Subsidiaries shall not acquire or agree to
acquire, by merging or consolidating with, by purchasing an equity interest in
or a portion of the assets of, or by any one manner, any business or any
corporation, partnership, association or other business organization or
division, or otherwise acquire or agree to acquire any assets of any person
that (i) would violate Section 6.08(b) or (ii) is reasonably likely to
materially delay or prevent the consummation of the Financing or the Merger;
and
(d) Davel, Holdings and the Davel Subsidiaries shall not agree in writing or
otherwise to take (i) any action that any of them is prohibited from taking by
this Section 6.08 or (ii) any action that would constitute or is likely to
cause or result in a breach in any material respect of any covenant,
agreement, or representation or warranty of Davel or Holdings set forth
herein.
For purposes of this Section 6.08, a change, circumstance or event shall be
deemed to have a "Disparate Adverse Effect" if the effect thereof on the
holders of Peoples Common Stock, after giving effect to the Merger, is less
favorable, in any material respect, than the effect that such change,
circumstance or event has on the holders of Davel Common Stock.
ARTICLE 7
COVENANTS OF THE PARTIES
The parties hereto agree that:
Section 7.01 Reasonable Best Efforts. Subject to the terms and conditions of
this Agreement, each party will use its reasonable best efforts to take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate the transactions contemplated by this Agreement, provided that
nothing herein shall require Davel, the Davel Surviving Corporation or
Holdings to hold, manage or operate any assets separately or to enter into any
sale or divestiture of assets, the effect of which would be to impair, in any
material respect, the full benefit of the Transaction to Davel and Holdings.
Peoples and Davel shall each furnish to one another and to one another's
counsel all such information as may be required in order to accomplish the
foregoing actions. In connection with and without limiting the foregoing,
Peoples and Davel shall (a) take all reasonable action necessary to ensure
that no state takeover statute or similar statute or regulation is or becomes
applicable to the Transaction, this Agreement or any of the other transactions
contemplated hereby and (b) if any state takeover statute or similar statute
or regulation becomes applicable to the Transaction, this Agreement or any of
the other transactions contemplated hereby, take all reasonable action
necessary to ensure that the Transaction and the other transactions
contemplated hereby may be consummated as promptly as practicable on the terms
contemplated by this Agreement and otherwise to minimize the effect of such
statute or regulation on the Transaction and the other transactions
contemplated by this Agreement.
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Section 7.02 Certain Filings. Peoples, Holdings and Davel shall cooperate
with one another (a) in connection with the preparation of the Form S-4, the
Proxy Statement and any other disclosure document filed after the date hereof
pursuant to the Securities Act, the Exchange Act or any state securities law
(each a "Disclosure Document"), (b) in determining whether any other action by
or in respect of, or filing with, any Governmental Entity or any actions,
consents, approvals or waivers are required to be obtained from parties to any
material contracts in connection with the consummation of the transactions
contemplated by this Agreement and (c) in seeking any such actions, consents,
approvals or waivers or making any such filings, furnishing information
required in connection therewith or with the Form S-4, the Proxy Statement and
the Disclosure Documents and seeking timely to obtain any such actions,
consents, approvals or waivers.
Section 7.03 Public Announcements. Davel and Peoples shall consult with each
other before issuing any press release or making any public statement with
respect to this Agreement and the transactions contemplated hereby and, except
as may be required by applicable law or any listing agreement with any
national securities exchange, will not issue any such press release or make
any such public statement prior to such consultation.
Section 7.04 Further Assurances.
(a) Upon the terms and subject to the satisfaction of the conditions
contained in this Agreement, each of the parties hereto shall use its
reasonable best efforts to take, or cause to be taken, all appropriate action,
and to do or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
Transaction.
(b) Without limiting the generality of Section 7.04(a), each of the parties
to this Agreement agree that, in the event the Transaction has not occurred as
a direct result of the failure of any of the conditions set forth in Section
8.01(i), 8.02(b), 8.02(d), 8.03(b) or 8.03(c) to have been satisfied as a
direct result of the exercise of dissenters' rights under Illinois Law, the
parties to this Agreement will amend and restate this Agreement to provide for
the Peoples Merger only and not for the Davel Merger.
Section 7.05 Notices of Certain Events. Peoples and Davel shall promptly
notify the other of:
(a) any notice or other communication from any person alleging that the
consent of such person is or may be required in connection with the
transactions contemplated by this Agreement;
(b) any notice or other communication from any Governmental Entity in
connection with the transactions contemplated by this Agreement;
(c) any actions, suits, claims, investigations or proceedings commenced
or, to the best of its knowledge threatened against, relating to or
involving or otherwise affecting Peoples or any Peoples Subsidiary, on the
one hand, or Davel, Holdings, D Sub or Newco, on the other hand, which
relate to the consummation of the transactions contemplated by this
Agreement; and
(d) any action, event or occurrence that would constitute a breach of any
representation, warranty, covenant or agreement of it set forth in this
Agreement.
Section 7.06 Preparation of the Form S-4 and the Proxy Statement. As soon as
practicable following the date of this Agreement, Peoples, Holdings and Davel
shall jointly prepare and file with the SEC the Proxy Statement and Holdings
and Davel shall prepare and file with the SEC the Form S-4, in which the Proxy
Statement will be included as a prospectus. Each of Peoples, Holdings and
Davel shall use reasonable best efforts to have the Form S-4 declared
effective under the Securities Act as promptly as practicable after such
filing. Peoples and Davel shall use their respective reasonable best efforts
to cause the Proxy Statement to be mailed to their respective stockholders as
promptly as practicable after the Form S-4 is declared effective under the
Securities Act. Davel and Holdings shall also take any action (other than
qualifying to do business in any jurisdiction in which it is not now so
qualified or to file a general consent to service of process) required to be
taken under any applicable state securities laws in connection with the
issuance of the Common Stock in the Transaction and Peoples shall furnish all
information concerning Peoples and the holders of the shares of Peoples Common
Stock as may be reasonably requested in connection with any such action. No
filing of, or amendment
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or supplement to, the Form S-4 or to the Proxy Statement will be made by Davel
or Holdings, and no filing of, or amendment or supplement to, the Proxy
Statement will be made by Peoples, Holdings or Davel without providing the
other parties the opportunity to review and comment thereon. Davel or Holdings
will advise Peoples, promptly after it receives notice thereof, of the time
when the Form S-4 has become effective or any supplement or amendment has been
filed, the issuance of any stop order, the suspension of the qualification of
the Holdings Common Stock issuable in connection with the Transaction for
offering or sale in any jurisdiction, or any request by the SEC for amendment
of the Proxy Statement or the Form S-4 or comments thereon and responses
thereto or requests by the SEC for additional information. If at any time
prior to the Closing any information relating to Peoples, Holdings or Davel,
or any of their respective affiliates, officers or directors, should be
discovered by Peoples, Holdings or Davel which should be set forth in an
amendment or supplement to any of the Form S-4 or the Proxy Statement, so that
any of such documents would not include any misstatement of a material fact or
omit to state any material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, the
party which discovers such information shall promptly notify the other parties
hereto and an appropriate amendment or supplement describing such information
shall be promptly filed with the SEC and, to the extent required by law,
disseminated to the stockholders of Peoples and Davel.
Section 7.07 Letters of Accountants.
(a) Each of Davel and Peoples shall use its reasonable best efforts to cause
to be delivered to the other party two letters from Peoples' independent
accountants, one dated a date within two business days before the date on
which the Form S-4 shall become effective and one dated a date within two
business days before the Closing Date, each addressed to Davel, in form and
substance reasonably satisfactory to Davel and Peoples and customary in scope
and substance for comfort letters delivered by independent public accountants
in connection with registration statements similar to the Form S-4.
(b) Each of Davel and Peoples shall use reasonable best efforts to cause to
be delivered to the other party and the other party's independent accountants
two letters from its independent accountants addressed to Davel and Peoples,
one dated as of the date the Form S-4 is effective and one dated as of the
Closing Date, in each case stating that accounting for the Transaction as a
pooling of interests under Opinion 16 of the Accounting Principles Board and
applicable SEC rules and regulations is appropriate if the Transaction is
consummated in accordance with this Agreement.
Section 7.08 Affiliates.
(a) Not less than 45 days prior to the Closing Date, Peoples shall deliver
to Davel a list of names and addresses of each person who, in Peoples'
reasonable judgment, is an affiliate within the meaning of Rule 145 of the
rules and regulations promulgated under the Securities Act or otherwise
applicable SEC accounting releases with respect to pooling of interests
accounting treatment (each such person, a "Pooling Affiliate") of Peoples.
Peoples shall provide Davel such information and documents as Davel shall
reasonably request for purposes of reviewing such list. Peoples shall deliver
or cause to be delivered to Davel, not later than 30 days prior to the Closing
Date, an affiliate letter in the form attached hereto as Exhibit 7.08(a),
executed by each of the Pooling Affiliates of Peoples identified in the
foregoing list. Holdings shall be entitled to place legends as specified in
such affiliate letters on the certificates evidencing any of the Holdings
Common Stock to be received by the Pooling Affiliates of Peoples pursuant to
the terms of this Agreement, and to issue appropriate stop transfer
instructions to the transfer agent for the Holdings Common Stock, consistent
with the terms of such letters.
(b) Not less than 45 days prior to the Closing Date, Davel shall deliver to
Peoples a list of names and addresses of each person who, in Davel's
reasonable judgment, is a Pooling Affiliate of Davel. Davel shall provide
Peoples such information and documents as Peoples shall reasonably request for
purposes of reviewing such list. Davel shall deliver or cause to be delivered
to Peoples, not later than 30 days prior to the Closing Date, an affiliate
letter in the form attached hereto as Exhibit 7.08(b), executed by each
Pooling Affiliate of Davel identified in the foregoing list.
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Section 7.09 Nasdaq Listing. Holdings shall use its reasonable best efforts
to cause the Holdings Common Stock to be approved for listing on the Nasdaq
Stock Exchange, subject to official notice of issuance, as promptly as
practicable after the date hereof, and in any event prior to the Closing Date
and to continue to be listed on the Nasdaq Stock Exchange following the
Peoples Effective Time.
Section 7.10 Tax Treatment. Each of Davel, Holdings and Peoples shall use
reasonable best efforts to cause the Peoples Merger and the Davel Merger to
qualify as tax-free transactions (except with respect to any cash received).
Section 7.11 Pooling of Interests. Each of Davel, Holdings and Peoples shall
use their respective reasonable best efforts to cause the transactions
contemplated by this Agreement, including the Peoples Merger and the Davel
Merger, to be accounted for as a pooling of interests under Opinion 16 of the
Accounting Principles Board and applicable SEC rules and regulations, and each
of Peoples and Davel agrees that it will not knowingly take any action that
would cause such accounting treatment not to be obtained.
Section 7.12 Representations. Each of Peoples, on the one hand, and Davel
and Holdings, on the other, (a) will use its reasonable best efforts to take
all action necessary to render true and correct as of the Closing Date its
representations and warranties contained in this Agreement, (b) will refrain
from taking any action that would render any such representation or warranty
untrue or incorrect as of such time, and (c) will perform or cause to be
satisfied each agreement, covenant or condition to be performed or satisfied
by it.
Section 7.13 Confidentiality. Each of Peoples and Davel will hold, and will
use its reasonable best efforts to cause its affiliates and its and their
respective officers, directors, employees, consultants, advisors and agents to
hold, in confidence, unless compelled to disclose by judicial or
administrative process or by other requirements of law, all trade secrets and
confidential information concerning the other party and its subsidiaries
furnished to it in connection with the transactions contemplated by this
Agreement, except to the extent that such information can be shown to have
been (a) previously known on a nonconfidential basis by the party receiving
such information, (b) in the public domain through no fault of the party
receiving such information or (c) lawfully available to the party receiving
such information from sources other than the other party; provided, however,
that any party so receiving such information may disclose such information to
such affiliates and officers, directors, employees, consultants, advisors and
agents so long as such persons are informed by such party of the confidential
nature of such information and are directed by such party to treat such
information confidentially; and provided further that the party receiving such
information shall be responsible for any disclosures of such information by
any such persons. If this Agreement is terminated, such confidence shall be
maintained and each of Peoples and Davel will, and will use its reasonable
best efforts to cause its affiliates and its and their respective officers,
directors, employees, consultants, advisors and agents to, destroy or deliver
to the other party, upon request, all documents and other materials, and all
copies thereof, obtained by it or on its behalf from the other party in
connection with this Agreement that are subject to such confidence.
ARTICLE 8
CONDITIONS TO THE MERGER
Section 8.01 Conditions to the Obligations of Each Party. The obligations of
Peoples, Davel, Holdings, Newco and D Sub to consummate the Transaction are
subject to the satisfaction of the following conditions:
(a) this Agreement shall have been approved and adopted by the
shareholders of Peoples in accordance with New York Law;
(b) this Agreement shall have been approved and adopted by the
shareholders of Davel in accordance with Illinois law;
(c) if required by applicable law or regulation or the rules of the
Nasdaq Stock Market, the issuance of the Peoples Merger Consideration and
the Davel Merger Consideration in the Transaction shall have been approved
by the stockholders of Holdings;
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(d) any applicable waiting period under the HSR Act relating to the
Merger shall have expired or been terminated;
(e) no provision of any applicable law or regulation and no judgment,
injunction, order or decree shall prohibit the consummation of the
Transaction;
(f) the Form S-4 shall have become effective under the Securities Act and
shall not be the subject of any stop order or proceedings seeking a stop
order;
(g) the shares of Holdings Common Stock issuable to Peoples' stockholders
and Davel's stockholders, as contemplated by this Agreement, shall have
been approved for listing on the Nasdaq Stock Market, subject to official
notice of issuance;
(h) all outstanding shares of the Series C Cumulative Convertible
Preferred Stock of Peoples shall have been converted into Peoples Common
Stock; and
(i) Holdings, Davel Financing Company, L.L.C. and/or the Davel
Subsidiaries shall have obtained the Financing and entered into appropriate
indentures, loan agreements, or other agreements with respect to the
Financing.
Section 8.02 Conditions to the Obligations of Davel, Holdings, Newco and D
Sub. The obligations of Davel, Holdings, Newco and D Sub to consummate the
Transaction are subject to the satisfaction of the following additional
conditions:
(a) the representations and warranties of Peoples as set forth in this
Agreement shall be true and correct as if made on and as of the Closing
Date (other than those representations and warranties which address matters
only as of a certain date, which shall be true and correct as of such
certain date), except where the facts, circumstances or events that cause
or constitute the failure of such representations and warranties to be true
and correct (after giving effect to the disclosures made by Peoples in any
disclosure schedules delivered pursuant hereto, but disregarding any
materiality qualifications contained within the body of such
representations and warranties) has not had and would not be reasonably
likely to have, in the aggregate, a Peoples Material Adverse Effect and
Peoples shall have complied with or performed in all material respects all
agreements and covenants required to be complied with or performed by it
under this Agreement at or prior to the Closing Date;
(b) receipt by Davel of an opinion of its independent certified public
accountants stating that accounting for the Transaction as a pooling of
interests under Opinion 16 of the Accounting Principles Board and
applicable SEC rules and regulations is appropriate if the Transaction is
consummated in accordance with this Agreement;
(c) at least 85% of the aggregate outstanding principal amount of the
Notes shall have been tendered to Peoples pursuant to and in accordance
with of Section 5.07 hereof; and
(d) Davel shall have received an opinion from Kirkland & Ellis, counsel
to Davel, dated as of the Closing Date, substantially to the effect that
(i) the Davel Merger will qualify as a tax-free reorganization pursuant to
Section 368(a) of the Code and (ii) no gain or loss will be recognized by a
shareholder of Davel upon the exchange of its shares of Davel Common Stock
for shares of Holdings Common Stock pursuant to the Davel Merger, except
with respect to cash, if any, received as a result of the exercise of
dissenters' rights. In rendering such opinion, counsel to Davel shall be
entitled to rely upon usual and customary representations of shareholders
and officers of Davel, Holdings, Peoples and others.
Section 8.03 Conditions to the Obligations of Peoples. The obligations of
Peoples to consummate the Transaction are subject to the satisfaction of the
following additional conditions:
(a) the representations and warranties of Davel as set forth in this
Agreement shall be true and correct as if made on and as of the Closing
Date (other than those representations and warranties which address matters
only as of a certain date, which shall be true and correct as of such
certain date), except where the facts, circumstances or events that cause
or constitute the failure of such representations and warranties to be true
and correct (after giving effect to the disclosures made by Davel in any
disclosure schedules
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delivered pursuant hereto, but disregarding any materiality qualifications
contained within the body of such representations and warranties) has not
had and would not be reasonably likely to have, in the aggregate, a Davel
Material Adverse Effect and Davel and Holdings shall have complied with or
performed in all material respects all agreements and covenants required to
be complied with or performed by them under this Agreement at or prior to
the Closing Date;
(b) receipt by Peoples of an opinion of its independent certified public
accountants stating that accounting for the Transaction as a pooling of
interests under Opinion 16 of the Accounting Principles Board and
applicable SEC rules and regulations is appropriate if the Transaction is
consummated in accordance with this Agreement;
(c) Peoples shall have received an opinion from Shearman & Sterling,
counsel to Peoples, dated as of the Closing Date, substantially to the
effect that (i) the Peoples Merger will qualify as a tax-free
reorganization pursuant to Section 368(a) of the Code and (ii) no gain or
loss will be recognized by a shareholder of Peoples upon the exchange of
its shares of Peoples Common Stock for shares of Holdings Common Stock
pursuant to the Peoples Merger, except with respect to cash, if any,
received in lieu of a fractional share of Holdings Common Stock. In
rendering such opinion, counsel to Peoples shall be entitled to rely upon
usual and customary representations of shareholders and officers of Davel,
Holdings, Peoples and others; and
(d) Samstock, L.L.C. and its affiliates shall continue to hold the
securities to be purchased by it pursuant to the Stock Purchase Agreement,
dated as of May 14, 1998, by and between Samstock, L.L.C. and Davel and to
be represented on Davel's or Holdings' Board of Directors as contemplated
thereby.
ARTICLE 9
TERMINATION
Section 9.01 Termination. This Agreement may be terminated and the
Transaction may be abandoned at any time prior to the Effective Time
(notwithstanding any approval of this Agreement by the stockholders of
Peoples):
(a) by mutual written consent of Peoples and Davel;
(b) by either Peoples or Davel, if the Transaction has not been
consummated by December 31, 1998; provided that no party may terminate this
Agreement pursuant to this subsection if such party's failure to fulfill
any of its obligations under this Agreement shall have been the reason that
the Peoples Effective Time or Davel Effective Time shall not have occurred
on or before such date;
(c) by either Peoples or Davel, if there shall be any law or regulation
that makes consummation of the Transaction illegal or otherwise prohibited
or if any judgment, injunction, order or decree enjoining Davel or Peoples
from consummating the Transaction is entered and such judgment, injunction,
order or decree shall have become final and nonappealable;
(d) by either Peoples or Davel, if (i) Peoples Stockholder Approval shall
not have been obtained at the Peoples Stockholders Meeting or any
adjournment or postponement thereof or (ii) if Davel Stockholder Approval
shall not have been obtained at the Davel Stockholders Meeting or any
adjournment or postponement thereof;
(e) by Davel, if the Peoples Board of Directors shall (i) withdraw,
modify or change its recommendation or approval in respect of this
Agreement or the Peoples Merger in a manner adverse to Davel or Holdings or
(ii) have recommended any Acquisition Proposal other than by Davel,
Holdings, D Sub or Newco;
(f) by Davel, if any corporation, partnership, person, other entity or
group (as defined in Section 13(d)(3) of the Exchange Act) other than
Davel, Holdings or Newco or any of their respective subsidiaries or
affiliates shall have become the beneficial owner of more than 15% of the
outstanding shares of Peoples Common Stock (either on a primary or a fully
diluted basis) and such beneficial owner files or is required
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to file a Schedule 13D with the SEC describing any plan or proposal of such
beneficial owner which would result in its acquisition of additional
securities of Peoples, any change in the present Board of Directors or
management of Peoples or any other extraordinary corporate transaction
involving Peoples that could prevent or materially delay the consummation
of the Peoples Merger;
(g) by Davel (provided that Davel is not then in breach of its
obligations hereunder in any material respect), if Peoples shall have
breached in any material respect any of its representations, warranties,
covenants or agreements contained herein, such that the condition to
consummation in Section 8.02(a) would not be fulfilled, and Peoples shall
not have cured such breach within 30 days after Peoples receives written
notice of such breach from Davel;
(h) by Peoples, to allow Peoples to enter into an agreement in respect of
an Acquisition Proposal which the Peoples Board of Directors has determined
in the exercise of its fiduciary duties is more favorable to Peoples and
its stockholders than the transactions contemplated hereby (provided that
the termination described in this subsection (h) shall not be effective
unless and until Peoples shall have paid to Davel the fee described in
Section 9.04(b) hereof); or
(i) by Peoples (provided that Peoples is not then in breach of its
obligations hereunder in any material respect), if Davel shall have
breached in any material respect any of its representations, warranties,
covenants or agreements contained herein, such that the condition to
consummation in Section 8.03(a) would not be fulfilled, and Davel shall not
have cured such breach within 30 days after Davel receives written notice
of such breach from Peoples.
Such right of termination shall be exercised by written notice of termination
given by the terminating party to the other parties hereto in the manner
hereinafter provided. Any such right of termination shall not be an exclusive
remedy hereunder but shall be in addition to any other legal or equitable
remedies that may be available to any non-defaulting party hereto arising out
of any default hereunder by any other party hereto.
Section 9.02 Waiver. At any time prior to the Closing Date, the parties
hereto, by action taken by or pursuant to resolutions of their respective
Boards of Directors, may (a) extend the time for the performance of any of the
obligations or other acts of the parties hereto, (b) waive any inaccuracies in
the representations and warranties contained herein or in any document
delivered pursuant hereto, and (c) except for the requirements set forth in
Sections 8.01(a) through (f), waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to
any such extension or waiver shall be valid if set forth in an instrument in
writing signed on behalf of such party.
Section 9.03 Closing. Subject to the satisfaction of the conditions
contained in Article 8 hereof, the closing of the Transaction contemplated by
this Agreement (the "Closing") shall take place at the offices of Kirkland &
Ellis in Chicago, Illinois as soon as practicable after the Closing Time or at
such other time and place as Davel and Peoples shall agree (the "Closing
Date").
Section 9.04 Effect of Termination; Termination Fee.
(a) If this Agreement is terminated pursuant to Section 9.01 hereof, this
Agreement shall become void and of no effect with no liability on the part
of any party hereto, except that the agreements contained in Sections 7.13,
9.04(b) and 10.04 hereof shall survive the termination hereof and the
Termination Option Agreement shall survive in accordance with its terms,
and except that no such termination shall relieve any party from liability
for breach of this Agreement or failure by it to perform its obligations
hereunder.
(b) If (i) Davel or Holdings shall have terminated this Agreement
pursuant to clause (e) of Section 9.01 hereof or (ii) Peoples shall have
terminated this Agreement pursuant to clause (h) of Section 9.01 hereof,
then in either such case, Peoples shall promptly, but in no event later
than two business days after the date of such failure to close or
termination, pay Davel a termination fee of $5,000,000 plus an amount, not
to exceed $1,000,000, equal to the actual and reasonably documented out-of-
pocket expenses incurred by Davel and Equity Group Investments, Inc.
directly attributable to the proposed acquisition of Peoples,
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including negotiation and execution of this Agreement and the attempted
financing and completion of the Transaction, which fee and amount shall be
payable in same day funds. In no event shall Peoples be required to pay
more than one termination fee and reimbursement of expenses pursuant to
this Section 9.04(b).
ARTICLE 10
MISCELLANEOUS
Section 10.01 Notices. All notices, requests and other communications to any
party hereunder shall be in writing (including facsimile, telex or similar
writing) and shall be given,
if to Davel, Holdings, D Sub or Newco, to:
Davel Communications Group, Inc.
1429 Massaro Boulevard
Tampa, Florida 33619
Attention: General Counsel
Facsimile: (813) 626-9610
with a copy to:
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: R. Scott Falk
Facsimile: (312) 861-2200
if to Peoples, to:
Peoples Telephone Company, Inc.
2300 N.W. 89th Place
Miami, Florida 33172
Attention: General Counsel
Facsimile: (305) 593-6116
with copies to:
Steel Hector & Davis LLP
200 South Biscayne Blvd.
Miami, Florida 33131-2398
Attention: Ira N. Rosner, P.A.
Facsimile: (305) 577-7001
and
Shearman & Sterling
599 Lexington Avenue
New York, New York 10022
Attention: John Madden, Esq.
Facsimile: (212) 848-7179
or such other address, telecopy or telex number as such party may hereafter
specify for the purpose by notice to the other parties hereto. Each such
notice, request or other communication shall be effective (a) if given by
facsimile or telex, upon confirmation of receipt, or (b) if given by any other
means, when delivered at the address specified in this Section 10.01.
Section 10.02 Survival of Representations and Warranties. The
representations and warranties contained herein shall not survive the
Effective Time.
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Section 10.03 Amendments; No Waivers.
(a) Any provision of this Agreement may be amended or waived prior to the
Closing if, and only if, such amendment or waiver is in writing and signed, in
the case of an amendment, by the parties or in the case of a waiver, by the
party against whom the waiver is to be effective; provided that after the
adoption of this Agreement by the shareholders of Peoples and Davel, no such
amendment or waiver shall, without the further approval of such shareholders,
alter or change (i) the amount or kind of consideration to be received in
exchange for any shares of capital stock of Peoples or Davel, (ii) any term of
the articles of incorporation of the Peoples Surviving Corporation (except
that alterations or changes may be made that could otherwise be adopted by the
Board of Directors of the Peoples Surviving Corporation), or (iii) any of the
terms or conditions of this Agreement if such alteration or change would
adversely affect the holders of any shares of capital stock of Peoples or
Davel.
(b) No failure or delay by any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies
herein provided shall be cumulative and not exclusive of any rights or
remedies provided by law.
Section 10.04 Expenses. Except as provided in Section 9.04 hereof, each
party shall pay its own costs and expenses relating to this Agreement and the
transactions contemplated hereby, except that each of Davel and Peoples shall
bear and pay one-half of the costs and expenses incurred in connection with
the filing, printing and mailing of the Form S-4 and the Proxy Statement
(including SEC filing fees).
Section 10.05 Successors and Assigns. The provisions of this Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided that no party may assign, delegate
or otherwise transfer any of its rights or obligations under this Agreement
without the consent of the other parties hereto.
Section 10.06 Governing Law. This Agreement shall be construed in accordance
with and governed by the law of the State of New York applicable to contracts
executed in and to be performed in that State.
Section 10.07 Counterparts; Effectiveness. This Agreement may be signed in
any number of counterparts (including by means of telecopied signature pages),
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument. This Agreement shall become
effective when each party hereto shall have received counterparts hereof
signed by all of the other parties hereto.
Section 10.08 Headings; Schedules.
(a) Section headings used in this Agreement are for convenience only and
shall be ignored in the construction and interpretation hereof.
(b) The parties hereto acknowledge that certain matters set forth in the
Schedules to this Agreement are included for informational purposes only,
notwithstanding the fact that, because they do not rise above applicable
materiality thresholds or otherwise, they would not be required to be set
forth therein by the terms of this Agreement and that disclosure of such
matters shall not be taken as an admission by Peoples or Davel that such
disclosure is required to be made under the terms of any provision of this
Agreement and in no event shall the disclosure of such matters be deemed or
interpreted to broaden or otherwise amplify the representations and warranties
contained in this Agreement or be used as a basis for interpreting the
materiality thresholds in this Agreement (including, but not limited to, the
terms "material," "materially," "materiality," "material adverse change,"
"material adverse effect" or "Material Adverse Effect").
Section 10.09 Obligations of Davel and Holdings. Notwithstanding anything to
the contrary contained in this Agreement: (a) Davel shall be jointly and
severally responsible, with Holdings, for the fulfillment of all of the
obligations of Holdings under this Agreement and for any breach by Holdings of
any representations, warranties, covenants and agreements of Holdings
contained in this Agreement; and (b) Holdings shall be jointly
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and severally responsible for the fulfillment of all of the obligations of
Davel under this Agreement and for any breach by Davel of any representations,
warranties, covenants and agreements of Davel contained in this Agreement.
Section 10.10 No Third Party Beneficiaries. Except for Section 6.03 hereof,
no provision of this Agreement is intended to, or shall, confer any third
party beneficiary or other rights or remedies upon any person other than the
parties hereto.
* * * * *
IN WITNESS WHEREOF, the parties hereto have caused this Amended and Restated
Agreement and Plan of Merger and Reorganization to be duly executed by their
respective authorized officers as of the day and year first above written.
Davel Communications Group, Inc.
By: /s/ Theodore C. Rammelkamp, Jr.
Name: Theodore C. Rammelkamp, Jr.
Title: Senior Vice President
Davel Holdings, Inc.
By: /s/ Theodore C. Rammelkamp, Jr.
Name: Theodore C. Rammelkamp, Jr.
Title: Senior Vice President
Peoples Telephone Company, Inc.
By: /s/ E. Craig Sanders
Name: E. Craig Sanders
Title: Chief Executive Officer
D Subsidiary, Inc.
By: /s/ Theodore C. Rammelkamp, Jr.
Name: Theodore C. Rammelkamp, Jr.
Title: Vice President
Miami Merger Corp.
By: /s/ Theodore C. Rammelkamp, Jr.
Name: Theodore C. Rammelkamp, Jr.
Title: Vice President
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APPENDIX IV
NEW DAVEL'S CERTIFICATE OF INCORPORATION
RESTATED
CERTIFICATE OF INCORPORATION
OF
DAVEL COMMUNICATIONS, INC.
ARTICLE ONE
The name of the corporation is Davel Communications, Inc.
ARTICLE TWO
The address of the corporation's registered office in the State of Delaware
is 9 East Loockerman Street, in the City of Dover, County of Kent 19901. The
name of its registered agent at such address is National Registered Agents,
Inc.
ARTICLE THREE
The nature of the business or the purpose to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
ARTICLE FOUR
The total number of shares of stock which the corporation has authority to
issue is 51,000,000 shares, of which 50,000,000 shares are Common Stock, par
value of $.01 per share, and 1,000,000 shares are Preferred Stock, par value
$.01 per share.
The board of directors of the corporation is authorized, subject to the
limitations prescribed by the General Corporation Law of the State of
Delaware, to provide for the issuance of shares of Preferred Stock in one or
more series, to establish from time to time the number of shares to be
included in such series and to fix the designation, powers, preferences and
rights of the shares of each series and the qualifications, limitations and
restrictions thereof.
ARTICLE FIVE
The name and mailing address of the sole incorporator are as follows:
NAME MAILING ADDRESS
Joan D. Donovan 200 East Randolph Drive
Suite 5700
Chicago, Illinois 60601
ARTICLE SIX
The corporation is to have perpetual existence.
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ARTICLE SEVEN
In furtherance and not in limitation of the powers conferred by statute, the
board of directors of the corporation is expressly authorized to make, alter
or repeal the by-laws of the corporation.
ARTICLE EIGHT
Meetings of stockholders may be held within or without the State of
Delaware, as the by-laws of the corporation may provide. The books of the
corporation may be kept outside the State of Delaware at such place or places
as may be designated from time to time by the board of directors or in the by-
laws of the corporation. Election of directors need not be by written ballot
unless the by-laws of the corporation so provide.
ARTICLE NINE
To the fullest extent permitted by the General Corporation Law of the State
of Delaware as the same exists or may hereafter be amended, a director of this
corporation shall not be liable to the corporation or its stockholders for
monetary damages for a breach of fiduciary duty as a director. Any repeal or
modification of this ARTICLE NINE shall not adversely affect any right or
protection of a director of the corporation existing at the time of such
repeal or modification.
ARTICLE TEN
The corporation expressly elects not to be governed by Section 203 of the
General Corporation Law of the State of Delaware.
ARTICLE ELEVEN
The corporation reserves the right to amend, alter, change or repeal any
provision contained in this certificate of incorporation in the manner now or
hereafter prescribed herein and by the laws of the State of Delaware, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
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APPENDIX V
NEW DAVEL'S BYLAWS
RESTATED
BY-LAWS
OF
DAVEL COMMUNICATIONS, INC.
A DELAWARE CORPORATION
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the corporation in
the State of Delaware shall be located at 9 East Loockerman Street, in the
city of Dover, County of Kent. The name of the corporation's registered agent
at such address shall be National Registered Agents, Inc.
Section 2. Other Offices. The corporation may also have offices at such
other places, both within and without the State of Delaware, as the board of
directors may from time to time determine or the business of the corporation
may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place and Time of Meetings. The date, time and place of the
annual meeting shall be determined by the president of the corporation;
provided, that if the president does not act, the board of directors shall
determine the date, time and place of such meeting.
Section 2. Special Meetings. Special meetings of stockholders may be called
at any time for any purpose (including, without limitation, the filling of
board vacancies and newly created directorships) and may be held at such time
and place, within or without the State of Delaware, as shall be stated in a
notice of meeting or in a duly executed waiver of notice thereof. Such
meetings may be called only by a majority of the board of directors or by the
chairman or the president.
Section 3. Place of Meetings. The board of directors may designate any
place, either within or without the State of Delaware, as the place of meeting
for any annual meeting or for any special meeting called by the board of
directors. If no designation is made, or if a special meeting be otherwise
called, the place of meeting shall be the principal executive office of the
corporation.
Section 4. Notice. Whenever stockholders are required or permitted to take
action at a meeting, written or printed notice stating the place, date, time,
and, in the case of special meetings, the purpose or purposes, of such
meeting, shall be given to each stockholder entitled to vote at such meeting
not less than 10 nor more than 60 days before the date of the meeting. All
such notices shall be delivered, either personally or by mail, by or at the
direction of the board of directors, the president or the secretary, and if
mailed, such notice shall be deemed to be delivered when deposited in the
United States mail, postage prepaid, addressed to the stockholder at his, her
or its address as the same appears on the records of the corporation.
Attendance of a person at a meeting shall constitute a waiver of notice of
such meeting, except when the person attends for the express purpose of
objecting at the beginning of the meeting to the transaction of any business
because the meeting is not lawfully called or convened.
Section 5. Stockholders List. The officer having charge of the stock ledger
of the corporation shall make, at least 10 days before every meeting of the
stockholders, a complete list of the stockholders entitled to vote at such
meeting arranged in alphabetical order, showing the address of each
stockholder and the number of shares
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registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least 10 days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting or, if not so
specified, at the place where the meeting is to be held. The list shall also
be produced and kept at the time and place of the meeting during the whole
time thereof, and may be inspected by any stockholder who is present.
Section 6. Quorum. The holders of a majority of the outstanding shares of
capital stock, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders, except as otherwise provided by
statute or by the restated certificate of incorporation. If a quorum is not
present, the holders of a majority of the shares present in person or
represented by proxy at the meeting, and entitled to vote at the meeting, may
adjourn the meeting to another time and/or place.
Section 7. Adjourned Meetings. When a meeting is adjourned to another time
and place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken.
At the adjourned meeting the corporation may transact any business which might
have been transacted at the original meeting. If the adjournment is for more
than thirty days, or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
Section 8. Vote Required. When a quorum is present, the affirmative vote of
the majority of shares present in person or represented by proxy at the
meeting and entitled to vote on the subject matter shall be the act of the
stockholders, unless the question is one upon which by express provisions of
an applicable law or of the restated certificate of incorporation a different
vote is required, in which case such express provision shall govern and
control the decision of such question.
Section 9. Voting Rights. Except as otherwise provided by the General
Corporation Law of the State of Delaware or by the restated certificate of
incorporation of the corporation or any amendments thereto and subject to
Section 3 of Article VI hereof, every stockholder shall at every meeting of
the stockholders be entitled to one vote in person or by proxy for each share
of common stock held by such stockholder.
Section 10. Proxies. Each stockholder entitled to vote at a meeting of
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him or
her by proxy, but no such proxy shall be voted or acted upon after three years
from its date, unless the proxy provides for a longer period.
Section 11. Action by Written Consent. Unless otherwise provided in the
restated certificate of incorporation, any action required to be taken at any
annual or special meeting of stockholders of the corporation, or any action
which may be taken at any annual or special meeting of such stockholders, may
be taken without a meeting, without prior notice and without a vote, if a
consent or consents in writing, setting forth the action so taken and bearing
the dates of signature of the stockholders who signed the consent or consents,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted and shall be delivered to the corporation by delivery to its
registered office in the state of Delaware, or the corporation's principal
place of business, or an officer or agent of the corporation having custody of
the book or books in which proceedings of meetings of the stockholders are
recorded. Delivery made to the corporation's registered office shall be by
hand or by certified or registered mail, return receipt requested. All
consents properly delivered in accordance with this section shall be deemed to
be recorded when so delivered. No written consent shall be effective to take
the corporate action referred to therein unless, within sixty days of the
earliest dated consent delivered to the corporation as required by this
section, written consents signed by the holders of a sufficient number of
shares to take such corporate action are so recorded. Prompt notice of the
taking of the
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corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing. Any
action taken pursuant to such written consent or consents of the stockholders
shall have the same force and effect as if taken by the stockholders at a
meeting thereof.
ARTICLE III
DIRECTORS
Section 1. General Powers. The business and affairs of the corporation shall
be managed by or under the direction of the board of directors.
Section 2. Number, Election and Term of Office. The number of directors
which shall constitute the first board shall be one (1). Thereafter, the
number of directors shall be established from time to time by a majority of
the entire board of directors, but such number shall be a minimum of at least
five, and a maximum of no more than eleven. The directors shall be elected by
a plurality of the votes of the shares present in person or represented by
proxy at the meeting and entitled to vote in the election of directors. The
directors shall be elected in this manner at the annual meeting of the
stockholders, except as provided in Section 4 of this Article III. Each
director elected shall hold office until a successor is duly elected and
qualified or until his or her earlier death, resignation or removal as
hereinafter provided.
Section 3. Removal and Resignation. Any director or the entire board of
directors may be removed at any time, with or without cause, by the holders of
a majority of the shares then entitled to vote at an election of directors.
Whenever the holders of any class or series are entitled to elect one or more
directors by the provisions of the corporation's restated certificate of
incorporation, the provisions of this section shall apply, in respect to the
removal without cause of a director or directors so elected, to the vote of
the holders of the outstanding shares of that class or series and not to the
vote of the outstanding shares as a whole.
Section 4. Vacancies. Except as otherwise provided by the restated
certificate of incorporation of the corporation or any amendments thereto,
board vacancies and newly created directorships resulting from any increase in
the authorized number of directors shall be filled until the next annual
meeting of the stockholders by a majority vote of the remaining directors,
though less than a quorum, at any regular meeting or special meeting of the
board of directors, and each director so chosen shall hold office until the
next annual meeting of the stockholders and until a successor is duly elected
and qualified or until his or her earlier death, resignation or removal.
Section 5. Annual Meetings. The annual meeting of each newly elected board
of directors shall be held without other notice than this by-law immediately
after, and at the same place as, the annual meeting of stockholders.
Section 6. Other Meetings and Notice. Regular meetings, other than the
annual meeting, of the board of directors may be held without notice at such
time and at such place as shall from time to time be determined by resolution
of the board. Special meetings of the board of directors may be called by or
at the request of the president on at least 24 hours notice to each director,
either personally, by telephone, by mail, or by telegraph; in like manner and
on like notice the president must call a special meeting on the written
request of at least one of the directors.
Section 7. Quorum, Required Vote and Adjournment. A majority of the total
number of directors then in office shall constitute a quorum for the
transaction of business, provided that in no event shall a quorum consist of
less than one-third of the total number of directors established by the
stockholders pursuant to Section 2 or this Article III. The vote of a majority
of directors present at a meeting at which a quorum is present shall be the
act of the board of directors. If a quorum shall not be present at any meeting
of the board of directors, the directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
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Section 8. Committee. The board of directors may, by resolution passed by a
majority of the whole board, designate one or more committees, each committee
to consist of one or more of the directors of the corporation, which to the
extent provided in such resolution or these by-laws shall have and may
exercise the powers of the board of directors in the management and affairs of
the corporation except as otherwise limited by law. The board of directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee.
Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the board of directors.
Each committee shall keep regular minutes of its meetings and report the same
to the board of directors when required.
Section 9. Committee Rules. Each committee of the board of directors may fix
its own rules of procedure and shall hold its meetings as provided by such
rules, except as may otherwise be provided by a resolution of the board of
directors designating such committee. In the event that a member and that
member's alternate, if alternates are designated by the board of directors as
provided in Section 8 of this Article III, of such committee is or are absent
or disqualified, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the board of directors to
act at the meeting in place of any such absent or disqualified member.
Section 10. Communications Equipment. Members of the board of directors or
any committee thereof may participate in and act at any meeting of such board
or committee through the use of a conference telephone or other communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in the meeting pursuant to this section shall
constitute presence in person at the meeting.
Section 11. Waiver of Notice and Presumption of Assent. Any member of the
board of directors or any committee thereof who is present at a meeting shall
be conclusively presumed to have waived notice of such meeting except when
such member attends for the express purpose of objecting at the beginning of
the meeting to the transaction of any business because the meeting is not
lawfully called or convened. Such member shall be conclusively presumed to
have assented to any action taken unless his or her dissent shall be entered
in the minutes of the meeting or unless his or her written dissent to such
action shall be filed with the person acting as the secretary of the meeting
before the adjournment thereof or shall be forwarded by registered mail to the
secretary of the corporation immediately after the adjournment of the meeting.
Such right to dissent shall not apply to any member who voted in favor of such
action.
Section 12. Action by Written Consent. Unless otherwise restricted by the
restated certificate of incorporation, any action required or permitted to be
taken at any meeting of the board of directors, or of any committee thereof,
may be taken without a meeting if all members of the board or committee, as
the case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the board or committee.
ARTICLE IV
OFFICERS
Section 1. Number. The officers of the corporation shall be elected by the
board of directors and shall consist of a chairman of the board, a president
and chief executive officer, one or more vice-presidents, a chief financial
officer, a secretary, a treasurer, and such other officers and assistant
officers as may be deemed necessary or desirable by the board of directors.
Any number of offices may be held by the same person. In its discretion, the
board of directors may choose not to fill any office for any period as it may
deem advisable, except that the offices of president and secretary shall be
filled as expeditiously as possible.
Section 2. Election and Term of Office. The officers of the corporation
shall be elected annually by the board of directors at its first meeting held
after each annual meeting of stockholders or as soon thereafter as
conveniently may be. Vacancies may be filled or new offices created and filled
at any meeting of the board of
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directors. Each officer shall hold office until a successor is duly elected
and qualified or until his or her earlier death, resignation or removal as
hereinafter provided.
Section 3. Removal. Any officer or agent elected by the board of directors
may be removed by the board of directors whenever in its judgment the best
interests of the corporation would be served thereby, but such removal shall
be without prejudice to the contract rights, if any, of the person so removed.
Section 4. Vacancies. Any vacancy occurring in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the
board of directors for the unexpired portion of the term by the board of
directors then in office.
Section 5. Compensation. Compensation of all officers shall be fixed by the
board of directors, and no officer shall be prevented from receiving such
compensation by virtue of his or her also being a director of the corporation.
Section 6. Chairman of the Board. The chairman of the board shall, subject
to the powers of the board of directors, be the corporation's chief policy
making officer. He or she shall preside at all meetings of the board of
directors and stockholders and shall have such other powers and perform such
other duties as may be prescribed by the board of directors or provided in
these by-laws. Whenever the president is unable to serve, by reason of
sickness, absence or otherwise, the chairman of the board shall perform all
the duties and responsibilities and exercise all the powers of the president.
Section 7. The President and Chief Executive Officer. The president and
chief executive officer shall be the chief executive officer of the
corporation; shall preside at all meetings of the stockholders and board of
directors at which the chairman of the board is not present; subject to the
powers of the board of directors, shall have general and active charge of the
business, affairs and property of the corporation, and control over its
officers, agents and employees; and shall see that all orders and resolutions
of the board of directors are carried into effect. The president shall execute
bonds, mortgages and other contracts requiring a seal, under the seal of the
corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the board of directors to some other officer or agent
of the corporation. The president shall have such other powers and perform
such other duties as may be prescribed by the board of directors or as may be
provided in these by-laws.
Section 8. Vice-Presidents. The vice-president, or if there shall be more
than one, the vice-presidents in the order determined by the board of
directors, shall, in the absence or disability of the president, act with all
of the powers and be subject to all the restrictions of the president. The
vice-presidents shall also perform such other duties and have such other
powers as the board of directors, the president or these by-laws may, from
time to time, prescribe.
Section 9. Chief Financial Officer. The chief financial officer of the
corporation shall, under the direction of the president and chief executive
officer, be responsible for all financial and accounting matters and for the
direction of the offices of treasurer and controller. The chief financial
officer shall have such other powers and perform such other duties as may be
prescribed by the chairman of the board, the president and chief executive
officer or the board of directors or as may be provided in these by-laws.
Section 10. The Secretary and Assistant Secretaries. The secretary shall
attend all meetings of the board of directors, all meetings of the committees
thereof and all meetings of the stockholders and record all the proceedings of
the meetings in a book or books to be kept for that purpose. Under the
president's supervision, the secretary shall give, or cause to be given, all
notices required to be given by these by-laws or by law; shall have such
powers and perform such duties as the board of directors, the president or
these by-laws may, from time to time, prescribe; and shall have custody of the
corporate seal of the corporation. The secretary, or an assistant secretary,
shall have authority to affix the corporate seal to any instrument requiring
it and when so affixed, it may be attested by his or her signature or by the
signature of such assistant secretary. The board of
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directors may give general authority to any other officer to affix the seal of
the corporation and to attest the affixing by his or her signature. The
assistant secretary, or if there be more than one, the assistant secretaries
in the order determined by the board of directors, shall, in the absence or
disability of the secretary, perform the duties and exercise the powers of the
secretary and shall perform such other duties and have such other powers as
the board of directors, the president or secretary may, from time to time,
prescribe.
Section 11. The Treasurer and Assistant Treasurer. The treasurer shall have
the custody of the corporate funds and securities; shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
corporation; shall deposit all monies and other valuable effects in the name
and to the credit of the corporation as may be ordered by the board of
directors; shall cause the funds of the corporation to be disbursed when such
disbursements have been duly authorized, taking proper vouchers for such
disbursements; and shall render to the president and the board of directors,
at its regular meeting or when the board of directors so requires, an account
of the corporation; shall have such powers and perform such duties as the
board of directors, the president or these by-laws may, from time to time,
prescribe. If required by the board of directors, the treasurer shall give the
corporation a bond (which shall be rendered every six years) in such sums and
with such surety or sureties as shall be satisfactory to the board of
directors for the faithful performance of the duties of the office of
treasurer and for the restoration to the corporation, in case of death,
resignation, retirement, or removal from office, of all books, papers,
vouchers, money, and other property of whatever kind in the possession or
under the control of the treasurer belonging to the corporation. The assistant
treasurer, or if there shall be more than one, the assistant treasurers in the
order determined by the board of directors, shall in the absence or disability
of the treasurer, perform the duties and exercise the powers of the treasurer.
The assistant treasurers shall perform such other duties and have such other
powers as the board of directors, the president or treasurer may, from time to
time, prescribe.
Section 12. Other Officers, Assistant Officers and Agents. Officers,
assistant officers and agents, if any, other than those whose duties are
provided for in these by-laws, shall have such authority and perform such
duties as may from time to time be prescribed by resolution of the board of
directors.
Section 13. Absence or Disability of Officers. In the case of the absence or
disability of any officer of the corporation and of any person hereby
authorized to act in such officer's place during such officer's absence or
disability, the board of directors may by resolution delegate the powers and
duties of such officer to any other officer or to any director, or to any
other person whom it may select.
ARTICLE V
INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
Section 1. Nature of Indemnity. Each person who was or is made a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a
person of whom he or she is the legal representative, is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee, fiduciary, or
agent of another corporation or of a partnership, joint venture, trust or
other enterprise, shall be indemnified and held harmless by the corporation to
the fullest extent which it is empowered to do so unless prohibited from doing
so by the General Corporation Law of the State of Delaware, as the same exists
or may hereafter be amended (but, in the case of any such amendment, only to
the extent that such amendment permits the corporation to provide broader
indemnification rights than said law permitted the corporation to provide
prior to such amendment) against all expense, liability and loss (including
attorneys' fees actually and reasonably incurred by such person in connection
with such proceeding) and such indemnification shall inure to the benefit of
his or her heirs, executors and administrators; provided, however, that,
except as provided in Section 2 hereof, the corporation shall indemnify any
such person seeking indemnification in connection with a proceeding initiated
by such person only if such proceeding was authorized by the board of
directors of the corporation. The right to indemnification conferred in this
Article V
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shall be a contract right and, subject to Sections 2 and 5 hereof, shall
include the right to be paid by the corporation the expenses incurred in
defending any such proceeding in advance of its final disposition. The
corporation may, by action of its board of directors, provide indemnification
to employees and agents of the corporation with the same scope and effect as
the foregoing indemnification of directors and officers.
Section 2. Procedure for Indemnification of Directors and Officers. Any
indemnification of a director or officer of the corporation under Section 1 of
this Article V or advance of expenses under Section 5 of this Article V shall
be made promptly, and in any event within 30 days, upon the written request of
the director or officer. If a determination by the corporation that the
director or officer is entitled to indemnification pursuant to this Article V
is required, and the corporation fails to respond within sixty days to a
written request for indemnity, the corporation shall be deemed to have
approved the request. If the corporation denies a written request for
indemnification or advancing of expenses, in whole or in part, or if payment
in full pursuant to such request is not made within 30 days, the right to
indemnification or advances as granted by this Article V shall be enforceable
by the director or officer in any court of competent jurisdiction. Such
person's costs and expenses incurred in connection with successfully
establishing his or her right to indemnification, in whole or in part, in any
such action shall also be indemnified by the corporation. It shall be a
defense to any such action (other than an action brought to enforce a claim
for expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any, has been tendered to the
corporation) that the claimant has not met the standards of conduct which make
it permissible under the General Corporation Law of the State of Delaware for
the corporation to indemnify the claimant for the amount claimed, but the
burden of such defense shall be on the corporation. Neither the failure of the
corporation (including its board of directors, independent legal counsel or
its stockholders) to have made a determination prior to the commencement of
such action that indemnification of the claimant is proper in the
circumstances because he or she has met the applicable standard of conduct set
forth in the General Corporation Law of the State of Delaware, nor an actual
determination by the corporation (including its board of directors,
independent legal counsel, or its stockholders) that the claimant has not met
such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
Section 3. Article Not Exclusive. The rights to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Article V shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision of the restated certificate of incorporation, by-law, agreement,
vote of stockholders or disinterested directors or otherwise.
Section 4. Insurance. The corporation may purchase and maintain insurance on
its own behalf and on behalf of any person who is or was a director, officer,
employee, fiduciary, or agent of the corporation or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him or her and incurred by him or her in any such
capacity, whether or not the corporation would have the power to indemnify
such person against such liability under this Article V.
Section 5. Expenses. Expenses incurred by any person described in Section 1
of this Article V in defending a proceeding shall be paid by the corporation
in advance of such proceeding's final disposition unless otherwise determined
by the board of directors in the specific case upon receipt of an undertaking
by or on behalf of the director or officer to repay such amount if it shall
ultimately be determined that he or she is not entitled to be indemnified by
the corporation. Such expenses incurred by other employees and agents may be
so paid upon such terms and conditions, if any, as the board of directors
deems appropriate.
Section 6. Employees and Agents. Persons who are not covered by the
foregoing provisions of this Article V and who are or were employees or agents
of the corporation, or who are or were serving at the request of the
corporation as employees or agents of another corporation, partnership, joint
venture, trust or other enterprise, may be indemnified to the extent
authorized at any time or from time to time by the board of directors.
Section 7. Contract Rights. The provisions of this Article V shall be deemed
to be a contract right between the corporation and each director or officer
who serves in any such capacity at any time while this Article V and
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the relevant provisions of the General Corporation Law of the State of
Delaware or other applicable law are in effect, and any repeal or modification
of this Article V or any such law shall not affect any rights or obligations
then existing with respect to any state of facts or proceeding then existing.
Section 8. Merger or Consolidation. For purposes of this Article V,
references to "the corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was
a director, officer, employee or agent of such constituent corporation, or is
or was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under this Article
V with respect to the resulting or surviving corporation as he or she would
have with respect to such constituent corporation if its separate existence
had continued.
ARTICLE VI
CERTIFICATES OF STOCK
Section 1. Form. Every holder of stock in the corporation shall be entitled
to have a certificate, signed by, or in the name of the corporation by the
president or a vice-president and the secretary or an assistant secretary of
the corporation, certifying the number of shares owned by such holder in the
corporation. If such a certificate is countersigned (1) by a transfer agent or
an assistant transfer agent other than the corporation or its employee or (2)
by a registrar, other than the corporation or its employee, the signature of
any such president, vice-president, secretary, or assistant secretary may be
facsimiles. In case any officer or officers who have signed, or whose
facsimile signature or signatures have been used on, any such certificate or
certificates shall cease to be such officer or officers of the corporation
whether because of death, resignation or otherwise before such certificate or
certificates have been delivered by the corporation, such certificate or
certificates may nevertheless be issued and delivered as though the person or
persons who signed such certificate or certificates or whose facsimile
signature or signatures have been used thereon had not ceased to be such
officer or officers of the corporation. All certificates for shares shall be
consecutively numbered or otherwise identified. The name of the person to whom
the shares represented thereby are issued, with the number of shares and date
of issue, shall be entered on the books of the corporation. Shares of stock of
the corporation shall only be transferred on the books of the corporation by
the holder of record thereof or by such holder's attorney duly authorized in
writing, upon surrender to the corporation of the certificate or certificates
for such shares endorsed by the appropriate person or persons, with such
evidence of the authenticity of such endorsement, transfer, authorization, and
other matters as the corporation may reasonably require, and accompanied by
all necessary stock transfer stamps. In that event, it shall be the duty of
the corporation to issue a new certificate to the person entitled thereto,
cancel the old certificate or certificates, and record the transaction on its
books. The board of directors may appoint a bank or trust Company organized
under the laws of the United States or any state thereof to act as its
transfer agent or registrar, or both in connection with the transfer of any
class or series of securities of the corporation.
Section 2. Lost Certificates. The board of directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates previously issued by the corporation alleged to have been lost,
stolen, or destroyed, upon the making of an affidavit of that fact by the
person claiming the certificate of stock to be lost, stolen, or destroyed.
When authorizing such issue of a new certificate or certificates, the board of
directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen, or destroyed certificate or
certificates, or his or her legal representative, to give the corporation a
bond sufficient to indemnify the corporation against any claim that may be
made against the corporation on account of the loss, theft or destruction of
any such certificate or the issuance of such new certificate.
Section 3. Fixing a Record Date for Stockholder Meetings. In order that the
corporation may determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, the
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board of directors may fix a record date, which record date shall not precede
the date upon which the resolution fixing the record date is adopted by the
board of directors, and which record date shall not be more than sixty nor
less than ten days before the date of such meeting. If no record date is fixed
by the board of directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be the
close of business on the next day preceding the day on which notice is given,
or if notice is waived, at the close of business on the day next preceding the
day on which the meeting is held. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to
any adjournment of the meeting; provided, however, that the board of directors
may fix a new record date for the adjourned meeting.
Section 4. Fixing a Record Date for Action by Written Consent. In order that
the corporation may determine the stockholders entitled to consent to
corporate action in writing without a meeting, the board of directors may fix
a record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the board of directors, and
which date shall not be more than ten days after the date upon which the
resolution fixing the record date is adopted by the board of directors. If no
record date has been fixed by the board of directors, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the board of directors is required
by statute, shall be the first date on which a signed written consent setting
forth the action taken or proposed to be taken is delivered to the corporation
by delivery to its registered office in the State of Delaware, its principal
place of business, or an officer or agent of the corporation having custody of
the book in which proceedings of meetings of stockholders are recorded.
Delivery made to the corporation's registered office shall be by hand or by
certified or registered mail, return receipt requested. If no record date has
been fixed by the board of directors and prior action by the board of
directors is required by statute, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting shall be
at the close of business on the day on which the board of directors adopts the
resolution taking such prior action.
Section 5. Fixing a Record Date for Other Purposes. In order that the
corporation may determine the stockholders entitled to receive payment of any
dividend or other distribution or allotment or any rights or the stockholders
entitled to exercise any rights in respect of any change, conversion or
exchange of stock, or for the purposes of any other lawful action, the board
of directors may fix a record date, which record date shall not precede the
date upon which the resolution fixing the record date is adopted, and which
record date shall be not more than sixty days prior to such action. If no
record date is fixed, the record date for determining stockholders for any
such purpose shall be at the close of business on the day on which the board
of directors adopts the resolution relating thereto.
Section 6. Registered Stockholders. Prior to the surrender to the
corporation of the certificate or certificates for a share or shares of stock
with a request to record the transfer of such share or shares, the corporation
may treat the registered owner as the person entitled to receive dividends, to
vote, to receive notifications, and otherwise to exercise all the rights and
powers of an owner.
Section 7. Subscriptions for Stock. Unless otherwise provided for in the
subscription agreement, subscriptions for shares shall be paid in full at such
time, or in such installments and at such times, as shall be determined by the
board of directors. Any call made by the board of directors for payment on
subscriptions shall be uniform as to all shares of the same class or as to all
shares of the same series. In case of default in the payment of any
installment or call when such payment is due, the corporation may proceed to
collect the amount due in the same manner as any debt due the corporation.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the corporation,
subject to the provisions of the restated certificate of incorporation, if
any, may be declared by the board of directors at any regular or special
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meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the restated
certificate of incorporation. Before payment of any dividend, there may be set
aside out of any funds of the corporation available for dividends such sum or
sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the corporation, or
any other purpose and the directors may modify or abolish any such reserve in
the manner in which it was created.
Section 2. Checks, Drafts or Orders. All checks, drafts, or other orders for
the payment of money by or to the corporation and all notes and other
evidences of indebtedness issued in the name of the corporation shall be
signed by such officer or officers, agent or agents of the corporation, and in
such manner, as shall be determined by resolution of the board of directors or
a duly authorized committee thereof.
Section 3. Contracts. The board of directors may authorize any officer or
officers, or any agent or agents, of the corporation to enter into any
contract or to execute and deliver any instrument in the name of and on behalf
of the corporation, and such authority may be general or confined to specific
instances.
Section 4. Loans. The corporation may lend money to, or guarantee any
obligation of, or otherwise assist any officer or other employee of the
corporation or of its subsidiary, including any officer or employee who is a
director of the corporation or its subsidiary, whenever, in the judgment of
the directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest, and may be unsecured, or secured in such manner as the board
of directors shall approve, including, without limitation, a pledge of shares
of stock of the corporation. Nothing in this section contained shall be deemed
to deny, limit or restrict the powers of guaranty or warranty of the
corporation at common law or under any statute. No loans shall be made or
contracted on behalf of the corporation and no evidences of indebtedness shall
be issued in its name unless authorized by resolution of the board of
directors. Such authority may be general or confined to specific instances.
Section 5. Fiscal Year. The fiscal year of the corporation shall be fixed by
resolution of the board of directors.
Section 6. Corporate Seal. The board of directors shall provide a corporate
seal which shall be in the form of a circle and shall have inscribed thereon
the name of the corporation and the words "Corporate Seal, Delaware". The seal
may be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise.
Section 7. Voting Securities Owned By Corporation. Voting securities in any
other corporation held by the corporation shall be voted by the president,
unless the board of directors specifically confers authority to vote with
respect thereto, which authority may be general or confined to specific
instances, upon some other person or officer. Any person authorized to vote
securities shall have the power to appoint proxies, with general power of
substitution.
Section 8. Inspection of Books and Records. Any stockholder of record, in
person or by attorney or other agent, shall, upon written demand under oath
stating the purpose thereof, have the right during the usual hours for
business to inspect for any proper purpose the corporation's stock ledger, a
list of its stockholders, and its other books and records, and to make copies
or extracts therefrom. A proper purpose shall mean any purpose reasonably
related to such person's interest as a stockholder. In every instance where an
attorney or other agent shall be the person who seeks the right to inspection,
the demand under oath shall be accompanied by a power of attorney or such
other writing which authorizes the attorney or other agent to so act on behalf
of the stockholder. The demand under oath shall be directed to the corporation
at its registered office in the State of Delaware or at its principal place of
business.
Section 9. Section Headings. Section headings in these bylaws are for
convenience of reference only and shall not be given any substantive effect in
limiting or otherwise construing any provision herein.
V-10
<PAGE>
Section 10. Inconsistent Provisions. In the event that any provision of
these by-laws is or becomes inconsistent with any provision of the restated
certificate of incorporation, the General Corporation Law of the State of
Delaware or any other applicable law, the provision of these by-laws shall not
be given any effect to the extent of such inconsistency but shall otherwise be
given full force and effect.
ARTICLE VIII
AMENDMENTS
These by-laws may be amended, altered, or repealed and new bylaws adopted at
any meeting of the board of directors by a majority vote; provided, however,
that the board of directors shall have no power to change the quorum for
meetings of stockholders or of the board of directors as provided in these by-
laws, or to change the minimum or maximum number of directors that can be
elected to the board of directors. The fact that the power to adopt, amend,
alter, or repeal the by-laws has been conferred upon the board of directors
shall not divest the stockholders of the same powers.
V-11
<PAGE>
APPENDIX VI
STATUTORY PROVISIONS UNDER THE ILLINOIS LAW
WITH RESPECT TO DISSENTERS' RIGHTS
APPENDIX 9: STATUTORY PROVISIONS UNDER ILLINOIS LAW WITH RESPECT TO
DISSENTERS' RIGHTS
The following statutory provisions govern the availability of dissenters'
rights for shareholders of Illinois corporations:
SECTION 11.65. RIGHT TO DISSENT.
(a) A shareholder of a corporation is entitled to dissent from, and obtain
payment for his or her shares in the event of any of the following corporate
actions:
(1) consummation of a plan of merger or consolidation or a plan of share
exchange to which the corporation is a party if
(i) shareholder authorization is required for the merger or
consolidation or the share exchange by Section 11.20 or the articles of
incorporation or
(ii) the corporation is a subsidiary that is merged with its parent
or another subsidiary under Section 11.30;
(2) consummation of sale, lease or exchange of all, or substantially all,
of the property and assets of the corporation other than in the usual and
regular course of business;
(3) an amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it:
(i) alters or abolishes a preferential right of such shares;
(ii) alters or abolishes a right in respect of redemption, including
a provision respecting a sinking fund for the redemption or repurchase,
of such shares;
(iii) in the case of a corporation incorporated prior to January 1,
1982, limits or eliminates cumulative voting rights with respect to
such shares; or
(4) any other corporate action taken pursuant to a shareholder vote if
the articles of incorporation, by-laws, or a resolution of the board of
directors provide that shareholders are entitled to dissent and obtain
payment for their shares in accordance with the procedures set forth in
Section 11.70 or as may be otherwise provided in the articles, by-laws or
resolution.
(b) A shareholder entitled to dissent and obtain payment for his or her
shares under this Section may not challenge the corporate action creating his
or her entitlement unless the action is fraudulent with respect to the
shareholder or the corporation or constitutes a breach of a fiduciary duty
owed to the shareholder.
(c) A record owner of shares may assert dissenters' rights as to fewer than
all the shares recorded in such person's name only if such person dissents
with respect to all shares beneficially owned by any one person and notifies
the corporation in writing of the name and address of each person on whose
behalf the record owner asserts dissenters' rights. The rights of a partial
dissenter are determined as if the shares as to which dissent is made and
other shares were recorded in the names of different shareholders. A
beneficial owner of shares who is not the record owner may assert dissenters'
rights as to shares held on such person's behalf only if the beneficial owner
submits to the corporation the record owner's written consent to the dissent
before or at the same time the beneficial owner asserts dissenters' rights.
SECTION 11.70. PROCEDURE TO DISSENT.
(a) If the corporate action giving rise to the right to dissent is to be
approved at a meeting of shareholders, the notice of meeting shall inform the
shareholders of their right to dissent and the procedure to dissent. If, prior
to the meeting, the corporation furnishes to the shareholders material
information with respect to the transaction
VI-1
<PAGE>
that will objectively enable a shareholder to vote on the transaction and to
determine whether or not to exercise dissenters' rights, a shareholder may
assert dissenters' rights only if the shareholder delivers to the corporation
before the vote is taken a written demand for payment for his or her shares if
the proposed action is consummated, and the shareholder does not vote in favor
of the proposed action.
(b) If the corporate action giving rise to the right to dissent is not to be
approved at a meeting of shareholders, the notice to shareholders describing
the action taken under Section 11.30 or Section 7.10 shall inform the
shareholders of their right to dissent and the procedure to dissent. If, prior
to or concurrently with the notice, the corporation furnishes to the
shareholders material information with respect to the transaction that will
objectively enable a shareholder to determine whether or not to exercise
dissenters' rights, a shareholder may assert dissenters' rights only if he or
she delivers to the corporation within 30 days from the date of mailing the
notice a written demand for payment for his or her shares.
(c) Within 10 days after the date on which the corporate action giving rise
to the right to dissent is effective or 30 days after the shareholder delivers
to the corporation the written demand for payment, whichever is later, the
corporation shall send each shareholder who has delivered a written demand for
payment a statement setting forth the opinion of the corporation as to the
estimated fair value of the shares, the corporation's latest balance sheet as
of the end of a fiscal year ending not earlier than 16 months before the
delivery of the statement, together with the statement of income for that year
and the latest available interim financial statements, and either a commitment
to pay for the shares of the dissenting shareholder at the estimated fair
value thereof upon transmittal to the corporation of the certificate or
certificates, or other evidence of ownership, with respect to the shares, or
instructions to the dissenting shareholder to sell his or her shares within 10
days after delivery of the corporation's statement to the shareholder. The
corporation may instruct the shareholder to sell only if there is public
market for the shares at which the shares may be readily sold. If the
shareholder does not sell within that 10 day period after being so instructed
by the corporation, for purposes of this Section the shareholder shall be
deemed to have sold his or her shares at the average closing price of the
shares, if listed on a national exchange, or the average of the bid and asked
price with respect to the shares quoted by a principal market maker, if not
listed on a national exchange, during that 10 day period.
(d) A shareholder who makes written demand for payment under this Section
retains all other rights of a shareholder until those rights are canceled or
modified by the consummation of the proposed corporate action. Upon
consummation of that action, the corporation shall pay to each dissenter who
transmits to the corporation the certificate or other evidence of ownership of
the shares the amount the corporation estimates to be the fair value of the
shares, plus accrued interest, accompanied by a written explanation of how the
interest was calculated.
(e) If the shareholder does not agree with the opinion of the corporation as
to the estimated fair value of the shares or the amount of interest due, the
shareholder, within 30 days from the delivery of the corporation's statement
of value, shall notify the corporation in writing of the shareholder's
estimated fair value and amount of interest due and demand payment for the
difference between the shareholder's estimate of fair value and interest due
and the amount of the payment by the corporation or the proceeds of sale by
the shareholder, whichever is applicable because of the procedure for which
the corporation opted pursuant to subsection (c).
(f) If, within 60 days from delivery to the corporation of the shareholder
notification of estimate of fair value of the shares and interest due, the
corporation and the dissenting shareholder have not agreed in writing upon the
fair value of the shares and interest due, the corporation shall either pay
the difference in value demanded by the shareholder, with interest, or file a
petition in the circuit court of the county in which either the registered
office or the principal office of the corporation is located, requesting the
court to determine the fair value of the shares and interest due. The
corporation shall make all dissenters, whether or not residents of this State,
whose demands remain unsettled parties to the proceeding as an action against
their shares and all parties shall be served with a copy of the petition.
Nonresidents may be served by registered or certified mail or by publication
as provided by law. Failure of the corporation to commence an action pursuant
to this Section shall not limit or affect the right of the dissenting
shareholders to otherwise commence an action as permitted by law.
VI-2
<PAGE>
(g) The jurisdiction of the court in which the proceeding is commenced under
subsection (f) by a corporation is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend
decision of the question of fair value. The appraisers have the power
described in the order appointing them, or in any amendment to it.
VI-3
<PAGE>
- -------------------------------------------------------------------------------
FOLD AND DETACH HERE
PROXY
THIS PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
DAVEL COMMUNICATIONS GROUP, INC.
ANNUAL MEETING OF SHAREHOLDERS
DECEMBER 22, 1998
The undersigned shareholder of Davel Communications Group, Inc., an Illinois
corporation (the "Company"), hereby appoints David R. Hill and Theodore C.
Rammelkamp, Jr., or either of them, each with full power of substitution, as
proxies or proxy of the undersigned, to vote all the shares of Common Stock,
no par value, of the Company which the undersigned would be entitled to vote
if personally present at the Annual Meeting of the Shareholders of the Company
to be held on December 22, 1998 at 9:00 a.m., local time, at One North
Franklin Street, Third Floor, Chicago, Illinois, and at any adjournment or
postponement thereof, upon the proposals set forth on the reverse side and as
described in the Joint Proxy Statement/Prospectus dated November 20, 1998,
and, in their discretion, upon all matters incident to the conduct of the
Annual Meeting and such other matters as may properly be brought before the
Annual Meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1 AND FOR THE ELECTION OF EACH OF THE NOMINEES FOR DIRECTOR
LISTED IN PROPOSAL 2 (ALLOCATING VOTES EVENLY AMONG THE SEVEN NOMINEES).
This signed Proxy revokes all proxies previously given by the undersigned to
vote at the Annual Meeting or any adjournment or postponement thereof. The
undersigned hereby acknowledges receipt of the Notice of Annual Meeting and
the Joint Proxy Statement/Prospectus relating to the Annual Meeting.
IMPORTANT--THIS PROXY MUST BE SIGNED AND DATED ON THE REVERSE SIDE
(CONTINUED ON REVERSE SIDE)
<PAGE>
- -------------------------------------------------------------------------------
FOLD AND DETACH HERE
Please mark
your votes as
indicated in
this example
X
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1 AND 2.
FOR
AGAINST
ABSTAIN
1. To approve and adopt the Amended and Restated Agreement and Plan of Merger
and Reorganization, dated as of July 5, 1998, and amended and restated as of
October 22, 1998, by and among the Company, Davel Holdings, Inc., D
Subsidiary, Inc., Miami Merger Corp. and Peoples Telephone Company, Inc., and
to approve the merger of D Subsidiary, Inc. with and into the Company, with
the Company surviving as an indirect, wholly owned subsidiary of Davel
Holdings, Inc.
2. ELECTION OF DIRECTORS
FOR all nominees listed below (except as marked to the contrary below)
WITHHOLD AUTHORITY to vote
for all nominees listed below
F. Philip Handy, Michael E. Hayes, David R. Hill, Robert D. Hill, Thomas M.
Vitale, A. Jones Yorke and Samuel Zell
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space provided below). To allocate votes among nom-
inees under the provisions for cumulative voting described in the accompanying
Joint Proxy Statement/ Prospectus, specify voting instructions in the space
provided below.
- -------------------------------------------------------------------------------
Signature(s) __________________________ Date _______________________________
Note: This Proxy should be dated, signed by the shareholder(s) exactly as the
name(s) appear(s) hereon, and returned promptly in the enclosed envelope.
Joint owners should each sign. Trustees, executors and others signing in a
representative capacity should indicate this capacity. An authorized officer
may sign on behalf of a corporation and should indicate the name of the
corporation and his or her capacity.
<PAGE>
- -------------------------------------------------------------------------------
FOLD AND DETACH HERE
PROXY
THIS PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
PEOPLES TELEPHONE COMPANY, INC.
SPECIAL MEETING OF SHAREHOLDERS
DECEMBER 22, 1998
The undersigned shareholder of Peoples Telephone Company, Inc., a New York
corporation (the "Company"), hereby appoints E. Craig Sanders and William A.
Baum, or either of them, each with full power of substitution, as proxies or
proxy of the undersigned, to vote all the shares of Common Stock, par value
$.01 per share, of the Company which the undersigned would be entitled to vote
if personally present at the Special Meeting of Shareholders of the Company to
be held on December 22, 1998 at 10:00 a.m., local time, at the Company's
principal executive offices at 2300 N.W. 89th Place, Miami, FL 33172, and at
any adjournment or postponement thereof, upon the proposal set forth on the
reverse side and as described in the Joint Proxy Statement/Prospectus dated
November 20, 1998, and, in their discretion, upon all matters incident to the
conduct of the Special Meeting and such other matters as may properly be
brought before the Special Meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR THE PROPOSAL.
This signed Proxy revokes all proxies previously given by the undersigned to
vote at the Special Meeting of Shareholders or any adjournment or postponement
thereof. The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Shareholders and the Joint Proxy Statement/Prospectus relating to
the Special Meeting of Shareholders.
IMPORTANT--THIS PROXY MUST BE SIGNED AND DATED ON THE REVERSE SIDE
(CONTINUED ON REVERSE SIDE)
<PAGE>
- -------------------------------------------------------------------------------
FOLD AND DETACH HERE
Please mark
your votes as
indicated in
this example
X
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE FOLLOWING PROPOSAL.
FOR
AGAINST
ABSTAIN
To approve and adopt the Amended and Restated Agreement and Plan of Merger and
Reorganization, dated as of July 5, 1998, and amended and restated as of
October 22, 1998, by and among the Company, Miami Merger Corp., D Subsidiary,
Inc., Davel Communications Group, Inc. and Davel Holdings, Inc., and to
approve the merger of the Company with a newly formed subsidiary of Davel
Holdings, Inc., with the Company surviving as a wholly owned subsidiary of
Davel Holdings, Inc.
Signature(s) __________________________ Date _______________________________
Note: This Proxy should be dated, signed by the shareholder(s) exactly as the
name(s) appear(s) hereon, and returned promptly in the enclosed envelope.
Joint owners should each sign. Trustees, executors and others signing in a
representative capacity should indicate this capacity. An authorized officer
may sign on behalf of a corporation and should indicate the name of the
corporation and his or her capacity.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The By-Laws of Davel Holdings, Inc. ("New Davel") provide that New Davel
shall indemnify and hold harmless, to the full extent authorized or permitted
by the Delaware General Corporation Law, any person who was or is made or is
threatened to be made a party or is otherwise involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that the person, or a person for whom he or she is the
legal representative, is or was a director, officer, employee or agent of New
Davel or is or was serving at the request of New Davel as a director, officer,
employee, fiduciary or agent of another corporation or of a partnership, joint
venture, trust or other enterprise.
Section 145(c) of the Delaware General Corporation Law provides for
"mandatory indemnification" to the extent that a present or former director or
officer of a corporation has been successful on the merits or otherwise in the
defense of any proceeding, or in defense of any claim, issue or matter
therein, against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with such proceeding. Section 145(e) of the
Delaware General Corporation Law provides that expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative, or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall be ultimately determined that he is
not entitled to be indemnified by the corporation as authorized in such
section.
The New Davel By-Laws provide that with respect to proceedings seeking to
enforce rights to indemnification, New Davel shall indemnify a person in
connection with a proceeding initiated by such person generally only if such
proceeding was authorized by the New Davel Board of Directors.
Pursuant to the Delaware General Corporation Law, New Davel may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of New Davel, or is or was serving at the request of New
Davel as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against such person and incurred by such person or on such person's
behalf in any such capacity, or arising out of such person's status as such,
whether or not New Davel would have the power to indemnify such person against
such liability under the By-Laws.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this Registration Statement
or incorporated by reference herein:
<TABLE>
<S> <C>
2.1 Amended and Restated Agreement and Plan of Merger and Reorganization,
dated as of October 22, 1998, by and among Davel Holdings, Inc., Davel
Communications Group, Inc., D Subsidiary, Inc., Miami Merger Corp. and
Peoples Telephone Company, Inc. (Appendix III to Joint Proxy
Statement/Prospectus)
3.1 Restated Certificate of Incorporation of Davel Holdings, Inc. (Appendix IV
to Joint Proxy Statement/Prospectus)
3.2 Restated Bylaws of Davel Holdings, Inc. (Appendix V to Joint Proxy
Statement/Prospectus)
5.1 Opinion of Kirkland & Ellis regarding legality
8.1 Opinion of Kirkland & Ellis regarding federal income tax considerations
8.2 Opinion of Shearman & Sterling regarding federal income tax considerations
21.1 List of Subsidiaries
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Kerber, Eck & Braekel LLP
23.3 Consent of Ernst & Young LLP
23.4 Consent of Ernst & Young LLP
23.5 Consents of Kirkland & Ellis (included in Exhibits 5.1 and 8.1)
23.6 Consent of Shearman & Sterling (included in Exhibit 8.2)
23.7 Consent of Latham & Watkins
23.8 Consent of Rammelkamp, Bradney, Kuster, Fritsche & Lindsay, P.C.
23.9 Consent of Dickstein Shapiro Morin & Oshinsky, LLP
99.1 Opinion of ABN AMRO Incorporated (Appendix I to Joint Proxy
Statement/Prospectus)
99.2 Consent of ABN AMRO Incorporated (included in Exhibit 99.1)
99.3 Opinion of Goldman, Sachs & Co. (Appendix II to Joint Proxy
Statement/Prospectus)
99.4 Consent of Goldman, Sachs & Co.
</TABLE>
(b) No financial statement schedules are required to be filed herewith
pursuant this Item.
II-2
<PAGE>
ITEM 22. UNDERTAKINGS.
(1) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through the use
of a prospectus which is a part of this registration statement, by any person
or party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933, as
amended, and is used in connection with an offering of securities subject to
Rule 415, will be filed as a part of an amendment to the registration
statement and will not be used until such amendment is effective, and that,
for purposes of determining any liability under the Securities Act of 1933, as
amended, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated document by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(4) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(5) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended, each
filing of the Registrant's annual report pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934, as amended (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Securities Exchange Act of 1934, as amended) that is
incorporated by reference in the registration statement shall be deemed to be
a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(6) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy expressed in the Securities Act of 1933, as amended, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Tampa,
Florida, on November 19, 1998.
Davel Holdings, Inc.
/s/ Robert D. Hill
By: _________________________________
Robert D. Hill
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED ON THE DATES INDICATED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David R. Hill, Robert D. Hill, Michael E. Hayes
and Theodore C. Rammelkamp, Jr., and each of them, his or her true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any or all amendments (including post-effective
amendments) to this registration statement (and any registration statement
filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended,
for the offerings which this Registration Statement relates), and to file the
same, with all 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 in and about
the premises, as fully to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or their, or his or her substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ David R. Hill Chairman and Director November 19, 1998
____________________________________
David R. Hill
/s/ Robert D. Hill President, Chief Executive November 19, 1998
____________________________________ Officer and Director
Robert D. Hill (Principal Executive
Officer)
/s/ Michael E. Hayes Senior Vice President, Chief November 19, 1998
____________________________________ Financial Officer and
Michael E. Hayes Director (Principal
Financial and Accounting
Officer)
/s/ F. Philip Handy Director November 19, 1998
____________________________________
F. Philip Handy
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Thomas M. Vitale Director November 19, 1998
____________________________________
Thomas M. Vitale
/s/ A. Jones Yorke Director November 19, 1998
____________________________________
A. Jones Yorke
/s/ Samuel Zell Director November 19, 1998
____________________________________
</TABLE> Samuel Zell
II-5
<PAGE>
EXHIBIT 5.1
[Letterhead of Kirkland & Ellis]
November 20, 1998
Davel Holdings, Inc.
1429 Massaro Boulevard
Tampa, Florida 33619
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
We are issuing this opinion letter in our capacity as special legal counsel
to Davel Holdings, Inc., a Delaware corporation ("Davel"), in connection with
the proposed registration by Davel of shares of Davel common stock, par value
$0.01 per share (the "Common Stock"), pursuant to a Registration Statement
(the "Registration Statement") on Form S-4 filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"). The Common Stock is to be issued to the shareholders of
Davel Communications Group, Inc., an Illinois corporation ("Old Davel"), and
Peoples Telephone Company, Inc., a New York corporation ("Peoples"), pursuant
to an Amended and Restated Agreement and Plan of Merger and Reorganization,
dated as of October 22, 1998, by and among Davel, Old Davel, Peoples, D
Subsidiary, Inc., an Illinois corporation, and Miami Merger Corp., a New York
corporation (the "Merger Agreement"). In addition, Common Stock is being
registered in order to effect the conversion of certain Old Davel stock
options and Peoples stock options into Davel stock options.
In that connection, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate records
and other instruments as we have deemed necessary for the purposes of this
opinion, including (i) the Restated Certificate of Incorporation and the
Restated By-Laws of Davel, (ii) minutes and records of the corporate
proceedings of Davel with respect to the issuance of the Common Stock and
(iii) the Registration Statement.
For purposes of this opinion, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to the originals of all
documents submitted to us as copies and the authenticity of the originals of
all documents submitted to us as copies. We have also assumed the genuineness
of the signatures of persons signing all documents in connection with which
this opinion is rendered, the authority of such persons signing on behalf of
the parties thereto and the due authorization, execution and delivery of all
documents by the parties thereto other than Davel. As to any facts material to
the opinions expressed herein which we have not independently established or
verified, we have relied upon statements and representations of officers and
other representatives of Davel and others.
<PAGE>
Our opinion expressed below is subject to the qualifications that we express
no opinion as to the applicability of, compliance with, or effect of (i) any
bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent
conveyance, moratorium or other similar law affecting the enforcement of
creditors' rights generally and (ii) general principles of equity (regardless
of whether enforcement is considered in a proceeding in equity or at law).
Based upon and subject to the qualifications, assumptions and limitations
set forth herein, we are of the opinion that when (i) the Registration
Statement becomes effective, (ii) the Common Stock has been duly executed and
authenticated in accordance with the provisions of the Merger Agreement and
duly delivered to the shareholders of Old Davel and Peoples in exchange for
their shares of common stock of Old Davel and Peoples, respectively, the
Common Stock will be duly authorized, validly issued and fully paid
obligations of Davel.
We hereby consent to the filing of this opinion with the commission as
Exhibit 5.1 to the Registration Statement. We also consent to the reference to
our firm under the heading "Legal Matters" in the Registration Statement. In
giving this consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Act or the rules and
regulations of the Commission.
This opinion is limited to the specific issues addressed herein, and no
opinion may be inferred or implied beyond that expressly stated herein. We are
admitted to practice law in the State of Illinois and this opinion is based on
the General Corporation Law of the State of Delaware and the federal laws of
the United States of America. We assume no obligation to revise or supplement
this opinion should the present laws of the State of Delaware or the federal
laws of the United States be changed by legislative action, judicial decision
or otherwise.
This opinion is furnished to you in connection with the filing of the
Registration Statement and is not to be used, circulated, quoted or otherwise
relied upon for any other purpose.
Sincerely,
Kirkland & Ellis
2
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF KIRKLAND & ELLIS]
November 20, 1998
Davel Communications Group, Inc.
1429 Massaro Boulevard
Tampa, Florida 33619
Ladies and Gentlemen:
We have acted as special counsel to Davel Communications Group, Inc., an
Illinois corporation (the "Company"), in connection with (i) the proposed
merger (the "Merger") of D Subsidiary, Inc., a Delaware corporation (the
"Sub"), which is an indirect subsidiary of Davel Holdings, Inc., a Delaware
corporation (the "Parent"), that is wholly owned by Davel Financing Company,
L.L.C., a Delaware limited liability company of which the Parent is the sole
member ("Finance"), with and into the Company and (ii) the Registration
Statement on Form S-4 of Parent (the "Registration Statement") relating to the
Merger. The Merger will be effected pursuant to an Amended and Restated
Agreement and Plan of Merger and Reorganization, dated as of October 22, 1998
(the "Merger Agreement"), by and among the Parent, the Sub, the Company,
Peoples Telephone Company, Inc., and Miami Merger Corp., a direct, wholly-
owned subsidiary of Finance. Unless otherwise defined, capitalized terms used
herein have the meaning assigned to them in the Merger Agreement.
In delivering our opinion, we have reviewed the Merger Agreement and the
documents attached as Exhibits thereto and have assumed that the
representations and warranties therein are true and correct and that the
parties have complied with and, if applicable, will comply with the covenants
contained therein. We have reviewed the Joint Proxy Statement/Prospectus of
Parent and Company ("Joint Proxy Statement/Prospectus") (which forms a part of
the Registration Statement) and have assumed that the factual statements
therein are and will remain true, correct and complete. Any variation or
difference in the facts from those set forth either herein or in the
Registration Statement or Joint Proxy Statement/Prospectus may affect the
conclusions stated herein. In addition, we have assumed that representations
will be made by the Parent and the Company in letters to us substantially in
the forms attached hereto and have assumed that such representations will be
true and accurate as of the Davel Effective Time.
Based upon the foregoing, in reliance thereon and subject thereto, and based
upon the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury
Regulations promulgated thereunder, judicial decisions, revenue rulings and
revenue procedures of the Internal Revenue Service, and other administrative
pronouncements, all as in effect on the date hereof, and assuming that the
Merger and related transactions will take place in accordance with the terms
of the Merger Agreement, it is our opinion that:
1. The Merger will be treated for United States federal income tax purposes
as a reorganization qualifying under the provisions of Section 368(a) of
the Code;
2. Each of Parent, Sub and the Company will be a party to the
reorganization within the meaning of Section 368(b);
3. No gain or loss will be recognized by the holders of common stock of the
Company ("Company Common Stock") who exchange all of their Company
Common Stock solely for common stock of the Parent ("Parent Common
Stock") pursuant to the Merger;
4. The aggregate tax basis of the Parent Common Stock received by holders
of Company Common Stock who exchange all of their Company Common Stock
solely for Parent Common Stock pursuant to the Merger will be the same
as the aggregate tax basis of the Company Common Stock surrendered in
exchange therefore; and
5. The holding period of a share of Parent Common Stock received in the
Merger will include the holder's holding period in the Company Common
Stock surrendered in exchange therefor.
<PAGE>
It is also our opinion that each of the discussions in the Joint Proxy
Statement/Prospectus under the captions "SUMMARY--Federal Income Tax
Considerations" and "THE TRANSACTION--Federal Income Tax Considerations,"
insofar as each relates to the Merger as defined herein is a fair and accurate
summary of such matters. We express no opinion (i) as to whether such
descriptions address all of the United States federal income tax consequences
of the Merger that may be applicable to the Company, the Parent or any
particular Company stockholder or (ii) as to the United States federal, state,
local, foreign or other tax consequences, other than as set forth in the Joint
Proxy Statement/Prospectus under the captions "SUMMARY--Federal Income Tax
Considerations" and "THE TRANSACTION--Federal Income Tax Considerations."
There can be no assurance that contrary positions may not be asserted by the
Internal Revenue Service.
This opinion does not address any tax consequences that might result to a
stockholder in light of its particular circumstances, such as stockholders who
are insurance companies or tax-exempt entities, holders who acquired the stock
of the Parent or the Company pursuant to the exercise of an employee stock
option or right or otherwise as compensation, and holders who hold Parent
Common Stock or Company Common Stock as part of a hedge, straddle or
conversion. In addition, this opinion does not tax consequences of the Merger
under applicable foreign, state or local laws.
No opinion is expressed as to any matter not specifically addressed above,
including the accuracy of the representations or reasonableness of the
assumptions relied upon by us in rendering the opinion set forth above. To the
extent any of the representations, warranties, statements and assumptions
material to our opinion and upon which we have relied are not complete,
correct, true and accurate in all material respects at all relevant times, our
opinion would be adversely affected and should not be relied upon. Our opinion
is based on current United States federal income tax law and administrative
practice; no assurance can be given that future legislative, judicial or
administrative changes would not adversely affect the accuracy of the
conclusions stated herein. By rendering this opinion, we do not undertake to
advise you as to any future changes in United States federal income tax law or
administrative practice that may affect our opinion unless we are specifically
retained to do so.
This opinion has been delivered to you for the purposes set forth in Section
8.02(d) of the Merger Agreement and for the purpose of inclusion as an exhibit
to the Joint Proxy Statement/Prospectus. This opinion may not be distributed
or otherwise made available to any other person or entity without prior
written consent; however, we consent to the filing of this opinion as an
exhibit to the Joint Proxy Statement/Prospectus and to the reference to
Kirkland & Ellis under the captions "THE TRANSACTION--Federal Income Tax
Considerations" and "LEGAL MATTERS" in the Joint Proxy Statement/Prospectus.
Very truly yours,
Kirkland & Ellis
2
<PAGE>
EXHIBIT 8.2
[LETTERHEAD OF SHEARMAN & STERLING]
November 20, 1998
MERGER OF MIAMI MERGER CORP.
WITH AND INTO
PEOPLES TELEPHONE COMPANY, INC.
Ladies and Gentlemen:
We have acted as special counsel to Peoples Telephone Company, Inc., a New
York corporation (the "Company") in connection with (i) the proposed merger
(the "Merger") of Miami Merger Corp., a New York corporation (the "Sub") which
is a wholly-owned subsidiary of Davel Holdings Inc. (the "Parent") through
Parent's single-member limited liability company Davel Financing Company,
L.L.C. ("Finance"), with and into the Company and (ii) the Registration
Statement on Form S-4 of Parent (the "Registration Statement") relating to the
Merger. The Merger will be effected pursuant to an Amended and Restated
Agreement and Plan of Merger and Reorganization, dated as of October 22, 1998
(the "Merger Agreement"), among the Parent, the Sub, the Company, Davel
Communications Group, Inc., which owns all of Parent's outstanding stock, and
D Subsidiary, Inc, a wholly-owned, directly held subsidiary of Finance. Unless
otherwise defined, capitalized terms used herein have the meaning assigned to
them in the Merger Agreement.
In delivering our opinion, we have reviewed the Merger Agreement and the
documents attached as Exhibits thereto and have assumed that the
representations and warranties therein are true and correct and that the
parties have complied with and, if applicable, will comply with the covenants
contained therein. We have reviewed the Joint Proxy Statement/Prospectus of
Parent and Company ("Joint Proxy Statement/Prospectus") (which forms a part of
the Registration Statement) and have assumed that the factual statements
therein are and will remain true, correct and complete. Any variation or
difference in the facts from those set forth either herein or in the
Registration Statement or Joint Proxy Statement/ Prospectus may affect the
conclusions stated herein. In addition, we have assumed that representations
will be made by the Parent and the Company in letters to us substantially in
the forms attached hereto and have assumed that such representations will be
true and accurate as of the Peoples Effective Time.
Based upon the foregoing, in reliance thereon and subject thereto, and based
upon the Internal Revenue Code of 1986, as amended (the "Code"), the Treasury
Regulations promulgated thereunder, judicial decisions, revenue rulings and
revenue procedures of the Internal Revenue Service, and other administrative
pronouncements, all as in effect on the date hereof, and assuming that the
Merger and related transactions will take place in accordance with the terms
of the Merger Agreement, it is our opinion that:
1. The Merger will be treated for United States federal income tax purposes
as a reorganization qualifying under the provisions of Section 368(a) of
the Code;
2. Each of Parent, Sub and Company will be a party to the reorganization
within the meaning of Section 368(b);
3. No gain or loss will be recognized by the holders of common stock of
Company ("Company Common Stock") who exchange all of their Company
Common Stock solely for common stock of Parent ("Parent Common Stock")
pursuant to the Merger (except with respect to cash received in lieu of
a fractional share interest in Parent Common Stock);
4. The aggregate tax basis of the Parent Common Stock received by holders
of Company Common Stock who exchange all of their Company Common Stock
solely for Parent Common Stock pursuant to the Merger will be the same
as the aggregate tax basis of the Company Common Stock surrendered in
exchange therefore (reduced by any basis amount allocable to the
fractional share interest in Parent Common Stock for which cash is
received);
<PAGE>
5. Cash received by a holder of Company Common Stock in lieu of a
fractional share interest in Parent Common Stock will be treated as
received in redemption of such fractional share interest, and a holder
of Company Common Stock should generally recognize capital gain or loss
for federal income tax purposes measured by the difference between the
amount of cash received and the portions of the tax basis of the share
of Company Common Stock allocable to such fractional share interest; and
6. The holding period of a share of Parent Common Stock received in the
Merger (including fractional share interests deemed received and
redeemed as described above) will include the holder's holding period in
the Company Common Stock surrendered in exchange therefor.
It is also our opinion that each of the discussions in the Joint Proxy
Statement/Prospectus under the captions "SUMMARY--Federal Income Tax
Considerations" and "THE TRANSACTION--Federal Income Tax Considerations,"
insofar as each relates to the Merger as defined herein is a fair and accurate
summary of such matters. We express no opinion (i) as to whether such
descriptions address all of the United States federal income tax consequences
of the Merger that may be applicable to the Company, the Parent or any
particular Company stockholder or (ii) as to the United States federal, state,
local, foreign or other tax consequences, other than as set forth in the Joint
Proxy Statement/Prospectus under the captions "SUMMARY--Federal Income Tax
Considerations" and "THE TRANSACTION--Federal Income Tax Considerations."
There can be no assurance that contrary positions may not be asserted by the
Internal Revenue Service.
This opinion does not address any tax consequences that might result to a
stockholder in light of its particular circumstances, such as stockholders who
are insurance companies or tax-exempt entities, holders who acquired the stock
of Parent or Company pursuant to the exercise of an employee stock option or
right or otherwise as compensation, and holders who hold Parent Common Stock
or Company Common Stock as part of a hedge, straddle or conversion. In
addition, this opinion does not tax consequences of the Merger under
applicable foreign, state or local laws.
No opinion is expressed as to any matter not specifically addressed above,
including the accuracy of the representations or reasonableness of the
assumptions relied upon by us in rendering the opinion set forth above. To the
extent any of the representations, warranties, statements and assumptions
material to our opinion and upon which we have relied are not complete,
correct, true and accurate in all material respects at all relevant times, our
opinion would be adversely affected and should not be relied upon. Our opinion
is based on current United States federal income tax law and administrative
practice; no assurance can be given that future legislative, judicial or
administrative changes would not adversely affect the accuracy of the
conclusions stated herein. By rendering this opinion, we do not undertake to
advise you as to any future changes in United States federal income tax law or
administrative practice that may affect our opinion unless we are specifically
retained to do so.
This opinion has been delivered to you for the purposes set forth in Section
8.03(c) of the Merger Agreement and for the purpose of inclusion as an exhibit
to the Joint Proxy Statement/Prospectus. This opinion may not be distributed
or otherwise made available to any other person or entity without prior
written consent; however, we consent to the filing of this opinion as an
exhibit to the Joint Proxy Statement/Prospectus and to the reference to
Shearman & Sterling under the captions "THE TRANSACTION--Federal Income Tax
Considerations" and "LEGAL MATTERS" in the Joint Proxy Statement/Prospectus.
Very truly yours,
Shearman & Sterling
2
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF DAVEL HOLDINGS, INC.
The following is a list of subsidiaries of Davel Holdings, Inc. (the
"Company"), assuming the completion of the transactions contemplated by the
Joint Proxy Statement/Prospectus. The common stock of all the corporations
listed below are wholly owned, directly or indirectly, by the Company. If
indented, the corporation is a wholly-owned subsidiary of the corporation under
which it is listed.
<TABLE>
<CAPTION>
NAME OF CORPORATION JURISDICTION OF INCORPORATION
- ------------------- -----------------------------
<S> <C>
Davel Holdings, Inc.............................. Delaware
Davel Financing Company, L.L.C................. Delaware
Davel Communications Group, Inc.............. Illinois
Telaleasing Enterprises, Inc............... Illinois
T.R.C.A., Inc.............................. Illinois
DavelTel, Inc.............................. Illinois
Davel Mexico, Ltd.......................... Illinois
Communications Central Inc. (d/b/a CCI).... Georgia
Communications Central of Georgia, Inc..... Georgia
Central Payphone Services. Inc............. Georgia
Invision Telecom, Inc...................... Georgia
Adtec Communication, Inc................... Florida
Interstate Communications, Inc............. Florida
Davel de Mexico S. de R.L. de C.V.......... Mexico
Telefonos Publicos de Mexico, S. de R.L. de
C.V....................................... Mexico
Peoples
Peoples Telephone Company, Inc............. South Carolina
Campus Telephone, Inc. (d/b/a Telink
Inc.)..................................... Texas
PTC Cellular, Inc.......................... Delaware
Silverado Communications, Inc.............. Colorado
Southwest Inmate Pay Telephone Systems,
Inc....................................... Texas
PTC Global Link, Inc....................... Florida
PTC Security Systems, Inc.................. Florida
Telink, Inc................................ Texas
Telink Telephone Systems, Inc.............. Georgia
Peoples Acquisition Corp................... Pennsylvania
PT Merger Corp. ............................... Ohio
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement of our report dated March 6, 1998 included in Davel
Communications Group, Inc.'s Form 10-K for the year ended December 31, 1997
and to all references to our Firm included in this registration statement.
/s/ Arthur Andersen LLP
St. Louis, Missouri
November 19, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement of our report dated March 14, 1997, included in Davel
Communication Group, Inc.'s Form 10-K for the year ended December 31, 1997 and
to all references to our Firm included in this registration statement.
Kerber, Eck & Braeckel LLP
Springfield, Illinois
November 17, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 27, 1998, except for the second and third
paragraphs of Note 20, as to which the date is October 27, 1998, and the
fourth paragraph of Note 1, as to which the date is November 6, 1998, with
respect to the consolidated financial statements of Peoples Telephone Company,
Inc. included in the Joint Proxy Statement/Prospectus of Davel Communications
Group, Inc. and Peoples Telephone Company, Inc. which is made part of the
Registration Statement (Form S-4) for the registration of shares of Davel
Holdings, Inc. common stock.
/s/ Ernst & Young LLP
Miami, Florida
November 18, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated September 19, 1997, with respect to the
consolidated financial statements of Communications Central, Inc. included in
the Joint Proxy Statement/Prospectus of Davel Communications Group, Inc. and
Peoples Telephone Company, Inc. that is made a part of the Registration
Statement (Form S-4) of Davel Holdings, Inc. for the registration of shares of
Davel Holdings, Inc.'s common stock.
/s/ Ernst & Young LLP
Atlanta, Georgia
November 19, 1998
<PAGE>
EXHIBIT 23.7
CONSENT OF LATHAM & WATKINS
We hereby consent to the reference to us and the summarization of our
opinion in the first sentence of the first full paragraph on page F-71, which
sentence is set forth in Note 19, "Provision for Dial-Around Compensation
Adjustment," of the Peoples Telephone Company, Inc. Notes to Consolidated
Financial Statements contained in the Joint Proxy Statement/Prospectus which
constitutes part of the Registration Statement on Form S-4 relating to the
proposed merger of Davel Communications Group, Inc. and Peoples Telephone
Company, Inc.
Latham & Watkins
Washington, D.C.
November 18, 1998
<PAGE>
EXHIBIT 23.8
CONSENT OF RAMMELKAMP, BRADNEY, KUSTER, FRITSCHE & LINDSAY, P.C.
We hereby consent to the reference to our firm in note 16 to Davel
Communication Group, Inc.'s financial statements for the twelve-month period
ended December 31, 1997 and in note 7 to Davel Communications Group, Inc.'s
financial statements for the nine-month period ended September 30, 1998. In
giving this consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of
1933, as amended, or the rules and regulations of the Securities and Exchange
Commission.
Rammelkamp, Bradney, Kuster,
Fritsche & Lindsay, P.C.
Jacksonville, Illinois
November 19, 1998
<PAGE>
EXHIBIT 23.9
CONSENT OF DICKSTEIN SHAPIRO MORIN & OSHINSKY, LLP
We hereby consent to the reference to us in Note 3 to the December 31, 1997
Consolidated Financial Statements of Communications Central, Inc. contained in
the Registration Statement on Form S-4 of Davel Holdings, Inc. filed with the
Securities and Exchange Commission in connection with the acquisition of
Peoples Telephone Company, Inc. In giving this consent we do not thereby admit
that we are in the category of persons whose consent is required under Section
7 of the Securities and Exchange Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission.
Dickstein Shapiro Morin & Oshinsky,
LLP
/s/ Matthew G. Maloney
-------------------------------------
By: Matthew G. Maloney
Its: Partner
Dated: November 5, 1998
<PAGE>
[LETTERHEAD OF GOLDMAN, SACHS & CO.]
EXHIBIT 99.4
PERSONAL AND CONFIDENTIAL
November 19, 1998
Board of Directors
Peoples Telephone Company, Inc.
2300 N.W. 89th Place
Miami, Florida 33172
Re:
Registration Statement of Davel Holdings, Inc. relating to shares of
common stock, par value $0.01 per share of Davel Holdings, Inc. being
registered in connection with the transactions contemplated by the
Amended and Restated Agreement and Plan of Merger and Reorganization,
dated as of July 5, 1998, and amended and restated as of October 22,
1998, by and among Davel Holdings, Inc., Davel Communications Group,
Inc., D Subsidiary, Inc., Miami Merger Corp. and Peoples Telephone
Company, Inc.
Gentlemen:
Reference is made to our opinion letter dated July 5, 1998 with respect to
the fairness from a financial point of view to the holders of the outstanding
shares of Common Stock, par value $0.01 per share (the "Shares"), of Peoples
Telephone Company, Inc. ("Peoples") of the exchange ratio of 0.235 shares of
Common Stock, par value $0.01 per share (the "Davel Shares"), of Davel
Communications Group, Inc. ("Davel"), to be received for each Share by such
holders pursuant to the Agreement and Plan of Merger, dated as of July 5,
1998, by and among Davel Holdings, Inc. ("Holdings"), Davel and Peoples. We
understand that pursuant to the Amended and Restated Agreement and Plan of
Merger and Reorganization, dated as of July 5, 1998, and amended and restated
as of October 22, 1998, by and among Holdings, Davel, D Subsidiary, Inc.,
Miami Merger Corp. and Peoples, shares of Common Stock, par value $0.01 per
share, of Holdings will be received by holders of Shares in lieu of Davel
Shares.
The foregoing opinion letter is provided for the information and assistance
of the Board of Directors of Peoples in connection with its consideration of
the transaction contemplated therein and is not to be used, circulated, quoted
or otherwise referred to for any other purpose, nor is it to be filed with,
included in or referred to in whole or in part in any registration statement,
proxy statement or any other document, except in accordance with our prior
written consent. We understand that Peoples has determined to include our
opinion in the above-referenced Registration Statement.
In that regard, we hereby consent to the reference to the opinion of our
Firm under the captions "SUMMARY--Board Recommendations to Shareholders--
Peoples," "PROPOSAL NO. 1: THE TRANSACTION--Recommendation of the Peoples
Board of Directors--Reasons of Peoples for the Transaction" and "--Fairness
Opinion of Peoples Financial Advisor" and to the inclusion of the foregoing
opinion in the Joint Proxy Statement/Prospectus included in the above-
mentioned Registration Statement. In giving such consent, we do not thereby
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933 or the rules and regulations of
the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Goldman, Sachs & Co.
Goldman, Sachs & Co.
