<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: September 30, 1999 Commission File Number: 0-22610
DAVEL COMMUNICATIONS, INC.
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 37-1064777
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. No.)
10120 WINDHORST ROAD, TAMPA, FL 33619
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant`s telephone number: (813) 628-8000
________________________
Indicate by check mark whether the Registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
------- ------
As of November 8, 1999, the number of shares outstanding of the Registrant`s
Common Stock was 10,846,176.
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except per share and share data)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1999 1998
------------- ------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 14,137 $ 17,162
Restricted cash - 790
Trade accounts receivable, net of allowance
for doubtful accounts of $9,248 and $5,383,
respectively 24,523 30,838
Other current assets 8,752 9,698
--------- ---------
Total current assets 47,412 58,488
PROPERTY AND EQUIPMENT 113,982 124,095
LOCATION CONTRACTS 20,663 34,252
GOODWILL 6,725 47,458
OTHER ASSETS 6,564 8,725
--------- ---------
Total assets $ 195,346 $ 273,018
========= =========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt and
obligations under capital leases $ 21,680 $ 11,525
Accounts payable and accrued liabilities 25,986 34,393
--------- ---------
Total current liabilities 47,666 45,918
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES 215,272 225,451
OTHER LONG-TERM LIABILITIES 416 -
--------- ---------
SHAREHOLDERS' (DEFICIT) EQUITY
Preferred stock - $.01 par value, 1,000,000
shares authorized, none issued and
outstanding - -
Common stock - $.01 par value, 50,000,000
shares Authorized, 10,731,060 and 10,536,155
shares issued and outstanding, respectively 107 105
Additional paid-in capital 127,116 126,325
Accumulated deficit (195,231) (124,781)
--------- ---------
Total shareholders' (deficit) equity (68,008) 1,649
--------- ---------
Total liabilities and shareholders'
(deficit) equity $ 195,346 $ 273,018
========= =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
2
<PAGE>
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 and 1998
(In thousands, except per share and share data)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Revenues
Coin calls $ 28,466 $ 34,692
Non-coin calls 18,081 19,498
----------- ----------
Total revenues 46,547 54,190
----------- ----------
Costs and expenses
Telephone charges 6,772 12,020
Commissions 10,287 12,222
Field operation costs 11,654 13,467
Depreciation and amortization 9,126 9,766
Asset valuation charge and other charges 51,224 -
Selling, general and administrative 5,773 5,132
----------- -----------
Total operating costs and expenses 94,836 52,607
----------- -----------
Operating (loss) income (48,289) 1,583
Interest expense (5,859) (5,294)
Other (319) (192)
----------- -----------
Loss from operations before income taxes (54,467) (3,903)
Income tax benefit - -
----------- -----------
Net loss (54,467) (3,903)
Preferred stock dividend and cost accretion - (363)
----------- ------------
Loss applicable to common shareholders $ (54,467) $ (4,266)
=========== ===========
Basic and diluted loss per share $ (5.11) $ (.44)
=========== ===========
Weighted average shares outstanding 10,648,324 9,590,482
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 and 1998
(in thousands, except per share and share data)
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Revenues:
Coin calls $ 86,285 $ 100,652
Non-coin calls 53,782 54,796
----------- ----------
Total revenues 140,067 155,448
----------- ----------
Cost and Expenses:
Telephone charges 29,046 36,043
Commissions 30,978 35,478
Field operation costs 39,795 38,786
Depreciation and amortization 26,448 28,414
Asset valuation charge and other charges 51,224 825
Selling, general and administrative 15,547 14,798
----------- ----------
Total operating costs and expenses 193,038 154,344
----------- ----------
Operating (loss) income (52,971) 1,104
Interest expense (17,236) (15,998)
Other (148) 151
----------- ----------
Loss from operations before income taxes (70,355) (14,743)
Income tax benefit - (1,456)
----------- ----------
Net loss $ (70,355) $ (13,287)
Preferred stock dividend and cost accretion (95) (1,300)
----------- ----------
Loss applicable to common shareholders $ (70,450) $ (14,587)
=========== ==========
Basic and diluted loss per share $ (6.66) $ (1.65)
=========== ==========
Weighted average shares outstanding 10,574,012 8,841,472
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 and 1998
(in thousands)
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (70,355) $ (13,287)
Adjustments to reconcile net loss to cash flows
from operating activities:
Gain on sale of property and equipment - (36)
Depreciation and amortization 26,448 28,414
Amortization of deferred financing costs 719 393
Deferred income taxes - 192
Asset valuation charge and other charges 51,224 825
Stock based compensation 786
Changes in assets and liabilities, net of
effects from acquisitions:
Restricted Cash 790
Accounts receivable 6,315 (9,233)
Notes receivable - 132
Other (2,205) (5,895)
Accounts payable and accrued liabilities (9,517) 368
---------- ---------
Net cash flows provided by operating activities 4,205 1,873
---------- ---------
Cash flows from investing activities
Capital expenditures (4,551) (12,321)
Proceeds from sale of property and equipment 2,140 51
Increase in other investing assets - (1,606)
Purchase of payphone assets, net of cash acquired (5,123) (115,951)
---------- ---------
Net cash flows used in investing activities (7,534) (129,827)
---------- ---------
Cash flows from financing activities
Proceeds from long-term debt 11,500 129,000
Payments on long-term debt (10,718) (44,522)
Principal payments under capital lease obligations (390) (577)
Repurchase of preferred stock rights (95) -
Increase in other financing activities - 28,708
Issuance of common stock through stock options and warrants 7 8
---------- ---------
Net cash flows provided by financing activities 304 112,617
---------- ---------
Net decrease in cash and cash equivalents (3,025) (15,337)
Cash and cash equivalents, beginning of period 17,162 25,401
---------- ---------
Cash and cash equivalents, end of period $ 14,137 $ 10,064
========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
Davel Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
(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, 1999
and 1998, 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, 1998 and 1997
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, 1998. The results of operations for the three
and nine month periods ended September 30, 1999 and 1998 are not necessarily
indicative of the results for the full year.
1. DESCRIPTION OF BUSINESS
-----------------------
Davel Communications, Inc. (the "Company" or "Davel") was incorporated on June
9, 1998 under the laws of the State of Delaware to effect the merger, on
December 23, 1998 (the "Peoples Merger"), of Davel Communications Group, Inc.
("Old Davel") with Peoples Telephone Company, Inc. ("Peoples Telephone"). As a
result of the Peoples Merger, the Company is the largest independent payphone
service provider in the United States, with approximately twice the number of
payphones as the second largest independent payphone service provider. The
Company operates in a single business segment within the telecommunications
industry, operating, servicing and maintaining a system of payphones in 43
states and the District of Columbia. The Company's headquarters is located in
Tampa, Florida, with divisional and administrative facilities in 30 dispersed
geographic locations.
Pursuant to an Agreement and Plan of Merger dated July 5, 1998 as amended and
restated on October 22, 1998, the Peoples Merger was consummated on December 23,
1998. The stock-for-stock transaction was approved by the shareholders of the
two companies, with the Company continuing as the surviving corporation in the
merger. Under the merger agreement, each outstanding share of Peoples Telephone
common stock was converted into the right to receive 0.235 common shares of the
Company and resulted in the issuance of 3,812,810 shares of common stock to the
common shareholders of Peoples Telephone. In addition, the outstanding shares
of Peoples Telephone's Series C Preferred Stock and accrued Preferred Stock
dividends were converted into 892,977 shares of common stock. The Peoples
Merger transaction has been accounted for as a pooling of interests, and
accordingly, the financial statements of the Company have been restated to
reflect the combined financial position and operating results as if the
companies had operated as one entity since inception.
6
<PAGE>
For periods preceding the merger, there were no intercompany transactions that
required elimination from the combined consolidated results of operations.
Selected financial information for the combining entities included in the
consolidated statement of operations for the periods ended September 30, 1998 is
as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
<S> <C> <C>
Total revenues
Davel $25,173 $ 69,183
Peoples 29,017 86,265
------- --------
Combined $54,190 $155,448
======= ========
Net loss applicable to common shareholders
Davel $ (754) $ (2,724)
Peoples (3,512) (11,863)
------- --------
Combined $(4,266) $(14,587)
======= ========
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
------------------------------------------
Reclassification
Certain reclassifications have been made to conform to the 1999
presentation.
3. ACQUISITION
-----------
On February 3, 1998, the Company completed its acquisition of Communications
Central Inc. (the "CCI Acquisition") at a price of $10.50 per share in cash, or
approximately $70.2 million in the aggregate, assumed CCI's outstanding debt of
$36.7 million and incurred $2.2 million in transaction costs. The CCI
Acquisition has been accounted for by the purchase method, and accordingly the
results of operations are included in the Company's consolidated statement of
operations from the date of acquisition. Goodwill associated with the
acquisition was being amortized over fifteen years using straight-line
amortization. The allocation of the purchase price of the CCI Acquisition is
summarized as follows:
<TABLE>
<S> <C>
Working capital $ 8,892
Property and equipment, net 46,119
Goodwill 42,541
Identifiable intangible assets 11,565
--------
$109,117
========
</TABLE>
7
<PAGE>
4. LONG TERM DEBT
--------------
On April 8, 1999, the Company and the Lenders agreed to the First Amendment to
Credit Agreement and Consent and Waiver (the "First Amendment") which waived
compliance, for the fiscal quarter ending March 31, 1999, with the financial
covenants set forth in the Senior Credit Facility. In addition, the First
Amendment waived any event of default related to two small acquisitions made by
the Company in the first quarter of 1999, and waived the requirement that the
Company deliver annual financial statements to the Lenders within 90 days of
December 31, 1998, provided that such financial statements were delivered no
later than April 15, 1999. The First Amendment contained amendments that
provided for the following:
. amendment of the applicable percentages for Eurodollar Loans for the period
between April 1, 1999 and June 30, 2000 at each pricing level to 0.25% higher
than those in the previous pricing grid
. prepayment of debt from receipt of dial-around compensation accounts
receivable related to the period November 1996 through October 1997
. further limitations on permitted acquisitions as defined in the Credit
Agreement through June 30, 2000
. during the period April 1, 1999 to June 30, 2000, required lenders consent
for the making of loans or the issuance of letters of credit if the sum of
revolving loans outstanding plus letter of credit obligations outstanding
exceeds $50.0 million
. the introduction of a new information covenant to provide certain operating
data to the Lenders on a monthly basis
. increases in the maximum allowable ratio of funded debt to EBITDA through the
quarter ended June 30, 2000
. decreases in the minimum allowable interest coverage ratio through the
quarter ended June 30, 2000
. decreases in the minimum allowable fixed charge coverage ratio through the
quarter ended June 30, 2000
The Company believes that it is probable that it will comply with the loan
covenants for the next twelve months and, as such, has not classified the
obligations under the Senior Credit Facility as current liabilities.
The First Amendment also limits capital expenditures and requires the payment of
an amendment fee equal to each Lender's commitment multiplied by 0.35%.
In connection with the provisions of its Senior Credit Facility and the
Company's overall interest rate management objectives, the Company utilizes
derivative financial instruments to reduce its exposure to market risks from
significant increases in interest rates. The Company's strategy is to purchase
interest rate swaps, collars and caps from large financial institutions that in
the aggregate maintain notional amounts exceeding 40% of the Company's
outstanding long-term debt balance to limit the impact of increases in interest
rates on the Company's variable rate long-term debt. As of September 30, 1999,
the Company has two interest rate swap agreements with an aggregate notional
amount of approximately $22 million with a termination date of March 2001. The
8
<PAGE>
interest rate swaps require the Company to pay fixed rates of 5.9% in exchange
for variable rate payments based on the U.S. three month LIBOR (5.51% as of
September 30, 1999). Interest rate differentials are paid or received every
three months and are recognized as adjustments to interest expense.
As of September 30, 1999, the Company has interest rate cap agreements with an
aggregate notional amount of $40 million that terminate in March 2000. The
interest rate cap agreements require premium payments to the counterparty based
on the notional amount of the contract that are capitalized and amortized to
interest expense over the life of the contract. These agreements entitle the
Company to receive quarterly payments from the counterparties for amounts, if
any, by which the U.S. three month LIBOR rate exceeds 7%. In addition, the
Company entered into an interest rate collar agreement with a financial
institution that terminates in February 2002. The notional amount of the
interest rate collar is $25 million and the agreement has a cap rate of 7% and a
floor rate of 4.8% based on the U.S. one month LIBOR rate.
The Company does not hold or issue derivative financial instruments for trading
purposes. The Company is exposed to credit risk in the event of nonperformance
by the counterparties; however, the Company does not anticipate nonperformance
by any of its counterparties. The carrying amount and fair value of these
contracts are not significant.
5. ASSET VALUATION AND OTHER CHARGES
---------------------------------
During the three months ended September 30, 1999, the Company recorded a $48.9
million charge for impaired goodwill and certain other identifiable intangibles
related to the 1998 CCI acquisition. The charge was based on a review of long-
lived assets and intangibles in connection with the provisions of the Statement
of Financial Accounting Standards No. 121. The Company considered continued
operating losses and lower cash flow than expected related to the payphones
acquired in the CCI Acquisition to be the primary indicator of potential
impairment. Based on the Company's estimate of discounted future cash flows, the
carrying values of these assets were written down to the Company's estimate of
fair value. Considerable management judgement is necessary to estimate
discounted future cash flows.
During the three months ended September 30, 1999, the Company sold the former
corporate offices of Peoples Telephone in Miami, Florida for approximately $2.2
million and recognized a loss of approximately $1.0 million. This item is
classified within Asset valuation and other charges in the consolidated
statement of operations for the three and nine months ended September 30, 1999.
The Asset valuation charge also includes approximately $1.3 million for the
disposal of fixed assets.
In connection with the Peoples Merger, the Company recognized non-recurring
costs of $10,814 in 1998. These costs included legal fees, investment banking
fees, accounting fees and change of control payments. In addition, the Company
recognized restructuring costs of $4,325 related to the Peoples Merger and other
restructurings. These costs were composed
9
<PAGE>
of payments incurred in connection with early lease terminations, facility
closing costs, a writedown of the value of the former Peoples headquarters and
employee termination benefits for 143 excess field operations and administrative
personnel. The following table summarizes reserves utilized during the quarter
ended September 30, 1999.
<TABLE>
<CAPTION>
Facility Employee Merger
Closing Termination Closing
Costs Costs Other Costs Total
------- ----------- ----- ------- -----
<S> <C> <C> <C> <C> <C>
Non-recurring and
restructuring charge at
June 30, 1999 $ 635 $ 0 $ 0 $ 0 $ 635
Utilized during quarter
ended September 30, 1999 (551) 0 0 0 (551)
------------------------------------------------
Remaining reserve at
September 30, 1999 $ 84 $ - $ - $ - $ 84
====== ======= === ====== =====
</TABLE>
A non-recurring charge of approximately $1.7 million relating to the departure
of the Company's former Chief Executive Officer, as well as certain other
executives of the Company, was recorded during the three months ended September
30, 1999, and is classified within selling, general, and administrative
expenses. All payments required under the related agreements were made through
issuance of the Company's common stock, with approximately $0.8 million made
during the quarter and approximately $0.9 million made primarily in October
1999.
6. 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
"Telecommunications 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
10
<PAGE>
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
were 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, was to be 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.
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.
11
<PAGE>
In response to the Court's second remand, the FCC conducted further proceedings
and sought additional comment from interested parties to address the relevant
issues posed by the Court. On February 4, 1999, the FCC released its Third
Report and Order, and Order on Reconsideration of the Second Report and Order
(the "1999 Payphone Order"), in which the FCC abandoned its efforts to derive a
"market-based" default dial-around compensation rate and instead adopted a
"cost-based" rate of $0.24 per dial-around call. This new rate became effective
April 21, 1999, and will serve as the default rate through January 31, 2002. The
new rate will also be applied retroactively to the period beginning on October
7, 1997, less a $0.002 amount to account for FLEX ANI payphone tracking costs,
for a net compensation rate of $0.238 per call. The 1999 Payphone Order
deferred a final ruling on the interim period (November 7, 1996 to October 6,
1997) treatment to a later, as yet unreleased, order, however, it appears from
the 1999 Payphone Order that the $0.238 per call rate will also be applied to
the initial interim period from November 7, 1996 to October 6, 1997. Upon
establishment of the interim period rate, the FCC has further ruled that a true-
up will be made for all payments or credits (with applicable interest) due and
owing between the IXCs and the PSPs, including Davel, for the payment period
commencing on November 7, 1996 through the effective date of the new $0.24 per
call rate.
Subsequent to entry of the 1999 Payphone Order by the FCC, several parties have
filed petitions for administrative reconsideration by the FCC and judicial
review by the U.S. Court of Appeals for the District of Columbia Circuit,
seeking to modify certain provisions of the 1999 Payphone Order. The primary
thrust of these petitions is to have the Court or the FCC increase or decrease
the dial around compensation rate prescribed in the 1999 Payphone Order. The
petitions are presently pending and awaiting further action by the Court and the
FCC, with a decision expected to occur sometime during the first quarter of
2000. While the Company believes that a further reduction in the dial around
rate is unlikely as a result of these proceedings, the Company is currently
unable to predict their outcome with any degree of certainty.
The Company recorded dial-around compensation revenue of approximately $10.5
million, $31.2 million, $9.3 million and $26.8 million for the three and nine-
month periods ended September 30, 1999 and 1998, 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 $31.18 per payphone per month and
the Company, based on the information available to it, does not believe that it
is reasonably possible that the amount will be materially less than $31.18 per
payphone per month. While the amount of $0.238 per call constitutes the
Company's position of the currently applicable 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 $0.238 per call. If the level of fair compensation is ultimately
determined to be an amount less than $0.238 per call, such determination could
12
<PAGE>
result in a material adverse impact on the Company's results of operations and
financial position.
13
<PAGE>
7. COMPREHENSIVE LOSS
------------------
For the quarters ended September 30, 1999 and 1998, comprehensive loss was
$54,467 and $4,276, respectively. For the nine months ended September 30, 1999
and 1998, comprehensive loss was $70,355 and $14,150 respectively. The
Company's adjustment to comprehensive loss consists solely of unrealized losses
on the Company's available-for-sale securities.
8. EARNINGS PER SHARE:
-------------------
For the quarters ended September 30, 1999 and 1998, the treasury stock method
was used to determine the dilutive effect of the options and warrants on
earnings per share data. Diluted earnings per share is equal to basic earnings
per share since the exercise of outstanding options and warrants would be anti-
dilutive for all periods presented.
9. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
The Financial Accounting Standards Board recently issued SFAS No. 133 Accounting
for Derivative Instruments and Hedging Activities, which requires that all
derivatives be recognized as either assets or liabilities in the statement of
financial position at fair value unless specific hedge criteria are met. In June
1999, the FASB issued SFAS No. 137 "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133".
SFAS No. 137 delays the effective date of SFAS No. 133 for one year, to fiscal
years beginning after June 15, 2000 and thus the Company will adopt SFAS No. 133
at that time. Adoption of this statement is not expected to significantly
impact the Company's consolidated financial position, results of operations or
cash flows.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes thereto appearing
elsewhere herein.
Certain of the statements contained below are forward-looking statements
(rather than historical facts) that are subject to risks and uncertainties that
could cause actual results to differ materially from those described in the
forward-looking statements.
General
On December 23, 1998, the Company and Peoples Telephone merged in a
transaction accounted for as a pooling-of-interests. As such, the results of
both companies have been restated as if they had been combined for all periods
presented.
On February 3, 1998 the Company completed its acquisition of Communications
Central Inc. ("CCI") in a transaction accounted for by the purchase method, and
accordingly the results of operations of CCI are included in the Company's
consolidated statement of operations from the date of acquisition.
During the third quarter of 1999, the Company derived its revenues from two
principal sources: coin calls and non-coin calls. Coin calls represent calls
paid for by callers with coins deposited in the payphones. Coin call revenues
are recorded in the amount of coins collected from the payphones.
Non-coin calls made from the Company's payphones generate revenues in an
amount that depends upon whether the Company or a long distance company handles
the call. If the non-coin call is handled by the Company through its switch or
an "unbundled" services arrangement, the Company recognizes non-coin revenues
equal to the total amount charged for the call. Under an unbundled services
arrangement, the Company performs certain functions necessary to service non-
coin calls, uses the long distance company's switching equipment and its other
services on an as-needed basis, and pays the long distance company on an
unbundled basis for the operator services actually used to complete these calls.
If the non-coin call is handled by a long distance company on a commission
basis, the Company generally recognizes revenues in an amount equal to the
commission on that call paid to the Company by the long distance company. During
the second quarter, the Company converted certain non-coin calls placed from a
majority of its payphones that were being carried by its switch or unbundled
services arrangements to the Sprint network. Under its agreement with Sprint,
the Company receives commission revenues on operator service calls, enhanced
compensation for dial-around calls carried over the Sprint network and revenues
for marketing certain Sprint products on its payphones.
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The Company also recognizes non-coin revenues from calls that are dialed
from its payphones to gain access to a long distance company other than the one
pre-programmed into the telephone; this is commonly referred to as "dial-around"
access. The Company also derives non-coin call revenue from certain local
exchange carriers ("LECs") for intraLATA non-coin calls.
The principal costs related to the ongoing operation of the Company's
payphones include telephone charges, commissions, and field operation costs.
Telephone charges consist of payments made by the Company to local access
providers for local access and use of their networks. Commission expense
represents payments to owners of locations where the Company's payphones are
installed. Field operation costs represent the cost of servicing and
maintaining the payphones on an ongoing basis, costs related to the operation of
the Company's long distance network and general and administrative costs related
to the Company's network of 30 divisional offices.
Regulatory Impact on Revenue
Local Coin Call Rates
In ensuring "fair compensation" for all calls, the FCC previously
determined that local coin rates from payphones should be generally deregulated
by October 7, 1997, but provided for possible modifications or exemptions from
deregulation upon a detailed showing by an individual state that there are
market failures within the state that would not allow market-based rates to
develop. On July 1, 1997, a federal court issued an order which upheld the
FCC's authority to deregulate local coin call rates. In accordance with the
FCC's ruling and the court order, certain LECs and independent payphone service
providers, including the Company, increased rates for local coin calls from $.25
to $.35. Given the lack of direction on the part of the FCC on specific
requirements for obtaining a state exemption, the Company's inability to predict
the responses of individual states or the market, and the Company's inability to
provide assurance that deregulation, if and where implemented, will lead to
higher local coin call rates, the Company is unable to predict the ultimate
impact on its operations of local coin rate deregulation. In 1998 and through
the third quarter of 1999, the Company experienced lower average coin call
volumes on its payphones than in prior periods, resulting from the increased
rates, increased competition from wireless communication services and changes in
call traffic and the geographic mix of the Company's payphones.
Dial Around Compensation
On September 20, 1996, the Federal Communications Commission ("FCC")
adopted rules which became effective November 7, 1996 (the "1996 Payphone
Order"), initially mandating dial-around compensation for both access code calls
and 800 subscriber calls at a flat rate of $45.85 per payphone per month (131
calls multiplied by $0.35 per call). Commencing October 7, 1997 and ending
October 6, 1999 the $45.85 per payphone per month rate was to transition to a
per-call system at the rate of $0.35 per call. Several parties challenged
certain of the FCC regulations including the dial-around compensation rate. On
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July 1, 1997, a federal court vacated certain portions of the FCC's 1996
Payphone Order, including the dial-around compensation rate.
In accordance with the court's mandate, on October 9, 1997, the FCC adopted
a second order (the "1997 Payphone Order"), establishing a rate of $0.284 per
call for the first two years of per-call compensation (October 7, 1997 through
October 6, 1999). The IXCs were required to pay this per-call amount to
payphone service providers, including the Company, beginning October 7, 1997.
On May 15, 1998, the court again remanded the per-call compensation rate to the
FCC for further explanation without vacating the $.284 default rate.
In accordance with the court's second mandate, on February 4, 1999, the FCC
released a third order (the "1999 Payphone Order"), in which the FCC abandoned
its efforts to derive a "market based" default dial-around compensation rate and
instead adopted a "cost based" rate of $.24 per dial-around call. This rate
became effective on April 21, 1999, and will serve as a default rate through
January 31, 2002. The new rate will also be applied retroactively to the period
beginning on October 7, 1997, less a $.002 amount to account for FLEX ANI
payphone tracking costs, for a net compensation rate of $.238 applicable during
this retroactive period. It also appears from the 1999 Payphone Order that this
new rate will be applied to the initial "interim" period, running from November
7, 1996 through October 7, 1997; however, the 1999 Payphone Order deferred a
final ruling on the interim period treatment to a later, as yet unreleased,
order. Upon establishment of the interim period, the FCC has further ruled that
a true-up will be made for all payments or credits (with applicable interest at
11.25%) due and owing between the IXCs and the PSPs, including the Company, for
the payment period commencing on November 7, 1996 through the effective date of
the new $.24 per call rate.
Subsequent to entry of the 1999 Payphone Order by the FCC, several parties
have filed petitions for administrative reconsideration by the FCC and judicial
review by the U.S. Court of Appeals for the District of Columbia Circuit,
seeking to modify certain provisions of the 1999 Payphone Order. The primary
thrust of these petitions is to have the Court or the FCC increase or decrease
the dial around compensation rate prescribed in the 1999 Payphone Order. The
petitions are presently pending and awaiting further action by the Court and the
FCC, with a decision expected to occur sometime during the first quarter of
2000. While the Company believes that a further reduction in the dial around
rate is unlikely as a result of these proceedings, the Company is currently
unable to predict their outcome with any degree of certainty.
The Company believes that it is legally entitled to fair compensation under
the Telecommunications Act for dial-around calls which the Company delivered to
any carrier during the period from November 7, 1996 to October 6, 1997. Based on
the information available, the Company believes that the minimum amount it is
entitled to as fair compensation under the Telecommunications Act for the period
from November 7, 1996 to October 6, 1997 is $31.18 per payphone per month (131
calls multiplied by $0.238 per call) and the Company, based on the information
available to it, does not believe that it is
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reasonably possible that the amount will be materially less than $31.18 per
payphone per month.
While the amount of $0.24 per call constitutes the Company's assessment of
the minimum level of fair compensation following the April 21, 1999 effective
date, certain IXCs have asserted in the past, are asserting and are expected to
assert in the future that the appropriate level of fair compensation should be
lower than $0.24 per call.
The payment levels for dial-around calls prescribed in the 1996 and 1997
Payphone Orders significantly increased dial-around compensation revenues to the
Company over the levels received prior to implementation of the
Telecommunications Act (although the 1999 Payphone Order has now moderated those
increases). However, market forces and factors outside the Company's control
could significantly affect these revenue increases. These factors include the
following: (i) the final resolution of the $.24 rate recently ordered by the FCC
and subsequent appeals to the courts, (ii) the resolution by the FCC of the
method of allocating the initial interim period flat-rate assessment among the
IXCs and the number of calls to be used in determining the amount of the
assessment, (iii) other litigation seeking to modify or overturn the 1999
Payphone Order or portions thereof, (iv) the IXCs' reaction to the FCC's
recognition that existing regulations do not prohibit an IXC from blocking 800
subscriber numbers from payphones in order to avoid paying per-call compensation
on such calls, and (v) ongoing technical or other difficulties in the
responsible carriers' ability and willingness to properly track or pay for dial-
around calls actually delivered to them.
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
For the three months ended September 30, 1999, total revenues decreased
approximately $7.6 million, or 14.1%, from approximately $54.2 million in the
third quarter of 1998 to approximately $46.5 million in the same period of 1999.
This decrease was primarily attributable to lower call volumes on the Company's
payphones resulting from higher coin call rates, the growth in wireless
communication services and changes in call traffic and the geographical mix of
the Company's payphones.
Coin call revenues decreased approximately $6.2 million, or 17.9%, from
approximately $34.7 million in the third quarter of 1998 to approximately $28.5
million in the third quarter of 1999. The decrease in coin call revenues was
primarily attributable to lower call volumes on the Company's payphones
resulting from higher coin rates, see "Local Coin Call Rates" above, increased
competition from wireless communication services and changes in call traffic and
the geographical mix of the Company's payphones.
Non-coin call revenues decreased approximately $1.4 million or 7.3%, from
approximately $19.5 million in the third quarter of 1998 to approximately $18.1
million in the three months ended September 30, 1999. The decrease in non-coin
call revenues was primarily attributable to a decrease in long distance calls,
partially offset by an increase in dial-around call traffic from the Company's
payphones and advertising revenues. Dial-around call revenue increased
approximately $1.2 million, from
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<PAGE>
approximately $9.3 million in the three months ended September 30, 1998 to
approximately $10.5 million in the third quarter of 1999. While dial-around call
revenues increased during the period, other non-coin call revenues, consisting
primarily of operator service calls, decreased approximately $3.7 million, from
approximately $10.1 million in the third quarter of 1998 to approximately $6.4
million in the three months ended September 30, 1999. The decrease in operator
service revenue was primarily due to Davel moving long distance call traffic
from its switch to Sprint. Davel previously recorded gross call revenues in non-
coin call revenues and expenses related to these revenues in field operation
costs. Under the agreement with Sprint, Davel records net revenues derived from
long distance calls reflecting the commission paid to the company by Sprint on
such calls. In addition, increased dial-around call traffic and increased
competition from wireless calling alternatives have negatively impacted the
number of operator service calls placed from the Company's payphones.
Telephone charges decreased approximately $5.2 million, or 43.7%, from
approximately $12.0 million in the third quarter of 1998 to approximately $6.8
million in the three months ended September 30, 1999. The decrease was primarily
due to favorable State and Federal regulatory proceedings under Section 276 of
the Telecom Act, and more favorable contracts with LECs and Competitive Local
Exchange Carriers for local line access. In addition, Davel received
approximately $2.4 million in cash refunds from two large LECs as a result of
favorable regulatory rulings. The Company continues to negotiate contracts that
it believes will further reduce local access charges on a per-phone basis, but
is unable to estimate the impact of further telephone charge reductions at this
time.
Commissions decreased approximately $1.9 million, or 15.8%, from
approximately $12.2 million in the third quarter of 1998 to approximately $10.3
million in the three months ended September 30, 1999. The decrease was
primarily attributable to lower revenues from the Company's payphones.
Commissions as a percentage of revenues decreased to 22.1% for the three months
ended September 30, 1999 as compared to 22.6% for the three months ended
September 30, 1998. The decrease in commissions as a percentage of revenues was
primarily attributable to increases in certain types of non-coin call revenues
that are excluded from commission calculations on a portion of the Company's
location agreements.
Field operation costs decreased approximately $1.8 million, or 13.5% from
approximately $13.5 million in the third quarter of 1998 to approximately $11.7
million in the three months ended September 30, 1999. The decrease is primarily
attributable to cost savings resulting from the consolidation of the Company's
field operations with those of Peoples Telephone. In connection with the
increased number of dial-around calls recorded in 1999, the Company began
recording additional reserves for uncollectible dial-around compensation.
Before the effect of the reserve for uncollectible dial-around receivables in
the third quarter of 1999, field operation costs would have been approximately
$2.8 million lower than the third quarter of 1998.
Depreciation and amortization expense decreased approximately $0.6 million,
or 6.6%, from the prior year, from $9.8 million in the third quarter of 1998 to
approximately $9.1 million in the three months ended September 30, 1999. The
decrease was primarily due
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to a reduction in depreciation related to payphones that became fully
depreciated over the course of the last year.
The asset valuation and other charges of approximately $51.2 million
consist of an approximately $48.9 million charge for impaired goodwill and
certain other intangibles related to the 1998 acquisition of Communications
Central Inc. The charge also includes approximately $2.3 million for the sale
or disposal of fixed assets.
Selling, general and administrative expenses increased approximately $0.6
million, or 12.5%, from approximately $5.1 million in the third quarter of 1998
to approximately $5.8 million in the three months ended September 30, 1999. The
increase was attributable to a charge of approximately $1.7 million relating to
the departure of the Company's former Chief Executive Officer, as well as
certain other executives of the Company. All payments required in connection
with the related agreements were made through the issuance of the Company's
common stock with approximately $0.8 million made during the third quarter and
approximately $0.9 million made subsequent to September 30, 1999. These costs
were partially offset by cost savings related to the integration of the
operations of Peoples Telephone.
Other expense remained relatively stable, increasing $0.1 million in the
third quarter of 1999. Interest expense in the three months ended September 30,
1999 increased approximately $0.6 million, or 10.7%, compared to the prior-year
period, from approximately $5.3 million in 1998 to approximately $5.9 million in
the third quarter of 1999. This increase resulted primarily from the
incurrence of additional indebtedness in December 1998 related to transaction
costs incurred in connection with the Peoples Merger, additional borrowings in
the first nine months of 1999 primarily related to the acquisition of the assets
of two payphone companies totaling approximately $5.1 million and an increase in
borrowing costs as a result of the credit agreement amendment on April 8, 1999.
Net loss increased approximately $50.6 million from the prior-year period,
from a net loss of approximately $3.9 million in the third quarter of 1998 to a
net loss of approximately $54.5 million in the third quarter of 1999. The
increase was primarily due to the approximately $51.2 million asset valuation
charge and approximately $1.7 million in severance pay. Loss applicable to
common shareholders increased approximately $50.2 million in the third quarter
of 1999, from a loss of approximately $4.3 million, or $0.44 per share, in the
third quarter of 1998, to a loss of approximately $54.5 million, or $5.11 per
share, in the three months ended September 30, 1999.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
For the nine months ended September 30, 1999, total revenues decreased
approximately $15.4 million, or 9.9%, from approximately $155.4 million in the
nine months ended September 30, 1998 to approximately $140.1 million in the same
period of 1999. This decrease was primarily attributable to lower call volumes
on the Company's payphones
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<PAGE>
resulting from the higher coin call rates, growth in wireless communication
services and changes in call traffic and the geographical mix of the Company's
payphones.
Coin call revenues decreased approximately $14.4 million, or 14.3%, from
approximately $100.7 million in the first three-quarters of 1998 to
approximately $86.3 million in the first nine months of 1999. The decrease in
coin call revenues was primarily attributable to lower call volumes on the
Company's payphones resulting from higher coin rates, increased competition from
wireless communication services and changes in call traffic and the geographical
mix of the Company's payphones.
Non-coin call revenues decreased approximately $1.0 million or 1.9%, from
approximately $54.8 million in the nine months ended September 30, 1998 to
approximately $53.8 million in the nine months ended September 30, 1999. The
decrease in non-coin call revenues was primarily attributable to a decrease in
long distance calls routed through the Company's switch and presubscribed long
distance carriers, partially offset by an increase in dial-around call traffic
from the Company's payphones. Dial-around call revenue increased approximately
$4.4 million, or 16.4% from approximately $26.8 million in the nine months ended
September 30, 1998 to approximately $31.2 million in the first three-quarters of
1999. While dial-around call revenues increased during the period, other non-
coin call revenues, consisting primarily of operator service calls, decreased
approximately $7.4 million, or 26.5% from approximately $27.9 million in the
first three quarters of 1998 to approximately $20.5 million in the nine months
ended September 30, 1999. The decrease in operator service revenue was primarily
due to Davel moving long distance call traffic from its switch to Sprint. Davel
previously recorded gross call revenues in non-coin call revenues and expenses
related to these revenues in field operation costs. Under the agreement with
Sprint, Davel records net revenues derived from long distance calls reflecting
the commission paid to the company by Sprint on such calls. In addition,
increased dial-around call traffic and increased competition from wireless
calling alternatives have negatively impacted the number of operator service
calls placed from the Company's payphones.
Telephone charges decreased approximately $7.0 million, or 19.4%,
decreasing from approximately $36.0 million in the nine months ended September
30, 1998 to approximately $29.0 million in the nine months ended September 30,
1999. The decrease was primarily due to favorable State and Federal regulatory
proceedings under Section 276 of the Telecom Act, and more favorable contracts
with LECs and Competitive Local Exchange Carriers for local line access. In
addition, Davel received approximately $2.4 million in cash refunds from two
large LECs as a result of favorable regulatory rulings. The company is
currently negotiating contracts and pursuing regulatory relief that it believes
will further reduce local access charges on a per-phone basis, but is unable to
estimate the impact of further telephone charge reductions at this time.
Commissions decreased approximately $4.5 million, or 12.7%, from
approximately $35.5 million in the first three-quarters of 1998 to approximately
$31.0 million in the nine months ended September 30, 1999. The decrease was
primarily attributable to lower revenues from the Company's payphones.
Commissions as a percentage of revenues decreased to 22.1% for the nine months
ended September 30, 1999 as compared to 22.8%
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for the prior year period. The decrease in commissions as a percentage of
revenues was primarily attributable to increases in certain types of non-coin
call revenues that are excluded from commission calculations on a portion of the
Company's location agreements.
Field operation costs increased approximately $1.0 million, or 2.6%, from
approximately $38.8 million in the first three-quarters of 1998 to approximately
$39.8 million in the nine months ended September 30, 1999. In connection with
the increased number of dial-around calls recorded in 1999, the Company began
recording additional reserves for uncollectible dial-around compensation. For
the first nine months of 1999, the Company recorded approximately $2.9 million
more in reserves for uncollectible dial-around compensation than in the same
period of 1998. Before the effect of the increase in the reserve for
uncollectible dial-around receivables in 1999, field operation costs would have
been approximately $1.7 million lower than the first nine months of 1998. The
decrease is primarily attributable to cost savings resulting from the
consolidation of the Company's Field operations with those of Peoples Telephone.
This is partially offset by the fact that field operation costs for the first
half of 1998 include field operation costs related to the operation of CCI's
payphones only since the date of acquisition in February 1998.
Depreciation and amortization expense decreased approximately $2.0 million,
or 6.9%, from the prior year, from $28.4 million in the first three-quarters of
1998 to approximately $26.4 million in the nine months ended September 30, 1999.
The decrease was primarily due to a reduction in depreciation related to
payphones that became fully depreciated over the course the last year.
The asset valuation and other charges of approximately $51.2 million
consists of an approximately $48.9 million charge for impaired goodwill and
certain other intangibles related to the 1998 acquisition of CCI. The charge
also includes approximately $2.3 million for the sale or disposal of fixed
assets. In the third quarter of 1998, a restructuring charge related to the CCI
Acquisition was included in the asset valuation and other charges.
Selling, general and administrative expenses increased approximately $0.7
million, or 5.1%, from approximately $14.8 million in the first nine months of
1998 to approximately $15.5 million in the nine months ended September 30, 1999.
The increase was attributable to the fact that selling, general and
administrative expenses related to the operation of payphones and administrative
facilities acquired in the CCI Acquisition are included in only eight of the
nine months of the prior year period due to the use of the purchase method to
record the transaction. In addition, a portion of the increase was attributable
to approximately $1.7 million in non-cash severance paid to former employees.
The Company also experienced additional costs in the first half of 1999 related
to the consolidation of its administrative functions into its corporate offices
in Tampa, Florida.
Other expense remained relatively stable, increasing $0.3 million in the
first three quarters of 1999. Interest expense in the nine months ended
September 30, 1999 increased approximately $1.2 million, or 7.7%, compared to
the prior-year period, from approximately
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$16.0 million in 1998 to approximately $17.2 million in the first three-quarters
of 1999. This increase resulted primarily from the incurrence of additional
indebtedness in December 1998 related to transaction costs incurred in
connection with the Peoples Merger, additional borrowings in the first nine
months of 1999 primarily related to the acquisition of the assets of two
payphone companies totaling approximately $5.1 million and an increase in
borrowing costs as a result of the credit agreement amendment on April 8, 1999.
Net loss increased approximately $57.1 million, or 4293.2% from the prior-
year period, from a net loss of approximately $13.3 million in the nine months
ended September 30, 1998 to a net loss of approximately $70.4 million in the
nine months ended September 30, 1999. The increase was primarily due to the
approximately $51.2 million asset valuation charge and approximately $1.7 in
severance pay. Loss applicable to common shareholders increased approximately
$55.9 million, or 3828.8% in the first nine months of 1999, from a loss of
approximately $14.6 million, or $1.65 per share, in the nine months ended
September 30, 1998 to a loss of approximately $70.5 million, or $6.66 per share,
in the nine months ended September 30, 1999. The Company made a redemption
payment to shareholders of record on April 19, 1999 of approximately $0.1
million in connection with the termination of its preferred share purchase
rights plan in April 1999.
Liquidity and Capital Resources
Cash Flows
As of September 30, 1999, the Company had a current ratio of 1.00 to 1, as
compared to a current ratio of 1.27 to 1 on December 31, 1998. The decrease was
primarily attributable to an increase in current maturities of long-term debt
and obligations under capital leases of approximately $10.1 million related to
scheduled amortization of principal under the credit agreement entered into in
connection with the Peoples Merger, a decrease of $3.8 million in cash and cash
equivalents and a decrease of $6.3 million in accounts receivable.
Cash flows used in investing activities totaled approximately $7.5 million
in the nine months ended September 30, 1999. Cash flows used in investing
activities consisted of capital expenditures of approximately $4.6 million for
the installation of new payphone locations and payments for securing payphone
location contracts, and approximately $5.1 million for the acquisition of the
assets of two payphone companies during the period. These investments were
offset by approximately $2.2 million from the proceeds from the sale of the
Miami facility. The Company's investing activities in the first three quarters
of 1999 were financed primarily through long-term debt financing and cash
reserves.
Cash flows from investing activities totaled approximately $129.8 million
in the nine months ended September 30, 1998. Cash flows from investing
activities included capital expenditures of approximately $12.3 million for the
installation of new payphone locations and payments for securing payphone
location contracts. Investing activities in the first three quarters of 1998
also included expenditures of approximately $11.3 million for the purchase of
the assets of Indiana Telcom and approximately $109.1 million for the
acquisition of CCI. The Company's investing activities in the first three
quarters
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of 1998 were financed primarily through a net increase of approximately $84.5
million in long-term debt financing and approximately $28.7 million in proceeds
from the issuance of common stock.
Credit Agreement
In connection with the merger with Peoples Telephone on December 23, 1998,
the Company entered into a senior credit facility ("Senior Credit Facility")
with Bank of America, formerly known as NationsBank, N.A. (the "Administrative
Agent") and the other lenders named therein. The Senior Credit Facility
provides for borrowings by Davel from time to time of up to $280.0 million for
working capital and other corporate purposes.
Indebtedness of the Company under the Senior Credit Facility is secured by
substantially all of its and its subsidiaries' assets, including but not limited
to their equipment, inventory, receivables and related contracts, investment
property, computer hardware and software, bank accounts and all other goods and
rights of every kind and description and is guaranteed by Davel and all its
subsidiaries.
The Company's borrowings under the Senior Credit Facility bear interest at
a floating rate and may be maintained as Base Rate Loans (as defined in the
Senior Credit Facility) or, at the Company's option, as Eurodollar Loans (as
defined in the Senior Credit Facility). Base Rate Loans shall bear interest at
the Base Rate (defined as the higher of (i) the applicable prime lending rate of
Bank of America or (ii) the Federal Reserve reported certificate of deposit rate
plus 1%). Eurodollar Loans shall bear interest at the Eurodollar Rate (as
defined in the Senior Credit Facility), plus a margin based on leverage.
The Company is required to pay the lenders under the Senior Credit Facility
a commitment fee, payable in arrears on a quarterly basis, on the average unused
portion of the Senior Credit Facility during the term of the facility. The
Company is also required to pay an annual agency fee to the Agent. In addition,
the Company was also required to pay an arrangement fee for the account of each
bank in accordance with the banks' respective pro rata share of the Senior
Credit Facility. The Agent and the lenders will receive such other fees as have
been separately agreed upon with the Agent.
The Senior Credit Facility requires the Company to meet certain financial
tests, including, without limitation, maximum levels of Senior Secured Debt as a
ratio of EBITDA (as defined in the Senior Credit Facility), minimum interest and
fixed charge ratios and maximum amount of capital expenditures. The Senior
Credit Facility also contains certain covenants which, among other things, will
limit the incurrence of additional indebtedness, prepayments of other
indebtedness (including the Notes), liens and encumbrances and other matters
customarily restricted in such agreements.
In the first quarter of 1999, the Company gave notice to the Administrative
Agent that lower than expected performance in the first quarter of 1999 would
result in the Company's inability to meet certain financial covenants contained
in the Senior Credit Facility. On April 8, 1999, the Company and the Lenders
agreed to the First Amendment
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to Credit Agreement and Consent and Waiver (the "First Amendment") which waived
compliance, for the fiscal quarter ending March 31, 1999, with the financial
covenants set forth in the Senior Credit Facility. In addition, the First
Amendment waived any event of default related to two acquisitions made by the
Company in the first quarter of 1999, and waived the requirement that the
Company deliver annual financial statements to the Lenders within 90 days of
December 31, 1998, provided that such financial statements were delivered no
later than April 15, 1999. The First Amendment contained amendments that
provided for the following:
. amendment of the applicable percentages for Eurodollar Loans for the period
between April 1, 1999 and June 30, 2000 at each pricing level to 0.25% higher
than those in the previous pricing grid
. prepayment of debt from receipt of dial-around compensation accounts
receivable related to the period November 1996 through October 1997
. further limitations on permitted acquisitions as defined in the Credit
Agreement through June 30, 2000
. during the period April 1, 1999 to June 30, 2000, required lenders' consent
for the making of loans or the issuance of letters of credit if the sum of
revolving loans outstanding plus letter of credit obligations outstanding
exceeds $50.0 million
. the introduction of a new covenant to provide certain operating data to the
Lenders on a monthly basis
. increases in the maximum allowable ratio of funded debt to EBITDA through the
quarter ended June 30, 2000
. decreases in the minimum allowable interest coverage ratio through the
quarter ended June 30, 2000
. decreases in the minimum allowable fixed charge coverage ratio through the
quarter ended June 30, 2000
The Company believes that it is probable that it will comply with the loan
covenants for the next twelve months and, as such, has not classified the
obligations under the Senior Credit Facility as current liabilities.
The First Amendment also places limits on capital expenditures and required
the payment of an amendment fee equal to each Lender's commitment multiplied by
0.35%.
The Senior Credit Facility contains customary events of default, including
without limitation, payment defaults, breaches of representations and
warranties, covenant defaults, cross-defaults to certain other indebtedness,
certain events of bankruptcy and insolvency, judgment defaults, failure of any
guaranty or security document supporting the Senior Credit Facility to be in
full force and effect, and a change of control of the Company.
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The Company believes that cash generated from operations and available
borrowings under the Senior Credit Facility will be sufficient to fund the
Company's forseeable cash requirements, including capital expenditures through
December 31, 2003. The Company also believes that it will be able to fund any
future acquisitions through a combination of cash generated from operations,
additional borrowings and the issuance of shares of the Company's Common Stock.
There can be no assurance, however, that the Company will continue to expand at
its current rate or that additional financing will be available when needed or,
if available, will be available on terms acceptable to the Company.
Impact of Inflation
Inflation is not considered a material factor affecting the Company's
business. General operating expenses such as salaries, employee benefits and
occupancy costs are, however, subject to normal inflationary pressures.
Seasonality
The Company's revenues from its payphone operation regions are affected by
seasonal variations, geographic distribution of payphones and type of location.
Because many of the Company's payphones are located outdoors, weather patterns
have differing effects on the Company's results depending on the region of the
country where they are located. Most of the Company's payphones in the
southeastern United States produce substantially higher call volume in the first
and second quarters than at other times during the year, while the Company's
payphones throughout the midwestern and eastern United States produce their
highest call volumes during the second and third quarters. While the aggregate
effect of the variations in different geographical regions tend to counteract
the effect of one another, the Company has historically experienced higher
revenue and income in the second and third quarters than in the first and fourth
quarters. Changes in the geographical distribution of its payphones may in the
future result in different seasonal variations in the Company's results.
26
<PAGE>
Year 2000 Issue
The Company is working to resolve the potential impact of the year 2000 on
the ability of the Company's computerized information systems to accurately
process information that may be date-sensitive. Any of the Company's programs
that recognize a date using "00" as the year 1900 rather than the year 2000
could result in errors or system failures. The Company utilizes a number of
computer programs across its entire operation. The Company has assessed the
impact of the year 2000 on both its computer programs and its computer systems.
As the Company acquires other payphone assets, it will continue to assess the
impact of the year 2000 on such acquired assets. To date, the Company has spent
approximately $0.3 million in assessing and addressing year 2000 issues and
estimates that its total costs will not exceed $0.5 million, which is
approximately 25% of the Company's budgeted expenditures for information
technology. The Company does not believe that these costs will have a material
effect on its financial position. The Company 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. The
Company intends to complete this assessment by December 31, 1999. The failure
of third parties on which the Company relies to address their year 2000 issues
in a timely manner could result in a material financial risk to the Company.
Through its assessment of the impact of year 2000 on both its computer programs
and systems, the Company 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, the Company's continuing assessment of its assets and of
third parties external to the Company may reveal the need for other contingency
planning in the future. The Company plans to devote all resources required to
resolve any significant year 2000 issues in a timely manner.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks related to changes in interest rates. The
Company's objective is to minimize the volatility in earnings and cash flow from
these risks. In connection with the provisions of its long-term debt agreement
and the Company's overall interest rate objectives, the Company utilizes
derivative financial instruments to reduce its interest rate exposure to market
risks from significant increases in interest rates. The Company's strategy is to
purchase interest rate swaps, collars and caps from large financial institutions
that in the aggregate maintain notional amounts of approximately 40% of the
Company's outstanding long-term debt balance to limit the impact of increases in
interest rates on the Company's variable rate long-term debt.
Based on the Company's overall interest rate exposure at September 30, 1999, a
ten-percent increase in interest rates would not have a material impact on the
financial position, results of operations or cash flows of the Company. These
effects of hypothetical changes in interest rates, however, ignore other effects
the same movement may have arising from other variables, and actual results
could differ from the sensitivity calculations of the Company.
27
<PAGE>
The Company regularly assesses these variables, establishes policies and
business practices to protect against the adverse effects of interest rate
fluctuations and does not anticipate any material losses generated by these
risks.
ITEM 5. OTHER INFORMATION
On November 9, 1999, the Company announced the departure of Robert D. Hill
as its President and Chief Executive Officer. Following his departure, Mr. Hill
will remain affiliated with the Company as a consultant and will remain a member
of the Company's Board of Directors, serving on the Board's Executive Committee.
The Company has begun a search for a new Chief Executive Officer. In the
interim, Michael E. Hayes, the Company's former Chief Financial Officer, has
been appointed Chief Operating Officer and has assumed responsibility for day-
to-day operations. In addition, the Company announced that William K. Breaden
has joined the Company as Chief Financial Officer. Mr. Breaden was formerly
Corporate Controller of Spalding Holdings Corporation, a global manufacturer and
marketer of branded consumer products serving the sporting goods markets.
28
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index.
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
29
<PAGE>
EXHIBIT INDEX
Exhibits Description
- -------- -----------
10.1 None.
27.1 Financial Data Schedule
30
<PAGE>
SIGNATURE
- ---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned thereunto duly authorized.
DAVEL COMMUNICATIONS, INC.
Date: November 12, 1999 /s/ Michael E. Hayes
---------------------
Michael E. Hayes
Senior Vice President and Chief Operating Officer
Principal Financial Officer
31
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