<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO _________
Commission File Number: 0-22610
DAVEL COMMUNICATIONS, INC.
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 59-3538257
-------- ----------
(State or other jurisdiction of (I.R.S. Employer)
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. Yes [X] No [ ]
As of April 21, 2000, there were 11,067,720 shares of the Registrant's
Common Stock outstanding.
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DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1
Financial Statements:
Consolidated Balance Sheets...................................................1
Consolidated Statements of Operations.........................................2
Consolidated Statements of Cash Flows ........................................3
Notes to Consolidated Financial Statements....................................4
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................9
Liquidity and Capital Resources..............................................13
ITEM 3
Quantitative and Qualitative Disclosures about
Market Risk.........................................................17
PART II OTHER INFORMATION
ITEM 4
Submission of Matters to a Vote of Security Holders..........................18
ITEM 6
Exhibits and Reports on Form 8-K.............................................18
Exhibit Index................................................................19
<PAGE> 3
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,560 $ 7,950
Trade accounts receivable, net of allowance for doubtful
accounts of $10,389 and 10,880, respectively 21,999 22,983
Other current assets 1,372 1,048
--------- ---------
TOTAL CURRENT ASSETS 31,931 31,981
Property and equipment, net 112,170 115,558
Location contracts, net 19,324 20,852
Goodwill, net 5,829 6,290
Other assets 6,398 6,080
--------- ---------
TOTAL ASSETS $ 175,652 $ 180,761
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current maturities of long-term debt and
obligations under capital leases $ 24,035 $ 21,535
Accounts payable and accrued liabilities 21,243 27,484
--------- ---------
TOTAL CURRENT LIABILITIES 45,278 49,019
--------- ---------
Long-term debt and obligations under capital leases 214,374 206,509
Deferred revenue 250 312
--------- ---------
TOTAL LIABILITIES 259,902 255,840
--------- ---------
Shareholders' equity (deficit)
Preferred stock - $.01 par value, 1,000,000 shares
authorized, none issued and outstanding -- --
Common stock - $.01 par value, 50,000,000
Shares authorized, 11,067,720 and 11,033,628 shares
issued and outstanding, respectively 111 110
Additional paid-in capital 128,510 128,338
Accumulated deficit (212,871) (203,527)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (84,250) (75,079)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 175,652 $ 180,761
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
1
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DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
2000 1999
------------ ------------
<S> <C> <C>
REVENUES
Coin calls $ 21,707 $ 28,032
Non-coin calls 14,694 16,413
------------ ------------
TOTAL REVENUES 36,401 44,445
------------ ------------
COSTS AND EXPENSES
Telephone charges 9,918 11,772
Commissions 8,655 10,416
Service, maintenance and network costs 7,677 13,303
Depreciation and amortization 8,669 8,975
Selling, general and administrative 4,223 5,089
------------ ------------
TOTAL OPERATING COSTS AND EXPENSES 39,142 49,555
------------ ------------
OPERATING LOSS (2,741) (5,110)
Interest expense 6,702 5,267
Other (income) expense (99) 23
------------ ------------
LOSS FROM OPERATIONS BEFORE INCOME TAXES (9,344) (10,400)
Income tax expense -- --
------------ ------------
NET LOSS $ (9,344) $ (10,400)
============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.84) $ (0.99)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 11,058,629 10,536,837
============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
2
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DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31
(IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (9,344) $ (10,400)
Adjustments to reconcile net loss to cash flows
from operating activities:
Depreciation and amortization 8,669 8,975
Amortization of deferred financing costs 652 139
Payment for certain contracts (1,797) (1,223)
Write-off of fixed assets 420 --
Increase (decrease) in allowance for doubtful accounts (491) 1,570
Stock issued as payment for services provided 173 7
Changes in assets and liabilities:
Accounts receivable 1,475 (222)
Other assets (1,582) (1,673)
Accounts payable and accrued liabilities (6,241) 1,737
Deferred revenue (62) --
-------- ---------
NET CASH FLOWS USED IN OPERATING ACTIVITIES (8,128) (1,090)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (1,627) (2,526)
Purchase of payphone assets, net of cash acquired -- (5,123)
-------- ---------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (1,627) (7,649)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt (5,237) --
Net proceeds on revolving line of credit 15,700 11,500
Principal payments under capital lease obligations (98) (50)
-------- ---------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 10,365 11,450
-------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 610 2,711
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,950 17,162
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,560 $ 19,873
======== =========
CASH PAID FOR INTEREST $ 6,024 $ 1,039
======== =========
</TABLE>
3
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DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(CONTINUED)
1. BASIS OF PRESENTATION
The accompanying consolidated balance sheet of Davel Communications,
Inc. and subsidiaries (the "Company") as of March 31, 2000, and the related
consolidated statements of operations and of cash flows for the three months
ended March 31, 2000 and 1999 are unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of such consolidated financial
statements have been included. Such adjustments consist only of normal,
recurring items. Certain information and footnote disclosures normally included
in audited financial statements have been omitted, in accordance with generally
accepted accounting principles for interim financial reporting. 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, 1999 and 1998 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, 1999. The results of operations for the three-month periods ended March 31,
2000 and 1999 are not necessarily indicative of the results for the full year.
The Company was incorporated on June 9, 1998, under the laws of the
state of Delaware, to effect the merger, on December 23, 1998 of Davel
Communications Group, Inc. ("Old Davel") with Peoples Telephone Company, Inc.
(the "Peoples Merger"). As a result of the Peoples Merger, the Company is the
largest domestic independent payphone service provider in the United States,
with approximately twice the number of payphones as the second largest domestic
independent payphone service provider. The Company operates in a single
business segment within the telecommunications industry, operating, servicing
and maintaining a system of approximately 72,900 payphones in 44 states and the
District of Columbia. The Company's headquarters is located in Tampa, Florida,
with divisional and administrative facilities in 31 geographically dispersed
locations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassification
Certain reclassifications have been made to prior year amounts to
conform to the current period presentation.
3. NON-RECURRING AND RESTRUCTURING COSTS
In connection with the Peoples Merger, the Company recognized
non-recurring costs of $10,814 in 1998. These costs include legal fees,
investment-banking fees, accounting fees and change of control payments. In
addition, the Company recognized restructuring costs of $4,325 related to the
Peoples Merger and other restructurings. These costs were composed of payments
incurred in connection with early lease terminations, facility closing costs, a
write down of the value of the former Peoples Telephone Company, Inc. ("Peoples
Telephone") headquarters and
4
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DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(CONTINUED)
employee termination benefits for 143 excess field operations and
administrative personnel. The following table summarizes reserves utilized
during the quarter ended March 31, 2000.
<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 January 1, 2000 $ 72 $ -- $ -- $ -- $ 72
Utilized during quarter ended
March 31, 2000 (13) -- -- -- (13)
----- ----- ----- ------ -----
Remaining reserve at March 31, 2000 $ 59 $ -- $ -- $ -- $ 59
===== ===== ===== ====== =====
</TABLE>
4. 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 ("IXC"s)
would be required to compensate payphone service providers ("PSP"s). The Court
remanded the issue to the FCC for further consideration, and clarified on
September 16, 1997, that it had vacated certain portions of the FCC's 1996
Payphone Order, including the dial-around compensation rate. Specifically, the
Court determined that the FCC did not adequately justify (i) the per-call
compensation rate for 800 subscriber and access code calls at the deregulated
local coin rate of $0.35, because it did not sufficiently justify its
conclusion that the costs of local coin calls are similar to those of 800
subscriber and access code calls; and (ii) the allocation of the payment
obligation among the IXCs for the period from November 7, 1996, through October
6, 1997.
5
<PAGE> 8
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(CONTINUED)
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.
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 local exchange carriers ("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 Regional Bell Operating Company ("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
payphones.
On May 15, 1998, the Court again remanded the per-call compensation
rate to the FCC for further explanation without vacating the $0.284 per call
rate. The Court opined that the FCC had failed to explain adequately its
derivation of the $0.284 default rate. The Court stated that any resulting
overpayment would be subject to refund and directed the FCC to conclude its
proceedings within a six-month period from the effective date of the Court's
decision.
In response to the Court's second remand, the FCC conducted further
proceedings and sought additional comment from interested parties to address
the relevant issues posed by the Court. On February 4, 1999, the FCC released
its Third Report and Order, and Order on Reconsideration of the Second Report
and Order (the "1999 Payphone Order"), in which the FCC abandoned its efforts
to derive a "market-based" default dial-around compensation rate and instead
adopted a "cost-based" rate of $0.24 per dial-around call. Both PSPs and IXCs
have petitioned the Court for review of the 1999 Payphone Order, and PSPs
petitioned the FCC for reconsideration of the Order. All of these petitions are
currently pending. The new rate became effective April 21, 1999, and will serve
as the default rate through January 31, 2002. The new rate will also be applied
retroactively to the period beginning on October 7, 1997, less a $0.002 amount
to account for FLEX ANI payphone tracking costs, for a net compensation rate of
$0.238. The 1999 Payphone Order deferred a final ruling on the interim period
(November 7, 1996 to October 6, 1997) treatment to a later, as yet unreleased,
order, however, it appears from the 1999
6
<PAGE> 9
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(CONTINUED)
Payphone Order that the $0.238 per call rate will also be applied to the
initial interim period from November 7, 1996 to October 6, 1997. Upon
establishment of the interim period rate, the FCC has further ruled that a
true-up will be made for all payments or credits (with applicable interest) due
and owing between the IXCs and the PSPs, including Davel, for the payment
period commencing on November 7, 1996 through the effective date of the new
$0.24 per call rate.
Based on the FCC's tentative conclusion in the 1997 Payphone Order,
the Company during 1997 adjusted the amounts of dial-around compensation
previously recorded related to the period from November 7, 1996, through June
30, 1997, from the initial $45.85 rate to $37.20 ($0.284 per call multiplied by
131 calls). As a result of this adjustment, the provision recorded for the year
ended December 31, 1997, related to reduced dial-around compensation, is
approximately $3.3 million. Based on the reduction in the per-call compensation
rate in the 1999 Payphone Order, the Company further reduced non-coin revenues
by $9.0 million during 1998. The adjustment included approximately $6.0 million
to adjust revenue recorded during the period November 7, 1996 to October 6,
1997 from $37.20 per-phone per-month to $31.18 per phone per month ($0.238 per
call multiplied by 131 calls). The remaining $3.0 million of the adjustment was
to adjust revenues recorded during the period October 7, 1997 through December
31, 1998 to actual dial-around call volumes for the period multiplied by $0.238
per call.
The Company recorded dial-around compensation revenue, net of
adjustments, of approximately $24.9 million for the year ended December 31,
1997; approximately $27.2 million for the year ended December 31, 1998; and
approximately $35.9 million for the year ended December 31, 1999.
The Company's counsel, Dickstein, Shapiro, Morin & Oshinsky, is of the
opinion that the Company is legally entitled to fair compensation under the
Telcom Act for dial-around calls the Company delivered to any carrier during
the period from November 7, 1996, through October 6, 1997. Based on the
information available, the Company believes that the minimum amount it is
entitled to as fair compensation under the Telcom Act for the period from
November 7, 1996, through October 6, 1997, is $31.18 per payphone per month and
the Company, based on the information available to it, does not believe that it
is reasonably possible that the amount will be materially less than $31.18 per
payphone per month. While the amount of $0.24 per call ($0.238 for retroactive
periods) constitutes the current level of "fair" compensation, as determined by
the FCC, certain IXCs have asserted in the past, are asserting and are expected
to assert in the future that the appropriate level of fair compensation should
be lower than $0.24 per call. If the level of fair compensation is ultimately
determined to be an amount less than $0.24 per call, such determination could
result in a material adverse impact upon the Company's results of operations
and financial position.
7
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DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(CONTINUED)
5. EARNINGS PER SHARE
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.
6. COMPREHENSIVE INCOME (LOSS)
For the three months ended March 31, 2000 and March 31, 1999, there is
no difference between comprehensive loss and net loss as presented on the
accompanying income statements.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and notes thereto
appearing elsewhere herein.
Certain of the statements contained below are forward-looking
statements (rather than historical facts) that are subject to risks and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements.
GENERAL
On December 23, 1998, Old Davel and Peoples Telephone merged together
in a transaction accounted for as a pooling-of-interests. As such, the results
of both companies have been restated as if they had been combined for all
periods presented.
During 1999, the Company derived its revenues from two principal
sources: coin calls and non-coin calls. Coin calls represent calls paid for by
callers with coins deposited in the payphone. Coin call revenues are recorded
in the amount of coins collected from the payphones.
Non-coin calls are calls made from the pay telephones without deposit
of coin by the caller. Payment is made via calling cards, credit card, collect
or third party. The Company utilizes various local and long-distance carriers
such as Sprint, AT&T and Bell South to handle and bill for these calls. These
carriers pay the Company a commission, typically based on a percentage of
revenues generated by these calls, pursuant to contract as the primary carrier
for the applicable traffic.
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 selected by the Company as the primary carrier for the phone. These
types of calls are commonly referred to as "dial-around" traffic.
See "- Regulatory Impact on Revenue - Dial Around Compensation."
The principal costs related to the ongoing operation of the Company's
payphones include telephone charges, commissions, and service, maintenance and
network costs. Telephone charges consist of payments made by the Company to LECs
or competitive local exchange carriers and long distance carriers for access to
and use of their telecommunications networks. Commission expense represents
payments to the owners or operators of the premises at which a payphone is
located ("Location Owners"). Service, maintenance and network costs represent
the cost of servicing and maintaining the payphones on an ongoing basis, costs
related to the operation of the Company's switch (which was deactivated as of
November 1999) and, in connection with unbundled services arrangements, the fees
paid for those services.
REGULATORY IMPACT ON REVENUE
Local Coin Rates
To ensure "fair compensation" for local coin 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 that upheld the FCC's
authority to deregulate local coin call rates. In accordance with the FCC's
ruling and the court order, certain LECs and independent payphone service
providers, including the Company, increased rates for local coin calls from
$0.25 to $0.35. Given the lack of direction on the part of the FCC on specific
requirements for obtaining a state exemption, the Company's inability to
9
<PAGE> 12
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 the first
quarter of 2000, the Company experienced lower coin call volumes on its
payphones resulting from the increased rates, growth in wireless communication
services and changes in call traffic and the geographic mix of the Company's
payphones.
Dial-Around Compensation
On September 20, 1996, the Federal Communications Commission ("FCC")
adopted rules which became effective November 7, 1996 (the "1996 Payphone
Order"), initially mandating dial-around compensation for both access code
calls and 800 subscriber calls at a flat rate of $45.85 per payphone per month
(131 calls multiplied by $0.35 per call). Commencing October 7, 1997 and ending
October 6, 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 challenged
certain of the FCC regulations including the dial-around compensation rate. On
July 1, 1997, a federal court vacated certain portions of the FCC's 1996
Payphone Order, including the dial-around compensation rate.
In accordance with the court's mandate, on October 9, 1997, the FCC
adopted a second order (the "1997 Payphone Order"), establishing a rate of
$0.284 per call for the first two years of per-call compensation (October 7,
1997 through October 6, 1999). The IXCs were required to pay this per-call
amount to payphone service providers, including the Company, beginning October
7, 1997. On May 15, 1998, the court again remanded the per-call compensation
rate to the FCC for further explanation without vacating the $0.284 default
rate.
In accordance with the court's second mandate, on February 4, 1999,
the FCC released a third order (the "1999 Payphone Order"), in which the FCC
abandoned its efforts to derive a "market based" default dial-around
compensation rate and instead adopted a "cost based" rate of $0.24 per
dial-around call. This rate became effective on April 21, 1999 and will serve
as a default rate through January 31, 2002. The new rate will also be applied
retroactively to the period beginning on October 7, 1997, less a $0.002 amount
to account for FLEX ANI payphone tracking costs, for a net compensation rate of
$0.238 applicable during this 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. Both PSPs and
IXCs have petitioned the Court for review of the 1999 Payphone Order, and PSPs
petitioned the FCC for reconsideration of the order. All of these petitions are
currently pending.
Based on the FCC's conclusion in the 1997 Payphone Order, the Company
adjusted the amounts of dial-around compensation previously recorded for the
period November 7, 1996 to June 30, 1997 from the initial $45.85 rate to $37.20
($0.284 per call multiplied by 131 calls). As a result of this adjustment, the
provision recorded in the year ended December 31, 1997 for reduced dial-around
compensation is approximately $3.3 million. For periods beginning November 7,
1996 but prior to the release of the 1999 Payphone Order, the Company has
recorded dial-around compensation at the rate of $37.20 per payphone per month.
The Company believes that it is legally entitled to fair compensation
under the 1996 Telecom Act for dial-around calls, which the Company delivered
to any carrier during the period November 7, 1996 to October 6, 1997. Based on
the information available, the Company
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<PAGE> 13
believes that the minimum amount it is entitled to as fair compensation under
the 1996 Telecom Act for the period November 7, 1996 to October 6, 1997 is
$31.18 per payphone per month (131 calls multiplied by $0.238 per call) and the
Company, based on the information available to it, does not believe that it is
reasonably possible that the amount will be materially less than $31.18 per
payphone per month.
While the amount of $0.24 per call constitutes the FCC's current
designation of the minimum level of fair compensation following the April 21,
1999 effective date, certain IXCs have asserted in the past, are asserting and
are expected to assert in the future that the appropriate level of fair
compensation should be lower than $0.24 per call.
The payment levels for dial-around calls prescribed in the 1996 and
1997 Payphone Orders significantly increase dial-around compensation revenues
to the Company over the levels received prior to implementation of the 1996
Telecom Act (although the 1999 Payphone Order moderated those increases).
However, market forces and factors outside the Company's control could
significantly affect these revenue increases. These factors include the
following: (i) the final resolution of the $0.24 rate recently ordered by the
FCC and the outcome of the pending appeal before the Court, (ii) the resolution
by the FCC of the method of allocating the initial interim period flat-rate
assessment among the IXCs and the number of calls to be used in determining the
amount of the assessment, (iii) the possibility of other litigation seeking to
modify or overturn the 1999 Payphone Order or portions 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 MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
For the three months ended March 31, 2000, total revenues decreased
approximately $8.0 million, or 18.1%, from approximately $44.4 million in the
three months ended March 31, 1999 to approximately $36.4 million in the same
period of 2000. This decrease was primarily attributable to the removal of
non-profitable phone locations, lower call volumes on the Company's payphones
resulting from the growth in wireless communication services and changes in
call traffic.
Coin call revenues decreased approximately $6.3 million, or 22.6%,
from approximately $28.0 million in the first quarter of 1999 to approximately
$21.7 million in the first quarter of 2000. The decrease in coin call revenues
was primarily attributable to a reduction in the number of payphones from
82,586 to 72,864 as a result of the Company's ongoing strategy to remove
unprofitable phones, and lower call volumes on the Company's payphones
resulting from increased competition from wireless communication services.
Non-coin call revenues, which is comprised primarily of dial-around
revenue and long distance revenue, decreased approximately $1.7 million or
10.5%, from approximately $16.4 million in the three months ended March 31,
1999 to approximately $14.7 million in the three months ended March 31, 2000.
Dial-around revenue decreased approximately $0.7 million, from approximately
$9.2 million in the three months ended March 31, 1999 to approximately $8.5
million in the first quarter of 2000. The dial-around decrease is primarily
attributable to the removal of approximately 9,722 unprofitable phones and
increased competition from wireless services. Long-distance revenues decreased
approximately $1.9 million, from approximately $7.2 million in the first
quarter of 1999 to approximately $5.3 million in the three months ended March
31, 2000. During the first quarter of 1999, long distance services were managed
through the Company's switch. Revenue was recorded for the gross billings and
service, maintenance and network costs were recorded for the cost of the
carrier services. Subsequent to March 31, 1999,
11
<PAGE> 14
the switch was shutdown and long distance services are now provided by third
parties who pay Davel a commission on the gross billings. These third parties
incur the expense related to the carrier services. Non-coin revenues decreased
by approximately $0.9 million as a result of the closure of the switch and the
change in recording revenue on a gross basis versus recording the commissions
on the gross billings. The remaining $1.0 million is primarily attributable to
increased competition from wireless communications services. These decreases
were partially offset by an increase in advertising revenue of approximately
$0.9 million in the first quarter of 2000.
Telephone charges decreased approximately $1.9 million or 15.7%, from
approximately $11.8 million for the quarter ended March 31, 1999 to
approximately $9.9 million in the three months ended March 31, 2000. The
Company's average monthly telephone charge on a per phone basis decreased from
approximately $48 per-phone, per-month at March 31, 1999 to approximately $41
per-phone, per-month at March 31, 2000 due to negotiation of more favorable
contracts with LECs and Competitive Local Exchange Carriers for local exchange
telephone services. The Company is currently negotiating contracts that it
believes will further reduce local access charges on a per-phone basis, but is
unable to estimate the impact of further telephone charge reductions at this
time.
Commissions decreased approximately $1.8 million, or 16.9%, from
approximately $10.4 million in the first quarter of 1999 to approximately $8.7
million in the three months ended March 31, 2000. The decrease was primarily
attributable to lower commissionable revenues from the reduced number of
Company payphones. Commissions as a percentage of revenues remained relatively
stable between the periods.
Service, maintenance and network costs decreased approximately $5.6
million, or 42.3%, from approximately $13.3 million in the first quarter of
1999 to approximately $7.7 million in the three months ended March 31, 2000.
Service, maintenance and network costs decreased from 29.9% of total revenues
in the first quarter of 1999 compared to 21.1% of total revenues in the first
quarter of 2000. The decrease was primarily attributable to: (1) $0.9 million
reduction due to elimination of the Company's switch, and (2) $4.7 million in
cost savings generated from consolidation of duplicate offices as a result of
the Peoples Merger, increased geographic density of the phones and the
Company's ability to improve efficiency on servicing the Company's payphones.
Additionally, surcharges assessed to provide funding for universal telephone
service were previously based on total coin revenue volume. Recent court
rulings have isolated the surcharge to interstate coin revenues only, thereby
significantly reducing the Company's liability. This accounted for
approximately $0.7 million of the reduction in service, maintenance and network
costs in the first quarter of 2000 as compared to the first quarter of 1999.
Depreciation and amortization were $4,595 and $4,074, respectively, in
the first quarter of 2000 and $5,130 and $3,845, respectively, in the first
quarter of 1999. The decrease in depreciation expense is primarily a result of
fewer phones being in service.
Amortization expense increased as a result of an acceleration of site
contact amortization of phones taken out of service. This increase was
partially offset by the elimination of goodwill and the site contract
intangible asset related to a 1998 purchase of assets from Communications
Central, Inc. ("CCI"). The write-off of these CCI assets occurred at September
30, 1999.
Selling, general and administrative expenses decreased approximately
$0.9 million, or 17.0%, from approximately $5.1 million in the first quarter of
1999 to approximately $4.2 million in the three months ended March 31, 2000.
The decrease was primarily attributable to the fact that the Company
experienced additional costs in the first quarter of 1999 related to the
consolidation of its administrative functions into a single, larger facility in
Tampa, Florida, subsequent to the People's Merger.
12
<PAGE> 15
Interest expense in the three months ended March 31, 2000 increased
approximately $1.4 million, or 27.2%, compared to the prior-year period, from
approximately $5.3 million in the first quarter of 1999 to approximately $6.7
million in the first quarter of 2000. This increase is attributable to: (1)
$1.0 million from higher average interest rates related to the Company's Senior
Credit Facility, and (2) $0.4 million write-off of deferred financing costs
related to the Second Amendment to the Credit Agreement See "Liquidity and
Capital Resources."
Net loss decreased approximately $1.1 million, or 10.2% from the
prior-year period, from approximately $10.4 million in the three months ended
March 31, 1999 to approximately $9.3 million in the first quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Historically, the Company's primary sources of liquidity have been
cash from operations and borrowings under various credit facilities. The
Company's revenues and net income from its payphone operating regions are
affected by seasonal variations, geographic distribution of payphones, removal
of unprofitable phones and type of location. Because many of the payphones are
located outdoors, weather patterns have differing effects on the Company's
results depending on the region of the country where the payphones are located.
Phones located in the southern United States produce substantially higher call
volume in the first and second quarters 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.
In the first quarter of 2000, operating activities used $8.1 million
of net cash, compared to a usage of $1.1 million in the first quarter of 1999,
primarily due to increased payments of location contracts of approximately $5.3
million and litigation settlement approximating $0.5 million. The remaining
$1.2 million increase is attributable to timing differences of payments on
accounts payable.
The Company's principal uses of liquidity will be to provide working
capital, meet debt service requirements and finance the Company's strategic
plans. At March 31, 2000, the Company had an available borrowing capacity of
$11.8 million under the revolving credit facility.
Cash flows used in investing activities totaled approximately $1.6
million in the three months ended March 31, 2000, consisting of capital
expenditures for the installation of new payphones. The Company's investing
activities in the first quarter of 2000 were financed primarily through
additional borrowings of $10.4 million from the revolving line of credit.
Credit Agreement
In connection with the Peoples Merger the Company entered into a
senior credit facility ("Senior Credit Facility") with Bank of America,
formerly known as NationsBank, N.A. (the "Administrative Agent"), and the other
lenders named therein (the "Lenders"). The Senior Credit Facility provides for
borrowings by Davel from time to time of up to $245.0 million, including a $45
million revolving facility, 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.
13
<PAGE> 16
The Company's borrowings under the Senior Credit Facility bear
interest at a floating rate and may be maintained as Base Rate Loans (as
defined in the Senior Credit Facility) or, at the Company's option, as
Eurodollar Loans (as defined in the Senior Credit Facility). Base Rate Loans
shall bear interest at the Base Rate (defined as the higher of (i) the
applicable prime lending rate of Bank of America or (ii) the Federal Reserve
reported certificate of deposit rate plus 1%). Eurodollar Loans shall bear
interest at the Eurodollar Rate (as defined in the Senior Credit Facility, as
amended).
The Company is required to pay the lenders under the Senior Credit
Facility a commitment fee, payable in arrears on a quarterly basis, on the
average unused portion of the Senior Credit Facility during the term of the
facility. The Company is also required to pay an annual agency fee to the
Agent. In addition, the Company was also required to pay an arrangement fee for
the account of each bank in accordance with the banks' respective pro rata
share of the Senior Credit Facility. The Administrative Agent and the other
lenders will receive such other fees as have been separately agreed upon with
the Administrative Agent.
The Senior Credit Facility requires the Company to meet certain
financial tests, including, without limitation, maximum levels of debt as a
ratio of EBITDA (as defined in the Senior Credit Facility and subsequent
amendments), minimum interest and fixed charge ratios and maximum amount of
capital expenditures. The Senior Credit Facility also contains certain
covenants that, among other things, will limit the incurrence of additional
indebtedness, prepayments of other indebtedness, liens and encumbrances and
other matters customarily restricted in such agreements.
First Amendment to Credit Agreement
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 who are party to the agreement agreed to the First
Amendment to Credit Agreement and Consent and Waiver (the "First Amendment")
which waived compliance, for the fiscal quarter ended March 31, 1999, with the
financial covenants set forth in the Senior Credit Facility. In addition, the
First Amendment waived any event of default related to two acquisitions made by
the Company in the first quarter of 1999, and waived the requirement that the
Company deliver annual financial statements to the Lenders within 90 days of
December 31, 1998, provided that such financial statements be delivered no
later than April 15, 1999. The First Amendment also provided for the following:
o Amendment of the applicable percentages for Eurodollar Loans for the
period between April 1, 1999 and June 30, 2000 at each pricing level
to 0.25% higher than those in the previous pricing grid
o Payment of debt from receipt of dial-around compensation accounts
receivable related to the period November 1996 through October 1997
o Further limitations on permitted acquisitions as defined in the Credit
Agreement through June 30, 2000
o During the period April 1, 1999 to June 30, 2000, required Lenders'
consent for the making of loans or the issuance of letters of credit
if the sum of revolving loans outstanding plus letter of credit
obligations outstanding exceeds $50.0 million
o The introduction of a new covenant to provide certain operating data
to the Lenders on a monthly basis
14
<PAGE> 17
o Increases in the maximum allowable ratio of funded debt to EBITDA
through the quarter ended June 30, 2000
o Decreases in the minimum allowable interest coverage ratio through the
quarter ended June 30, 2000
o Decreases in the minimum allowable fixed charge coverage ratio through
the quarter ended June 30, 2000.
The First Amendment also places limits on capital expenditures and
required the payment of an amendment fee equal to the product of each Lender's
commitment multiplied by 0.35%.
Second Amendment to Credit Agreement
In the first quarter of 2000, the Company gave notice to the
Administrative Agent that lower than expected performance in the first quarter
of 2000 would result in the Company's inability to meet certain financial
covenants contained in the Senior Credit Facility. Effective March 9, 2000, the
Company and the Lenders agreed to the Second Amendment to Credit Agreement and
Consent and Waiver (the "Second Amendment"), which waived certain covenants
through January 15, 2001. In exchange for the covenant relief, the Company
agreed to a lowering of the available credit facility from $280.0 million to
$245.0 million (through a permanent reduction of the revolving line of credit
to $45.0 million), placement of a block on the final $10 million of borrowing
under the revolving credit facility (which requires that all of the Lenders be
notified in order to access the final $10.0 million of availability on that
facility), a fee of 35 basis points of the Lenders commitment and a moratorium
on acquisitions. The Second Amendment also provided for the following:
o Amendment of the applicable interest rates and fees to:
(a) 3.50% for all Revolving Loans which are Eurodollar Loans, all
Tranche A Term Loans which are Eurodollar Loans, and all
Letter of Credit Fees;
(b) 4.25% for all Tranche B Term Loans which are Eurodollar
Loans;
(c) 2.00% for all Revolving Loans which are Base Rate Loans and
all Tranche A Term Loans which are Base Rate Loans;
(d) 2.75% for all Tranche B Term Loans which are Base Rate Loans;
and
(e) 0.75% for all Commitment Fees;
o After March 9, 2000, introduction of a new covenant requiring 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 $35.0 million;
o The addition of a new covenant to provide financial statements to the
Lenders on a monthly basis;
o Increases in the maximum allowable ratio of funded debt to EBITDA
through the maturity date of the loan;
o Decreases in the minimum allowable interest coverage ratio through the
maturity date of the loan;
o Decreases in the minimum allowable fixed charge coverage ratio through
the maturity date of the loan;
15
<PAGE> 18
o Decreases in permitted capital expenditures to $10 million annually;
and
o Reduction of the maximum interest period for Eurodollar Loans to 30
days.
The Company believes that it is probable that it will comply with the
loan covenants for the next twelve months and, as such, has not classified the
obligations under the Senior Credit Facility as current liabilities.
The Senior Credit Facility contains customary events of default,
including without limitation, payment defaults, defaults for breaches of
representations and warranties, covenant defaults, cross-defaults to certain
other indebtedness, defaults for 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 defaults for a
change of control of the Company.
The Company believes that cash generated from operations and available
borrowings under the Senior Credit Facility will be sufficient to fund the
Company's foreseeable cash requirements, including capital expenditures,
through December 31, 2000. There can be no assurance, however, 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.
16
<PAGE> 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks inherent in the
Company's financial instruments that arise from transactions entered into in
the normal course of business. The Company is subject to variable interest rate
risk on its existing Senior Credit Facility and any future financing
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations-Liquidity and Capital Resources."
In connection with the provisions of its Senior Credit Facility and
the Company's overall interest rate management objectives, the Company utilizes
derivative financial instruments to reduce its exposure to market risks from
significant increases in interest rates. The Company's strategy is to purchase
interest rate swaps, collars and caps from large financial institutions that, in
the aggregate, maintain notional amounts exceeding 40% of the Company's
outstanding long-term debt balance to limit the impact of increases in interest
rates on the Company's variable rate long-term debt.
As of March 31, 2000, the Company has interest rate cap agreements with
an aggregate notional amount of $40.0 million that terminate in March 2000. The
interest rate cap agreements require premium payments to the counter party based
on the notional amount of the contracts that are capitalized and amortized to
interest expense over the life of the contract. These agreements entitle the
Company to receive quarterly payments from the counter parties for amounts, if
any, by which the U.S. three-month LIBOR rate exceeds 7%. In addition, the
Company has an interest rate collar agreement that terminates in February 2002,
and two interest rate swap agreements that terminate in March 2001 and June
2001. The notional amount of the interest rate collar is $25.0 million and the
agreement has a cap rate of 7.0% and a floor rate of 4.8% based on the U.S. one
month LIBOR rate. The notional value of the swaps approximates $18.9 million at
March 31, 2000. The Company pays 5.66% on an amortizing notional amount ($13.4
million at March 31, 2000) and 5.92% on a separate amortizing notional amount
($5.5 million at March 31, 2000) and receives the three-month LIBOR from the
respective financial institutions.
Based upon the Company's variable rate indebtedness and weighed
average interest rates at March 31, 2000, a ten percent change in market rates
of interest would impact future cash outflows for interest payments or inflows
through interest savings by approximately $0.6 million per quarter.
These amounts were determined by considering the impact of
hypothetical interest rates on the Company's financial instruments. These
analyses do not consider the effects of the reduced level of overall economic
activity that could exist in such an environment. Further, in the event of a
change of such magnitude, management would likely take actions to further
mitigate its exposure to the change. However, due to the uncertainty of
specific actions that would be taken and their possible effects, this analysis
assumes no changes in the Company's financial structure.
17
<PAGE> 20
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 25, 2000, the Company held its 1999 Annual Meeting of
Stockholders in Chicago, Illinois. One proposal was brought before the
stockholders for a vote. The proposal was to elect eight members of the
Company's Board of Directors. The Company's directors hold one-year terms and
are subject to annual re-election by the stockholders. The stockholders elected
each nominee who was proposed for election. The following tabulation displays
the names of each nominee elected, the number of votes cast for each nominee,
and the number of votes withheld for each nominee.
Name of Nominee Number of Votes For Number of Votes Withheld
--------------- ------------------- ------------------------
Samuel Zell 6,757,172 21,864
Michael E. Hayes 6,755,682 23,354
David R. Hill 6,755,855 23,181
Robert D. Hill 6,756,055 22,981
F. Philip Handy 6,755,202 23,834
Justin S. Maccarone 6,757,172 21,864
Thomas M. Vitale 6,757,172 21,864
A. Jones Yorke, IV 6,757,172 21,864
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index
(b) On February 28, 2000, the Company filed a Current Report
on Form 8-K, announcing the appointment of Raymond A.
Gross as Chief Executive Officer, as well as naming other
officers.
18
<PAGE> 21
EXHIBIT INDEX
EXHIBITS DESCRIPTION
- -------- -----------
27.1 Financial Data Schedule
19
<PAGE> 22
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: May 15, 2000 /s/ William K. Breaden
---------------------------- -------------------------------------
William K. Breaden
Senior Vice President and
Chief Financial Officer
20
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