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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 JUNE 30, 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.
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(Exact name of registrant as specified in its charter)
DELAWARE 59-3538257
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(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) I.D. No.)
10120 WINDHORST ROAD, TAMPA, FL 33619
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(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 July 31, 2000, there were 11,143,420 shares of the Registrant's Common
Stock outstanding.
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<PAGE>
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..................................... 4
Notes to Consolidated Financial Statements................................ 5
ITEM 2
Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 10
Liquidity and Capital Resources........................................... 16
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk................ 20
PART II OTHER INFORMATION
ITEM 1
Legal Proceedings......................................................... 21
ITEM 6
Exhibits and Reports on Form 8-K.......................................... 21
Exhibit Index............................................................. 22
<PAGE>
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
UNAUDITED
JUNE 30, DECEMBER 31,
2000 1999
--------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 6,941 $ 7,950
Trade accounts receivable, net of allowance for doubtful
accounts of $11,114 and $10,880, respectively 21,091 22,983
Other current assets 1,709 1,048
--------- ---------
TOTAL CURRENT ASSETS 29,741 31,981
Property and equipment, net 108,720 115,558
Location contracts, net 17,100 20,852
Goodwill, net 5,368 6,290
Other assets 5,932 6,080
--------- ---------
TOTAL ASSETS $ 166,861 $ 180,761
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current maturities of long-term debt and
obligations under capital leases $ 235,790 $ 21,535
Accounts payable and accrued liabilities 25,561 27,484
--------- ---------
TOTAL CURRENT LIABILITIES 261,351 49,019
--------- ---------
Long-term debt and obligations under capital leases 1,165 206,509
Deferred revenue 208 312
--------- ---------
TOTAL LIABILITIES 262,724 255,840
--------- ---------
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, 11,143,420 and 11,033,628 shares
issued and outstanding, respectively 111 110
Additional paid-in capital 128,617 128,338
Accumulated deficit (224,591) (203,527)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (95,863) (75,079)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 166,861 $ 180,761
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
1
<PAGE>
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30
(IN THOUSANDS, EXCEPT SHARE DATA)
2000 1999
------------ ------------
REVENUES
Coin calls $ 22,098 $ 29,787
Non-coin calls 13,354 16,968
------------ ------------
TOTAL REVENUES 35,452 46,755
------------ ------------
COSTS AND EXPENSES
Telephone charges 9,846 10,502
Commissions 7,955 10,275
Service, maintenance and network costs 9,082 11,175
Depreciation and amortization 8,906 8,347
Selling, general and administrative 5,028 6,028
------------ ------------
TOTAL OPERATING COSTS AND EXPENSES 40,817 46,327
------------ ------------
OPERATING INCOME (LOSS) (5,365) 428
Interest expense 6,400 6,052
Other (income) expense (94) (136)
------------ ------------
LOSS FROM OPERATIONS BEFORE INCOME TAXES (11,671) (5,488)
Income tax expense (benefit) 49 --
------------ ------------
NET LOSS $ (11,720) $ (5,488)
============ ============
BASIC AND DILUTED LOSS PER SHARE $ (1.05) $ (0.53)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 11,121,662 10,536,860
============ ============
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
2
<PAGE>
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30
(IN THOUSANDS, EXCEPT SHARE DATA)
2000 1999
------------ ------------
REVENUES
Coin calls $ 43,805 $ 57,819
Non-coin calls 28,048 33,381
------------ ------------
TOTAL REVENUES 71,853 91,200
------------ ------------
COSTS AND EXPENSES
Telephone charges 19,763 22,274
Commissions 16,610 20,691
Service, maintenance and network costs 16,758 24,478
Depreciation and amortization 17,575 17,322
Selling, general and administrative 9,254 11,117
------------ ------------
TOTAL OPERATING COSTS AND EXPENSES 79,960 95,882
------------ ------------
OPERATING INCOME (LOSS) (8,107) (4,682)
Interest expense 13,031 11,319
Other (income) expense (123) (113)
------------ ------------
LOSS FROM OPERATIONS BEFORE INCOME TAXES (21,015) (15,888)
Income tax expense (benefit) 49 --
------------ ------------
NET LOSS $ (21,064) $ (15,888)
============ ============
BASIC AND DILUTED LOSS PER SHARE $ (1.90) $ (1.52)
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 11,090,008 10,536,860
============ ============
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
3
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<TABLE>
<CAPTION>
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30
(IN THOUSANDS)
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(21,064) $(15,888)
Adjustments to reconcile net loss to cash flows
from operating activities:
Depreciation and amortization 17,575 17,322
Amortization of deferred financing costs 962 430
Write-off of fixed assets 42 --
Increase (decrease) in allowance for doubtful accounts 234 3,104
Stock issued as payment for services provided 280 7
Changes in assets and liabilities:
Accounts receivable 1,658 985
Other assets (1,744) 2,508
Accounts payable and accrued liabilities (1,923) (7,984)
Payment for certain location contracts (2,368) (1,223)
Deferred revenue (104) --
-------- --------
NET CASH FLOWS USED IN OPERATING ACTIVITIES (6,452) (739)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (3,468) (6,785)
Purchase of payphone assets, net of cash acquired -- (5,123)
-------- --------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (3,468) (11,908)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt (5,238) (4,316)
Net proceeds under revolving line of credit 13,800 11,500
Borrowing under capital leases 723 --
Principal payments under capital lease obligations (374) (245)
Payment of preferred stock dividend -- (95)
-------- --------
NET CASH FLOWS PROVIDED BY FINANCING ACTIVITIES 8,911 6,844
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,009) (5,803)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,950 17,162
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,941 $ 11,359
======== ========
CASH PAID FOR INTEREST $ 10,000 $ 1,039
======== ========
CASH PAID FOR TAXES $ 49 $ 0
======== ========
NON-CASH ACTIVITIES:
STOCK ISSUED AS PAYMENT FOR SERVICES PERFORMED $ 280 $ 7
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
4
<PAGE>
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. BASIS OF PRESENTATION
The accompanying consolidated balance sheet of Davel Communications,
Inc. and subsidiaries (the "Company") as of June 30, 2000, and the related
consolidated statements of operations and of cash flows for the three and
six-month periods ended June 30, 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 year ended December 31, 1999 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 and six month
periods ended June 30, 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 69,000 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. LIQUIDITY
The Company's ability to fund operations, make capital expenditures and
meet its debt service obligations or to refinance its indebtedness will depend
upon its future financial and operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors, some
of which are beyond its control. There can be no assurance that the Company's
results of operations, cash flows, and capital resources will be sufficient to
fund its operations and capital expenditures.
The Company's ability to meet its debt service obligations is also
dependent upon obtaining additional modifications to the Senior Credit Facility.
The Company is currently in negotiations with the Lenders to obtain
modifications related to the debt amortization schedule, as well as the loan
covenants. Debt amortization payments totaling approximately $10.5 million and
interest payments of approximately $6.5 million is currently scheduled to be due
and payable on September 30, 2000. Because of these pending payments and the
probable violation of the loan covenants at September 30, 2000, the Company has
classified the obligations under the Senior Credit Facility as current
liabilities, in accordance with Emerging Issues Task Force Issue No. 86-30,
"Classification of Obligations when a Waiver is Obtained by the Creditor."
In the absence of improved operating results and a modification to the
Senior Credit Facility, the Company may face liquidity problems and might be
required to dispose of material assets or operations to fund its operations and
make capital expenditures and to meet its debt service and other obligations,
and there can be no assurances as to the timing of such sales or the proceeds
that the Company could realize therefrom. The Company has been advised by its
independent certified public accountants that, if these contingencies have not
been resolved prior to the completion of their audit of the Company's financial
statements for the year ending December 31, 2000, their auditors' report on
those financial statements may be modified for those contingencies.
3. RECLASSIFICATIONS
Certain reclassifications have been made to prior year amounts to
conform to the current period presentation.
4. 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 employee termination benefits for 143 excess field
operations and administrative personnel. The following table summarizes reserves
utilized during the quarter ended June 30, 2000.
5
<PAGE>
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(CONTINUED)
<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 March 31, 2000 $ 59 $ -- $ -- $ -- $ 59
Utilized during the quarter
Ended: June 30, 2000 (13) -- -- -- (13)
-------- -------- -------- -------- --------
Remaining reserve at
June 30, 2000 $ 46 $ -- $ -- $ -- $ 46
======== ======== ======== ======== ========
</TABLE>
5. 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.
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
6
<PAGE>
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(CONTINUED)
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. The new rate became
effective April 21, 1999, and will likely serve as the default rate through the
end of 2001. 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 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 issuance of the 1999 Payphone Order, both the PSPs and
IXCs petitioned the Court for appellate review. On June 16, 2000, after full
briefing and oral argument, the Court affirmed the 1999 Payphone Order and the
establishment of a $0.24 dial around rate. On all of the issues raised by those
challenging the FCC's decision, the Court denied the appeals and found that the
FCC's rulings were not "arbitrary and capricious". As a result of the Court's
affirmance, the $0.24 "default" payment measure is likely to remain in place at
least until the end of 2001, when the FCC has
7
<PAGE>
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(CONTINUED)
indicated it will complete a third-year review of the dial around compensation
rate. While a petition to the U.S. Supreme Court for certiorari review of the
most recent Court order affirming the 1999 Payphone Order may be filed on or
before September 14,2000, the Company does not believe such an appeal is likely
or would be successful if pursued, although no assurances can be given.
While the Company believes that a rate higher than $0.24 per call is
well justified on the record established in the relevant proceedings, the
Company also believes there is a benefit associated with the Court's affirmance
of the 1999 Payphone Order, in terms of removing the significant uncertainty
that previously surrounded this important aspect of the Company's business and
by allowing the industry to focus its full energies on seeking financially
beneficial improvements to the dial around compensation collection process.
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 recognizes revenues from dial-around calls based on
estimates of calls made and the FCC mandated rate of $0.24 per call. The Company
recorded dial-around compensation revenue, net of adjustments, of approximately
$35.9 million for the year ended December 31, 1999 and approximately $16.4
million for the six months ended June 30, 2000.
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.
6. 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.
8
<PAGE>
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(CONTINUED)
7. COMPREHENSIVE INCOME (LOSS)
For the three and six months ended June 30, 2000, there is no difference
between comprehensive loss and net loss as presented on the accompanying
statements of operations.
8. COMMITMENTS & CONTINGENCIES
On or about October 31, 1998, PhoneTel Technologies, Inc. ("PhoneTel")
named the Company as a third party defendant to the action and counterclaimed
seeking specific performance of a certain merger agreement. Parties commenced
discovery, and, on December 17, 1998, Peoples moved to dismiss the action. On or
about February 15, 2000, the parties submitted a status report to the Court of
Chancery, indicating the matter has been stayed pending PhoneTel's bankruptcy
filed in the district court for the Southern District of New York. Although the
bankruptcy is apparently no longer a bar to litigation, there has been no
activity in the case since the February 15, 2000 status report. The Company, at
this time, cannot predict the outcome of this litigation.
In December 1999, the Company and its affiliate Telaleasing Enterprises,
Inc. were sued in the United States District Court, Central District of
California, by Telecommunications Consultant Group, Inc. ("TCG") and U.S.
Telebrokers, Inc. ("UST"), two payphone consulting companies who assisted the
Company in obtaining a telephone placement agreement with CSK Auto, Inc. The
suit alleges that the Company breached its commission agreement with the
plaintiffs based on the Company's wrongful rescission of its agreement with CSK
Auto, Inc. Plaintiffs' amended complaint alleges damages in excess of $700,000.
The Company has filed a motion to dismiss the amended complaint. No discovery
has been conducted to date. The Company intends to vigorously defend the case.
In March 2000, the Company and its affiliate Telaleasing Enterprises,
Inc. were sued in Maricopa County, Arizona Superior Court by CSK Auto, Inc.
("CSK"). The suit alleges that the Company breached a location agreement between
the parties. CSK's complaint alleges damages in excess of $5,000,000. No
discovery has been conducted to date. The Company intends to vigorously defend
the case.
9
<PAGE>
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.
With the exception of historical information (information relating to
the Company's financial condition and results of operations at historical dates
or for historical periods), the matters discussed in this Management's
Discussion and Analysis of financial Condition and Result of Operations ("MD&A")
are forward-looking statements that necessarily are based on certain assumptions
and are subject to certain risks and uncertainties. The forward-looking
statements are based on management's expectations as of the date hereof. Actual
future performance and results could differ from that contained in or suggested
by these forward-looking statements as a result of the factors set forth in this
MD&A and related filings with the Securities and Exchange Commission. The
Company assumes no obligation to update any such forward-looking statements.
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 and the first six months of 2000, 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 billing. The Company utilizes various local and long-distance
carriers such as Sprint and AT&T 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 or to make
traditional "toll free" calls. These types of calls are commonly referred to as
"dial-around" calls. 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.
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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 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 six
months 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.
There can be no assurances that such trends will not continue
DIAL-AROUND COMPENSATION
On September 20, 1996, the FCC adopted rules which became effective
November 7, 1996. The 1996 Payphone Order initially mandated dial-around
compensation for both access code calls and 800 subscriber calls at a flat rate
of $45.85 per payphone per month (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 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.
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.
In accordance with the court's second mandate, on February 4, 1999, the
FCC released 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
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effective on April 21, 1999 and will likely serve as a default rate through the
end of 2001. 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. Subsequent to issuance of the 1999 Payphone Order,
both the PSPs and IXCs petitioned the Court for appellate review. On June 16,
2000, after full briefing and oral argument, the Court affirmed the 1999
Payphone Order and the establishment of a $0.24 dial around rate. On all of the
issues raised by those challenging the FCC's decision, the Court denied the
appeals and found that the FCC's rulings were not "arbitrary and capricious". As
a result of the Court's affirmance, the $0.24 "default" payment measure is
likely to remain in place at least until the end of 2001, when the FCC has
indicated it will complete a third-year review of the dial around compensation
rate. While a petition to the U.S. Supreme Court for certiorari review of the
most recent Court order affirming the 1999 Payphone Order may be filed on or
before September 14, 2000, the Company does not believe such an appeal is likely
or would be successful if pursued, although no assurances can be given.
While the Company believes that a rate higher than $0.24 per call is
well justified on the record established in the relevant proceedings, the
Company also believes there is a benefit associated with the Court's affirmance
of the 1999 Payphone Order, in terms of removing the significant uncertainty
that previously surrounded this important aspect of the Company's business and
by allowing the industry to focus its full energies on seeking financially
beneficial improvements to the dial-around compensation collection process. 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.
Based on the FCC's conclusion in the 1997 Payphone Order, the Company
adjusted the amounts of dial-around compensation previously recorded for the
period November 7, 1996 to June 30, 1997 from the initial $45.85 rate to $37.20
($0.284 per call multiplied by 131 calls). As a result of this adjustment, the
provision recorded in the year ended December 31, 1997 for reduced dial-around
compensation is approximately $3.3 million. For periods beginning November 7,
1996 but prior to the release of the 1999 Payphone Order, the Company has
recorded dial-around compensation at the rate of $37.20 per payphone per month.
The Company believes that it is legally entitled to fair compensation
under the 1996 Telecom Act for dial-around calls, which the Company delivered to
any carrier during the period November 7, 1996 to October 6, 1997. Based on the
information available, the Company believes that the minimum amount it is
entitled to as fair compensation under the 1996 Telecom Act for the period
November 7, 1996 to October 6, 1997 is $31.18 per payphone per month (131 calls
multiplied by $0.238 per call) and the Company, based on the information
available to it, does not believe that it is reasonably possible that the amount
will be materially less than $31.18 per payphone per month.
While the amount of $0.24 per call constitutes the 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
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the following: (i) the final resolution of the $0.24 rate currently ordered by
the FCC and subject to a further discretionary appeal to the U.S. Supreme 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 JUNE 30, 2000 (THE "2000 QUARTER") COMPARED TO THREE MONTHS
ENDED JUNE 30, 1999 (THE "1999 QUARTER")
For the three months ended June 30, 2000, total revenues decreased
approximately $11.3 million, or 24.2%, from approximately $46.8 million in the
three months ended June 30, 1999 to approximately $35.5 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 $7.7 million, or 25.8%, from
approximately $29.8 million in the 1999 Quarter to approximately $22.1 million
in the 2000 Quarter. The decrease in coin call revenues was primarily
attributable to a reduction in the number of payphones from approximately 83,000
at the beginning of 1999 to approximately 69,000 at June 30, 2000, which
resulted from the Company's ongoing strategy to remove unprofitable phones, as
well as lower call volumes on the Company's payphones resulting from increased
competition from wireless and other public communication services.
Non-coin call revenues, which is comprised primarily of dial-around
revenue and long distance revenue, decreased approximately $3.6 million or
21.3%, from approximately $17.0 million in the 1999 Quarter to approximately
$13.4 million in the 2000 Quarter. Dial-around revenue decreased approximately
$1.4 million, or 15.1%, from approximately $9.3 million in the 1999 Quarter to
approximately $7.9 million in the 2000 Quarter. The dial-around decrease is
primarily attributable to the removal of approximately 14,000 unprofitable
phones and increased competition from wireless and other public communication
services. Long-distance revenues decreased approximately $1.9 million, or 27.7%,
from approximately $6.7 million in the 1999 Quarter to approximately $4.8
million in the 2000 Quarter. During the 1999 Quarter, long distance services
were partially managed through the Company's switch. During the 1999 Quarter, a
portion of the long-distance revenues was recorded at a gross billings amount
and service, maintenance and network costs were recorded for the cost of the
carrier services that related to those billings. During 1999, the switch was
phased out and shutdown in November 1999. Long distance services are now
provided by third parties who pay Davel a commission based on their gross
billings of services through our phones. These third parties incur the expense
related to their network services. The decrease in non-coin revenue is primarily
attributable to increased competition from wireless and other public
communications services. Additionally, a decrease in advertising revenues was
attributable to the transition of the advertising contract from a flat rate to a
commission based rate based on usage of certain dial-around numbers. This change
resulted in a decrease in advertising revenues of $0.3 million for the 2000
Quarter compared to the 1999 Quarter.
Telephone charges decreased approximately $0.7 million, or 6.2%, from
approximately $10.5 million for the 1999 Quarter to approximately $9.8 million
in the 2000 Quarter. 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 $2.3 million, or 22.6%, from
approximately $10.3 million in the 1999 Quarter to approximately $8.0 million in
the 2000 Quarter. 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.
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Service, maintenance and network costs decreased approximately $2.1
million, or 18.7%, from approximately $11.2 million in the 1999 Quarter to
approximately $9.1 million in the 2000 Quarter. The decrease was primarily
attributable to cost savings generated from consolidation of duplicate offices
as a result of the Peoples Merger, increased geographic concentration 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.
Court rulings during the 2000 first quarter have isolated the surcharge to
interstate coin revenues only.
Depreciation and amortization were $5.3 million and $3.6 million,
respectively, in the 2000 Quarter and $5.4 million and $2.9 million,
respectively, in the 1999 Quarter. 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
location contract amortization related to phones taken out of service. This
increase was partially offset by the elimination of goodwill and the location
contract intangible asset related to a 1998 purchase of assets from
Communications Central, Inc. ("CCI"). The write-off of these CCI assets occurred
during the quarter ending September 30, 1999.
Selling, general and administrative expenses decreased approximately
$1.0 million, or 16.6%, from approximately $6.0 million in the 1999 Quarter to
approximately $5.0 million in the 2000 Quarter. The decrease was primarily
attributable to the fact that the Company experienced additional costs in the
second 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.
Interest expense in the 2000 Quarter increased approximately $0.3
million, or 5.1%, compared to the 1999 Quarter, from approximately $6.1 million
in the 1999 Quarter to approximately $6.4 million in the 2000 Quarter. This
increase is attributable to higher average interest rates related to the
Company's Senior Credit Facility.
Net loss increased approximately $6.2 million from the prior-year
period, from approximately $5.5 million in the 1999 Quarter to approximately
$11.7 million in the 2000 Quarter.
SIX MONTHS ENDED JUNE 30, 2000 (THE "2000 PERIOD") COMPARED TO SIX MONTHS ENDED
JUNE 30, 1999 (THE "1999 PERIOD")
Total revenues decreased approximately $19.3 million, or 21.2%, from
approximately $91.2 million in the 1999 Period to approximately $71.9 million in
the 2000 Period. 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 and other public communication services
and changes in call traffic.
Coin call revenues decreased approximately $14.0 million, or 24.2%, from
approximately $57.8 million in the 1999 Period to approximately $43.8 million in
the 2000 Period. The decrease in coin call revenues was primarily attributable
to a reduction in the number of payphones from approximately 83,000 at the
beginning of 1999 to approximately 69,000 at June 30, 2000, which resulted from
the Company's ongoing strategy to remove unprofitable phones, as well as lower
call volumes on the Company's payphones resulting from increased competition
from wireless and other public communication services.
Non-coin call revenues, which is comprised primarily of dial-around
revenue and long distance revenue, decreased approximately $5.3 million, or
16.0%, from approximately $33.4 million in the 1999 Period to approximately
$28.1 million in the 2000 Period. Dial-around revenue decreased approximately
$2.0 million, from approximately $18.4 million in the 1999 Period to
approximately $16.4 million in the 2000 Period. The
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dial-around decrease is primarily attributable to the removal of approximately
14,000 unprofitable phones and increased competition from wireless and other
public communication services. Long-distance revenues decreased approximately
$3.8 million, from approximately $13.9 million in the 1999 Period to
approximately $10.1 million in the 2000 Period. During the 1999 Period, 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. During 1999, the switch was
phased out and shutdown in November 1999. Long distance services are now
provided by third parties who pay Davel a commission on their gross billings.
These third parties incur the expense related to their 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 $2.9
million is primarily attributable to increased competition from wireless and
other public communications services. These decreases were partially offset by
an increase in advertising revenue of approximately $0.5 million in the 2000
Period.
Telephone charges decreased approximately $2.5 million or 11.3%, from
approximately $22.3 million for the 1999 Period to approximately $19.8 million
in the 2000 Period. 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 $4.1 million, or 19.7%, from
approximately $20.7 million in the 1999 Period to approximately $16.6 million in
the 2000 Period. 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 $7.7
million, or 31.5%, from approximately $24.5 million in the 1999 Period to
approximately $16.8 million in the 2000 Period. Service, maintenance and network
costs decreased from 26.8% of total revenues in the 1999 Period compared to
23.3% of total revenues in the 2000 Period. The decrease was primarily
attributable to: (1) $0.9 million reduction due to elimination of the Company's
switch, and (2) $6.1 million in cost savings generated from consolidation of
duplicate offices as a result of the Peoples Merger, increased geographic
concentration 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. Court rulings during the 2000 first quarter 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 2000 Period as
compared to the 1999 Period.
Depreciation and amortization were $9.9 million and $7.7 million,
respectively, in the 2000 Period and $10.5 million and $6.8 million,
respectively, in the 1999 Period. 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
location contract amortization related to phones taken out of service. This
increase was partially offset by the elimination of goodwill and the location
contract intangible asset related to a 1998 purchase of assets from CCI. The
write-off of these CCI assets occurred during the quarter ending September 30,
1999.
Selling, general and administrative expenses decreased approximately
$1.9 million, or 16.8%, from approximately $11.1 million in the 1999 Period to
approximately $9.2 million in the 2000 Period. 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
Peoples Merger.
Interest expense in the 2000 Period increased approximately $1.7
million, or 15.1%, compared to the 1999 Period, from approximately $11.3 million
in the 1999 Period to approximately $13.0 million in the 2000
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Period. This increase is attributable to: (1) $1.2 million from higher average
interest rates related to the Company's Senior Credit Facility, and (2) a $0.5
million write-off of deferred financing costs related to the Second Amendment to
the Credit Agreement. See "Liquidity and Capital Resources."
Net loss increased approximately $5.2 million, or 32.6% from the
prior-year period, from approximately $15.9 million in the 1999 Period to
approximately $21.1 million in the 2000 Period.
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 mid-western and eastern United
States produce their highest call volumes during the second and third quarters.
In the 2000 Period, operating activities used $6.5 million of net cash,
compared to a usage of $0.7 million in the 1999 Period. The change in cash flow
is due primarily to $6.9 million in greater cash operating losses, offset by
$1.2 million of balance sheet improvements.
The Company's principal uses of capital resources will be to provide
working capital, meet debt service requirements and finance the Company's
strategic plans. At June 30, 2000, the Company had an available borrowing
capacity of $3.2 million under the revolving credit facility.
Cash flows used in investing activities totaled approximately $3.5
million in the 2000 Period, consisting of capital expenditures for the
installation of new payphones. The Company's investing activities in the 2000
Period were financed primarily through additional borrowings of $13.8 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.
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Indebtedness of the Company under the Senior Credit Facility is secured
by substantially all of its and its subsidiaries' assets, including but not
limited to their equipment, inventory, receivables and related contracts,
investment property, computer hardware and software, bank accounts and all other
goods and rights of every kind and description and is guaranteed by the Company
and all its subsidiaries.
The Company's borrowings under the Senior Credit Facility bear interest
at a floating rate and may be maintained as Base Rate Loans (as defined in the
Senior Credit Facility) or, at the Company's option, as Eurodollar Loans (as
defined in the Senior Credit Facility). Base Rate Loans shall bear interest at
the Base Rate (defined as the higher of (i) the applicable prime lending rate of
Bank of America or (ii) the Federal Reserve reported certificate of deposit rate
plus 1%). Eurodollar Loans shall bear interest at the Eurodollar Rate (as
defined in the Senior Credit Facility, as amended).
The Company is required to pay the lenders under the Senior Credit
Facility a commitment fee, payable in arrears on a quarterly basis, on the
average unused portion of the Senior Credit Facility during the term of the
facility. The Company is also required to pay an annual agency fee to the
Administrative 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 Senior Credit Facility (the "Lenders")
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;
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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; and
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 $10.0 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;
o Decreases in permitted capital expenditures to $10 million annually;
and
o Reduction of the maximum interest period for Eurodollar Loans to 30
days.
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THIRD AMENDMENT TO CREDIT AGREEMENT
In the second quarter of 2000, the Company gave notice to the
Administrative Agent that lower than expected performance during the first six
months of 2000 would result in the Company's inability to meet certain financial
covenants contained in the Senior Credit Facility as well as the June 30, 2000
debt amortization and interest payments. On June 22, 2000, the Company and the
Lenders who are party to the agreement agreed to the Third Amendment to Credit
Agreement (the "Third Amendment"), which eliminated the financial covenant
compliance test for the fiscal quarter ended June 30, 2000, as was set forth in
the Senior Credit Facility. The Third Amendment also provided for the following:
o Term Loan A amortization payments totaling $5.0 million scheduled for
June 30, 2000 would be due on September 30, 2000 together with the $5.0
million amortization payment scheduled for that date. The total Term A
amortization payments due on September 30, 2000 are $10.0 million;
o Term Loan B amortization payments totaling approximately $0.2 million
scheduled for June 30, 2000 would be due on September 30, 2000 together
with the approximately $0.2 million amortization payment scheduled for
that date. The total Term B amortization payments due on September 30,
2000 are approximately $0.5 million;
o Interest payments due on June 30, 2000 became due and were paid on
July 10, 2000; and
o All interest otherwise due and payable on each interest payment date
occurring after June 30, 2000 and before September 30, 2000 shall
continue to accrue on the applicable loans from and after such interest
payment date and shall be due and payable in arrears on September 30,
2000.
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's ability to fund operations, make capital expenditures and
meet its debt service obligations or to refinance its indebtedness will depend
upon its future financial and operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors, some
of which are beyond its control. There can be no assurance that the Company's
results of operations, cash flows, and capital resources will be sufficient to
fund its operations and capital expenditures.
The Company's ability to meet its debt service obligations is also
dependent upon obtaining additional modifications to the Senior Credit Facility.
The Company is currently in negotiations with the Lenders to obtain
modifications related to the debt amortization schedule, as well as the loan
covenants. Debt amortization payments totaling approximately $10.5 million and
interest payments of approximately $6.5 million is currently scheduled to be due
and payable on September 30, 2000. Because of these pending payments and the
probable violation of the loan covenants at September 30, 2000, the Company has
classified the obligations under the Senior Credit Facility as current
liabilities, in accordance with Emerging Issues Task Force Issue No. 86-30,
"Classification of Obligations when a Waiver is Obtained by the Creditor."
In the absence of improved operating results and a modification to the
Senior Credit Facility, the Company may face liquidity problems and might be
required to dispose of material assets or operations to fund its operations and
make capital expenditures and to meet its debt service and other obligations,
and there can be no assurances as to the timing of such sales or the proceeds
that the Company could realize therefrom. The Company has been advised by its
independent certified public accountants that, if these contingencies have not
been resolved prior to the completion of their audit of the Company's financial
statements for the year ending December 31, 2000, their auditors' report on
those financial statements may be modified for those contingencies.
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.
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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 June 30, 2000, the Company has interest rate cap agreements with
an aggregate notional amount of $36.0 million that terminate in January 1, 2001.
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 monthly 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 $18.5 million at
June 30, 2000. The Company pays 5.66% on an amortizing notional amount ($13.4
million at June 30, 2000) and 5.92% on a separate amortizing notional amount
($5.1 million at June 30, 2000) and receives the three-month LIBOR from the
respective financial institutions.
Based upon the Company's variable rate indebtedness and weighted average
interest rates at June 30, 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.
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PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
On or about October 31, 1998, PhoneTel Technologies, Inc. ("PhoneTel")
named the Company as a third party defendant to the action and counterclaimed
seeking specific performance of a certain merger agreement. Parties commenced
discovery, and, on December 17, 1998, Peoples moved to dismiss the action. On or
about February 15, 2000, the parties submitted a status report to the Court of
Chancery, indicating the matter has been stayed pending PhoneTel's bankruptcy
filed in the district court for the Southern District of New York. Although the
bankruptcy is apparently no longer a bar to litigation, there has been no
activity in the case since the February 15, 2000 status report. The Company, at
this time, cannot predict the outcome of this litigation.
In December 1999, the Company and its affiliate Telaleasing Enterprises,
Inc. were sued in the United States District Court, Central District of
California, by Telecommunications Consultant Group, Inc. ("TCG") and U.S.
Telebrokers, Inc. ("UST"), two payphone consulting companies who assisted the
Company in obtaining a telephone placement agreement with CSK Auto, Inc. The
suit alleges that the Company breached its commission agreement with the
plaintiffs based on the Company's wrongful rescission of its agreement with CSK
Auto, Inc. Plaintiffs' amended complaint alleges damages in excess of $700,000.
The Company has filed a motion to dismiss the amended complaint. No discovery
has been conducted to date. The Company intends to vigorously defend the case.
In March 2000, the Company and its affiliate Telaleasing Enterprises,
Inc. were sued in Maricopa County, Arizona Superior Court by CSK Auto, Inc.
("CSK"). The suit alleges that the Company breached a location agreement between
the parties. CSK's complaint alleges damages in excess of $5,000,000. No
discovery has been conducted to date. The Company intends to vigorously defend
the case.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index
(b) No current reports on Form 8-K were filed during the quarter/
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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: August 14, 2000 /s/ WILLIAM K. BREADEN
----------------------
William K. Breaden
SENIOR VICE PRESIDENT, TREASURER,
CHIEF FINANCIAL OFFICER
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 Third Amendment to the Credit Agreement and Consent and Waiver,
dated as of June 22, 2000, by and among Davel Financing Company,
L.L.C., Davel Communications, Inc., NationsBank, N.A. as
Administrative Agent, and the other Lenders party thereto.
27.1 Financial Data Schedule
23
