<PAGE>
================================================================================
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 September 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.
(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 November 10, 2000, there were 11,170,151 shares of the Registrant's Common
Stock outstanding.
<PAGE>
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<S> <C>
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... 11
Liquidity and Capital Resources......................................................... 17
Item 3
Quantitative and Qualitative Disclosures about Market Risk.............................. 22
Part II Other Information
Item 1
Legal Proceedings....................................................................... 23
Item 6
Exhibits and Reports on Form 8-K........................................................ 23
Exhibit Index........................................................................... 25
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 9,326 $ 7,950
Trade accounts receivable, net of allowance for doubtful
accounts of $ 12,530 and 10,880 respectively 18,458 22,983
Other current assets 801 1,048
------------- -------------
Total current assets 28,585 31,981
Property and equipment, net 103,279 115,558
Location contracts, net 15,095 20,852
Goodwill, net 4,906 6,290
Other assets 5,621 6,080
------------- -------------
Total assets $ 157,486 $ 180,761
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Current maturities of long-term debt and
obligations under capital leases $ 239,080 $ 21,535
Accounts payable and accrued liabilities 30,083 27,484
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Total current liabilities 269,163 49,019
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Long-term debt and obligations under capital leases 1,023 206,509
Deferred revenue 167 312
------------- -------------
Total liabilities 270,353 255,840
------------- -------------
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, 11,170,151 and 10,731,060 shares
issued and outstanding, respectively 111 110
Additional paid-in capital 128,481 128,338
Accumulated deficit (241,459) (203,527)
------------- -------------
Total shareholders' equity (deficit) (112,867) (75,079)
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Total liabilities and shareholders' equity (deficit) $ 157,486 $ 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 September 30
(In thousands, except share data)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Revenues
Coin calls $ 20,454 $ 28,466
Non-coin calls 11,625 16,603
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Total revenues 32,079 45,069
----------- -----------
Costs and expenses
Telephone charges 9,558 6,772
Commissions 9,122 10,287
Service, maintenance and network costs 8,032 10,464
Depreciation and amortization 8,526 9,126
Asset valuation charge and other charges - 51,224
Selling, general and administrative 7,144 5,586
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Total operating costs and expenses 42,382 93,459
----------- -----------
Operating loss (10,303) (48,390)
Interest expense 6,534 5,891
Other (income) expense 7 186
----------- -----------
Loss from operations before income taxes (16,844) (54,467)
Income tax expense 23 -
----------- -----------
Net loss $ (16,867) $ (54,467)
=========== ===========
Basic and diluted loss per share $ (1.51) $ (5.11)
=========== ===========
Weighted average shares outstanding 11,156,988 10,648,324
=========== ===========
</TABLE>
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 Nine Months Ended September 30
(In thousands, except share data)
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Revenues
Coin calls $ 64,259 $ 86,285
Non-coin calls 39,671 49,681
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Total revenues 103,930 135,966
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Costs and expenses
Telephone charges 29,320 29,046
Commissions 25,732 30,978
Service, maintenance and network costs 24,790 34,639
Depreciation and amortization 26,101 26,448
Asset valuation charge and other charges - 51,224
Selling, general and administrative 16,398 16,703
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Total operating costs and expenses 122,341 189,038
----------- -----------
Operating loss (18,411) (53,072)
Interest expense 19,565 17,210
Other (income) expense (116) 73
----------- -----------
Loss from operations before income taxes (37,860) (70,355)
Income tax expense 72 -
----------- -----------
Net loss (37,932) (70,355)
Preferred stock dividend and cost accretion - 95
----------- -----------
Loss applicable to common shareholders $ (37,932) $ (70,450)
=========== ===========
Basic and diluted loss per share $ (3.41) $ (6.66)
=========== ===========
Weighted average shares outstanding 11,107,812 10,574,012
=========== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
3
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DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30
(In thousands)
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (37,932) $ (70,355)
Adjustments to reconcile net loss to cash flows
from operating activities:
Depreciation and amortization 26,101 26,448
Amortization of deferred financing costs 1,232 719
Payment for certain contracts (2,460) (1,836)
Write-off of fixed assets/asset valuation charge 193 51,224
Increase in allowance for doubtful accounts 1,649 3,865
Stock issued as payment for services provided 144 793
Changes in assets and liabilities:
Restricted cash - 790
Accounts receivable 2,876 2,450
Other assets (832) 1,771
Accounts payable and accrued liabilities 2,599 (9,517)
Deferred revenue (145) -
---------- ----------
Net cash flows (used in) provided by operating activities (6,575) 6,352
---------- ----------
Cash flows from investing activities
Capital expenditures (3,298) (4,551)
Purchase of payphone assets, net of cash acquired - (5,123)
---------- ----------
Net cash flows provided by investing activities (3,298) (9,674)
---------- ----------
Cash flows from financing activities
Payments on long-term debt (5,237) (10,718)
Net proceeds under revolving line of credit 17,043 11,500
Repurchase of preferred stock rights - (95)
Principal payments under capital lease obligations (557) (390)
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Net cash flows provided by financing activities 11,249 297
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Net increase in cash and cash equivalents 1,376 (3,025)
Cash and cash equivalents, beginning of period 7,950 17,162
---------- ----------
Cash and cash equivalents, end of period $ 9,326 $ 14,137
========== ==========
Cash paid for interest $ 12,219 $ 16,883
========== ==========
Supplemental Disclosure Of Non-Cash Financing Activities:
Property Plant and Equipment acquired under Capital Leases $ 810 $ -
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements.
4
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DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(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 September 30, 2000 and the related
consolidated statements of operations for the three and nine-month periods ended
September 30, 2000 and 1999 and of cash flows for the nine-month period ended
September 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 nine month periods ended September
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 67,000 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, or waivers of certain
provisions of, its Senior Credit Facility. Debt amortization payments totaling
approximately $15.7 million and interest payments of approximately $12.5 million
are currently scheduled to be due and payable on January 12, 2001. Because the
Company will need to obtain an additional modification to the Senior Credit
Facility to revise and/or postpone these pending payments, the Company has
classified the obligations under the Senior Credit Facility as current
liabilities.
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.
There can be no assurances as to the ability to execute sales, or the timing
thereof or the proceeds that the Company could realize from such sales. The
Company has been advised by its independent certified public accountants that,
if these contingencies have not been
5
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DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except share data)
(Continued)
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 will 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 activity related to the
restructuring charge during the quarter ended September 30, 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 July 1, 2000 $ 46 $ - $ - $ - $ 46
Utilized during
quarter ended
September 30, 2000 (11) - - - (11)
-------- ----------- ----- ------- -----
Remaining reserve at
September 30, 2000 $ 35 $ - $ - $ - $ 35
======== =========== ===== ======= =====
</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
6
<PAGE>
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except share data)
(Continued)
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 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.
7
<PAGE>
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except share data)
(Continued)
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. On June 16, 2000, the Court
affirmed the 1999 Payphone Order setting a 24-cent dial around compensation
rate. On all the issues, including those raised by the IXCs and the payphone
providers, the court applied the "arbitrary and capricious" standard of review,
and found that the FCC's rulings were lawful and sustainable under that
standard. As a result of the Court's June 16, 2000 decision, the 24-cent dial
around compensation rate is likely to remain in place until at least the end of
2001, when the FCC has promised to complete a third-year review of the rate.
With respect to the Petition for Reconsideration of the 1999 Payphone Order
filed with the FCC by the payphone providers, this Petition is still pending and
has yet to be ruled on by the FCC. In view of the Court's affirmance of the 1999
Payphone Order, it is unlikely that the FCC will adopt material changes to the
key components of the Order pursuant to the pending Reconsideration Petition,
although no assurances can be given.
The new 24-cent 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 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 may 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
has recorded approximately $22.2 million of dial-around revenue through
September 30, 2000.
8
<PAGE>
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except share data)
(Continued)
The Company believes that it is legally entitled to fair compensation under
the Telcom Act for dial-around calls 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 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.
7. COMPREHENSIVE INCOME (LOSS)
For the three months and nine months ended September 30, 2000 and September
30, 1999, there is no difference between comprehensive loss and net loss as
presented on the accompanying statements of operations.
8. COMMITMENTS & CONTINGENCIES
In an action brought by the Company against PhoneTel Technologies, Inc.
("PhoneTel"), on or about October 31, 1998, PhoneTel counter sued the Company
seeking performance of a certain merger agreement and named Peoples Telephone
Company Inc. as a third party defendant to the action. 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 which allege to
have 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 alleged wrongful rescission of its
agreement with CSK Auto, Inc. Plaintiffs' amended complaint alleges damages in
excess of $700,000. The Company moved to dismiss the complaint, and, on August
24, 2000, the Court denied the Company's motion. The Company subsequently
answered the complaint and asserted a counterclaim, seeking declaratory relief.
On October 13, 2000, plaintiffs answered the counterclaim, denying its material
allegations. No discovery has been conducted to date. The Company intends to
vigorously defend itself in the case.
9
<PAGE>
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except share data)
(Continued)
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. The Company
removed the case to the U.S. District Court for Arizona and moved to have the
matter transferred to facilitate consolidation with the related case in
California brought by TCG and UST. On October 16, 2000, the U.S. District Court
for Arizona denied the Company's transfer motion and ordered the case remanded
back to Arizona state court. The Company intends to vigorously defend itself in
the case.
A certain IXC has alleged that the Company and its subsidiaries are
indebted to the IXC in the sum of $3,100,000 for services provided to them
through certain long distance service provider agreements. The Company contends
that it is not liable for the alleged indebtedness. The Company believes that
the majority of the IXC's claims consist of charges for fraudulent calls,
improperly assessed payphone charges or other erroneous billings. In October
2000, the IXC withheld approximately $1,900,000 of the Company's second quarter
dial-around compensation payment as a setoff against the alleged indebtedness.
The IXC has alleged that it will also withhold the remaining $1,200,000 from the
third-quarter 2000 dial-around payment as a final set-off against the alleged
indebtedness. The Company believes that it is legally entitled to these dial-
around payments under the Telecom Act and intends to pursue recovery of such
payments.
10
<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 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 as the
actual amount of coins collected from the payphones.
Non-coin calls are calls made from the pay telephones without deposit of
coin by the caller. The caller makes payment 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.
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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. The Company has
experienced, and continued to experience in the third quarter of 2000, lower
coin call volumes on its payphones resulting from the growth in wireless
communication services, 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 may 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
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$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 Telecom Act for dial-around calls that 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 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 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 September 30, 2000 Compared to Three Months Ended September
30, 1999
For the three months ended September 30, 2000, total revenues decreased
approximately $13.0 million, or 28.8%, from approximately $45.1 million in the
three months ended September 30, 1999 to approximately $32.1 million in the same
period of 2000. This decrease was primarily attributable to the removal of
unprofitable phone locations, lower call volumes on the Company's payphones
resulting from the growth in wireless communication services, changes in call
traffic and conclusion of the Sprint advertising program at the end of the
second quarter 2000 that provided $1.0 million in revenues during the third
quarter of 1999.
Coin call revenues decreased approximately $8.0 million, or 28.1%, from
approximately $28.5 million in the third quarter of 1999 to approximately $20.5
million in the third quarter of 2000. The decrease in coin call revenues was
primarily attributable to a reduction in the number of payphones from
approximately 79,000 phones at September 30, 1999 to approximately 67,000 at
September 30, 2000, 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 and changes
in call traffic.
Non-coin call revenues, which is comprised primarily of dial-around revenue
and long distance revenue, decreased approximately $5.0 million, or 30.0%, from
approximately $16.6 million in the three months ended September 30, 1999 to
approximately $11.6 million in the three months ended September 30, 2000. The
decrease was primarily attributable to the removal of unprofitable phone
locations, lower call volumes on the Company's payphones resulting from the
growth in wireless communication services and changes in call traffic.
Dial-around revenue decreased approximately $3.3 million, from approximately
$9.1 million in the three months ended
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September 30, 1999 to approximately $5.8 million in the third quarter of 2000.
The dial-around decrease is primarily attributable to the removal of
approximately 12,000 unprofitable phones, or 15.2 % of the total payphone base,
over the 12-month period, and lower calls per phone due to increased competition
from wireless services. Dial-around calls per phone have decreased to
approximately 112 per unit per month. Long-distance revenues decreased
approximately $.5 million, from approximately $6.3 million in the third quarter
of 1999 to approximately $5.8 million in the three months ended September 30,
2000. The decrease is attributable to the decline in the number of active phones
due to the removal of unprofitable units during the current fiscal year. The
remaining $1.2 million is primarily attributable to a decline in other non-coin
revenues due primarily to the conclusion of Sprint advertising programs in the
second quarter of 2000. Income from these programs was $1.0 million in the third
quarter 1999.
Telephone charges increased approximately $2.8 million, or 41.1%, from
approximately $6.8 million for the quarter ended September 30, 1999 to
approximately $9.6 million in the three months ended September 30, 2000. In the
third quarter of 1999, telephone charges were impacted favorably by targeted
state and Federal regulatory proceedings under section 276 of the Telecom Act.
In addition, the Company was the recipient of $2.4 million of refunds from two
large LECs as the result of favorable regulatory rulings, further offsetting
normal operational telephone charges for the 1999 period. Costs per phone in the
third quarter 2000 rose to approximately $45.00 per phone due to one-time
charges related to changes in long distance carriers in selected areas for the
benefit of long-term savings. The Company is currently negotiating contracts and
pursuing additional regulatory relief that it believes will further reduce local
access charges on a per-phone basis, but is unable to estimate the impact of
further telephone charge reductions at this time.
Commissions decreased approximately $1.2 million, or 11.3%, from
approximately $10.3 million in the third quarter of 1999 to approximately $9.1
million in the three months ended September 30, 2000. The decrease was primarily
attributable to lower commissionable revenues from the reduced number of Company
payphones. Commissions as a percentage of revenues have begun to rise due to
revenue mix changes. Average commissions paid on dial-around revenue are
traditionally lower than on coin and long distance revenue sources. The shift in
revenue mix to the higher commission sources has given rise to higher average
commissions per phone. The Company is actively reviewing its strategies related
to contract renewals in order to maintain its competitive position while
retaining its customer base.
Service, maintenance and network costs decreased approximately $2.4
million, or 23.2%, from approximately $10.4 million in the third quarter of 1999
to approximately $8.0 million in the three months ended September 30, 2000. The
decrease was primarily attributable to reductions in headcount and wage related
costs of approximately $1.5 million 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. Reductions in service vehicle expenses of approximately $
0.1 million and lower field office expenses of approximately $0.2 million were
also realized due to lower phone count and office consolidation. Regulatory fees
and surcharges declined by approximately $0.3 million due to favorable rate
changes related to FCC mandated "Universal Service Fund" fees and lower revenue
volume on which the charges are based. Court rulings in the fourth quarter 1999
have isolated the surcharge to interstate coin revenues only, thereby
significantly reducing the Company's expense.
Depreciation and amortization were $5.7 million and $2.8 million,
respectively, in the third quarter of 2000 and $5.5 million and $3.6 million,
respectively, in the third quarter of 1999. The increase in depreciation expense
is primarily a result of a write-down in the third quarter 2000 of selected
uninstalled phone parts.
Amortization expense in the third quarter decreased as a result of earlier
acceleration of site contract amortization related to phones removed from
service during the fourth quarter of 1999 and the first half of 2000. Additional
reductions in amortization have also occurred due to the elimination of goodwill
and the site contract
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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 increased approximately $1.6
million, or 27.9%, from approximately $5.6 million in the third quarter of 1999
to approximately $7.1 million in the three months ended September 30, 2000. The
increase was primarily attributed to reserving for trade receivables of two
specific customers. In addition, approximately $.7 million of expenses were
recorded for professional advisory and analytical services. The increase was
partially offset by lower compensation expenses related to continued
consolidation of its administrative functions into a single, larger facility in
Tampa, Florida, subsequent to the Peoples Merger. Further reductions in areas
such as travel and general office expenses were also realized.
Interest expense in the three months ended September 30, 2000 increased
approximately $0.6 million, or 10.9%, compared to the prior-year period, from
approximately $5.9 million in the third quarter of 1999 to approximately $6.5
million in the third quarter of 2000. This increase is attributable to higher
average interest rates related to the Company's Senior Credit Facility and
increased borrowing levels.
Net loss decreased approximately $37.6 million, or 69.0%, from the prior-
year period, from approximately $54.5 million in the three months ended
September 30, 1999 to approximately $16.9 million in the third quarter of 2000.
In the third quarter 1999, the Company recorded a $51.4 million asset valuation
charge consisting of approximately $48.9 million for impaired goodwill and
certain other intangibles related to the 1998 acquisition of CCI. The charge
also included approximately $2.3 million for the sale or disposal of fixed
assets.
Nine months Ended September 30, 2000 Compared to Nine months Ended September 30,
1999
Total revenues decreased approximately $32.0 million, or 23.6%, from
approximately $136.0 million in the first nine months of 1999 (the "1999
Period") to approximately $104.0 million in the first nine months of 2000 (the
"2000 Period"). This decrease was primarily attributable to the removal of
unprofitable 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 $22.0 million, or 25.5%, from
approximately $86.3 million in the 1999 Period to approximately $64.3 million in
the 2000 Period. The decrease in coin call revenues was primarily attributable
to a reduction in the number of payphones from approximately 85,500 at the
beginning of 1999 to approximately 67,000 at September 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 $10.0 million, or 20.1%, from
approximately $49.7 million in the 1999 Period to approximately $39.7 million in
the 2000 Period. This decrease was primarily attributable to the removal of
unprofitable phone locations, lower call volumes on the Company's payphones
resulting from the growth in wireless communication services and changes in call
traffic. Dial-around revenue decreased approximately $5.0 million, from
approximately $27.2 million in the 1999 Period to approximately $22.2 million in
the 2000 Period. The dial-around decrease is primarily attributable to the
removal of approximately 18,500 unprofitable phones since January 1, 1999 and
continuing underpayments of dial-around revenues caused by deficiencies in the
established payment and tracking process now under regulatory review by the FCC.
Long-distance revenues decreased approximately $3.7 million, from approximately
$19.9 million in the 1999 Period to approximately $16.2 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. The switch was phased out during 1999 and shut down 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
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revenue on a gross basis versus recording the commissions on the gross billings.
The remaining $2.8 million is primarily attributable to a reduction in phone
volume and increased competition from wireless and other public communications
services. Other revenue decreased approximately $1.3 million, or 6.5%, from
approximately $2.5 million in the 1999 Period to approximately $1.2 million in
the 2000 Period. Advertising revenue from Sprint declined $0.5 million due to
the conclusion of the program in the second quarter of 2000. An additional $0.6
million of debit card sales were realized in the 1999 period that did not take
place in 2000.
Telephone charges increased approximately $0.3 million, or 0.9%, from
approximately $29.0 million for the 1999 Period to approximately $29.3 million
in the 2000 Period. In the third quarter of 1999, telephone charges were
impacted favorably by state and Federal regulatory proceedings under section 276
of the Telecom Act. In addition, the Company was the recipient of $2.4 million
of refunds from two large LECs, the result of favorable regulatory rulings,
partially offsetting normal operational telephone charges for the period. The
Company is currently negotiating contracts and pursuing additional regulatory
relief that it believes will further reduce local access charges on a per-phone
basis, but is unable to estimate the impact of further telephone charge
reductions at this time.
Commissions decreased approximately $5.3 million, or 17.0%, from
approximately $31.0 million in the 1999 Period to approximately $25.7 million in
the 2000 Period. The decrease was primarily attributable to lower commissionable
revenues from a reduced number of Company payphones. Commissions as a percentage
of revenues have begun to rise due to revenue mix changes. Average commissions
paid on dial-around revenue are traditionally lower than on coin and long
distance revenue sources. The shift in revenue mix to the higher commissioned
based sources has given rise to higher average commissions per phone. The
Company is actively reviewing its strategies related to contract renewals in
order to maintain its competitive position while retaining its customer base.
Service, maintenance and network costs decreased approximately $9.8
million, or 28.3%, from approximately $34.6 million in the 1999 Period to
approximately $24.8 million in the 2000 Period. Service, maintenance and network
costs decreased from 25.5% of total revenues in the 1999 Period to 23.9% of
total revenues in the 2000 Period. 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 pursuant to FCC orders to provide funding for
universal telephone service were previously based on total coin revenue volume.
Court rulings in the fourth quarter 1999 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 $15.5 million and $10.6 million,
respectively, in the 2000 Period and $16.1 million and $10.3 million,
respectively, in the 1999 Period. The decrease in depreciation expense is
primarily a result of fewer phones being in service partially offset by a write-
down in the third quarter 2000 of selected uninstalled phone parts.
Amortization expense increased on an overall basis as a result of acceleration
of site contract amortization of phones taken out of service during the prior
twelve months. Approximately 12,000 phones have been removed from service during
the period from October 1, 1999 to September 30, 2000. Reductions in
amortization have also occurred to a lesser extent due to the elimination of
goodwill and the site contract intangible asset related to a 1998 purchase of
assets from CCI. The write-off of these CCI assets occurred at September 30,
1999.
Selling, general and administrative expenses decreased approximately $0.3
million, or 1.8%, from approximately $16.7 million in the 1999 Period to
approximately $16.4 million in the 2000 Period. The decrease was primarily
attributable to the fact that the Company experienced additional costs in 1999
related to the consolidation of its administrative functions into a single,
larger facility in Tampa, Florida, subsequent to
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the Peoples Merger. The impact of the cost reductions was partially offset by a
$1.4 million adjustment for allowance for doubtful accounts on trade receivables
taken in the third quarter of 2000.
Interest expense in the 2000 Period increased approximately $2.4 million,
or 13.7%, compared to the 1999 Period, from approximately $17.2 million in the
1999 Period to approximately $19.6 million in the 2000 Period. This increase is
attributable to higher average interest rates related to the Company's Senior
Credit Facility, increased borrowing levels and a $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 $32.4 million, or 46.1%, from the prior-
year period, from approximately $70.4 million in the 1999 Period to
approximately $38.0 million in the 2000 Period. This decrease is primarily
attributable to the Company recording a $51.4 million asset valuation charge in
the third quarter 1999, consisting of approximately $48.9 million for impaired
goodwill and certain other intangibles related to the 1998 acquisition of CCI.
The charge also included approximately $2.3 million for the sale or disposal of
fixed assets.
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 2000 Period, operating activities used $6.6 million of net cash,
compared to a generation of $6.4 million in the 1999 Period. The change in cash
flow is due primarily to $22.0 million in greater cash operating losses, offset
by $9.0 million of balance sheet improvements. Payables and accruals recorded a
combined $12.1 million improvement in the 2000 period over the 1999 period due
in part to extension of payment terms with vendors, and an effort to shift a
greater number of customers from monthly to quarterly commission payments.
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 September 30, 2000, the Company had utilized all available
borrowing capacity under the revolving credit facility.
Cash flows used in investing activities totaled approximately $3.3 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 $17.0 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") in December 1998 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
provided 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 Davel and all its
subsidiaries.
The Company's borrowings under the Senior Credit Facility bear interest at
a floating rate and may be maintained as Base Rate Loans (as defined in the
Senior Credit Facility) or, at the Company's option, as Eurodollar Loans (as
defined in the Senior Credit Facility). Base Rate Loans shall bear interest at
the Base Rate (defined as the higher of (i) the applicable prime lending rate of
Bank of America or (ii) the Federal Reserve reported certificate of deposit rate
plus 1%). Eurodollar Loans shall bear interest at the Eurodollar Rate (as
defined in the Senior Credit Facility, as amended).
The Company is required to pay the lenders under the Senior Credit Facility
a commitment fee, payable in arrears on a quarterly basis, on the average unused
portion of the Senior Credit 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 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, 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:
. 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
. Payment of debt from receipt of dial-around compensation accounts
receivable related to the period November 1996 through October 1997
. Further limitations on permitted acquisitions as defined in the Credit
Agreement through June 30, 2000
. During the period April 1, 1999 to June 30, 2000, required Lenders' consent
for the making of loans or the issuance of letters of credit if the sum of
revolving loans outstanding plus letter of credit obligations outstanding
exceeds $50.0 million
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. The introduction of a new covenant to provide certain operating data to the
Lenders on a monthly basis
. Increases in the maximum allowable ratio of funded debt to EBITDA through
the quarter ended June 30, 2000
. Decreases in the minimum allowable interest coverage ratio through the
quarter ended June 30, 2000
. Decreases in the minimum allowable fixed charge coverage ratio through the
quarter ended June 30, 2000.
The First Amendment also placed 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:
. 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;
. 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;
. The addition of a new covenant to provide financial statements to the
Lenders on a monthly basis;
. Increases in the maximum allowable ratio of funded debt to EBITDA through
the maturity date of the loan;
. Decreases in the minimum allowable interest coverage ratio through the
maturity date of the loan;
. Decreases in the minimum allowable fixed charge coverage ratio through the
maturity date of the loan;
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. Decreases in permitted capital expenditures to $10 million annually; and
. Reduction of the maximum interest period for Eurodollar Loans to 30
days.
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:
. 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;
. 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;
. Interest payments due on June 30, 2000 became due and were paid on
July 10, 2000; and
. 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.
Fourth Amendment to Credit Agreement
In the third quarter of 2000, the Company gave notice to the Administrative
Agent that lower than expected performance during the first nine 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 September 30, 2000 debt
amortization and interest payments. On September 28, 2000, the Company and the
Lenders who are party to the agreement agreed to the Fourth Amendment to Credit
Agreement, which eliminated the financial covenants in their entirety with
respect to all periods ending on and after September 30, 2000 and also provided
for the following:
. Term Loan A, Term Loan B and Revolving Loan amortization payments
totaling $15.7 million will be due on January 12, 2001. In addition,
amortization payments of approximately $7.7 million are due on each of
March 31, June 30, September 30 and December 31, 2001, and the balance
of the then outstanding principal amount of all loan obligations is
due on January 12, 2002;
. Interest payments otherwise due and payable on any interest payment
date prior to January 12, 2001 will continue to accrue and be payable
in arrears on January 12, 2001;
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. Interest rates after September 29, 2000 were generally lowered from
those set forth in the Third Amendment to 2.75% for all Loans, except
that rates will continue to equal 3.50% for all Letter of Credit Fees
and 0.75% for all Commitment Fees;
. Positive net cash on hand in excess of $2.0 million at the end of each
month will be paid to the Lenders as a prepayment of the Loans;
. The Revolving Loan commitment was terminated;
. Capital expenditures for the period October 1, 2000 to January 12,
2001 are limited to $400,000; and
. The provision regarding the application of prepayments was modified,
and a new provision was added requiring the Company to submit to the
Lenders bi-weekly cash flow forecasts and a revised business plan for
the 2001 fiscal year.
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, or waivers of certain
provisions of, the Senior Credit Facility. Debt amortization payments totaling
approximately $15.7 million and interest payments of approximately $12.5 million
are currently scheduled to be due and payable on January 12, 2001. Because the
Company will need to obtain an additional modification to the Senior Credit
Facility to revise and/or postpone these pending payments, the Company has
classified the obligations under the Senior Credit Facility as current
liabilities.
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. There can be no assurances as to the ability to execute sales, or
the timing thereof, or the proceeds that the Company could realize from such
sales. The company ha been advised by its independent certified public
accountant 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
will 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.
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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.
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 September 30, 2000, the Company had two interest rate cap agreements
with an aggregate notional amount of $51.0 million. One agreement with a
notional amount of $36.0 million terminates on January 1, 2001, and the other
has a notional amount of $15.0 million and terminates on September 30, 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 quarterly payments from the counter parties for amounts, if
any, by which the U.S. three-month LIBOR rate exceeds a fixed rate. In addition,
the Company has an interest rate collar agreement that terminates in February
2002, and one interest rate swap agreement that terminates in June 2001. A
second interest rate swap agreement that had been previously in effect was
terminated effective August 18, 2000. 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
swap approximates $4.8 million at September 30, 2000. The Company pays 5.92% on
the amortizing notional amount.
Based upon the Company's variable rate indebtedness and weighed average
interest rates at September 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 which allege to
have 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 moved to dismiss the complaint, and, on August 24, 2000,
the Court denied the Company's motion. The Company subsequently answered the
complaint and asserted a counterclaim, seeking declaratory relief. On October
13, 2000, plaintiffs answered the counterclaim, denying its material
allegations. 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. The Company
removed the case to the U.S. District Court for Arizona and moved to have the
matter consolidated with the related case in California brought by TCG and UST.
On October 16, 2000, the U.S. District Court for Arizona denied the Company's
consolidation motion and ordered the case remanded back to Arizona state court.
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
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned thereunto duly authorized.
DAVEL COMMUNICATIONS, INC.
Date: November 14, 2000 /s/ MARC S. BENDESKY
--------------------
Marc S. Bendesky
CHIEF FINANCIAL OFFICER
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EXHIBIT INDEX
Exhibit
Number Description
------ -----------
10.1 Fourth Amendment to Credit Agreement, dated as of September 28,
2000, by and among Davel Financing Company L.L.C., Davel
Communications, Inc., Bank of America, N.A. as Administrative
Agent, and the other lenders party thereto.
27.1 Financial Data Schedule
