UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark one)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
10120 WINDHORST ROAD
TAMPA, FLORIDA 33619
- ---------------------------------------- -------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (813) 628-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
- ---------------------------------------- -------------------------------------
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has 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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [ ]
As of March 15, 2000 the aggregate market value of the voting and nonvoting
common equity held by non-affiliates of the registrant was approximately
$21,599,768 based upon the closing price on March 15, 2000 of $4.00 and using
beneficial ownership rules adopted pursuant to Section 13 of the Securities
Exchange Act of 1934 to exclude voting shares owned by directors and officers,
some of whom may not be held to be affiliates upon judicial determination. As of
March 15, 2000, there were 11,033,628 shares of the registrant's Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
EXPLANATORY NOTE
On March 27, 2000, a draft of the Annual Report on Form 10-K for Davel
Communications, Inc. was inadvertently filed with the Securities and Exchange
Commission prior to its being finalized. This Amendment No. 1 on Form 10-K/A
supersedes and replaces in its entirety the March 27 filing.
<PAGE>
DAVEL COMMUNICATIONS, INC.
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Part I
Item 1 Business 2
Item 2 Properties 18
Item 3 Legal Proceedings 18
Item 4 Submission of Matters to a Vote of Security Holders 19
Part II
Item 5 Market for the Registrant's Common Stock and
Related Stockholder Matters 20
Item 6 Selected Consolidated Financial Data 21
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
Item 7A Quantitative and Qualitative Disclosures About Market Risk 36
Item 8 Financial Statements and Supplementary Data 38
Item 9 Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 63
Part III
Item 10 Directors and Executive Officers 63
Item 11 Executive Compensation 68
Item 12 Security Ownership of Certain Beneficial Owners and
Management 71
Item 13 Certain Transactions 72
Part IV
Item 14 Exhibits, Financial Statement Schedules and
Reports on Form 8-K 74
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PART I
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934:
Certain of the statements contained in the body of this Report 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. In the preparation of
this Report, where such forward-looking statements appear, the Company has
sought to accompany such statements with meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those described in the forward-looking statements. An additional
statement summarizing the principal risks and uncertainties inherent in the
Company's business is included herein under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations-Regulatory Impact
on Revenue." Readers of this Report are encouraged to read these cautionary
statements carefully.
ITEM 1. BUSINESS
GENERAL OVERVIEW
Davel Communications, Inc. (the "Company" or "Davel") was incorporated
on June 9, 1998 under the laws of the State of Delaware to effect the merger
(the "Peoples Merger"), on December 23, 1998, of Davel Communications Group,
Inc. ("Old Davel"), with Peoples Telephone Company, Inc. ("Peoples Telephone").
The merger was accounted for as a pooling-of-interests transaction and
accordingly the results of both companies have been restated as if they had been
combined for all periods presented.
As a result of the Peoples Merger and the prior acquisition of
Communications Central Inc. in February, 1998 (the "CCI Acquisition"), the
Company is the largest domestic independent payphone service provider ("IPP") in
the United States, with approximately twice the number of payphones as the
second largest domestic independent payphone service provider. The Company's
principal executive offices are located at 10120 Windhorst Road, Tampa, Florida
33619, and its telephone number is (813) 628-8000.
As of December 31, 1999, the Company owned and operated a network of
74,869 payphones in 44 states and the District of Columbia, providing it with
one of the broadest geographic coverages of any payphone service provider
("PSP") in the country. The Company's installed payphone base generates revenue
through both coin calls (local and long-distance), non-coin calls (calling card,
credit card, prepaid calling card, collect, toll-free and third-party billed
calls) and dial-around calls (utilizing a 1-800, 1010XXX or similar dialing
method to select a carrier other than the Company's pre-selected carrier). The
Company also facilitates the provision of operator assisted services at its
payphones through contractual relationships with various interexchange carriers
("IXCs"), including Sprint and AT&T. A significant portion of the Company's
payphones are located in high-traffic areas such as convenience stores, shopping
centers, truck stops, service stations, grocery stores, restaurants and
airports.
As part of the Telecommunications Act of 1996 ("1996 Telecom Act"),
Congress directed the Federal Communications Commission ("FCC") to ensure
widespread access to payphones for the general public. Industry reports estimate
that there are approximately 2.0 million payphones
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currently operating in the United States, of which approximately 1.6 million are
operated by the Regional Bell Operating Companies ("RBOCs"), AT&T, Sprint and
GTE.
The remaining approximately 400,000 payphones are owned by more than
1,000 IPPs and smaller local exchange carriers ("LECs"). The Company believes
that its scale, geographic reach and proven integration expertise position it to
play a leading role in the ongoing consolidation of the fragmented payphone
industry. The Company's strategy is to increase its nationwide presence through
internal growth primarily focusing on regional and national accounts and through
targeted strategic acquisitions, generally in existing markets or contiguous
markets. Additionally, the Company is developing new revenue streams associated
with the presence afforded by its large and geographically dispersed payphone
location base.
INDUSTRY OVERVIEW
Today's telecommunications marketplace was principally shaped by the
1984 court-approved divestiture by AT&T of its local telephone operations (the
"AT&T Divestiture") and the many regulatory changes adopted by the FCC and state
regulatory authorities in response to the AT&T Divestiture, including the
authorization of the connection of competitive or independently owned payphones
to the public switched network. The "public switched network" is the traditional
domestic landline public telecommunications network used to carry, switch and
connect telephone calls. The connection of independently owned payphones to the
public switched network has resulted in the creation of additional business
segments in the telecommunications industry. Prior to these developments, only
the consolidated Bell system or independent LECs were permitted to own and
operate payphones. Following the AT&T Divestiture, the independent payphone
sector developed as a competitive alternative to the consolidated Bell system
and other LECs by providing more responsive customer service, lower cost of
operations and higher commissions to the owners or operators of the premises at
which a payphone is located ("Location Owners").
Prior to the AT&T Divestiture, the LECs could refuse to provide
payphone service to a business operator or, if service was installed, would
typically pay no or relatively small commissions for the right to place a
payphone on the business premises. Following the AT&T Divestiture and the FCC's
authorization of payphone competition, IPPs began to offer Location Owners
higher commissions on coin calls made from the payphones in order to obtain the
contractual right to install the equipment on the Location Owners' premises.
Initially, coin revenue was the only source of revenue for the payphone
operators because they were unable to participate in revenues from non-coin
calls. However, the operator service provider ("OSP") industry emerged and
enabled the competitive payphone operators to compete more effectively with the
regulated telephone companies by paying commissions to payphone owners for
non-coin calls. For the first time, IPPs were able to receive non-coin call
revenue from their payphones. With this incremental source of revenue from
non-coin calls, IPPs were able to compete more vigorously on a financial basis
with RBOCs and other LECs for site location agreements, as a complement to the
improved customer service and more efficient operations provided by the IPPs. As
part of the AT&T Divestiture, the United States was divided into Local Access
Transport Areas ("LATAs"). RBOCs were authorized to provide telephone service
that both originates and terminates within the same LATA ("intraLATA") pursuant
to tariffs filed with and approved by state regulatory authorities. RBOCs
provide payphone service primarily in their own respective territories, and are
now authorized to share payphone revenues from telecommunications services
between LATAs ("interLATA"). Long-distance companies, such as Sprint, AT&T, MCI
and Worldcom, provide interLATA services, and in some circumstances, may also
provide local or long-distance service within LATAs. An interLATA long-distance
telephone call generally begins with an originating LEC transmitting the call
from the originating payphone to a point of connection with a long-
3
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distance carrier. The long-distance carrier, through its owned or leased
switching and transmission facilities, transmits the call across its
long-distance network to the LEC servicing the local area in which the recipient
of the call is located. The terminating LEC then delivers the call to the
recipient.
BUSINESS STRATEGY
The Company's objective is to increase revenues and profitability
through strategic acquisitions, internal sales growth, development of new
revenue streams and continued reductions in its overall cost structure. The
Company has implemented the following strategy to meet its objective.
UTILIZE ADVANCED PAYPHONE TECHNOLOGY. The Company's payphones utilize
"smart" technology which provide voice synthesized calling instructions, detect
and count coins deposited during each call, inform the caller at certain
intervals of the time remaining on each call, identify the need for and the
amount of an additional deposit in order to continue the call, and other
functions associated with the completion of calls. Through the use of a
non-volatile, electronically erasable, programmable read-only memory chip, the
payphones can also be programmed and reprogrammed from the Company's central
computer facilities to update rate information or to direct different kinds of
calls to particular carriers. The Company's payphones can also distinguish coins
by size and weight, report to a remote location the total amount of coin in the
coin box, perform self-diagnosis and automatically report problems to a
pre-programmed service number.
APPLY SOPHISTICATED MONITORING AND MANAGEMENT INFORMATION SYSTEMS. The
Company utilizes proprietary and non-proprietary software that continuously
tracks coin and non-coin revenues from each payphone, as well as expenses
relating to that payphone, including commissions payable to the Location Owners.
The software allows the Company to generate detailed financial information by
customer, by location and by payphone, which allows it to monitor the
profitability and operating condition of each location and payphone.
PROVIDE OUTSTANDING CUSTOMER SERVICE. The technology used by the
Company enables it to (i) respond quickly to equipment malfunctions and (ii)
maintain accurate records of payphone activity which can be verified by
customers. The Company strives to minimize "downtime" on its payphones by
identifying service problems as quickly as possible. The Company believes its
ability to service payphones promptly allows it to retain existing customers and
attract new ones. The Company employs both advanced telecommunications
technology and trained field technicians as part of its commitment to provide
superior customer service. The records generated through the Company's
technology also allow for the more timely and accurate payment of commissions to
Location Owners.
DEVELOP STRONG RELATIONSHIPS WITH SERVICE PROVIDERS AND SUPPLIERS. As
part of its strategy to continue to reduce operating costs, the Company has
formed strategic alliances with a number of service and equipment providers. The
Company has formed alliances with certain LECs and competitive local exchange
carriers to purchase local line access services, and has agreements with a
number of IXCs to provide transmission and operator services to its payphones at
a discount. In addition, the Company's volume of new payphone installations has
allowed it to negotiate favorable purchasing arrangements with payphone
equipment providers.
FACILITATE GROWTH THROUGH INTERNAL SALES AND MARKETING. The Company
actively seeks to install new payphones through its sales and marketing efforts
to obtain additional payphone
4
<PAGE>
locations with new and existing accounts. The Company conducts site surveys to
examine various factors, including population density, traffic patterns and
historical usage information. The Company intends to install approximately 4,200
payphones in 2000, compared with 5,985 payphones installed in 1999 and 7,233
payphones installed in 1998, exclusive of acquisitions.
RATIONALIZATION OF LOW-REVENUE PHONES. In 1999, the Company experienced
revenue declines as a result of increased competition from cellular and other
telecommunications products. As a result of declining revenues, the Company has
begun implementing a strategy to remove low revenue phones that do not meet the
Company's minimum criteria of profitabilty. During 1999, the Company removed
16,841 phones. The Company has an ongoing program to identify additional phones
to be removed in 2000 based upon low revenue performance.
PURSUE STRATEGIC ACQUISITIONS. The Company is currently restricted from
making acquistions by the Second Amendment to the Credit Agreement (see
"Liquidity and Capital Resource-Second Amendment"). However, the Company will
continue to seek key opportunities, as strategic acquisitions have enabled the
Company to expand its market presence and further its strategy of concentrating
its payphones more rapidly than with internal sales growth alone. Any acquistion
would require appoval from the lenders. Concentrating its payphones in close
proximity allows the Company to plot more efficient collection routes. The
Company believes that route density contributes to cost savings. Because smaller
companies typically are not able to achieve the economies of scale that may be
realized by the Company, the integration of acquired payphones into the
Company's network of payphones often results in lower operating costs than the
seller of such payphones had been able to realize. By clustering its payphones
around its regional offices, the Company is able to leverage its existing
infrastructure through more efficient service and collection routes which leads
to a lower overall cost structure. For example, since integrating the Peoples
Merger, Davel has been able to increase the number of payphones per technician
to an average of 222 in 1999 from 186 in 1998 as a result of greater payphone
density, workforce rationalizations and computerized route design.
ACQUISITIONS
The Company has historically generated growth by pursuing the
acquisition of payphone companies or assets within its existing market areas and
in areas in which the Company desires to establish a new market presence. With
the Peoples Merger, the Company added approximately 43,000 payphones to its
network. With the CCI Acquisition, the Company added 19,543 payphones to its
network. The Company added an additional 1,341 and 4,019 payphones to its
network through other acquisitions during 1999 and 1998, respectively.
5
<PAGE>
Listed below is a summary of acquisitions completed by the Company, Old
Davel or Peoples Telephone during 1999, 1998 and 1997.
<TABLE>
<CAPTION>
NUMBER OF PURCHASE PRICE
COMPANY DATE PAYPHONES (IN THOUSANDS)
- ---------------------------------------- -------------------- ----------- --------------
<S> <C> <C> <C>
Reliable Payphones, Inc March 3, 1999 560 $ 2,350
Vend-Lease Company, Inc. January 20, 1999 652 2,673
Eat N' Park Restaurants December 1998 136 286
Call Communications, Inc. August 1998 1,251 2,948
Communications Central Inc. February 1998 19,543 109,117
Indiana Telecom January 1998 2,632 11,317
Tele/Data Pay Telephone August 1997 183 511
Blair Telephone June 1997 1,255 3,868
Quarter Call June 1997 954 2,160
Mid-Eastern April 1997 117 233
All others (fewer than 70 phones each) 610 462
----------- --------------
Totals 27,893 $ 135,925
=========== ==============
</TABLE>
OPERATIONS
As of December 31, 1999 and December 31, 1998, the Company owned and
operated 74,869 and 84,384 payphones, respectively.
COIN CALLS
The Company's payphones generate coin revenues primarily from local
calls. Historically, the maximum rate that LECs and independent payphone
companies could charge for local calls was generally set by state regulatory
authorities and in most cases was $0.25 through October 6, 1997. In ensuring
"fair compensation" for all calls, the FCC previously determined that local coin
rates from payphones should be generally deregulated by October 7, 1997, but
provided for possible modifications or exemptions from deregulation upon a
detailed demonstration by an individual state that there are market failures
within the state that would not allow market-based rates to develop. On July 1,
1997, a federal court issued an order which upheld the FCC's authority to
deregulate local coin call rates. In accordance with the FCC's ruling and the
court order, certain LECs and IPPs, including the Company, began to increase
rates for local coin calls from $0.25 to $0.35 after October 7, 1997. The
Company is also testing, in limited areas, a $0.50 per call rate for local
calls. See "--Effect of Federal Regulation of Local Calls and Dial-Around
Calls."
InterLATA long distance coin calls are carried by long distance
carriers that have contracted to provide service to the Company's payphones. The
Company pays a charge to the long-distance carrier each time that carrier
transports a long-distance call for which the Company receives coin revenue. The
Company's payphones also generate coin revenue from intraLATA long-distance
calls which are transported by either IXC or LEC facilities.
6
<PAGE>
NON-COIN CALLS
The Company also receives revenues from non-coin calls made from its
payphones. Non-coin calls include credit card, calling card, prepaid calling
card, collect and third-party billed calls.
The services needed to complete a non-coin call include providing an
automated or live operator to answer the call, verifying billing information,
validating calling cards and credit cards, routing and transmitting the call to
its destination, monitoring the call's duration and determining the charge for
the call, and billing and collecting the applicable charge. The Company has
contracted with IXC operator service providers to handle calls that require
operator services and to perform all associated functions while paying the
Company a commission on the revenues generated thereby.
The Company realizes additional non-coin revenue from certain long
distance companies pursuant to the 1996 Telecom Act and FCC regulations
thereunder as compensation for "dial-around" non-coin calls made from its
payphones. A dial-around call is made by dialing an access code for the purpose
of reaching a long distance company other than the one designated by the
payphone operator, using a "toll free" number, generally by dialing a
1-800/888/877 number, a 950-number or a seven-digit "1010XXX" code before
dialing "0" for operator service. "Regulation."
PAYPHONE BASE
In addition to payphones acquired by the Company (see
"--Acquisitions"), the Company's payphone base includes payphones installed by
the Company. The following table sets forth, for the last three fiscal years,
the number of Company payphones acquired, installed and removed during the year
as well as the net increase (decrease) in Company payphones in operation.
1999 1998 1997
-------- --------- ---------
Acquired 1,341 23,691 2,861
Installed 5,985 7,233 6,311
Removed (16,841) (5,549) (3,953)
------- ------ ------
Net Increase/(Decrease) (9,515) 25,375 5,219
Most of the Company's payphones are located in proximity to one of the
Company's division offices, from which Company employees operate and service the
payphones and conduct ales and marketing efforts. The following table sets forth
the number of payphones operated by the
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Company (Davel, Old Davel and Peoples Telephone) in each state and the District
of Columbia as of December 31, 1999, 1998 and 1997:
DECEMBER 31,
----------------------------------------
STATE 1999 1998 1997
- ----------------------------- -------- -------- --------
Alabama 1,932 2,357 692
Arizona 637 779 745
Arkansas 505 528 45
California 2,572 3,760 3,830
Colorado 452 447 33
Connecticut 69 -- --
Delaware 138 119 97
District of Columbia 460 511 460
Florida 12,799 15,708 12,851
Georgia 4,672 5,357 2,838
Illinois 2,233 2,626 1,713
Indiana 2,635 2,947 895
Iowa 546 747 784
Kansas 172 13 9
Kentucky 1,423 1,436 913
Louisiana 2,363 2,580 1,676
Maine 52 52 39
Maryland 3,383 3,464 3,258
Massachusetts 488 534 410
Michigan 504 504 406
Minnesota 811 471 --
Mississippi 1,657 2,201 1,205
Missouri 519 366 170
Nebraska 23 32 36
Nevada 355 388 404
New Hampshire 68 80 57
New Jersey 566 611 588
New Mexico 2 -- --
New York 5,684 6,022 6,022
North Carolina 3,957 4,586 3,578
North Dakota 8 10 --
Ohio 2,646 2,719 1,583
Oklahoma 149 102 10
Oregon 1 11 12
Pennsylvania 3,404 3,472 2,691
Rhode Island 75 76 42
South Carolina 2,495 2,892 2,219
South Dakota 8 1 3
Tennessee 4,177 4,763 2,632
Texas 4,367 4,237 2,015
Utah 131 272 248
Vermont 30 18 17
Virginia 5,127 5,917 3,372
Washington -- -- 1
West Virginia 332 402 261
Wisconsin 242 266 149
------ ------ ------
Totals 74,869 84,384 59,009
====== ====== ======
8
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The Company selects locations for its payphones where there is
typically high demand for payphone service, such as convenience stores, truck
stops, service stations, grocery stores, shopping centers, restaurants, hotels
and airports. For many locations, historical information regarding an installed
payphone is available because payphone operators are often obligated pursuant to
agreements to provide this information to Location Owners for their payphones.
In locations where historical revenue information is not available, the Company
relies on its site survey to examine geographic factors, population density,
traffic patterns and other factors in determining whether to install a payphone.
The Company's marketing staff attempts to obtain agreements to install the
Company's payphones ("Location Agreements") at locations with favorable
historical data regarding payphone revenues.
Location Agreements generally provide for revenue sharing with the
applicable Location Owner. The Company's Location Agreements generally provide
commissions based on fixed percentages of revenues and have three-to five-year
terms. The Company can generally terminate a Location Agreement on 30 days
notice to the Location Owner if the payphone does not generate sufficient
revenue.
During 1999, the Company became more aggressive in monitoring its
payphone base and removing underperforming payphones, which it often relocates
to locations with more potential for profitability.
SERVICE AND MAINTENANCE
The Company employs field service technicians, each of whom collects
coin boxes from, cleans and maintains an average of approximately 222 payphones.
The technicians also respond to trouble calls made by Location Owners, by users
of payphones or by the telephone itself as part of its internal diagnostic
procedures. Some technicians are also responsible for the installation of new
payphones. Due to the proximity of most of the Company's payphones to the
Company's division offices, the concentration of the Company's payphone base and
the ability of the field service technicians to perform on-site service and
maintenance functions, the Company is able to limit the frequency of trips to
the payphone as well as the number of employees needed to service the payphones.
CUSTOMERS, SALES AND MARKETING
The Company employs marketing personnel for its payphone operations in
each of its regions of operation. Regional marketing personnel are responsible
for finding desirable locations for payphones and obtaining Location Agreements
with Location Owners within their geographic areas. The Company believes that
using regional marketing personnel provides better market penetration because of
their familiarity with and proximity to their regions. To date, IPPs have had a
competitive advantage over LECs due to their ability to offer commissions to
Location Owners for both local and long-distance calls. Historically, LECs were
generally unable to derive revenues from interstate calls and non-coin,
interLATA calls, and consequently, were unable to offer commissions on such
calls. FCC rules adopted pursuant to the 1996 Telecom Act granted LECs the
ability to select the long-distance carrier for interLATA long-distance calls in
conjunction with the Location Owner. As a result, LECs may now derive revenues
from and pay commissions on these calls. See "--Regulation."
The Location Owners with whom the Company contracts are a diverse group
of small, medium-sized and large businesses which are frequented by individuals
needing payphone access. The majority of the Company's payphones are located at
convenience stores, truck stops, service
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stations, grocery stores, shopping centers, hotels and airports. As of December
31, 1999, corporate payphone accounts of 50 or more payphones represented
approximately 48% of the Company's installed payphone base.
SERVICE AND EQUIPMENT SUPPLIERS
The Company's primary suppliers provide payphone components, local line
access, and long-distance services. In order to promote acceptance by end users
accustomed to using LEC-owned payphone equipment, the Company utilizes payphones
designed to be similar in appearance and operation to payphones owned by LECs.
The Company purchases circuit boards from various manufacturers for
repair and installation of payphones. The Company primarily obtains local line
access from various LECs, including BellSouth, Bell Atlantic, GTE, SBC
Communications, US West and various other incumbent and competitive suppliers of
local line access. New sources of local line access are expected to emerge as
competition continues to develop in local service markets. Long-distance
services are provided to the Company by various long-distance and operator
service providers, including Sprint, AT&T, MCI Worldcom, Qwest and others.
The Company expects the basic availability of such products and
services to continue in the future, although the continuing availability of
alternative sources cannot be assured. Transition from the Company's existing
suppliers, if necessary, could have a disruptive influence on the Company's
operations and could give rise to unforeseen delays and/or expenses. The Company
is not aware of any current circumstances that would require the Company to seek
alternative suppliers for any of the products or services used in the operation
of its business.
ASSEMBLY AND REPAIR OF PAYPHONES
The Company assembles and repairs payphone equipment for its own use.
The assembly of payphone equipment provides the Company with technical expertise
used in the operation, service, maintenance and repair of its payphones. The
Company assembles payphones from standard payphone components purchased from
component manufacturers. These components include a metal case, an integrated
circuit board incorporating a microprocessor, a handset and cord, and a coin box
and lock. All of the components purchased by the Company are available from
several suppliers, and Davel does not believe that the loss of any supplier
would have a material adverse effect on its assembly operations.
The Company's payphones comply with all material regulatory
requirements regarding the performance and quality of payphone equipment and
have all of the operating characteristics required by the state regulatory
authorities, including: free access to local emergency ("911") telephone
numbers; dial-around access to all locally available long-distance companies;
the capability of receiving incoming calls at no charge; and automatic coin
return capability for incomplete calls.
TECHNOLOGY
The payphone equipment installed by the Company makes use of
microprocessors to provide voice synthesized calling instructions, detect and
count coin deposits during each call, inform the caller at certain intervals of
the time remaining on each call, identify the need for and the amount of an
additional deposit and other functions associated with completion of calls.
Through the use of non-volatile, electronically erasable, programmable read-only
memory chips,
10
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the payphones can also be programmed and reprogrammed from the Company's central
computer facilities to update rate information or to direct different kinds of
calls to particular carriers.
The Company's payphones can distinguish coins by size and weight,
report to a remote location the total coin in the coin box, perform
self-diagnosis and automatically report problems to a pre-programmed service
number, and immediately report attempts at vandalism or theft. Many of the
payphones operate on power available from the telephone lines, thereby avoiding
the need for and reliance upon an additional power source at the installation
location.
The Company utilizes proprietary and non-proprietary software that
tracks the coin and non-coin revenues from each payphone as well as expenses
relating to that payphone, including commissions payable to the Location Owners.
The software allows the Company to generate detailed financial information by
Location Owner, location and payphone, which allows the Company to monitor the
profitability and operating condition of each location and payphone.
The Company provides all technical support required to operate the
payphones, such as computers and software and hardware specialists, at its
headquarters in Tampa, Florida. The Company's manufacturing support operations
provide materials, equipment, spare parts and accessories to the field. Each of
the Company's division offices maintains inventories for immediate access by
field service technicians.
REGULATION
The FCC and state regulatory authorities have traditionally regulated
payphone and long-distance services, with regulatory jurisdiction being
determined by the interstate or intrastate character of the service and the
degree of regulatory oversight varying among jurisdictions. On September 20 and
November 8, 1996, the FCC adopted initial rules and policies to implement
Section 276 of the 1996 Telecom Act. The 1996 Telecom Act substantially
restructured the telecommunications industry, included specific provisions
related to the payphone industry and required the FCC to develop rules necessary
to implement and administer the provisions of the 1996 Telecom Act on both an
interstate and intrastate basis. Among other provisions, the 1996 Telecom Act
granted the FCC the power to preempt state payphone regulations to the extent
that any state requirements are inconsistent with the FCC's implementation of
Section 276.
FEDERAL REGULATION OF LOCAL COIN AND DIAL-AROUND CALLS
The Telephone Operator Consumer Services Improvement Act of 1990
("TOCSIA") established various requirements for companies that provide operator
services and for call aggregators, including PSPs, who send calls to those OSPs.
The requirements of TOCSIA as implemented by the FCC included call branding,
information posting, rate quotations, the filing of informational tariffs and
the right of payphone users to access any OSP to make non-coin calls. TOCSIA
also required the FCC to take action to limit the exposure of payphone companies
to undue risk of fraud upon providing this "open access" to carriers.
TOCSIA further directed the FCC to consider the need to provide
compensation for IPPs for dial-around calls. Accordingly, the FCC ruled in May
1992 that IPPs were entitled to dial-around compensation. Because of the
complexity of establishing an accounting system for determining per call
compensation for these calls, and for other reasons, the FCC temporarily set
this compensation at $6.00 per payphone per month based on an assumed average of
15 interstate carrier access code dial-around calls per month and a rate of
$0.40 per call. The failure by the FCC to provide compensation for 800 "toll
free" dial-around calls was challenged by the IPPs, and
11
<PAGE>
a federal court subsequently ruled that the FCC should have provided
compensation for these toll free calls.
In 1996, recognizing that independent payphone providers had been at a
severe competitive disadvantage under the existing system of regulation and had
experienced substantial increases in dial-around calls without a corresponding
adjustment in compensation, Congress enacted Section 276 to promote both
competition among payphone service providers and the widespread deployment of
payphones throughout the nation. Section 276 directed the FCC to implement rules
by November 1996 that would:
o create a standard regulatory scheme for all public payphone service
providers;
o establish a per call compensation plan to ensure that all payphone
service providers are fairly compensated for each and every
completed intrastate and interstate call, except for 911 emergency
and telecommunications relay service calls;
o terminate subsidies for LEC payphones from LEC regulated rate-base
operations;
o prescribe, at a minimum, nonstructural safeguards to eliminate
discrimination between LEC and independent payphone service
providers and remove the LEC payphones from the LEC's regulated
asset base;
o provide for the RBOCs to have the same rights that independent
payphone service providers have to negotiate with Location Owners
over the selection of interLATA carrier services, subject to the
FCC's determination that the selection right is in the public
interest and subject to existing contracts between the Location
Owners and interLATA carriers;
o provide for the right of all payphone service providers to choose
the local, intraLATA and interLATA carriers subject to the
requirements of, and contractual rights negotiated with, Location
Owners and other valid state regulatory requirements;
o evaluate the requirement for payphones which would not normally be
installed under competitive conditions but which might be desirable
as a matter of public policy, and establish how to provide for and
maintain such payphones if it is determined they are required; and
o preempt any state requirements which are inconsistent with the FCC's
regulations implementing Section 276.
In September and November 1996, the FCC issued its rulings implementing
Section 276 (the "1996 Payphone Order"). In the 1996 Payphone Order, the FCC
determined that the best way to ensure fair compensation to independent and LEC
PSPs for each and every call was to deregulate, to the maximum extent possible,
the price of all calls originating from payphones. For local coin calls, the FCC
mandated that deregulation of the local coin rate would not occur until October
1997 in order to provide a period of orderly transition from the previous system
of state regulation.
To achieve fair compensation for dial-around calls through deregulation
and competition, the FCC in the 1996 Payphone Order directed a two-phase
transition from a regulated market. In the first phase, November 1996 to October
1997, the FCC prescribed flat-rate compensation payable to the PSPs by the IXCs
in the amount of $45.85 per month per payphone. This rate was arrived at by
determining that the deregulated local coin rate was a valid market-based
surrogate
12
<PAGE>
for dial-around calls. The FCC applied a market-based, deregulated coin rate of
$0.35 per call to a finding from the record that there was a monthly average of
131 compensable dial-around calls per payphone. This total included both carrier
access code calls dialed for the purpose of reaching a long distance company
other than the one designated by the PSP as well as 800 "toll free" calls. The
monthly, per phone flat-rate compensation of $45.85 was to be assessed only
against IXCs with annual toll-call revenues in excess of $100 million and
allocated among such IXCs in proportion to their gross long-distance revenues.
During the second phase of the transition to deregulation and market-based
compensation (initially from October 1997 to October 1998, but subsequently
extended in a later order by one year to October 1999), the FCC directed the
IXCs to pay the PSPs on a per-call basis for dial-around calls at the assumed
deregulated coin rate of $0.35 per call. At the conclusion of the second phase,
the FCC set the market-based local coin rate, determined on a
payphone-by-payphone basis, as the default per-call compensation rate in the
absence of a negotiated agreement between the PSP and the IXC. To facilitate
per-call compensation, the FCC required the PSPs to transmit payphone-specific
coding digits which would identify each call as originating from a payphone and
required the LECs to make such coding available to the PSPs as a tariffed item
included in the local access line service.
In July 1997, a federal court responded to an appeal of the 1996
Payphone Order, finding that the FCC erred in (1) setting the default per-call
rate at $0.35 without considering the differences in underlying costs between
dial-around calls and local coin calls, (2) assessing the flat-rate compensation
against only the carriers with annual toll-call revenues in excess of $100
million, and (3) allocating the assessment of the flat-rate compensation based
on gross revenues rather than on a factor more directly related to the number of
dial-around calls processed by the carrier. The Court also assigned error to
other aspects of the 1996 Payphone Order concerning inmate payphones and the
accounting treatment of payphones transferred by an RBOC to a separate
affiliate.
In response to the Court's remand, the FCC issued its modified ruling
implementing Section 276 (the "1997 Payphone Order") in October of 1997. The FCC
determined that distinct and severable costs of $0.066 were attributable to coin
calls that did not apply to the costs incurred by the PSPs in providing access
for dial-around calls. Accordingly, the FCC adjusted the per call rate during
the second phase of interim compensation to $0.284 (which is $0.35 less $0.066).
While the FCC tentatively concluded that the $0.284 default rate should be
utilized in determining compensation during the first phase and reiterated that
PSPs were entitled to compensation for each and every call during the first
phase, it deferred a decision on the precise method of allocating the initial
interim period (November 1996 through October 1997) flat-rate payment obligation
among the IXCs and the number of calls to be used in determining the total
amount of the payment obligation.
On March 9, 1998, the FCC issued a Memorandum Opinion and Order, FCC
98-481, which extended and waived certain requirements concerning the provision
by the LECs of payphone-specific coding digits which identify a call as
originating from a payphone. Without the transmission of payphone-specific
coding digits, some of the IXCs have claimed they are unable to identify a call
as a payphone call eligible for dial-around compensation. With the stated
purpose of ensuring the continued payment of dial-around compensation the FCC, a
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
13
<PAGE>
multiplying the $0.284 per call rate by the nationwide average number of 800
subscriber and access code calls placed from RBOC payphones for corresponding
payment periods. Accurate payments made at the flat rate are not subject to
subsequent adjustment for actual call counts from the applicable payphone.
On May 15, 1998, the Court again remanded the per-call compensation
rate to the FCC for further explanation without vacating the $0.284 per call
rate. The Court opined that the FCC had failed to explain adequately its
derivation of the $0.284 default rate. The Court stated that any resulting
overpayment would be subject to refund and directed the FCC to conclude its
proceedings within a six-month period from the effective date of the Court's
decision.
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 the
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
petitioned the Court for review of the 1999 Payphone Order's determination of
the dial-around compensation rate.
In addition, PSPs requested the FCC to reconsider aspects of the 1999
Payphone Order. These petitions are awaiting decision by the Court and the FCC,
respectively. The new rate became effective on April 21, 1999, and will serve as
the default rate through January 31, 2002, absent modification by the Court or
the FCC.
The new rate was 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 8, 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. The FCC has
further ruled that an adjustment will be made for all payments or credits (with
applicable interest at 11.25%) due and owing between the IXCs and the PSPs,
including Davel. It is possible that the final implementation of the 1999
Payphone Order, including resolution of this retroactive adjustment and the
outcome of any related administrative or judicial review, could have a material
adverse effect on the Company. See "--EFFECT OF FEDERAL REGULATION OF LOCAL COIN
AND DIAL-AROUND CALLS."
EFFECT OF FEDERAL REGULATION OF LOCAL COIN AND DIAL-AROUND CALLS
DIAL-AROUND CALLS. Based on the FCC's tentative conclusion in the 1997
Payphone Order, the 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 per-phone, per-month rate to $37.20 ($0.284 per call multiplied
by 131 calls). Based on this adjustment, the Company recorded a provision in the
three-month period ended September 30, 1997 to reflect reduced dial-around
compensation. In addition, beginning with the third quarter of 1997, the Company
recorded dial-around compensation at the same rate of $37.20 per payphone per
month. Based on the reduction in the per-call compensation rate in the 1999
Payphone Order, the Company further reduced, through an adjustment to non-coin
revenues totaling $9.0 million, the amounts of dial-around compensation
previously recorded for the period from November 7, 1996 to December 31, 1998.
The adjustment included approximately $6.0 million to adjust revenue recorded
during the period
14
<PAGE>
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 reflect actual dial-around call
volumes for the period multiplied by $0.238 per call. The Company believes that
it is legally entitled to fair compensation under the 1996 Telecom Act for
dial-around calls which were delivered to any carrier during the period from
November 7, 1996 to December 31, 1998, and to date.
While the amount of $0.24 per call ($0.238 for retroactive periods)
constitutes the Company's assessment of the minimum level of fair compensation,
certain IXCs have asserted in the past, are asserting and are expected to assert
in the future, that the appropriate level of fair compensation should be lower
than $0.24 per call or should be determined by requiring the user to deposit
coins at the time of making a dial-around call.
The payments for dial-around calls prescribed in the 1997 Payphone
Order significantly increased dial-around compensation revenues to the Company
over the levels received prior to implementation of the 1996 Telecom Act
(although the 1999 Payphone Order has now moderated those increases). However,
market forces and factors outside the Company's control could significantly
affect the resulting revenue impact.
These factors include the following: (1) the final resolution of court
and administrative review of the $0.24 rate ordered by the FCC; (2) resolution
by the FCC of the method of allocating the initial interim period flat-rate
assessment among the IXCs and the number of calls to be used in determining the
amount of the assessment; and (3) ongoing technical or other difficulties in the
responsible carriers' ability and willingness to properly track or pay for
dial-around calls actually delivered to them.
LOCAL COIN CALL RATES. As a result of the 1996 Telecom Act and in
accordance with the FCC's initial rulings implementing Section 276 of the 1996
Telecom Act (which were upheld on appeal by the U.S. Supreme Court), rates for
local coin calls placed from payphones have been effectively deregulated. The
Company and other PSPs have utilized this new deregulatory environment as an
opportunity to adjust prices in an effort to maximize revenues from this call
category. In deciding to deregulate local coin rates for payphones; however, the
FCC did provide for possible modifications or exemptions from deregulation,
either upon its own motion in response to consumer complaints or where an
individual state regulatory body makes a detailed showing that there are market
failures within the state that would not allow market-based rates to develop.
While no such action has been taken to date by the FCC or state regulators, no
assurances can be given as to the future regulatory treatment of local coin call
rates, including the potential re-regulation of those rates or other
modifications.
Initial experience with local coin call rate increases indicates that
price sensitivity of consumers for the service does exist and has resulted and
will result in a potentially material reduction in the number of local coin
calls made. The Company is unable to predict the ultimate impact on its
operations of local coin call rate deregulation.
OTHER PROVISIONS OF THE 1996 TELECOM ACT AND FCC RULES
As a whole, the 1996 Telecom Act and FCC Rules significantly alter the
competitive framework of the payphone industry. The Company believes that
implementation of the 1996 Telecom Act has addressed certain historical
inequities in the payphone marketplace and has, in part, led to a more equitable
and competitive environment for all payphone providers. However,
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<PAGE>
there are numerous uncertainties in the implementation and interpretation of the
1996 Telecom Act which make it impossible for the Company to provide assurance
that the 1996 Telecom Act will result in a long-term positive impact. The
Company has identified the following such uncertainties:
o Various matters pending in several federal courts and raised before the
Congress which, while not directly challenging Section 276, relate to the
validity and constitutionality of the 1996 Telecom Act, as well as other
uncertainties related to the impact, timing and implementation of the 1996
Telecom Act; and
o The 1996 Payphone Order required that LEC payphone operations be removed
from the regulated rate base on April 15, 1997. The LECs were also required
to make the access lines that are provided for their own payphones equally
available to IPPs and to ensure that the cost to payphone providers for
obtaining local lines and services met the FCC's new services test
guidelines, which require that LECs price payphone access lines at the
direct cost to the LEC plus a reasonable allocation of overhead.
Proceedings are now pending in various stages and formats before the FCC
and numerous state regulatory bodies across the nation to resolve these
issues.
In the past, RBOCs were allegedly impaired in their ability to compete
with the IPPs because they were not permitted to select the interLATA carrier to
serve their payphones. Recent changes to the FCC Rules remove this restriction.
Under the new rules, the RBOCs are now permitted to participate with the
Location Owner in selecting the carrier of interLATA services to their
payphones, effective upon FCC approval of each RBOC's Comparably Efficient
Interconnection plans. Existing contracts between Location Owners and payphone
or long-distance providers which were in effect as of February 8, 1996 are
grandfathered and will remain in effect pursuant to their terms.
o The 1996 Payphone Order preempts state regulations that may require IPPs to
route intraLATA calls to the LEC by containing provisions that allow all
payphone providers to select the intraLATA carrier of their choice.
Outstanding questions exist with respect to 0+ local and 0- call routing,
whose classification will await the outcome of various state regulatory
proceedings or initiatives and potential FCC action; and
o The 1996 Payphone Order determined that the administration of programs for
maintaining public interest payphones should be left to the states within
certain guidelines. Various state proceedings have been undertaken in
reviewing this issue, and the matter can be readdressed as circumstances
change.
BILLED PARTY PREFERENCE AND RATE DISCLOSURE
The FCC previously issued a Second Notice of Proposed Rulemaking
regarding Billed Party Preference and associated call rating issues, including
potential rate benchmarks and caller notification requirements for 0+ and
interstate long-distance calls. On January 29, 1998, the FCC released its Second
Report and Order on Reconsideration entitled In the Matter of Billed Party
Preference for InterLATA 0+ Calls, Docket No. 92-77. Effective July 1, 1998, all
carriers providing operator services were required to give consumers using
payphones the option of receiving a rate quote before a call is connected when
making a 0+ interstate call.
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<PAGE>
STATE AND LOCAL REGULATION
State regulatory authorities have primarily been responsible for
regulating the rates, terms, and conditions for intrastate payphone services.
Regulatory approval to operate payphones in a state typically involves
submission of a certification application and an agreement by the Company to
comply with applicable rules, regulations and reporting requirements. The states
and the District of Columbia have adopted a variety of state-specific
regulations that govern rates charged for coin and non-coin calls, as well as a
broad range of technical and operational requirements. The 1996 Telecom Act
contains provisions that require all states to allow payphone competition on
fair terms for both LECs and IPPs. State authorities also in most cases regulate
LEC tariffs for interconnection of independent payphones, as well as the LECs'
own payphone operations and practices.
The Company is also affected by state regulation of operator services.
Most states have capped the rates that consumers can be charged for coin toll
calls and non-coin local and intrastate toll calls made from payphones. In
addition, the Company must comply with regulations designed to afford consumers
notice at the payphone location of the long-distance company or companies
servicing the payphone and the ability to access alternate carriers. The Company
believes that it is currently in material compliance with all such regulatory
requirements.
In accordance with requirements under the 1996 Telecom Act, state
regulatory authorities are currently reviewing the rates that LECs charge IPPs
for local line access and associated services. Local line access charges have
been reduced in certain states and the Company believes that selected states'
continuing review of local line access charges, coupled with competition for
local line access service resulting from implementation of the 1996 Telecom Act,
may lead to more options available to the Company for local line access at
competitive rates. The Company cannot provide assurance, however, that such
options or local line access rates will become available.
The Company believes that an increasing number of municipalities and
other units of local government have begun to impose taxes, license fees and
operating rules on the operations and revenues of payphones. The Company
believes that some of these fees and restrictions may be in violation of
provisions of the 1996 Telecom Act prohibiting barriers to entry into the
business of operating payphones and the policy of the Act to encourage wide
deployment of payphones. However, in at least one instance, involving a
challenge to a payphone ordinance adopted by the Village of Huntington Park,
California, the FCC declined to overturn a total ban on payphones in a downtown
area. The proliferation of local government licensing, restriction, taxation and
regulation of payphone services could have an adverse affect on the Company and
other PSPs unless the industry is successful in resisting or moderating this
trend.
MAJOR CUSTOMERS
No individual customer accounted for more than 10% of the Company's
consolidated revenues in 1999, 1998 or 1997.
COMPETITION
The Company competes for payphone locations directly with LECs and
IPPs. The Company also competes, indirectly, with long-distance companies, which
can offer Location Owners commissions on long-distance calls made from LEC-owned
payphones. Most LECs and long-distance companies against which the Company
competes and some IPPs may have substantially greater financial, marketing and
other resources than the Company. In addition, many
17
<PAGE>
LECs, faced with competition from the Company and other IPPs, have increased
their compensation arrangements with Location Owners to offer more favorable
commission schedules.
The Company believes the principal competitive factors in the payphone
business are (1) the commission payments to a Location Owner and the opportunity
for a Location Owner to obtain commissions on both local and long-distance calls
from the same provider, (2) the ability to serve accounts with locations in
several LATAs or states, (3) the quality of service and the availability of
specialized services provided to a Location Owner and payphone users, and (4)
responsiveness to customer service needs. The Company believes it is currently
competitive in each of these areas.
The Company competes with long-distance carriers that provide
dial-around services which can be accessed through the Company's payphones.
Certain national long-distance operator service providers and prepaid calling
card providers have implemented extensive advertising promotions and
distribution schemes which have increased dial-around activity on payphones
owned by LECs and IPPs, including the Company, thereby reducing traffic to the
Company's primary providers of long-distance service. The Company does, however,
receive compensation for dial-around calls placed from its payphones. See
"--Regulation."
The Company also competes with providers of wireless communications
services for both local and long distance traffic. Certain providers of wireless
communication services have introduced rate plans that are competitively priced
with certain of the products offered by the Company and appear to be negatively
impacting the usage of payphones throughout the nation.
EMPLOYEES
As of December 31, 1999, the Company had 718 full-time employees, none
of whom is the subject of a collective bargaining agreement. The Company
believes that its relationship with its employees is good.
ITEM 2. PROPERTIES
The Company leases approximately 48,500 square feet of space in Tampa,
Florida that includes two locations for executive office space, a divisional
office for payphone operations and facilities for the assembly and repair of
payphones. The Company also leases approximately 30 division offices for
payphone operations in various geographic locations. In addition, the Company
operates a regional distribution and assembly center in approximately 10,000
square feet of space in Jacksonville, Illinois, which the Company leases
pursuant to an agreement with David Hill, who is a Davel director and major
shareholder. The Company also leases from Mr. Hill 18,000 square feet of
warehouse space used for the storage and distribution of inventory and filing
materials in Jacksonville, Illinois pursuant to an agreement.
ITEM 3. LEGAL PROCEEDINGS
In December 1995, Cellular World, Inc. filed suit in Dade County
Circuit Court against the Company's affiliates, Peoples Telephone Company, Inc.
and PTC Cellular, Inc., alleging tortious interference with Cellular World's
advantageous business relationship with Alamo Rent-A-Car and misappropriation of
Cellular World's trade secrets involving a credit card cellular car phone
system. The trial court previously entered partial summary judgment in favor of
the Company as to the Plaintiff's trade secrets claim, leaving the tortious
interference claim for trial.
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Trial on the tortious interference claim commenced on February 29,
2000. The Company had several meritorious legal and factual defenses to
Plaintiff's claims. Although the Company believes that it had a reasonable
possibility of prevailing at trial or through an appeal, if necessary, the case
presented significant risks to the Company because Plaintiff intended to ask the
jury to award damages of up to $18 million. Following three days of trial, the
Company and Cellular World agreed to settle and resolve the dispute in its
entirety. Pursuant to the settlement, the Company agreed to pay Cellular World a
total of $1.5 million on extended payment terms: $500,000 by March 8, 2000,
$250,000 by January 5, 2001 and the remaining $750,000 in 15 equal monthly
installments of $50,000 beginning in January 2001.
On September 29, 1998, the Company announced that it was exercising its
contractual rights to terminate a merger agreement (the "Davel/PhoneTel Merger
Agreement") with PhoneTel Technologies, Inc. ("PhoneTel"), based on breaches of
representations, warranties and covenants by PhoneTel. On October 1, 1998, the
Company filed a lawsuit in Delaware Chancery Court seeking damages, rescission
of the Davel/PhoneTel Merger Agreement and a declaratory judgment that such
breaches occurred. On October 27, 1998, PhoneTel answered the complaint and
filed a counterclaim against the Company alleging that the Davel/PhoneTel Merger
Agreement had been wrongfully terminated. At the same time, PhoneTel also filed
a third party claim against Peoples Telephone Company, Inc. (acquired by the
Company on December 23, 1998) alleging that Peoples wrongfully caused the
termination of the Davel/PhoneTel Merger Agreement. The counterclaim and third
party claim seek specific performance by the Company of the transactions
contemplated by the Davel/PhoneTel Merger Agreement and damages and other
equitable relief from the Company and Peoples. The Company believes that it has
meritorious claims against PhoneTel and intends to defend vigorously against the
counterclaim against Davel and the third party claim against Peoples initiated
by PhoneTel. The Company, at this time, cannot predict the outcome of this
litigation.
The Company is involved in other litigation arising in the normal
course of its business which it believes will not materially affect its
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
None during the fourth quarter of 1999
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION. Davel Common Stock trades on the NASDAQ National
Market System. The following table sets forth, for the periods indicated, the
high and low closing prices of Davel Common Stock on the NASDAQ National Market
System from January 1, 1997 through December 31, 1999.
1997 HIGH LOW
- ---- ---- ---
First Quarter $ 18.25 $ 14.75
Second Quarter 18.00 12.00
Third Quarter 23.25 15.25
Fourth Quarter 29.00 21.25
1998
- ----
First Quarter $ 28.50 $ 24.38
Second Quarter 29.25 21.25
Third Quarter 25.25 10.88
Fourth Quarter 19.75 9.00
1999
- ----
First Quarter $ 18.13 $ 7.00
Second Quarter 8.50 5.25
Third Quarter 6.50 3.94
Fourth Quarter 5.38 3.00
As of March 15, 2000, there were approximately 201 holders of record of
the Common Stock, not including stockholders whose shares were held in "nominee"
or "street" name. The closing sale price of the Company's Common Stock on March
15, 2000 was $4.00 per share.
DIVIDENDS. The Company did not pay any dividends on its Common Stock
during 1999 and does not intend to pay any Common Stock dividends in the
foreseeable future. It is the current policy of the Company's Board of Directors
to retain cash to finance the growth and development of the Company's business.
The payment of dividends is effectively prohibited by the Company's Senior
Credit Facility. Payment of cash dividends, if made in the future, will be
determined by the Company's Board of Directors based on the conditions then
existing, including the Company's financial condition, capital requirements,
cash flow, profitability, business outlook and other factors.
RECENT SALES OF UNREGISTERED SECURITIES. On June 29, 1998, Old Davel
sold to EGI-Davel Investors, L.L.C. 1,000,000 shares of its common stock, no par
value, and warrants for 218,750 shares of common stock at $32.00 per share. The
aggregate consideration for the shares and warrants was $28 million, which was
used by Old Davel for working capital and payment of the merger consideration
for the Peoples Merger. The sale to EGI-Davel Investors, L.L.C. was made
pursuant to an exemption from registration, pursuant to Section 4(2) of the
Securities Act.
In addition, as part of the Peoples Merger, the Company issued warrants
for an aggregate of 229,124 shares of Common Stock exerciseable at $22.34 per
share, to Bank Austria Creditanstalt American Corporation and to former
partners of Appian Capital Partners, L.L.C., each of whom had held warrants of
Peoples Telephone prior to the Peoples Merger. The warrants were issued in
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exchange for the warrants of Peoples Telephone and no additional consideration
was paid to the Company. The issuance of the warrants was made pursuant to
Section 4(2) of the Securities Act.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data presented below under the captions
"Operating Data" and "Balance Sheet Data" are derived from the consolidated
financial statements of the Company. The selected financial data should be read
in conjunction with the financial statements and notes thereto included
elsewhere in this Amendment No. 1 to Annual Report on Form 10-K/A and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Year ended December 31, (1)
-----------------------------------------------------------------
(In thousands, except per share data)
-----------------------------------------------------------------
1999 1998 (2) 1997 1996 1995
--------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue $ 175,846 $ 194,818 $ 158,411 $ 143,979 $ 144,192
Expenses 232,435 220,600 152,368 140,665 146,516
--------- --------- --------- --------- ---------
(56,589) (25,782) 6,043 3,314 (2,324)
Operating (income) loss
Other expense 23,412 23,881 13,084 12,519 10,844
Income taxes (1,755) -- 2,459 1,868 2,186
--------- --------- --------- --------- ---------
Loss from continuing operations before
Extraordinary item (78,246) (49,663) (9,500) (11,073) (15,354)
Gain (loss) from discontinued operations -- 607 2,092 (1,114) (17,867)
Extraordinary loss from extinguishment of debt -- (17,856) -- -- (3,327)
--------- --------- --------- --------- ---------
Net loss $ (78,246) $ (66,912) $ (7,408) $ (12,187) $ (36,548)
========= ========= ========= ========= =========
Basic and diluted loss per share:
Continuing operations before extraordinary item $ (7.35) $ (5.68) $ (1.27) $ (1.47) $ (1.92)
Gain (loss) from discontinued operations -- 0.07 0.25 (0.13) (2.18)
Extraordinary loss from extinguishment of debt -- (1.98) -- -- (0.40)
Net loss $ (7.35) $ (7.59) $ (1.02) $ (1.60) $ (4.50)
Weighted average common shares outstanding 10,660 9,029 8,407 8,317 8,236
BALANCE SHEET DATA:
Total assets $ 180,761 $ 273,018 $ 180,786 $ 184,732 $ 193,399
Long-term debt and obligations under capital leases,
Less current maturities 206,509 225,451 107,076 106,956 102,782
Manditorily redeemable preferred stock -- -- 16,284 15,079 13,886
Shareholders' equity (deficit) (75,079) 1,649 20,290 28,641 42,278
</TABLE>
(1) On December 23, 1998, the Company consummated its merger with Peoples
Telephone, which was accounted for as a pooling-of-interests. Accordingly,
all financial data has been restated to reflect the combined operations of
Old Davel and Peoples for all periods presented.
(2) The year ended December 31, 1998 includes the results of CCI from the date
of the CCI Acquisition, February 3, 1998.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and notes thereto appearing
elsewhere herein.
Certain of the statements contained below are forward-looking
statements (rather than historical facts) that are subject to risks and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements.
GENERAL
On December 23, 1998, Old Davel and Peoples Telephone merged together
in a transaction accounted for as a pooling-of-interests. As such, the results
of both companies have been restated as if they had been combined for all
periods presented.
During 1999, the Company derived its revenues from two principal
sources: coin calls and non-coin calls. Coin calls represent calls paid for by
callers with coins deposited in the payphone. Coin call revenues are recorded in
the amount of coins collected from the payphones.
Non-coin calls made from the Company's payphones generate revenues in
an amount that depends upon whether the Company or a long distance company
handles the call. If the non-coin call is handled through an "unbundled"
services arrangement, the Company recognizes non-coin revenues equal to the
total amount charged for the call. If the non-coin call is handled by a long-
distance company, the Company generally recognizes revenues in an amount equal
to the commission on that call paid to the Company by the long distance company.
Under an unbundled services arrangement, the Company performs certain functions
necessary to service non-coin calls, uses the long distance company's switching
equipment and its other services on an as-needed basis, and pays the long
distance company on an unbundled basis for the operator services actually used
to complete these calls. Prior to November 1999, the Company also serviced
long-distance calls through its switch.
The Company also recognizes non-coin revenues from calls that are
dialed from its payphones to gain access to a long distance company other than
the one pre-programmed into the telephone; this is commonly referred to as
"dial-around" access. See "--Regulation." The Company also derives revenue from
certain LECs for intraLATA non-coin calls. See "--Operations."
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
and long distance carriers for access charges and use of their networks.
Commission expense represents payments to Location Owners. Service, maintenance
and network costs represent the cost of servicing and maintaining the payphones
on an ongoing basis, costs related to the operation of the Company's switch
(which was inactivated as of November 1999) and, in connection with unbundled
services arrangements, the fees paid for those services.
22
<PAGE>
REGULATORY IMPACT ON REVENUE
LOCAL COIN RATES
In ensuring "fair compensation" for all calls, the FCC previously
determined that local coin rates from payphones should be generally deregulated
by October 7, 1997, but provided for possible modifications or exemptions from
deregulation upon a detailed showing by an individual state that there are
market failures within the state that would not allow market-based rates to
develop. On July 1, 1997, a federal court issued an order which upheld the FCC's
authority to deregulate local coin call rates. In accordance with the FCC's
ruling and the court order, certain LECs and independent payphone service
providers, including the Company, increased rates for local coin calls from
$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 1999, the Company
experienced lower coin call volumes on its payphones resulting from the
increased rates, growth in wireless communication services and changes in call
traffic and the geographic mix of the Company's payphones.
DIAL-AROUND COMPENSATION
On September 20, 1996, the Federal Communications Commission ("FCC")
adopted rules which became effective November 7, 1996 (the "1996 Payphone
Order"), initially mandating dial-around compensation for both access code calls
and 800 subscriber calls at a flat rate of $45.85 per payphone per month (131
calls multiplied by $0.35 per call). Commencing October 7, 1997 and ending
October 6, 1999 the $45.85 per payphone per month rate was to transition to a
per-call system at the rate of $0.35 per call. Several parties challenged
certain of the FCC regulations including the dial-around compensation rate. On
July 1, 1997, a federal court vacated certain portions of the FCC's 1996
Payphone Order, including the dial-around compensation rate.
In accordance with the court's mandate, on October 9, 1997, the FCC
adopted 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 retroative 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
23
<PAGE>
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.
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 Company's assessment
of the minimum level of fair compensation following the April 21, 1999 effective
date, certain IXCs have asserted in the past, are asserting and are expected to
assert in the future that the appropriate level of fair compensation should be
lower than $0.24 per call.
The payment levels for dial-around calls prescribed in the 1996 and
1997 Payphone Orders significantly 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 has now moderated those increases).
However, market forces and factors outside the Company's control could
significantly affect these revenue increases. These factors include the
following: (i) the final resolution of the $0.24 rate recently ordered by the
FCC and the possibility of subsequent appeals to the courts, (ii) the resolution
by the FCC of the method of allocating the initial interim period flat-rate
assessment among the IXCs and the number of calls to be used in determining the
amount of the assessment, (iii) the possibility of other litigation seeking to
modify or overturn the 1999 Payphone Order or portions therof, (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.
24
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
information from the Company's Consolidated Statements of Operations, included
elsewhere in this Amendment No. 1 to Annual Report on Form 10-K/A, expressed as
a percentage of total revenues.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- --------- --------
<S> <C> <C> <C>
REVENUES:
Coin calls 63.0% 68.0% 64.2%
Non-coin calls, net of dial-around compensation adjustments 37.0 32.0 35.8
----- ----- -----
Total revenues 100.0 100.0 100.0
----- ----- -----
COSTS AND EXPENSES:
Telephone charges 20.9 23.4 24.5
Commissions 23.3 24.1 22.6
Service, maintenance and network costs 23.9 27.1 24.9
Depreciation and amortization 22.3 19.8 16.2
Selling, general and administrative 12.0 11.0 7.9
Non-recurring items 29.1 5.6 --
Restructuring charge 0.9 2.2 --
----- ----- -----
Total operating costs and expenses 132.4 113.2 96.1
----- ----- -----
Operating income (loss) (32.4)% (13.2)% 3.9%
===== ===== ====
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
For the year ended December 31, 1999, total revenues from continuing
operations decreased approximately $19.0 million or 9.7%, compared to the year
ended December 31, 1998, from $194.8 million in the year ended December 31, 1998
to $175.8 million in the year ended December 31, 1999. This decline was
primarily attributable to an 11.3% decrease in installed payphones (84,384
payphones on December 31, 1998 to 74,869 payphones on December 31, 1999),
erosion of coin revenue due to increased competition from wireless communication
services and a reduction in the federally established dial-around rate.
Coin call revenues decreased approximately $21.7 million, or 16.4%,
from $132.5 million in 1998 to $110.8 million in 1999, primarily attributable to
lower call volumes on the Company's payphones resulting from higher coin call
rates, increased competition from wireless communication services, changes in
call traffic and the geographic mix of the Company's payphones.
Non-coin call revenues increased approximately $2.7 million, or 4.4%,
from $62.3 million in the year ended December 31, 1998 to $65.1 million in the
year ended December 31, 1999. The increase was primarily attributable to an
increase in dial-around call traffic from the Company's payphones. Dial-around
call revenue increased approximately $9.5 million, or 35.9%, from $26.4 million
in 1998 to $35.9 million in 1999. Other non-coin call revenues, consisting
primarily of operator service calls, decreased approximately $9.5 million, or
26.8%, from approximately $35.5 million in 1998 to approximately $26.0 million
1999. This decrease was primarily due to the fact that when the Company operated
its long-distance switching equipment, revenues associated with the calls were
recorded based on the price charged for the call. The Company then remitted the
25
<PAGE>
access cost associated with the call to other parties. With the decommissioning
of the switch, the Company now collects the net revenue (price charged less cost
of access) from the outside long-distance providers who handle the routing of
the call.
Telephone charges decreased $2.8 million, or 12.3%, from $43.6 million
in the year ended December 31, 1998 to $36.8 million in 1999. The decrease in
telephone charges was primarily attributable to the decrease in the number of
installed payphones, the effects of the FCC's "new services test" (pursuant to
the 1996 Telecom Act that reduced phone bills in 10 states), more favorable
contracts with LECs and utilization of competitive local exchange carriers for
local line access services. The Company is currently negotiating contracts that
it believes will further reduce local access charges on a per-phone basis but is
unable to estimate the impact of further telephone charge reductions at this
time. Telephone charges for 1999 decreased to 20.9% of total revenues compared
to 23.4% in the prior year as a result of these reductions.
Commissions decreased $6.0 million, or 12.7%, from $47.0 million in the
year ended December 31, 1998 to $41.0 million in the year ended December 31,
1999. The decrease was primarily attributable to lower revenues from the
Company's payphones. Commissions decreased to 23.3% of total revenues compared
to 24.1% in the prior year. The decrease in commissions as a percentage of total
revenues was primarily attributable to increases in certain types of revenues
that are excluded from commission calculations on a portion of the Company's
location agreements.
Service, maintenance and network costs decreased $10.7 million, or
20.2%, from $52.8 million in the year ended December 31, 1998 to $42.1 million
in the year ended December 31, 1999. The decrease was primarily attributable to
the closing of duplicate offices after the Peoples Merger and CCI Acquisition.
Service, maintenance and network decreased to 23.9% of total revenues in 1999
compared to 27.1% in 1998. The decrease in service, maintenance and network as a
percentage of total revenues was primarily attributable to cost saving generated
from increased geographic density of the phones and the Company's ability to
improve efficiency in servicing the Company's payphones.
Depreciation and amortization expense in 1999 increased $0.6 million,
or 1.5%, from $38.6 million in 1998 to $39.2 million in 1999. The increase was
primarily due to an increase in amortization expense. The increased amortization
expense resulted from an acceleration of the amortization of location contracts
on removed payphones. An acceleration of amortization expense should continue as
the Company continues to remove unprofitable phones.
Selling, general and administrative expenses decreased approximately
$0.5 million, or 2.1% from $21.5 million in the year ended December 31, 1998 to
$21.1 million in the year ended December 31, 1999. The decrease was primarily
attributable to the fact that selling, general and administrative expenses
related to the separate operation of payphones and administrative facilities
acquired in the CCI Acquisition and the Peoples Merger are included in the prior
year. The integration of CCI and Peoples was completed during 1999, and included
closing the separate corporate offices and duplicate field offices, thereby
eliminating duplicative costs.
The Company recognized a non-recurring charge of approximately $51.2
million in 1999 primarily related to a $37.9 million write-down of goodwill and
$7.8 million write-down of location contracts related to deinstallation of
phones acquired in the CCI Acquisition and $3.1 million related to the removal
of other nonprofitable phones. In addition, the Company incurred and paid
restructuring and other merger-related charges during the year ended December
31, 1999 of approximately $1.6 million related to integration and restructuring
of the Peoples acquisition. The
26
<PAGE>
restructuring and other merger-related charges were primarily related to
severance pay for terminated employees, relocation costs and costs related to
the closing of redundant facilities.
Other expense decreased approximately $0.5 million, or 2.0%, from $23.9
million in the year ended December 31, 1998 of $23.4 million in the year ended
December 31, 1999. This decrease resulted primarily from the recognition in 1998
of a $2.8 million impairment loss on an investment held by Peoples Telephone for
which there was no corresponding loss during 1999. This decrease was partially
offset by a $2.2 million increase in interest expense during 1999. The increase
in interest expense is related to higher borrowings under the credit facilities.
Loss from continuing operations before extraordinary items increased
approximately $28.6 million, or 57.6%, from approximately $49.7 million in 1998
to approximately $78.2 million in 1999. Loss before extraordinary item increased
approximately $29.2 million from approximately $49.1 million in 1998 to
approximately $78.2 million in 1999.
Net loss increased approximately $11.3 million, or 16.9%, from the
prior year, from a net loss of approximately $66.9 million in 1998 to a net loss
of approximately $78.2 million in 1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Total revenues from continuing operations increased approximately $36.4
million, or 23.0%, from $158.4 million in the year ended December 31, 1997 to
$194.8 million in the year ended December 31, 1998. This growth was primarily
attributable to an increase from 59,009 (treating the Peoples Telephone
payphones as pooled together with the Old Davel payphones) payphones on December
31, 1997 to 84,384 payphones on December 31, 1998. The growth in the number of
payphones was primarily due to the CCI Acquisition, consisting of 19,543
installed payphones, and the acquisition of Indiana Telcom by Peoples Telephone
in January 1998, consisting of 2,632 installed payphones. Coin call revenues
increased approximately $30.8 million, or 30.3%, rising from $101.7 million in
1997 to $132.5 million in 1998, driven primarily by the increase in the number
of installed payphones. While coin call revenues increased during the period on
an aggregate basis, coin call revenues on a per-phone, per-month basis decreased
due to lower coin call volumes resulting from the growth in wireless
communication services and changes in call traffic and the geographic mix of the
Company's payphones.
Non-coin call revenues increased approximately $5.6 million, or 9.8%,
from $56.8 million in the year ended December 31, 1997 to $62.3 million in the
year ended December 31, 1998. The increase in non-coin call revenues was
primarily attributable to the growth in the number of installed payphones. While
non-coin call revenues increased during the period on an aggregate basis,
non-coin call revenues on a per-phone, per-month basis decreased due to lower
call volumes resulting primarily from the growth in wireless communication
services. Non-coin call revenues were further reduced, through an adjustment
totaling $9.0 million resulting from the adjustment to the dial-around
compensation rate prescribed in the 1999 Payphone Order. 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 to December 31, 1998 to actual dial-around call volumes for the period
multiplied by $0.238 per call.
Telephone charges increased $6.7 million, or 17.2%, from $38.9 million
in the year ended December 31, 1997 to $45.6 million in the year ended December
31, 1998. The increase in telephone charges was primarily attributable to the
growth in the number of installed payphones.
27
<PAGE>
Telephone charges for 1998 decreased to 23.4% of total revenues compared to
24.5% in the prior year. The decrease in telephone charges as a percentage of
revenues was due to reductions in line access charges on a per-phone, per-month
basis as a result of implementation of the FCC's "new services test" pursuant to
the 1996 Telecom Act and rate reductions received from certain LECs with which
the Company has negotiated agreements for the provision of local access
services.
Commissions increased $11.1 million, or 31.0%, from $35.9 million in
the year ended December 31, 1997 to $47.0 million in the year ended December 31,
1998. The increase in commissions was primarily attributable to the growth in
the number of installed payphones. Commissions increased to 24.1% of total
revenues compared to 22.6% in the prior year. The increase in commissions as a
percentage of total revenues was primarily attributable to the CCI Acquisition
which included a higher proportion of national accounts than those previously
serviced by the Company. National accounts typically receive higher commission
rates than local and regional accounts due primarily to their higher revenues.
Service, maintenance and network costs rose $13.3 million, or 33.7%,
from $39.5 million in the year ended December 31, 1997 to $52.8 million in the
year ended December 31, 1998. The increase was primarily attributable to the
growth in the number of installed payphones. Service, maintenance and network
costs increased to 27.1% of total revenues compared to 24.9% in the prior year.
The increase in service, maintenance and network costs as a percentage of total
revenues was primarily attributable to the CCI Acquisition. Service, maintenance
and network costs in 1998 include the network costs related to the CCI payphones
which primarily direct long distance call traffic to an unbundled services
agreement. In 1997, the Company had a higher mix of long distance call traffic
directed to commission plans which do not include a cost component in service,
maintenance and network costs.
Depreciation and amortization expense in 1999 increased $13.0 million,
or 50.7%, from $25.6 million in 1997 to $38.6 million in 1998. The increase was
primarily driven by the increase in the number of installed payphones.
Approximately $10.0 million of the increase in depreciation and amortization
expense was related to the CCI Acquisition.
Selling, general and administrative expenses increased approximately
$9.0 million, or 71.5%, from $12.6 million in the year ended December 31, 1997
to $21.5 million in the year ended December 31, 1998. The increase was primarily
attributable to selling, general and administrative expenses related to the CCI
Acquisition. The Company continued to operate the former corporate office of CCI
through August 1998, when CCI's administrative functions were combined into the
Company's facilities in other locations. In addition, the Company eliminated
nine duplicative field offices during the year in the integration of CCI's
operations with Old Davel's operations.
Other expense decreased approximately $10.9 million, from expense of
$13.1 million in the year ended December 31, 1997 to expense of $23.9 million in
the year ended December 31, 1998. This decrease resulted primarily from the
recognition of a $2.8 million impairment loss on an investment held by Peoples
Telephone prior to the merger with Old Davel. The remaining decrease was
primarily due to a reduction in interest income as a result of lower cash
balances available for investment.
Interest expense in 1998 increased approximately $7.4 million, or
54.3%, from $13.6 million in 1997 to $21.0 million in 1998. This increase
resulted primarily from the incurrence of $120.0 million in indebtedness in
connection with the CCI Acquisition and refinancing of Old Davel's credit
facility.
28
<PAGE>
Loss from continuing operations before extraordinary items increased
approximately $40.2 million, from approximately $9.5 million in 1997 to
approximately $49.7 million in 1998. Loss before extraordinary items increased
approximately $41.6 million from approximately $7.4 million in 1997 to
approximately $49.1 million in 1998.
The Company's gain on discontinued operations included $0.6 million of
a gain realized on the sale of the Peoples Telephone investment in Shared
Technologies Cellular, Inc. (STC) Common Stock which was received in 1995 as
proceeds from the sale of Peoples Telephone cellular telephone operations, which
were treated as discontinued operations in 1995. The Company's loss from
discontinued operations in 1997 represents a $2.4 million loss on the sale of
the inmate phone division and a $0.3 million gain related to its previously
discontinued cellular telephone operations.
In the year ended December 31, 1998, the Company recorded an
extraordinary loss of $17.9 million, consisting of approximately $12.9 million
in premiums and fees related to the repurchase of $100.0 million principal
amount of Peoples Telephone's outstanding 12 1/4% Senior Notes due 2002 in
connection with the refinancing of the combined companies' credit facilities as
part of the Peoples Merger. The Company also recorded approximately $5.0 million
in extraordinary losses related to the write-off of unamortized debt issuance
costs related to the refinancing of the existing credit facilities of Old Davel
and Peoples Telephone.
Net loss increased approximately $59.5 million from approximately $7.4
million in 1997 to approximately $66.9 million in 1998.
29
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Historically, the Company's primary sources of liquidity have been cash
from operations, borrowings under various credit facilities, and periodically,
proceeds from the issuances of common stock and proceeds from the issuance of
preferred stock. For 1999, quarterly revenue as a percentage of total revenue
was approximately 25%, 27%, 26%, and 22%, respectively, for the first through
fourth quarters of the year. In addition, for fiscal 1999 quarterly income
(loss) from operations as a percentage of total (loss) from operations was
approximately (9)%, 0%, (85)%, and (6)%, respectively, for the first through
fourth quarters of the year. 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
that at other times during the years, while the Company's payphones throughout
the Midwestern and eastern United States produce their highest call volumes
during the second and third quarters.
In 1999, operating activities generated $9.0 million of net cash,
compared to a usage of $14.3 million in 1998. In 1997, the Company's operating
activities generated $10.6 million of cash flow. The 1999 increase in cash from
operating activities is a result of improved operating performance prior to the
inclusion of the non-cash expenses related to depreciation, amortization,
write-off of goodwill, write-off of location contracts, write-off of certain
fixed assets, expenses associated with the issuance of stock in payment for
services, and extraordinary losses on the early extinguishment of debt. In
addition to the $26.9 million improvement in cash generated from operating
activities (before non-cash items), increased working capital erosion used $3.8
million in cash flow.
30
<PAGE>
Capital expenditures for 1999 were $4.9 million compared to $11.9 for
1998. These capital expenditures were primarily used to purchase payphone and
computer equipment. Additionally, $5.1 million were used in 1999 for acquisition
activities compared to $116.2 million in 1998.
The Company's principal sources of liquidity will come from cash flow
generated from operating activities and borrowings under the Company's $45
million revolving credit facility. The Company's principal uses of liquidity
will be to provide working capital, meet debt service requirements and finance
the Company's strategic plans. At December 31, 1998, the Company had an
available borrowing capacity of $27.5 million under the revolving credit
facility. The Company has required amortization of Term Loans in calendar 2000
totaling approximately $21.0 million.
Financing activities used approximately $9.0 million in cash to repay
approximately $11.4 million of long-term debt and capital lease obligations. Net
proceeds on the revolving line of credit provided $2.5 million in cash.
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 Senior Credit Facility provides for borrowings by Davel from time
to time of up to $280.0 million for working capital and other corporate
purposes.
Indebtedness of the Company under the Senior Credit Facility is secured
by substantially all of its and its subsidiaries' assets, including but not
limited to their equipment, inventory, receivables and related contracts,
investment property, computer hardware and software, bank accounts and all other
goods and rights of every kind and description and is guaranteed by Davel and
all its subsidiaries.
The Company's borrowings under the Senior Credit Facility bear interest
at a floating rate and may be maintained as Base Rate Loans (as defined in the
Senior Credit Facility) or, at the Company's option, as Eurodollar Loans (as
defined in the Senior Credit Facility). Base Rate Loans shall bear interest at
the Base Rate (defined as the higher of (i) the applicable prime lending rate of
Bank of America or (ii) the Federal Reserve reported certificate of deposit rate
plus 1%). Eurodollar Loans shall bear interest at the Eurodollar Rate (as
defined in the Senior Credit Facility, 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
31
<PAGE>
Facility during the term of the facility. The Company is also required to pay an
annual agency fee to the Agent. In addition, the Company was also required to
pay an arrangement fee for the account of each bank in accordance with the
banks' respective pro rata share of the Senior Credit Facility. The
Administrative Agent and the other lenders will receive such other fees as have
been separately agreed upon with the Administrative Agent.
The Senior Credit Facility requires the Company to meet certain
financial tests, including, without limitation, maximum levels of debt as a
ratio of EBITDA (as defined in the Senior Credit Facility and subsequent
amendments), minimum interest and fixed charge ratios and maximum amount of
capital expenditures. The Senior Credit Facility also contains certain covenants
that, among other things, will limit the incurrence of additional indebtedness,
prepayments of other indebtedness (including the Notes), liens and encumbrances
and other matters customarily restricted in such agreements.
FIRST AMENDMENT
In the first quarter of 1999, the Company gave notice to the
Administrative Agent that lower than expected performance in the first quarter
of 1999 would result in the Company's inability to meet certain financial
covenants contained in the Senior Credit Facility. On April 8, 1999, the Company
and the Lenders agreed to the First Amendment 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 contained amendments that 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% highter than those in the previous pricing grid
o Prepayment 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
obligaions outstanding exceeds $50.0 million
o The introduction of a new covenant to provide certain operating data
to the Lenders on a monthly basis
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
32
<PAGE>
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 the Lender's
commitment multiplied by 0.35%.
SECOND AMENDMENT
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 to $245 million (through a
permanent reduction of the revolving line of credit to $45 million), placement
of a block on the final $10 million of borrowing under the revolving credit
facility, a fee of 35 basis points and a moritorium on acquisitions. The Second
Amendment contained amendments that provided for the following:
o Reduction of the maximum available credit available on the revolving
facility to $45 million;
o Amendment of the applicable percentages for Eurodollar Loans 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 introduction 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;
33
<PAGE>
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 to 30 days.
The Company believes that it is probable that it will comply with the
loan covenants for the next twelve months and, as such, has not classified the
obligations under the Senior Credit Facility as current liabilities.
The Senior Credit Facility contains customary events of default,
including without limitation, payment defaults, defaults for breaches of
representations and warranties, covenant defaults, cross-defaults to certain
other indebtedness, defaults for certain events of bankruptcy and insolvency,
judgment defaults, failure of any guaranty or security document supporting the
Senior Credit Facility to be in full force and effect, and defaults for a change
of control of the Company.
The Company believes that cash generated from operations and available
borrowings under the Senior Credit Facility will be sufficient to fund the
Company's forseeable cash requirements, including capital expenditures through
December 31, 2000. There can be no assurance, however, that the Company will
continue to expand at its current rate or that additional financing will be
available when needed or, if available, will be available on terms acceptable to
the Company.
34
<PAGE>
IMPACT OF INFLATION
Inflation is not 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 operating 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 the payphones are located. Most of the Company's payphones
in Florida 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.
YEAR 2000 ISSUE
The Company did not experience any significant problems as a result of
the date change to the Year 2000. At January 1, 2000, the Company's computerized
information systems recognized the 2000 date and processed information related
to the operation of the payphones, as well as its internal accounting and
information systems, correctly. The Company also has not experienced any
problems related to its suppliers or other parties on whom it relies in
providing payphone and operator services.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued SFAS No. 133 Accounting
for Derivative Instruments and Hedging Activities, which requires that all
derivatives be recognized as either assets or liabilities in the statement of
financial position at fair value unless specific hedge criteria are met. The
Company is required to adopt the provisions of SFAS No. 133 in 2000. Adoption of
this statement is not expected to significantly impact the Company's
consolidated financial position, results of operations or cash flows.
ITEM 7A. 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
35
<PAGE>
debt balance to limit the impact of increases in interest rates on the Company's
variable rate long-term debt.
As of December 31, 1999, the Company has interest rate cap agreements
with an aggregate notional amount of $40 million that terminate in March 2000.
The interest rate cap agreements require premium payments to the counterparty
based on the notional amount of the 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 counterparties for amounts, if
any, by which the U.S. three month LIBOR rate exceeds 7%. In addition, the
Company entered into an interest rate collar agreement with a large financial
institution that terminates in February 2002. The notional amount of the
interest rate collar is $25 million and the agreement has a cap rate of 7% and a
floor rate of 4.8% based on the U.S. one month LIBOR rate.
Based upon the Company's variable rate indebtedness and weighed average
interest rates at December 31, 1999, a ten percent increase in market rates of
interest would decrease future earnings and cash flows by approximately $12.0
million and would decrease the fair market value of debt by approximately $47.7
million. A ten percent decrease in market rates of interest would increase
future earnings and cash flows by approximately $5.0 million and would increase
the fair market value of debt by approximately $242.8 million.
These amounts were determined by considering the impact of hypothetical
interest rates and equity prices 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.
36
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Supplementary Data
PAGE NUMBERS
------------
Independent Public Accountants Report of Arthur Andersen LLP
for the years ended December 31, 1999, 1998 and 1997 39
Consolidated Balance Sheets for December 31,
1999 and 1998 40
Consolidated Statements of Operations for the years
ended December 31, 1999, 1998 and 1997 41
Consolidated Statements of Shareholders'
Equity (Deficit) for the years ended December 31,
1999, 1998 and 1997 42
Consolidated Statements of Cash Flows for
the years ended December 31, 1999, 1998 and 1997 43
Notes to Consolidated Financial Statements 44
37
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Davel Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Davel
Communications, Inc. (a Delaware corporation) and Subsidiaries as of December
31, 1999 and 1998, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Davel Communications, Inc. and
Subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Tampa, Florida
March 16, 2000
(except with respect to the
matters discussed in Note 20,
as to which the date is
March 28, 2000)
38
<PAGE>
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - DECEMBER 31, 1999 AND 1998
(In thousands, except per share and share data)
<TABLE>
<CAPTION>
ASSETS
1999 1998
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,950 $ 17,162
Restricted cash -- 790
Trade accounts receivable, net of allowance for doubtful
accounts of $10,880 and $5,383, respectively 22,983 30,838
Other current assets 1,048 3,694
--------- ---------
Total current assets 31,981 52,484
PROPERTY AND EQUIPMENT, NET 115,558 130,099
LOCATION CONTRACTS 20,852 34,252
GOODWILL 6,290 47,458
OTHER ASSETS 6,080 8,725
--------- ---------
Total assets $ 180,761 $ 273,018
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt and obligations under capital leases $ 21,535 $ 11,525
Accounts payable and accrued expenses 27,484 34,393
--------- ---------
Total current liabilities 49,019 45,918
--------- ---------
LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES 206,509 225,451
--------- ---------
DEFERRED LONG TERM REVENUE 312 --
--------- ---------
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock - $.01 par value, 50,000,000 shares authorized, 11,033,628 and
10,536,155 shares issued and outstanding as of December 31, 1999 and 1998,
respectively 110 105
Additional paid-in capital 128,338 126,325
Accumulated deficit (203,527) (124,781)
--------- ---------
Total shareholders' equity (deficit) (75,079) 1,649
--------- ---------
Total liabilities and shareholders' equity (deficit) $ 180,761 $ 273,018
========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
39
<PAGE>
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(In thousands, except per share and share data)
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ -------------
<S> <C> <C> <C>
REVENUES:
Coin calls $ 110,790 $ 132,483 $ 101,660
Non-coin calls, net of dial-around compensation adjustments--Note 17 65,056 62,335 56,751
------------ ------------ ------------
Total revenues 175,846 194,818 158,411
COSTS AND EXPENSES:
Telephone charges 36,783 45,582 38,886
Commissions 41,014 46,986 35,858
Service, maintenance and network costs 42,077 52,751 39,451
Depreciation and amortization 39,204 38,617 25,620
Selling, general and administrative 21,063 21,525 12,553
Non-recurring items 51,224 10,814 --
Restructuring charge and merger-related expenses 1,570 4,325 --
------------ ------------ ------------
Total operating costs and expenses 232,935 220,600 152,368
------------ ------------ ------------
Operating income (loss) (57,089) (25,782) 6,043
OTHER INCOME (EXPENSE):
Interest expense, net (23,183) (20,955) (13,581)
Loss on investment (350) (2,772) --
Other 121 (154) 497
------------ ------------ ------------
Total other expense (23,412) (23,881) (13,084)
------------ ------------ ------------
Loss from continuing operations before income taxes
and extraordinary items (80,501) (49,663) (7,041)
INCOME TAX PROVISION (BENEFIT) (1,755) -- 2,459
------------ ------------ ------------
Loss from continuing operations before extraordinary item (78,746) (49,663) (9,500)
------------ ------------ ------------
DISCONTINUED OPERATIONS:
Loss from operations -- -- (2,418)
Gain on sale of discontinued operations -- 607 4,510
------------ ------------ ------------
Gain on discontinued operations -- 607 2,092
------------ ------------ ------------
Loss before extraordinary item (78,746) (49,056) (7,408)
EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT -- (17,856) --
------------ ------------ ------------
Net loss $ (78,746) $ (66,912) $ (7,408)
============ ============ ============
BASIC AND DILUTED EARNINGS PER SHARE: Note 14
Loss from continuing operations before extraordinary item $ (7.40) $ (5.68) $ (1.27)
------------ ------------ ------------
Gain from discontinued operations -- .07 .25
------------ ------------ ------------
Extraordinary loss -- (1.98) --
------------ ------------ ------------
Net loss per share $ (7.40) $ (7.59) $ (1.02)
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 10,659,594 9,029,285 8,407,255
============ ============ ============
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated financial statements.
40
<PAGE>
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNREALIZED TOTAL
------------------ PAID-IN ACCUMULATED LOSS ON SHAREHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INVESTMENT EQUITY LOSS
-------- ------ ------------- ----------- ---------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 8,387,094 $ 84 $ 80,489 $ (50,461) $ (1,471) $ 28,641 $ (13,658)
===========
Stock options exercised and grants of
common stock 51,438 -- 817 -- -- 817 --
Series C preferred stock dividends
accrued -- -- (1,050) -- -- (1,050) --
Preferred stock issuance cost
accretion -- -- (156) -- -- (156) --
Unrealized loss on investment -- -- -- -- (554) (554) (554)
Net loss for the year ended
December 31, 1997 -- -- -- (7,408) -- (7408) (7,408)
---------- ------ ----------- ----------- ---------- ----------- -----------
BALANCE, December 31, 1997 8,438,532 84 80,100 (57,869) (2,025) 20,290 $ (7,962)
===========
Stock options exercised and grants of
common stock 160,146 2 2,225 -- -- 2,227 --
Series C preferred stock dividends
accrued -- -- (1,464) -- -- (1,464) --
Preferred stock issuance cost
accretion -- -- (158) -- -- (158) --
Issuance of stock 1,000,000 10 26,529 -- -- 26,539 --
Stock issued as payment for services
provided 44,659 -- 751 -- -- 751 --
Stock issued for retirement of
preferred stock 892,977 9 17,897 -- -- 17,906 --
Option repricing -- -- 445 -- -- 445 --
Unrealized loss on investment -- -- -- -- (747) (747) (747)
Reclassification of investment to a
trading security -- -- -- -- 2,772 2,772 2,772
Fractional shares retired upon
completion of merger (159) -- -- -- -- -- --
Net loss for the year ended
December 31, 1998 -- -- -- (66,912) -- (66,912) (66,912)
---------- ------ ----------- ----------- ---------- ----------- -----------
BALANCE, December 31, 1998 10,536,155 105 126,325 (124,781) -- 1,649 $ (64,887)
===========
Grants of common stock 497,473 5 2,108 -- -- 2,113 --
Preferred stock dividend -- -- (95) -- -- (95) --
Net loss for the year ended
December 31, 1999 -- -- -- (78,746) -- (78,746) $ (78,746)
---------- ------ ----------- ----------- ---------- ----------- -----------
BALANCE, December 31, 1999 11,033,628 $ 110 $ 128,338 $ (203,527) $ -- $ (75,079) $ (78,746)
========== ====== =========== =========== ========== =========== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these consolidated statements.
41
<PAGE>
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(78,746) $ (66,912) $ (7,408)
Adjustments to reconcile net loss to cash flows from operating activities:
Gain on sale of discontinued operations -- (607) (4,510)
Losses from discontinued operations -- -- 2,418
Depreciation and amortization 39,204 38,617 25,620
Increase in allowance for bad debts 5,497 262 606
Loss on sale of property and equipment -- (36) (156)
Amortization of deferred financing charges 992 -- --
Deferred taxes -- -- 1,021
Nonrecurring items 51,224 3,769 --
Restructuring charge and merger-related expenses -- 2,969 --
Option repricing -- 445 --
Recognition of unrealized loss on investment -- 2,772 --
Stock based compensation 2,113 751 --
Extraordinary loss from the early extinguishment of debt -- 17,856 --
Payment for certain contracts (7,859) (6,248) (3,163)
Changes in assets and liabilities, net of effects from acquisition:
Accounts receivable 2,358 3,374 (10,538)
Other assets 1,970 3,984 750
Accounts payable and accrued expenses (8,019) (15,246) 5,946
Deferred revenue 312 -- --
-------- --------- --------
Net cash provided by (used in) operating activities 9,046 (14,250) 10,586
Net cash provided by (used in) discontinued operations -- -- (337)
-------- --------- --------
Net cash before investing activities 9,046 (14,250) 10,249
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,898) (11,920) (7,024)
Proceeds from sale of discontinued operations -- -- 10,625
Purchase of payphone assets, net of cash acquired (5,123) (3,216) (7,131)
Purchase of Communications Central, Inc., net of cash acquired -- (101,644) --
Purchase of Indiana Telecom, net of cash acquired -- (11,317) --
Other -- 181 407
-------- --------- --------
Net cash used in investing activities (10,021) (127,916) (3,123)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt -- 366,500 13,660
Payments on long-term debt (10,950) (231,408) (10,400)
Net proceeds (payments) on revolving line of credit 2,500 (9,028) (1,176)
Bond tender premium paid on early extinguishment of debt -- (12,929) --
Principal payments under capital lease agreements (482) (769) (1,594)
Debt issuance costs -- (7,335) (218)
Payment of preferred stock dividend (95) -- --
Sale of common stock -- 26,539 --
Issuance of common stock through stock options and warrants -- 2,227 817
-------- --------- --------
Net cash provided by (used in) financing activities (9,027) 133,797 1,089
-------- --------- --------
Net increase (decrease) in cash and cash equivalents (10,002) (8,369) 8,215
CASH AND CASH EQUIVALENTS, beginning of period 17,952 26,321 18,106
-------- --------- --------
CASH AND CASH EQUIVALENTS, end of period $ 7,950 $ 17,952 $ 26,321
======== ========= ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements.
42
<PAGE>
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
1. DESCRIPTION OF BUSINESS AND THE PEOPLES MERGER:
Davel Communications, Inc. (the "Company" or "Davel") was incorporated
on June 9, 1998 under the laws of the State of Delaware to effect the merger, on
December 23, 1998 of Davel Communications Group, Inc. ("Old Davel"), with
Peoples Telephone Company, Inc. (the "Peoples Merger"). As a result of the
Peoples Merger (defined in the following paragraph), 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 76,500 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 dispersed geographic
locations.
Pursuant to an Agreement and Plan of Merger dated July 5, 1998 as
amended and restated on October 22, 1998, the Peoples Merger was consummated
between the Company and Peoples Telephone, Inc ("Peoples") on December 23, 1998.
The stock-for-stock transaction was approved by the shareholders of the two
companies, with the Company continuing as the surviving corporation in the
merger. Under the merger agreement, each outstanding share of Peoples common
stock was converted into the right to receive 0.235 of a common share of the
Company and resulted in the issuance of approximately 3,812,810 shares of common
stock to the common shareholders of Peoples Telephone. In addition, the
outstanding shares of Peoples Telephone Series C Preferred Stock and accrued
Preferred Stock dividends were converted into approximately 892,977 shares of
common stock. This transaction has been accounted for as a pooling of interests,
and accordingly, the financial statements of the Company have been restated to
reflect the combined financial position and operating results as if the
companies had operated as one entity since inception. For periods preceding the
merger, there were no intercompany transactions which required elimination from
the combined consolidated results of operations.
Selected financial information for the combining entities included in
the consolidated statements of operations for the years ended December 31, 1998
and 1997 are as follows:
1998 1997
--------- ---------
Total revenues
Davel $ 84,663 $ 47,008
Peoples 110,155 111,403
--------- ---------
Combined $ 194,818 $ 158,411
========= =========
Net income (loss)
Davel $ (13,952) $ 4,262
Peoples (19,965) (11,670)
Non-recurring items (10,814) --
Restructuring charges (4,325) --
Extraordinary item (17,856) --
--------- ---------
Combined $ (66,912) $ (7,408)
========= =========
43
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. Financial data for all periods
presented reflect the retroactive effect of the merger, accounted for as a
pooling of interest, with Peoples consummated in December 1998. All significant
intercompany accounts and transactions are eliminated in consolidation.
The divestitures of the Company's cellular and inmate telephone
operations have been classified as discontinued operations. Accordingly,
operating results and cash flows for these businesses have been segregated and
reported as discontinued operations in the accompanying consolidated financial
statements.
RESTRICTED CASH
Approximately $0 and $790 of cash on the accompanying consolidated
balance sheets at December 31, 1999 and 1998, respectively, was restricted and
served as collateral for the Company's performance under a letter of credit.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
Receivables have a significant concentration of credit risk in the
telecommunications industry. In addition, a significant amount of receivables
are generated by approximately 17% of the Company's payphones located in the
state of Florida.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments approximate their
carrying amounts. Fair value for all financial instruments other than long-term
debt, for which no quoted market prices exist, were based on appropriate
estimates. The value of the Company's long-term debt is estimated based on
market prices for similar issues or on the current rates offered to the Company
for debt of the same remaining maturities.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciation is provided
over the estimated useful lives using the straight-line method. Installed
payphones and related equipment includes installation costs which are
capitalized and amortized over the estimated useful lives of the equipment. The
costs associated with normal maintenance, repair and refurbishment of telephone
equipment are charged to expense as incurred.
The capitalized cost of equipment and vehicles under capital leases is
amortized over the lesser of the lease term or the asset's estimated useful
life, and is included in depreciation and amortization expense in the
consolidated statements of operations.
LOCATION CONTRACTS
Location contracts include acquisition costs allocated to location
owner contracts and other costs associated with obtaining written and signed
location contracts. These assets are amortized on a straight-line basis over
their estimated useful lives based on contract terms (3 to 5 years). Accumulated
amortization as of December 31, 1999 and 1998 was approximately $28,689 and
$30,665, respectively. During 1999, the Company determined that a permanent
impairment had occurred to certain of the location contracts associated with the
CCI Acquisition (see Note 4). In the third quarter of 1999, the Company wrote
off $7,753 of location contracts associated with this transaction.
44
<PAGE>
GOODWILL
Goodwill is amortized on a straight-line basis over periods estimated
to be benefited, generally 15 years. Accumulated amortization as of December 31,
1999 and 1998 was approximately $6,833 and $7,911, respectively. During 1999,
the Company determined that a permanent impairment had occurred to the goodwill
associated with the CCI transaction of 1998. In the third quarter of 1999, the
Company wrote off $37,865 of goodwill associated with this transaction.
LONG-LIVED ASSETS
The Company accounts for long-lived assets pursuant to Financial
Accounting Standards Board Statement of Financial Accounting Standards ("SFAS")
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", which requires impairment losses to be recorded on
long-lived assets used in operations when events or changes in circumstances
indicate that the carrying amount on an asset may not be recoverable. Management
reviews long-lived assets and the related intangible assets for impairment
whenever events or changes in circumstances indicate the asset may be impaired.
After accounting for the impairments described above, the Company does not
believe that any long-lived assets are impaired at December 31, 1999 based on
the estimated future cash flows of the Company. (See Goodwill and Location
Contracts).
RECOGNITION OF REVENUE
The Company derives its revenues from two principal sources: coin calls
and non-coin calls. Coin calls represent calls paid for by callers with coins
deposited in the payphone. Coin call revenues are recorded in the amount of
coins collected from the payphones.
Non-coin calls made from the Company's payphones generate revenues in
an amount that depends upon whether the Company or a long distance company
handles the call. If the non-coin call is handled through an "unbunbled" service
arrangement, the Company recognizes non-coin revenues equal to the total amount
charged for the call. If the non-coin call is handled by a long distance
company, the Company generally recognizes revenues in an amount equal to the
commission on that call paid to the Company by the long distance company. Under
an unbundled services arrangement, the Company performs certain functions
necessary to service non-coin calls, uses the long distance company's switching
equipment and its other services on an as-needed basis, and pays the long
distance company on an unbundled basis for the operator services actually used
to complete these calls. Prior to November 1999, the Company also serviced
long-distance calls through its switch.
The Company also recognizes non-coin revenues from calls that are
dialed from its payphones to gain access to a long distance company other than
the one pre-programmed into the telephone (dial-around calls). Revenues from
dial-around calls are recognized based on estimates of calls made and the
Federal Communications Commission mandated dial-around compensation rate in
effect (see note 17).
INCOME TAXES
The Company has accounted for income taxes under SFAS No. 109, an asset
and liability approach to accounting and reporting for income taxes. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, they may
ultimately differ from actual results.
RECLASSIFICATION
Certain reclassifications have been made to prior year balances to conform to
the current year presentation.
3. DISCONTINUED OPERATIONS:
INMATE TELEPHONE OPERATIONS
On December 19, 1997, the Company sold the remaining assets of the
Company's inmate phone division to Talton Holdings, Inc. ("Talton") for $10,625
in cash plus additional contingent consideration. This transaction resulted in a
gain of approximately $4,242. The contingent consideration is payable within 18
months after the closing based upon a formula which generally provides for the
sharing of (a) incremental profits from revenue increases on certain contracts
sold to Talton and (b) profits resulting from Talton closing on pending bids
initiated by the Company which result in new contracts. For financial accounting
purposes, the contingent consideration will be recognized as received. The
Company recorded a loss in discontinued operations of $2,418 for the year ended
December 31, 1997. The inmate phone division had revenues of $11,931 in 1997.
45
<PAGE>
CELLULAR OPERATIONS
During the year ended December 31, 1998, the Company sold its
investment in Shared Technologies Cellular, Inc. (STC) Common Stock resulting in
a gain of $607. The STC common stock was received in 1995 as part of the
proceeds from the sale of the Company's Cellular Telephone Operations to STC,
which was treated as discontinued operations. Accordingly, the gain from the
sale of the investment is recorded in discontinued operations in the 1998
statement of operations.
4. ACQUISITIONS:
On February 3, 1998, the Company completed its acquisition of
Communications Central Inc. (the "CCI Acquisition") at a price of $10.50 per
share in cash, or approximately $70,200 in the aggregate, assumed CCI's
outstanding debt of $36,700 and incurred $2,200 in transaction costs. The CCI
Acquisition has been accounted for by the purchase method, and accordingly the
results of operations are included in the Company's consolidated statement of
operations from the date of acquisition. Goodwill associated with the
acquisition was to be amortized over fifteen years using straight-line
amortization (See Note 2). The following summarizes unaudited pro forma
consolidated results of operations for the year ended December 31, 1997 assuming
the CCI Acquisition occurred at the beginning of 1997. These pro forma results
are provided for comparative purposes only and do not purport to be indicative
of the results which would have been obtained if this acquisition had been
effected on the dates indicated or which may be obtained in the future.
Year Ended December 31, 1997:
Total revenues $ 214,395
=========
Loss from continuing operations $ (14,031)
=========
Basic and diluted loss from continuing operations
per share $ (1.81)
=========
The allocation of the purchase price of the CCI Acquisition is
summarized as follows:
Working capital $ 8,892
Property and equipment 46,119
Goodwill 42,541
Identifiable intangible assets 11,565
--------
$109,117
========
During 1999 the Company wrote off $37,865 of goodwill and $7,753 of
location contracts related to the CCI Acquisition. (See Note 2 and Note 5).
In January 1998, the Company acquired the operating assets of Indiana
Telcom Corporation including 2,632 payphones for $11,317 in a cash transaction
accounted for as a purchase. Accordingly, approximately $5,400 of the purchase
price was allocated to installed payphones and related equipment and $300 was
allocated to location contracts. The excess of the purchase price over the fair
value of the assets acquired of $5,600 was recorded as goodwill and is being
amortized over five years. Pro forma results of operations have not been
presented because the effect of this acquisition was not significant.
During the years ended December 31, 1999, 1998 and 1997, the Company
made additional acquisitions, which have been accounted for as purchases. The
consolidated financial statements include the operating results of each business
from the date of acquisition. Pro forma results of operations have not been
presented because the effects of each of these acquisitions were not
significant. For all transactions, the purchase price was allocated to payphones
and associated assets and, in some instances, noncompete agreements and
goodwill. These acquisitions included a total of 1,341, 1,516 and 2,861
payphones in 1999, 1998 and 1997, respectively, for purchase prices totaling
$5,123, $3,216 and $7,131, respectively.
46
<PAGE>
5. NON-RECURRING ITEMS AND RESTRUCTURING CHARGE:
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
writedown of the value of the former Peoples headquarters and employee
termination benefits for 143 excess field operations and administrative
personnel. The following table summarizes the restructuring charge and the
amounts incurred during the year ended December 31, 1999.
<TABLE>
<CAPTION>
MERGER
FACILITY EMPLOYEE WRITEDOWN OF CLOSING
CLOSING COSTS TERMINATION COSTS ASSETS OTHER COSTS TOTAL
-------------- ------------------ --------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Non-recurring and
restructuring charge $ 1,140 $ 1,424 $ 790 $ 971 $10,814 $15,139
Utilized in 1998 (251) (131) (790) (184) (7,045) (8,401)
-------- ------- ------- ------- ------- -------
Remaining reserve at
December 31, 1998 889 1,293 -- 787 3,769 6,738
Adjustments to certain
reserves (647) 1,311 -- -- (664) --
Utilized in 1999 (170) (2,604) -- (787) (3,105) (6,666)
-------- ------- ------- ------- ------- -------
Remaining reserve at
December 31, 1999 $ 72 $ 0 $ 0 $ 0 $ 0 $ 72
======== ======= ======= ======= ======= =======
</TABLE>
During the year ended December 31, 1998, the Company over-estimated
restructing charges related to facilities closing costs and merger-related
closing costs. The Company underestimated restucturing charges related to
employee terminations. Accordingly during 1999, the Company reversed
approximately $647 of the restructing reserve related to facility closing costs
and $664 of the reserve related to merger closing costs. Additionally during
1999, the Company incurred an additional $1,311 of restructuring charges related
to employee termination costs.
Also during 1999, the Company incurred and paid restructuring charges
and other merger-related expense related to the Peoples Merger of approximately
$1,570 related to integration and restructuring activities. The restructuring
charges and other merger-related expense were primarily related to severance pay
for terminated employees, relocation costs and costs related to the closing of
redundant facilities.
In 1999 the Company recorded a non-recurring charge of approximately
$51,224 which primarily related to impaired goodwill and certain other
identifiable intangibles related to the CCI Acquisition. The charge was based on
a review of long-lived assets and intangibles under the provisions of SFAS No.
121. The Company considered continued operating losses and lower cash flow than
expected related to the payphones acquired in the CCI Acquisition to be the
primary indicators of potential impairment. Based on the Company's estimate of
discounted future cash flows, the carrying values of the assets were written
down to the Company's estimate of fair value. Considerable management judgement
is necessary to estimate discounted future cash flows.
6. INVESTMENTS AND OTHER COMPREHENSIVE LOSS:
Investments in debt and equity securities are accounted for in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". During 1999, the Company wrote off its investment in Global
Telecommunications Solutions, Inc. ("GTS"). Accordingly, the Company recognized
a realized loss of $350 during 1999 and an unrealized loss on the investment of
$2,772 during 1998 in the accompanying statement of operations. The Company's
investment in GTS common stock at December 31, 1999 and 1998, respectively, was
approximately $13 and $363 and is included in other assets in the accompanying
consolidated balance sheets.
47
<PAGE>
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
SFAS No. 130 had no impact on the Company's net loss or shareholders' equity.
SFAS No. 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which, prior to adoption, were reported
separately in shareholders' equity, to be included in other comprehensive loss.
Prior year financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
7. ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Activity in the allowance for doubtful accounts is summarized as follows for the
years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Balance, at beginning of period $ 5,383 $ 5,121 $ 4,515
Charged to expense 5,497 1,299 4,590
Uncollected balances written off, net of recoveries -- (1,037) (3,984)
-------- ------- -------
Balance, at end of period $ 10,880 $ 5,383 $ 5,121
======== ======= =======
</TABLE>
8. PROPERTY AND EQUIPMENT:
Property and equipment is summarized as follows at December 31:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
1999 1998 IN YEARS
----------- ----------- ------------
<S> <C> <C> <C>
Installed payphones and related equipment $212,441 $ 209,177 10
Furniture, fixtures and office equipment 9,224 8,638 5-7
Vehicles, equipment under capital leases and other equipment 4,521 6,432 4-10
Building and improvements 1,190 4,027 25
-------- ---------
227,376 228,274
Less- Accumulated depreciation (132,606) (110,871)
-------- -----------
94,770 117,403
Uninstalled payphone equipment 20,788 11,746
Land - 950
-------- -----------
$115,558 $130,099
======== ===========
</TABLE>
48
<PAGE>
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December 31:
1999 1998
-------- ---------
Accounts payable $ 12,791 $ 5,498
Taxes payable 2,361 5,472
Accrued commissions 4,972 7,551
Accrued merger and restructuring costs 72 6,738
Accrued telephone bills 612 3,259
Deferred revenue 1,767 1,725
Interest payable 170 491
Accrued compensation 929 1,210
Other 3,810 2,449
-------- ---------
$ 27,484 $ 34,393
======== ========
10. LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES:
Following is a summary of long-term debt and obligations under long-term leases
as of December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
SENIOR CREDIT FACILITY
Term A note payable to banks at an adjusted LIBOR rate (9.7% at December
31, 1999), interest payments due quarterly beginning March 31, 1999
and monthly beginning April 30, 2000. Principal payments due quarterly
beginning June 30, 1999, collateralized by the Company's assets $115,000 $125,000
Term B note payable to the banks at an adjusted LIBOR rate (10.44% at
December 31, 1999), interest payments due quarterly beginning March
31, 1999 and monthly beginning April 30, 2000. Principal payments due
quarterly beginning June 30, 1999, collateralized by the Company's assets 94,050 95,000
Revolving Advance on bank's line of credit at the bank's adjusted LIBOR
rate (9.64% at December 31, 1999), interest due quarterly during 1999,
and monthly beginning April 30, 2000. Principal due December 23, 2003,
collateralized by the Company's assets 17,500 15,000
Capital lease obligations and other notes with various interest rates and
various maturity dates through 2003 1,494 1,976
--------- --------
228,044 236,976
Less- Current maturities (21,535) (11,525)
--------- --------
$ 206,509 $225,451
========= ========
</TABLE>
In connection with the Peoples Merger on December 23, 1998, the Company
entered into a senior credit facility ("Senior Credit Facility") with Bank of
America, formerly NationsBank, N.A., (the "Administrative Agent") and the other
lenders named therein. The Senior Credit Facility provided for borrowings by the
Company from time to
49
<PAGE>
time of up to $280 million for working capital and other corporate purposes.
Upon consummation of the Peoples Merger, the Company redeemed $100,000 in Senior
Notes that were scheduled to mature in 2002 and retired approximately $96,660 in
notes payable prior to maturity. In connection with this early extinguishment of
debt, the Company recognized an extraordinary loss of $17,856.
The Senior Credit Facility was amended on April 8, 1999 (the "First
Amendment"). This amendment waived compliance, for the first quarter of 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 statement to the Lenders
within 90 days of December 31, 1998, provided that such financial statement be
delivered no later than April 15, 1999.
On March 28, 2000, the Company and the Lenders agreed to the
Second Amendment to Credit Agreement and Consent and Waiver (the "Second
Amendment") which amended certain covenants through January 15, 2001. In
exchange for the covenant relief, the Company agreed to a lowering of the
available credit facility to $245,000 (through a permanent reduction of the
revolving line of credit) and placement of a block on the final $10,000 of
revolver borrowing. The Second Amendment also placed a moritorium on
acquisitions and changed the calculation of interest rates for the Senior Credit
Facility.
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.
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, as amended) or, at the Company's option, as Eurodollar
Loans (as defined in the Senior Credit Facility, as amended). 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 of 0.5%, payable in arrears on a quarterly basis, on
the average unused portion of the Senior Credit Facility during the term of the
facility. The Company is also required to pay an annual agency fee to the Agent.
In addition, the Company was also required to pay an arrangement fee for the
account of each bank in accordance with the banks' respective pro rata share of
the Senior Credit Facility. The Agent and the lenders will receive such other
fees as have been separately agreed upon with the Agent.
The Senior Credit Facility requires the Company to meet certain
financial tests, including, without limitation, maximum levels of Senior Secured
Debt as a ratio of EBITDA (as defined in the Senior Credit Facility, as
amended), minimum interest coverage, minimum fixed charge coverage and maximum
amount of capital expenditures. The Senior Credit Facility also contains certain
covenants which, among other things, will limit the incurrence of additional
indebtedness, prepayments of other indebtedness (including the Notes), liens and
encumbrances and other matters customarily restricted in such agreements.
The Senior Credit Facility contains customary events of default,
including without limitation, payment defaults, breaches of representations and
warranties, covenant defaults, cross-defaults to certain other indebtedness,
certain events
50
<PAGE>
of bankruptcy and insolvency, judgement defaults, failure of any guaranty or
security document supporting the Senior Credit Facility to be in full force and
effect, and a change of control of the Company.
Annual maturities of the Term A and Term B notes payable are as follows:
Year ended December 31:
2000 $20,950
2001 30,950
2002 30,950
2003 35,950
2004 60,167
Thereafter 30,083
------
Total $209,050
========
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 December 31, 1999,
the Company has two interest rate swap agreements with an aggregate notional
amount of $23 million with a termination date of March 2001. The interest rate
swaps require the Company to pay fixed rates of 5.9% in exchange for variable
rate payments based on the U.S. three month LIBOR (5.1% as of December 31,
1999). Interest rate differentials are paid or received every three months and
are recognized as adjustements to interest expense.
As of December 31, 1999, the Company has interest rate cap agreements
with an aggregate notional amount of $40 million that terminate in March 2000.
The interest rate cap agreements require premium payments to the counterparty
based on the notional amount of the 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 counterparties for amounts, if
any, by which the U.S. three month LIBOR rate exceeds 7%. In addition, the
Company entered into an interest rate collar agreement with a large financial
institution that terminates in February 2002. The notional amount of the
interest rate collar is $25 million and the agreement has a cap rate of 7% and a
floor rate of 4.8% based on the U.S. one month LIBOR rate.
The Company does not hold or issue derivative financial instruments for
trading purposes. The Company is exposed to credit risk in the event of
nonperformance by the counterparties; however, the Company does not anticipate
nonperformance by any of its counterparties. The carrying amount and fair value
of these contracts are not significant.
11. LEASE COMMITMENTS:
The Company conducts a portion of its operations in leased facilities under
noncancellable operating leases expiring at various dates through 2003. Some of
the operating leases provide the Company pay taxes, maintenance, insurance and
other occupancy expenses applicable to leased premises. The Company also
maintains certain equipment under noncancellable capital leases expiring at
various dates through 2003.
The annual minimum rental commitments under operating and capital leases are as
follows:
OPERATING CAPITAL TOTAL
--------- ------- -------
Year ended December 31:
2000 $ 2,505 $ 586 $ 3,091
2001 4,498 556 5,054
2002 3,142 350 3,492
2003 2,066 20 2,068
------- ------- -------
$12,211 $ 1,494 $13,705
======= ======= =======
51
<PAGE>
Rent expense for operating leases from continuing operations for the years ended
December 31, 1999, 1998, and 1997 was $2,566, $1,060, and $864, respectively.
12. INCOME TAXES:
Deferred income taxes arise from temporary differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered. Income tax provisions will increase or decrease in the same
period in which a change in tax rates is enacted.
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current provision (benefit):
Federal $ (1,755) $ -- $ 1,323
State -- 108 115
Deferred provision -- (108) 1,021
-------- -------- --------
Total income tax expense (benefit) (1,755) -- 2,459
</TABLE>
A reconciliation of federal statutory income taxes to the Company's effective
tax provision is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Provision for federal income tax at the
statutory rate (34%) $(26,604) $(16,885) $ (2,394)
State income taxes net of federal benefit (1,770) (1,902) (270)
Change in valuation allowance 16,595 17,808 5,167
Goodwill amortization 10,380 927 --
Other, net (356) 52 (44)
-------- -------- --------
Income taxes from continuing operations (1,755) -- $ 2,459
Expected income tax expense (benefit) from
discontinued and extraordinary items -- (6,525) 792
Change in valuation allowance -- 6,525 (792)
-------- -------- --------
Total income tax expense (benefit) $ (1,755) $ -- $ 2,459
======== ======== ========
</TABLE>
52
<PAGE>
The tax effects of significant temporary differences representing deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforward $ 69,412 $ 62,772
Capital loss carryforward 687 574
Amortization 14,618 12,989
Alternative minimum tax credit carryforward 862 1,200
Other 17,884 10,259
--------- ---------
Total deferred tax assets 103,463 87,794
Valuation allowance (71,392) (54,797)
--------- ---------
Net deferred tax assets 32,071 32,997
--------- ---------
Deferred Tax Liabilities:
Depreciation (32,071) (32,061)
Other -- (936)
--------- ---------
Total deferred tax liabilities (32,071) (32,997)
--------- ---------
Net Deferred Tax Liability $ -- $ --
--------- ---------
</TABLE>
As of December 31, 1999, the deferred tax asset valuation allowance
increased to approximately $71,392 from $54,797 as of December 31, 1998. The
increase is recorded as a component of the Company's 1999 tax provision.
Realization of deferred tax assets is dependent upon sufficient future taxable
income during the periods that temporary differences and carryforwards are
expected to be available to reduce taxable income. As such, the Company has
recorded a valuation allowance to reflect the estimated amount of deferred tax
assets which may not be realized due to the expiration of its operating loss and
capital loss carryforwards.
At December 31, 1999, the Company had tax net operating loss
carryforwards of approximately $184,459 and capital losses of $1,826, which
expire in various amounts in the years 2001 to 2019. Approximately $134,353 of
the net operating loss carryforwards plus $700 of the capital loss carryforwards
relate to multiple business acquisitions for which annual utilization will be
limited. The net operating losses and capital losses will be subject to
limitations if future ownership changes occur. In addition, these loss
carryforwards can only be utilized against future taxable income, if any,
generated by these acquired companies as if these companies continued to file
separate income tax returns.
13. CAPITAL STOCK TRANSACTIONS:
PREFERRED STOCK
The Company's certificate of incorporation authorize 1,000,000 shares
of preferred stock, par value $.01 per share. The Company does not have any
immediate plans to issue any shares of preferred stock.
Peoples' articles of incorporation authorized 5,000,000 shares of
preferred stock, of which 600,000 shares were designated as Series B Preferred
Stock and 160,000 shares were designated as Series C Preferred Stock. During
1995, Peoples issued 150,000 shares of Series C Cumulative Convertible Preferred
Stock to UBS Capital II LLC, a wholly-owned subsidiary of Union Bank of
Switzerland, for proceeds of $15.0 million. The Preferred Stock accumulated
dividends at an annual rate of 7%. The dividends were payable in cash or may
accumulate. In connection with the Peoples Merger, the Company issued 892,977
shares of common stock for the outstanding Series C Preferred Stock and
cumulative dividends and cancelled the 5,000,000 authorized shares of Peoples
Preferred Stock.
53
<PAGE>
COMMON STOCK
On June 30, 1998, the Company announced the closing of an investment by
an affiliate of Equity Group Capital Investments ("EGCI"), a privately-held
investment company controlled by Sam Zell. In the transaction, the EGCI
affiliate invested $28,000 in the Company as payment for 1,000,000 shares of
newly issued common stock and warrants to purchase an additional 215,531 shares,
which are exercisable at a price of $32.00 per share. Proceeds of the sale were
used for working capital and payment of the merger consideration for the Peoples
Merger.
In December 1998, the shareholders of the Company approved an increase
in the number of shares of authorized common stock from 10,000,000 to 50,000,000
in order to accommodate issuance of stock in connection with the Peoples Merger.
STOCK OPTIONS AND WARRANTS
The Company has several stock option plans under which options to
acquire up to 2,234,525 shares may be granted to directors, officers and certain
employees of the Company including the stock option plans acquired in the
Peoples Merger. Vesting periods for options issued under these plans range from
immediate vesting up to 10 years and generally expire after 5 to 10 years. The
plans also provide for the outright grant of common stock. For the years ended
December 31, 1999 and 1998, respectively, 28,222 and 7,286 outright stock grants
were issued. During 1998, 45,000 warrants with an exercise price of $15.60
issued in connection with the Company's initial public offering in 1993 expired.
The exercise price of each option generally equals the market price of the
Company's stock on the date of grant. Accordingly, no compensation cost has been
recognized for options granted under the plans. Had compensation cost for the
plans been determined based on the fair value of the options at the grant dates
consistent with the method of SFAS No. 123, Accounting for Stock-Based
Compensation, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ---------- ---------
<S> <C> <C> <C> <C>
Net loss As reported $ (78,746) $ (66,912) $ (7,408)
Pro forma $ (81,208) $ (71,766) $ (8,921)
Basic and diluted loss per common share As reported $ (7.40) $ (7.59) $ (1.02)
Pro forma $ (7.62) $ (8.13) $ (1.20)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing method with the following
weighted-average assumptions used for grants in 1999, 1998 and 1997: dividend
yield of 0% for all years; expected volatility of 84.7%, 48.8% and 54.0%,
respectively, risk-free interest rates of 5.0%, 5.4% and 5.7%, respectively, and
expected life of approximately five years.
54
<PAGE>
A summary of the status of the Company's stock option plans as of
December 31 and changes during the years ending on those dates is presented
below (Shares in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ---------------------------- ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------ -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,291 $ 19.84 1,136 $ 20.34 903 $ 19.26
Granted 524 5.85 407 23.98 317 23.04
Exercised -- -- (153) 13.35 (27) 13.35
Expired (50) 10.33 (99) 15.60 (23) 23.95
Cancelled (400) 21.90 -- -- (34) 22.85
------- ------ ------
Outstanding at end of
year 1,365 $ 14.77 1,291 $ 20.88 1,136 $ 20.34
------- ------ ------
Options exercisable
at end of year 1,051 $ 13.68 1,065 $ 20.03 1,946 $ 21.29
======= ====== ======
Weighted-average fair
value of options
granted during the
year $ 5.79 $ 11.92 $ 6.04
</TABLE>
The following information applies to options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------- -------------------------------------------------------
WEIGHTED
NUMBER AVERAGE NUMBER
OUTSTANDING AT REMAINING WEIGHTED EXERCISABLE AT
RANGE OF EXERCISE DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, WEIGHTED AVERAGE
PRICE 1999 LIFE (YEARS) EXERCISE PRICE 1999 EXERCISE PRICE
- ----------------- ----------------- ---------------- ---------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
$3.50 to $4.94 102,500 4.9 $ 4.26 62,500 $ 4.23
$5.38 to $6.50 408,250 5.2 $ 6.23 237,349 $ 6.05
$9.25 to $13.83 103,477 3.3 $ 11.57 104,950 $ 11.49
$14.13 to $19.13 350,671 2.7 $ 15.49 350,671 $ 16.06
$21.53 to $30.85 399,870 4.9 $ 25.86 295,917 $ 25.14
--------- ---------
1,364,768 $ 14.77 1,051,387 $ 13.68
--------- ---------
</TABLE>
As a result of a change of control provision included in Peoples'
option agreement with Mr. Jeffery Hanft (former Peoples Chairman and Chief
Executive Officer), the exercise price on 250,000 options was modified from
$8.50 per share to $2.80 per share which represents Peoples' average closing
stock price for the 30 days prior to the
55
<PAGE>
announcement of the merger. A charge of $445 is included in non-recurring items
in the accompanying consolidated statement of operations for the year ended
December 31, 1998, related to the option repricing. Upon completion of the
Peoples Merger the options were converted to options for Davel Common Stock. Mr.
Hanft's options are collateral for a security agreement between Mr. Hanft and
the Company related to a loan which is due in September 2001.
At December 31, 1999, approximately 1,400,000 shares of Common Stock
were reserved pursuant to stock option plans.
14. EARNINGS PER SHARE:
The treasury stock method was used to determine the dilutive effect of
the options and warrants on earnings per share data. The following table
summarizes the restated net loss from continuing operations per share and the
weighted average number of shares outstanding used in the computations in
accordance with SFAS No. 128. In accordance with SFAS No. 128, the following
table reconciles net income and weighted average shares outstanding to the
amounts used to calculate the basic and diluted earnings per share (in
thousands, except share and per share data):
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------- -------------
<S> <C> <C> <C>
Loss from continuing operations before
extraordinary items $ (78,746) $ (49,663) $ (9,500)
Deduct:
Cumulative preferred stock dividend requirement 95 1,464 1,050
Preferred stock issuance cost accretion -- 158 156
------------ ----------- -----------
Loss applicable to common shareholders $ (78,841) $ (51,285) $ (10,706)
============ =========== ===========
Weighted average common shares outstanding 10,659,594 9,029,285 8,407,255
============ =========== ===========
Basic and diluted loss per share $ (7.40) $ (5.68) $ (1.27)
============ =========== ===========
</TABLE>
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.
15. 401(K) PROFIT SHARING PLAN:
Certain subsidiaries maintain 401(k) profit sharing plans (the
"Plans"). The Plans provide for matching contributions from the subsidiaries
that are limited to certain percentages of employee contributions. Additional
discretionary amounts may be contributed by the subsidiaries. The subsidiaries
contributed approximately $456, $397 and $153 for the years ended December 31,
1999, 1998 and 1997, respectively. During 1999, these plans were merged into the
Davel plan.
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<PAGE>
16. STATEMENT OF CASH FLOWS:
Cash paid for interest and income taxes and non-cash activities during
the years ended December 31 was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid for :
Interest $22,619 $26,445 $13,737
------- ------- -------
Income taxes $ -- $ 143 $ 447
------- ------- -------
Non-cash activities:
Fixed assets acquired under capital lease obligations $ -- $ 1,934 $ 224
------- ------- -------
Common stock issued for retirement of preferred stock $ -- $17,906 $ --
------- ------- -------
Series C preferred stock dividends accrued $ -- $ 1,464 $ 1,050
------- ------- -------
Preferred stock issuance accretion $ -- $ 158 $ 156
------- ------- -------
Sale of certain fixed assets and a life insurance policy to the Chairman
of the Board in exchange for phone switching equipment and the assumption
of two corporate loans $ -- $ -- $ 148
------- ------- -------
</TABLE>
17. PROVISION FOR DIAL-AROUND COMPENSATION:
On September 20, 1996, the Federal Communications Commission (FCC)
adopted rules in a docket entitled IN THE MATTER OF IMPLEMENTATION OF THE
PAYPHONE RECLASSIFICATION AND COMPENSATION PROVISIONS OF THE TELECOMMUNICATIONS
ACT OF 1996, FCC 96-388 (the "1996 Payphone Order"), implementing the payphone
provisions of Section 276 of the Telecommunications Act of 1996 (the "Telcom
Act"). The 1996 Payphone Order, which became effective November 7, 1996,
initially mandated dial-around compensation for both access code calls and 800
subscriber calls at a flat rate of $45.85 per payphone per month (131 calls
multiplied by $0.35 per call). Commencing October 7, 1997, and ending October 6,
1998, the $45.85 per payphone per month rate was to transition to a per-call
system at the rate of $0.35 per call. Several parties filed petitions for
judicial review of certain of the FCC regulations including the dial-around
compensation rate. On July 1, 1997, the U.S. Court of Appeals for the District
of Columbia Circuit (the "Court") responded to appeals related to the 1996
Payphone Order by remanding certain issues to the FCC for reconsideration. These
issues included, among other things, the manner in which the FCC established the
dial-around compensation for 800 subscriber and access code calls, the manner in
which the FCC established the interim dial-around compensation plan and the
basis upon which interexchange carriers (IXCs) would be required to compensate
payphone service providers ("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.
57
<PAGE>
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
deregulation 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 LECs of payphone-specific coding digits which identify a call as
originating from a payphone. Without the transmission of payphone-specific
coding digits some of the IXCs have claimed they are unable to identify a call
as a payphone call eligible for dial-around compensation. With the stated
purpose of ensuring the continued payment of dial-around compensation the FCC,
by Memorandum and Order issued on April 3, 1998, left in place the requirement
for payment of per-call compensation for payphones on lines that do not transmit
the requisite payphone-specific coding digits, but gave the IXCs a choice for
computing the amount of compensation for payphones on LEC lines not transmitting
the payphone-specific coding digits of either accurately computing per-call
compensation from their databases or paying per-phone, flat-rate compensation
computed by multiplying the $0.284 per call rate by the nationwide average
number of 800 subscriber and access code calls placed from RBOC payphones for
corresponding payment periods. Accurate payments made at the flat rate are not
subject to subsequent adjustment for actual call counts from the applicable
payphone.
On May 15, 1998, the Court again remanded the per-call compensation
rate to the FCC for further explanation without vacating the $0.284 per call
rate. The Court opined that the FCC had failed to explain adequately its
derivation of the $0.284 default rate. The Court stated that any resulting
overpayment would be subject to refund and directed the FCC to conclude its
proceedings within a six-month period from the effective date of the Court's
decision.
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
petitioned the Court for review of the 1999 Payphone Order, and PSPs petitioned
the FCC for reconsideration of the Order. All of these petitions are currently
pending. The new rate became effective April 21, 1999, and will serve as the
default rate through January 31, 2002. The new rate will also be applied
retroactively to the period beginning on October 7, 1997, less a $0.002 amount
to account for FLEX ANI payphone tracking costs, for a net compensation rate of
$0.238. The 1999 Payphone Order deferred a final ruling on the interim period
(November 7, 1996 to Octoer 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.
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 reorded 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.
58
<PAGE>
The Company recorded dial-around compensation revenue, net of
adjustments, of approximately $4.4 million for the period from November 7, 1996
through December 31, 1996, approximately $24.9 million for the period from
January 1, 1997 through December 31, 1997 and approximately $27.2 million for
the period from January 1, 1998 through December 31, 1998.
The Company's counsel,Dickstein, Shaprio, Morin & Oshensky, 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 Company's position of the appropriate level of fair
compensation, certain IXCs have asserted in the past, are asserting and are
expected to assert in the future that the appropriate level of fair compensation
should be lower than $0.24 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 on the Company's results
of operations and financial position.
18. RELATED-PARTY NOTES AND TRANSACTIONS:
TRANSACTIONS WITH MAJOR SHAREHOLDER AND DIRECTOR
The Company engaged in the following transactions with the Company's
largest shareholder (a Director) and former Chairman of the Board during the
years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Payments made for rent of commercial real estate $119 $ 68 $116
==== ==== ====
Payments received for providing administrative services $ 46 $ 85 $107
==== ==== ====
</TABLE>
During 1997, the Company sold a life insurance policy, a house and an
airplane to Mr. David Hill (former Chairman of the Board) who owned
approximately 18% of the Company's outstanding common stock as of December 31,
1999. The sale price was at the estimated fair value of the assets as determined
based upon independent appraisals and the sale resulted in a gain of $273. The
house and the airplane were subsequently leased back to the Company and the gain
was deferred and was being recognized ratably over the term of the lease. During
1999, 1998 and 1997, the Company recognized $48, $72 and $152, respectively, of
the deferred gain. Both leases were terminated in August 1999.
Through September 1997, the Company leased long distance switching
equipment from Mr. Hill for $80. In September 1997, the Company purchased this
equipment for $378 which was the estimated fair market value of the equipment
based upon independent appraisals.
The Company received management advisory services from Equity Group
Corporate Investments, Inc. (EGCI), an affiliate of the Company. In exchange for
these services, during 1998 the Company issued to affiliates of EGCI 44,659
shares of common stock with a fair value of $751 at the date of grant. In 1999,
the Company agreed to pay a fee, payable in the Company's common stock, equal to
0.35% of the enterprise value of the merger with PTC and any other merger,
payable upon consummation of such merger. In connection with the advisory
agreement the Company also agreed to grant stock options for ongoing consulting
services. Each month EGI receives as a management fee 12,500 options at a strike
price based on the closing price of the Company's common stock on the last day
of the prior month.
Also during 1999, the Company sold to Mr. David Hill a building located
in Miami, Florida for $2,250. The Company believes that the terms of the sale
approximate fair value for the property.
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<PAGE>
19. COMMITMENTS AND CONTINGENCIES:
On September 29, 1998, the Company announced that it was exercising its
contractual rights to terminate a merger agreement (the "Davel/PhoneTel Merger
Agreement") with PhoneTel Technologies, Inc. ("PhoneTel"), based on breaches of
representations, warranties and covenants by PhoneTel. On October 1, 1998, the
Company filed a lawsuit in Delaware Chancery Court seeking damages, rescission
of the Davel/PhoneTel Merger Agreement and a declaratory judgment that such
breaches occurred. On October 27, 1998, PhoneTel answered the complaint and
filed a counterclaim against the Company alleging that the Davel/PhoneTel Merger
Agreement had been wrongfully terminated. At the same time, PhoneTel also filed
a third party claim against Peoples Telephone Company, Inc. (acquired by the
Company on December 23, 1998) alleging that Peoples wrongfully caused the
termination of the Davel/PhoneTel Merger Agreement. The counterclaim and third
party claim seek specific performance by the Company of the transactions
contemplated by the Davel/PhoneTel Merger Agreement and damages and other
equitable relief from the Company and Peoples. The Company believes that it has
meritorious claims against PhoneTel and intends to defend vigorously against the
counterclaim against Davel and the third party claim against Peoples initiated
by PhoneTel. The Company, at this time, cannot predict the outcome of this
litigation.
In December 1995, Cellular World, Inc. filed a complaint in Dade County
Circuit Court against Peoples and its subsidiary, PTC Cellular, Inc., alleging
wrongful interference with Cellular World's advantageous business relationship
with Alamo Rent-A-Car, and alleged misappropriation of Cellular World's trade
secrets concerning Cellular World's proprietary cellular car phone rental system
equipment. Cellular World was seeking damages alleged to exceed $10 million. In
March 2000, the Company settled this complaint for approximately $1,500, which
is accrued in the accompanying consolidated balance sheet as of December 31,
1999.
The Company is involved in other litigation arising in the normal
course of its business which it believes will not materially affect its
financial position or results of operations.
20. SUBSEQUENT EVENTS:
On March 28, 2000, the Company and the Lenders agreed to the
Second Amendment to Credit Agreement and Consent and Waiver (the "Second
Amendment") which amended certain covenants through January 15, 2001. In
exchange for the covenant relief, the Company agreed to a lowering of the
available credit facility to $245,000 (through a permanent reduction of the
revolving line of credit) and placement of a block on the final $10,000 of
revolver borrowing. The Second Amendment also placed a moritorium on
acquisitions and changed the calculation of interest rate for the Senior Credit
Facility.
In March 2000, the Company settled litigation involving a suit filed in
1995 by Cellular World, Inc. (See Note 19)
21. NEW ACCOUNTING PRONOUNCEMENTS:
In June of 1998, the Financial Accounting Standards Board ("FASB")
issued a SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities," which requires that all derivatives be recognized as either assets
or liabilities in the statement of financial position at fair value unless
specific hedge criteria are met. The FASB later issued in June 1999 SFAS No.
137, which deferred the effective date for SFAS No. 133 to all fiscal years
beginning after June 15, 2000, with earlier application encouraged. Adoption of
this statement is not expected to significantly impact the Company's
consolidated financial position, results of operations or cash flows.
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<PAGE>
22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Certain unaudited quarterly financial information for the year ended
December 31, 1999 and 1998, is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------- FULL
1999 MARCH JUNE SEPTEMBER DECEMBER YEAR
---- -------- -------- --------- -------- ----
<S> <C> <C> <C> <C> <C>
Total revenues $ 44,445 $ 46,805 $ 45,183 $ 39,413 $ 175,846
Operating income (loss) (5,110) 428 (48,289) (4,118) (57,089)
Net loss (10,400) (5,488) (54,467) (8,391) (78,746)
Net loss per share:
Basic and diluted $ (.99) $ (.53) $ (5.11) $ (0.77) $ (7.40)
1998
----
Total revenues $ 47,003 $ 53,867 $ 53,996 $ 39,952 $ 194,818
Operating income (loss) (1,633) 1,154 1,583 (26,886) (25,782)
Net loss (5,354) (4,030) (3,903) (53,625) (66,912)
Net loss per share:
Basic and diluted $ (.67) $ (.55) $ (.44) $ (5.57) $ (7.59)
</TABLE>
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<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no reported disagreements on any matter of accounting
principles or practice or financial statement disclosure at any time during the
twenty-four months prior to December 31, 1999.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Company has eight directors. Each member of the Board of Directors
will serve until the next annual meeting of the Company's stockholders or until
his successor has been elected and qualified.
The following table sets forth certain information for each director.
DIRECTOR
CONTINUOUSLY
NAME SINCE AGE
- ---- ------------ -------
Samuel Zell June 1998 58
David R. Hill April 1979 68
Robert D. Hill August 1993 48
Michael E. Hayes December 1994 41
F. Philip Handy June 1998 55
Justin S. Maccarone December 1998 40
Thomas M. Vitale July 1994 43
A. Jones Yorke, IV August 1993 68
- ------------------------------------------------------------------------------
Samuel Zell, Chairman of the Board of Directors, became a director in
June 1998. Mr. Zell was the founder, and serves as Chairman of Equity Group
Investments, L.L.C. ("EGI") and President of EGI-DM Investments, L.L.C.
("EGI-DM") (a principal shareholder of the Company). The managing member of
EGI-DM, with sole power to direct the vote and disposition of securities held by
EGI-DM, is Samstock/SIT, L.L.C., which is indirectly owned by a trust formed for
the benefit of Samuel Zell and members of his family. Mr. Zell is a Board
designee of EGI-DM pursuant to the Investment Agreement dated April 19, 1999
among the Company, EGI-DM and David Hill (the "Investment Agreement") which
amends and restates a prior agreement among Davel Communications Group, Inc.,
David Hill and Samstock, L.L.C. Mr. Zell is also a member of the Board of
Directors and serves as the Chairman of the Board of Anixter International Inc.,
a value-added provider of integrated networking and cabling solutions; American
Classic Voyages, Co., a
62
<PAGE>
passenger cruise line; Chart House Enterprises, Inc., an owner and operator of
restaurants; Manufactured Home Communities, Inc., a real estate investment trust
that owns and operates manufactured home communities; Capital Trust, Inc. a
specialized real estate finance company; and Danielson Holding Corporation, a
financial services and investment company. Mr. Zell is a member of the board of
trustees and serves as Chairman of the Board of Equity Residential Properties
Trust, an apartment real estate investment trust, and Equity Office Properties
Trust, an office real estate investment trust. Mr. Zell is also a non-executive
director of RAMCO Energy plc.
David R. Hill founded the Company's predecessor, Davel Communications
Group, Inc., and its subsidiaries. He served as the Chief Executive Officer of
the Company from October 1993 through December 1994 and as Chairman of the Board
until July 1999. Mr. Hill is a self-appointed Board designee pursuant to the
Investment Agreement. Mr. Hill is the father of Robert D. Hill.
Robert D. Hill joined the Company in 1981 as the general manager of its
largest telephone remanufacturing facility. Between January 1990 and December
1994, he served as the Company's President. From January 1995 until November
1999, he served as the Company's President and Chief Executive Officer. Mr. Hill
is a Board designee of David Hill pursuant to the Investment Agreement.
Michael E. Hayes joined the Company in September 1992 as its Controller
and Treasurer. Mr. Hayes became Vice President and Chief Financial Officer in
August 1993, a Senior Vice President in January 1996 and Chief Operating Officer
in August 1999. In March 2000, Mr. Hayes was promoted to Chief Operating Officer
and President. Mr. Hayes is a Board designee of David Hill pursuant to the
Investment Agreement.
F. Philip Handy was appointed to the Board of Directors in June 1998.
Mr. Handy is a Board designee of EGI-DM pursuant to the Investment Agreement.
Mr. Handy is a private investor. He was a managing director of Equity Group
Corporate Investments, a division of EGI, from September 1997 through December
1999. Mr. Handy is Chairman and President of Winter Park Capital Company, a
private investment firm he founded in 1980. He also serves as a director of
Anixter International, Inc., Banca Quadrum, S.A., Inc., Chart House Enterprises,
Inc., Transmedia Network Inc. and Wink Communications, Inc.
Justin S. Maccarone was appointed to the Board of Directors following
the Company's merger with Peoples in December 1998. Mr. Maccarone is a partner
in UBS Capital II LLC, a private investment firm, and its affiliate UBS Capital
LLC. Prior to joining UBS Capital in 1993, he was a Senior Vice President with
GE Capital Corporation
Thomas M. Vitale was appointed to the Board of Director in August 1995.
Mr. Vitale has been a partner of Mayer Brown & Platt, a national law firm, since
1991.
A. Jones Yorke has been the Chairman of the Board of Auerbach Financial
Group, a financial holding company, since August 1998. From March 1997 to June
1998, Mr. Yorke was the Chairman of Weatherly Securities Corp., a registered
securities dealer. From September 1995 to March 1997 he was President of Coleman
& Company Securities Corp., a registered securities dealer. Mr. Yorke was
Chairman of Auerbach, Pollack & Richardson, Inc., a registered securities
dealer, from September 1994 to September 1995. Mr. Yorke also serves as Chairman
of 42nd Street Development Corporation, a not-for-profit corporation, and a
director of Austins Steaks & Saloon Inc.
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<PAGE>
EXECUTIVE OFFICERS
The following table sets forth the names and ages of the Company's
executive officers and their positions with the Company:
NAME AGE POSITION
- ---- --- --------
Raymond A. Gross 50 Chief Executive Officer
Michael E. Hayes 41 President and Chief Operating
Officer
William K. Breaden 40 Chief Financial Officer
Senior Vice President and Treasurer
Bruce W. Renard 46 Senior Vice President of Regulatory
Affairs, General Counsel and
Secretary
Lawrence T. Ellman 47 Senior Vice President of National
Accounts
Bruce Forsyth 44 Senior Vice President of Marketing
- -------------------------------------------------------------------------------
Raymond A. Gross was appointed as CEO by the Board of Directors on
February 28, 2000. Mr. Gross was formerly Chief Operating Officer of BHI
Holdings, now Carlisle Holdings LTD and President of Carlisle's U.S. subsidiary,
One Source. Prior to 1998, Mr. Gross was Senior Vice President of ADT Security
Services responsible for directing the residential business unit, corporate
marketing and negotiating strategic business alliances. From 1993 to 1996, Mr.
Gross was President and CEO of Alert Centre, Inc., a publicly traded alarm
company. Prior to 1993, Mr. Gross held various executive positions in the
telecommunications and computer services industries.
William K. Breaden has been Senior Vice President and Chief Financial
Officer since November 1999 when he joined the Company. In March 2000, Mr.
Breaden was also named Treasurer. Between 1990 to 1999, Mr. Breaden served as
Corporate Controller, International Controller and North American Controller
with Spalding Holding Corporation, a manufacturer and marketer of sporting
goods. From 1981 to 1990 he served on the audit staff of Deloitte & Touche
L.L.P.
Bruce W. Renard joined the Company as Senior Vice President of
Regulatory and External Affairs and Associate General Counsel in December 1998,
subsequent to the Peoples Merger. He has served as General Counsel since July
1999. At Peoples, Mr. Renard served in the positions of General Counsel and
Executive Vice President of Regulatory Affairs from February 1996 to December
1998 and General Counsel and Vice President of Regulatory Affairs from January
1992 to February 1996. From September 1991 to December 1991, Mr. Renard was a
sole practitioner specializing in legal and regulatory consulting services to
the telecommunications and utility industries. From August 1984 to September
1991, Mr. Renard was a partner with the Florida law firm of Messer Vickers,
Caparello, French & Madsen, managing the utility and telecommunications law
sections of the firm. Mr. Renard also serves as a director and Chairman of the
Legal Committee for the American Public
64
<PAGE>
Communications Council, the national public communication trade organization,
and as a director of several state public communication trade organizations.
Lawrence T. Ellman has been Senior Vice President of National Accounts
since December 1998 when he joined the Company following the Peoples Merger. Mr.
Ellman was at Peoples from 1994 through 1998 and held several sales related
positions including Executive Vice President/President National Accounts. Prior
to joining Peoples, Mr. Ellman was President of Atlantic Telco, Inc., an
independent pay telephone provider operating in the Northeastern United States.
Mr. Ellman has served as Treasurer and a member of the board of directors for
the American Public Communications Council as well as President and Chairman of
the Board for the Mid-Atlantic Payphone Association.
Bruce Forsyth, Senior Vice President of Marketing, joined the Company
in July 1999. Prior to that time, Mr. Forsyth was a Vice President with
Intermedia Communications from 1996 to 1999 in its sales, marketing and planning
departments. From 1987 to 1996 he was with Frontier Communications in their
Marketing and Consumer Account Divisions. From 1986 to 1987 he was with MCI and
was with Rochester Telephone from 1979 to 1986.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 and related
regulation require the Company's directors, certain officers, and any persons
holding more than 10% of the Company's common stock ("reporting persons") to
report their initial ownership of the Company's common stock and any subsequent
changes in that ownership to the Securities and Exchange Commision. Specific due
dates have been established, and the Company is required to disclose in this
Item 10 any failure to file by these dates during 1999. All reporting persons of
the Company satisfied these filing requirements, except the following:
The forms 5 for the year ended December 31, 1999 for each of Messrs.
Breaden, Ellman, Forsyth, Hayes, David Hill, and Renard were filed four days
late; and forms 3 have not been filed for Messrs, Breaden, Forsyth and Gross.
In making these disclosures the Company has relied on written
representations of reporting persons and copies filed with the Commission.
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<PAGE>
COMPENSATION OF DIRECTORS
Through December 31, 1995, the Company did not pay cash compensation
for service as directors. In 1996, the Company began paying cash compensation to
directors who are not employees of the Company in the amount of $2,500 per
meeting of the Board of Directors or of any committee thereof. In April 1998,
the Board approved a resolution to eliminate the per-meeting payment and to
begin paying (effective as of the date of the 1998 Annual Meeting) an annual
cash retainer to directors who are not employees in the amount of $20,000. In
July 1999, the Board approved a resolution to eliminate the cash retainer and to
begin granting, on the date of each annual meeting (effective as of the 1999
Annual Meeting), to each non-employee director 18,000 options to purchase Common
Stock of the Company at a strike price equal to the market price of the Common
Stock as of the close of business immediately preceding the date of grant.
Directors of the Company who are not employees of the Company are also
reimbursed for their out-of-pocket expenses associated with attending meetings
of the Board of Directors and committees and are eligible to receive options
granted pursuant to the Company's Directors' Stock Option Plan.
The Company provides Mr. Yorke with individual health insurance
coverage.
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ITEM 11. EXECUTIVE COMPENSATION
The following tables and notes set forth the compensation of the
Company's Chief Operating Officer and the four highest paid executive officers
whose salary and bonuses exceeded $100,000 in the fiscal year ended December 31,
1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------- ----------------------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL RESTRICTED UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION(2) STOCK AWARDS OPTIONS COMPENSATION
- --------- ---- ------ -------- --------------- ------------ ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael E. Hayes 1999 $ 156,000 (1) -- $ 50,998(7) 129,170 $ --
President and Chief 1998 170,000 25,500 -- -- 88,920 3,138(3)
Operating Officer (4) 1997 120,000 49,200 -- 30,000 10,613 1,693(3)
William K. Breaden 1999 $ 20,000 (1) -- $ 3,284(7) 35,000 $ --
Senior Vice-President 1998 -- -- -- -- -- --
and Chief Financial 1997 -- -- -- -- -- --
Officer (5)
Bruce W. Renard 1999 $ 158,000 (1) -- $ 38,249(7) 47,750 $ 192,500(8)
Senior Vice-President 1998 346,000 -- -- -- -- --
of Regulatory and 1997 192,500 140,425 -- 37,500 -- --
External Affairs,
Secretary and General
Counsel
Lawrence T. Ellman 1999 $ 158,000 (1) -- $ 38,249(7) 47,750 $ 223,600(8)
Senior Vice President 1998 284,000 -- -- -- -- --
of National Accounts 1997 170,000 42,850 -- 37,500 -- --
Bruce Forsyth 1999 $ 71,000 (1) -- $ 20,914(7) 40,000 $ --
Senior Vice President 1998 -- -- -- -- -- --
of Marketing (6) 1997 -- -- -- -- -- --
</TABLE>
- -------------------
(1) Bonuses in 1999 were paid in the form of restricted common stock grants.
(2) Other Annual Compensation was paid in the form of perquisites and was less
than the level required for reporting.
(3) All Other Compensation represents the Company's contributions, both vested
and not vested, to the Company's defined contribution plan.
(4) Mr. Hayes served as Acting Chief Executive Officer during November and
December of 1999. Raymond A. Gross was appointed Chief Executive Officer
in February 2000 at an annual salary of $325,000.
(5) Mr. Breaden was hired in November 1999 at an annual salary of $175,000.
(6) Mr. Forsyth was hired in July 1999 at an annual salary of $155,000.
(7) Granted pursuant to the Restricted Stock Option Plan dated January 25,
2000, which states that each grant of shares shall specify the applicable
restrictions on such shares and the duration. No shares have yet been
issued under this plan, including the shares relating to such grants.
(8) All other compensation represents severance payments from Peoples
Telephone.
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OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------
NUMBER OF
SECURITIES PERCENT OF TOTAL EXERCISE POTENTIAL REALIZABLE
UNDERLYING OPTIONS GRANTED OR BASE PRICE EXPIRATION VALUE (1)
NAME OPTIONS GRANTS TO EMPLOYEES ($/SHARE) DATE 0% 5% 10%
- ---- -------------- ---------------- ------------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
Michael E. Hayes (4) 41,420 (2) 7% $6.50 4/21/04 $269,230/$327,251/$394,180
12,750 (3) 2% $5.38 6/30/04 $68,531/ $83,300/$100,337
William K Breaden (5) 35,000 (4) 6% $4.25 11/05/04 $148,750/ $180,807/$217,785
Bruce W. Renard 30,000 (5) 5% $6.50 4/22/09 $195,000/ $237,024/$285,500
12,750 (3) 2% $5.38 6/30/04 $68,531/ $83,300/$100,337
Lawrence T. Ellman 30,000 (5) 5% $6.50 4/22/09 $195,000/ $237,024/$285,500
12,750 (3) 2% $5.38 6/30/04 $68,531/ $83,300/$100,337
Bruce Forsyth 25,000 (6) 4% $6.31 7/13/04 $157,813/ $191,822/$231,053
</TABLE>
- -----------------
(1) The values shown are purely hypothetical and have been calculated on the
assumption that the value of the Common Stock underlying an option
appreciates at the specified rate (0%, 5% or 10% per annum) from the date
of the grant of the option until its expiration. In fact, the options
cannot be valued without prediction of the future movement of the price of
the Common Stock. The amount realized from the options disclosed in this
table will depend upon, among other things, the continued employment of the
recipient of the option and the actual performance of the Common Stock
during the applicable period.
(2) Granted on April 21, 1999. 13,807 options exercisable on October 21, 1999,
13,807 options exercisable on April 21, 2000 and 13,806 options exercisable
on April 21, 2001.
(3) Granted on June 30, 1999. Exercisable on December 30, 1999.
(4) Granted on November 15, 1999. Options become exercisable as follows: 11,667
options on May 15, 2000; 11,667 options on November 15, 2000, and 11,666
options on November 15, 2001.
(5) Granted on April 22, 1999. Exercisable on October 22, 1999.
(6) Granted on July 13, 1999. Exercisable on January 13, 2000.
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<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
IN-THE-MONEY
NUMBER OF NUMBER OF SHARES UNDERLYING OPTIONS AT
SHARES UNEXERCISED OPTIONS AT DECEMBER 31, 1999
ACQUIRED VALUE DECEMBER 31, 1999 EXERCISABLE/
NAME ON EXERCISE(1) REALIZED (1) EXERCISABLE/UNEXERCISABLE UNEXERCISABLE (2)
- ---- ------------- ------------ ------------------------------- ------------------
<S> <C> <C> <C> <C>
Michael E. Hayes -- -- 71,299/46,984 $0/$0
William K Breaden -- -- 0/35,000 $0/$17,500
Bruce W. Renard -- -- 62,726/ 5,289 $0/$0
Lawrence T. Ellman -- -- 46,276/ 5,289 $0/$0
Bruce Forsyth -- -- 0/25,000 $0/$0
</TABLE>
- ------------------
(1) There were no option exercises in the last fiscal year.
(2) Equals the difference between the aggregate exercise price of such options
and the aggregate fair market value of the shares of Common Stock that would
be received upon exercise, assuming such exercise occurred on December 31,
1999, at which date the closing price of the Common Stock as quoted on the
Nasdaq National Market System was $4.75 per share. The above valuations may
not reflect the actual value of unexercised options as the value of
unexercised options fluctuates with market activity.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of December 31,
1999, with respect to the beneficial ownership of the Company's Common Stock by
(i) each person who is known by the Company to own beneficially more than 5% of
the Common Stock, (ii) each of the Company's directors and executive officers
and (iii) by all executive officers and directors as a group. Unless otherwise
indicated, each person has sole voting power and investment power with respect
to the shares attributed to him and such person's address is c/o Davel
Communications, Inc., 10120 Windhorst Road, Tampa, Florida 33619.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME (1) BENEFICIALLY OWNED PERCENTAGE OF CLASS
- -------- ------------------ -------------------
<S> <C> <C>
Samuel Zell (3) (13) 1,807,800 16.4%
David R. Hill (3) (4) 2,153,945 19.5%
Robert D. Hill (3) (5) 185,086 1.7%
Michael E. Hayes (2) (3) (6) 156,105 1.4%
Lawrence T. Ellman (2) (7) 90,347 *
Bruce W. Renard (2) (8) 106,797 1.0%
F. Philip Handy (3) (9) 73,010 *
Justin S. Maccarone (3) (10) 927,427 8.4%
William K. Breaden (2) 12,278 *
Bruce Forsyth (2) 33,891 *
Thomas M. Vitale (3) (11) 46,000 *
A. Jones Yorke (3) (12) 41,000 *
EGI-DM Investments, L.L.C. (14) 1,773,800 16.1%
Goldman Sachs Assset Management (15) 1,309,827 11.9%
UBS Capital II LLC (16) 927,427 8.4%
Heartland Advisors, Inc. (17) 885,156 8.0%
Ann Lurie (18) 1,030,759 9.3%
All current directors and executive 5,633,686 51.1%
directors as a group (12 persons) (19)
</TABLE>
- ---------------------
*Less than 1%
(1) For purposes of calculating the beneficial ownership of each
stockholder, it was assumed (in accordance with the Securities and
Exchange Commission's definition of "beneficial ownership") that such
stockholder had exercised all options, conversion rights or warrants by
which such stockholder had the right, within 60 days, to acquire shares
of such class of stock.
(2) Such person is an employee of the Company.
(3) Such person is a director of the Company.
(4) Includes 284,412 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.
(5) Includes 91,250 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.
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<PAGE>
(6) Includes 57,488 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.
(7) Includes 83,231 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.
(8) Includes 99,681 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.
(9) Includes 20,000 shares that are owned by Blaine Trust, a trust for
which Mr. Handy acts as co-trustee.
(10) Includes 34,450 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Directors' Stock Option
Plan, and 892,977 shares beneficially owned by UBS Capital II LLC that
Mr. Maccarone could be deemed to beneficially own as a result of being
a principal of UBS Capital II LLC. Mr. Maccarone disclaims beneficial
ownership of such shares.
(11) Includes 46,000 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Directors' Stock Option
Plan.
(12) Includes 41,000 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Directors' Stock Option
Plan.
(13) Includes 34,000 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Directors' Stock Option
Plan and 1,773,800 shares beneficially owned by EGI-DM Investments,
L.L.C. (including warrants to acquire 299,513 shares) that Mr. Zell
could be deemed to beneficially own as a result of his relationship to
EGI-DM. Mr. Zell disclaims beneficial ownership of such shares. The
managing member of EGI-DM, with the sole power to direct the vote and
disposition of securities held by EGI-DM, is Samstock/SIT, L.L.C.
("Samstock/SIT"). The sole member of Samstock/SIT is a trust formed for
the benefit of Mr. Zell and members of his family. Mr. Zell is the
President of both EGI-DM and Samstock/SIT. The principal business
address for each of EGI-DM, Samstock/SIT and Samuel Zell is c/o Equity
Group Investments, L.L.C., Two North Riverside Plaza, Chicago, Illinois
60606.
(14) Includes warrants to purchase 299,513 shares with an exercise price of
$32.00 per share from the Company and certain individual stockholders.
Mr. Zell disclaims beneficial ownership of such shares and warrants.
(15) Based on a Schedule 13G/A filed on February 10, 2000. The address of
Goldman, Sachs & Co. is 85 Broad Street, New York, NY 10004.
(16) Based on a Schedule 13D/A filed on January 14, 1999. Includes 16,450
shares that could be acquired within 60 days upon the exercise of
options granted pursuant to the Directors' Stock Option Plan. The
address of UBS Capital II LLC is 299 Park Avenue, New York, NY 10171.
(17) Based on a Schedule 13G/A filed January 18, 2000. The address of
Heartland Advisors, Inc. is 790 North Milwaukee Street, Milwaukee,
Wisconsin 53202.
(18) Based on a Schedule 13G/A filed on February 3, 2000. Includes shares
owned by the Ann Lurie Revocable Trust, of which Ms. Lurie is the sole
trustee, and the Robert H. and Ann Lurie Trust, of which Ms. Lurie is
a co-trustee. Ms. Lurie's address is Two North Riverside Plaza, Suite
1500, Chicago, IL 60606.
(19) Includes 967,641 shares that could be acquired within 60 days upon the
exercise of options and 299,513 shares that could be acquired within 60
days upon the exercise of warrants.
EMPLOYMENT AGREEMENTS
In June 1998, the Company entered into new employment agreements with
Robert D. Hill, formerly the President and Chief Executive Officer of the
Company, Michael E. Hayes, Paul B. Demirdjian and Michael G. Kouri
(collectively, the "Executives"), which replaced certain employment agreements
entered into between the Company and the Executives in 1996 and subsequently
amended in 1997. Following the merger of the Company with PTC, the Company also
entered into employment agreements with Messrs. Lawrence T. Ellman and Bruce W.
Renard (who for purposes hereof shall also be referred to as "Executives").
The employment agreements provide for an initial employment period
through December 31, 2000, with automatic one-year renewals unless either party
notifies the other at least 60 days prior to the end of any term. The employment
agreements provide for an annual base salary of at least $250,000 for Mr. Robert
Hill, $170,000 for Mr. Hayes, $190,000 for Mr. Demirdjian, $170,000 for Mr.
Kouri, $170,000 for Mr. Ellman and $170,000 for Mr. Renard. The employment
agreements provide for employment of such persons in their current respective
positions, subject to change or reassignment of duties by the Company. The
employment agreements provide for certain fringe benefits and incentive
compensation as outlined below.
Under the employment agreements, the Company may terminate any
Executive for cause (as defined therein). An Executive can voluntarily terminate
his employment agreement by providing 60 days' written notice to the Company at
any time. In the event of termination with cause or voluntary termination, the
Executive will receive all accrued base pay and a credit for certain unused
vacation. If the Company breaches any provisions of, terminates without cause or
fails to renew an employment agreement with any Executive, the Executive will be
deemed to have been involuntarily terminated. In the event of involuntary
termination or termination for a disability, all of such Executive's options
fully vest and all accrued base pay and a credit for certain vacation benefits
become due. The Executive will also receive the greater of one year's base pay
or the remaining base pay due under the term of the employment agreement, the
greater of the target incentive bonus for such year or the highest annualized
bonus during the prior three years, and continuation of benefits for the
remainder of the term. The Executives will be deemed to have been terminated
upon a "Change in Control" if any party other than David Hill or his descendants
or Samstock, L.L.C. acquires control of 25% or more of the combined voting power
of the Company and within two years thereafter the Company terminates the
Executive or the Executive resigns for any reason. In the event of termination
upon such a Change in Control, an Executive will receive a severance payment
equal to the sum of the Executive's base salary and target incentive bonuses for
the year in which the Change in Control occurred multiplied by three, subject to
certain reductions if such amounts would constitute "parachute payments" under
the Internal Revenue Code. In addition, the Executive will receive those other
benefits described in the preceding paragraph afforded to the Executive as if he
had been involuntarily terminated. The Company's employment agreements with
Messrs. Hill, Demirdjian and Kouri were cancelled in 1999.
In September 1996, the Company entered into an employment agreement
with Mr. David Hill, the former Chairman of the Board and Chairman of the
Executive Committee of the Board, for six years at an annual base salary of
$400,000. Under the agreement, Mr. David Hill was eligible to receive a cash
bonus as well as a grant of options based upon the percentage by which the
annual before tax profit exceeds the annual before tax profit for 1996. Mr.
David Hill agreed not to compete with the company during his employment and for
a period of one year afterwards. The agreement also provides that, upon a change
of control (as defined therein), (1) all stock options previously awared to Mr.
David Hill will vest and become immediately exercisable and (2) in the event of
a termination of Mr. David Hill, he will receive severance pay from the Company
as specified in his employment agreement. Effective July 6, 1999 Mr. Hill
resigned as Chairman of the Board, agreed to terminate his employment agreement
and entered into a consulting agreement with the Company for the 2000 and 2001
years. Under the consulting agreement, Mr. Hill will receive monthly payments
aggregating $100,000 annually. Under certain circumstances the payments may be
deferred or paid in the Company's Common Stock.
On November 9, 1999, the Company announced the resignation of Robert D.
Hill as its President and Chief Executive Officer. Following his departure, Mr.
Hill remains affiliated with the Company as a consultant and a member of the
Company's Board of Directors, serving on the Board's Executive Committee. Mr.
Hill agreed to terminate his employment agreement and subsequently entered into
a consulting agreement with the Company for the year 2000. Under the consulting
agreement, Mr. Hill will receive monthly payments aggregating $120,000 for 2000.
In addition, Mr. Hill received compensation, in the form of common stock of the
Company, having a value approximating the severance that would have been payable
under his employment agreement.
ITEM 13. CERTAIN TRANSACTIONS
The Company has entered into certain transactions with Mr. David R.
Hill, who is a director. The Company leased an aircraft and residential real
estate from Mr. David Hill, for which the Company paid Mr. Hill $82,300 and
$13,000 in 1999 and 1998, respectively. Both leases were terminated in July
1999. The Company also leased office space in Jacksonville, Illinois from Mr.
Hill, which it paid aggregate amounts of $118,600, $68,000 and $116,000 and in
1999, 1998 and
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<PAGE>
1997, respectively. Until September 1997, the Company also leased long distance
switching equipment from Mr. Hill for which it paid $80,000. In September 1997,
Davel purchased the equipment from Mr. Hill for $378,000 which was its estimated
fair market value equipment based upon independent appraisals.
During 1999 the Company sold to Mr. David Hill a building located in
Miami, Florida for $2,250,000. The Company believes that the terms of the sale
are at least as favorable to the Company as those that could have been obtained
from unrelated parties at the time it was entered into.
In addition, the Company received payments from Mr. Hill for
administrative services provided to him by certain employees of the Company in
the aggregate amounts of $45,900 and $85,000 and $107,000 in 1999, 1998 and
1997, respectively.
In connection with advisory services provided by EGI, an affiliate of
EGI-DM, to the Company, the Company has paid EGI a fee, payable in the Company's
Common Stock, equal to 0.35% of the enterprise value of the Peoples Merger and
any other merger, payable upon consummation of such merger. In connection with
the advisory agreement the Company also agreed to grant stock options to EGI for
ongoing consulting services. Each month EGI receives 12,500 options at a strike
price based on the closing price of the Company's Common Stock on the last day
of the prior month. To date, options have been accrued but not issued.
Any future transactions between the Company and its officers,
directors, employees and affiliates that are outside the scope of the Company's
employment relationship with such persons will be subject to the approval of a
majority of the disinterested members of the Board of Directors.
72
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed with, and as part of, this
Amendment No. 1 to Annual Report on Form 10-K/A.
1. FINANCIAL STATEMENTS
See Part II.
2. FINANCIAL STATEMENT SCHEDULES
None
3. EXHIBITS
See Exhibit Index on the following page.
Reports on Form 8-K.
None during the three months ended December 31, 1999.
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<PAGE>
EXHIBIT INDEX
2.1 Agreement and Plan of Merger and Reorganization, dated June 11, 1998,
by and among Davel Communications Group, Inc., Davel Holdings, Inc.,
D Subsidiary, Inc., PT Merger Corp. and PhoneTel Technologies, Inc.
(incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K
filed with the Commission on June 23, 1998).
2.2 Agreement and Plan of Merger and Reorganization, dated as of July 5,
1998, by and among Davel Communications Group, Inc., Davel Holdings,
Inc. and Peoples Telephone Company, Inc. (incorporated by reference to
Exhibit 2.1 to Current Report on Form 8-K filed with the Commission on
July 22, 1998).
3.1 Restated Certificate of Incorporation of Davel Communications, Inc.
(incorporated by reference to Exhibit 3.1 to Registration Statement on
Form S-4 (Registration No. 333-67617) dated November 20, 1998).
3.2 Restated By-laws of Davel Communications, Inc. (incorporated by
reference to Exhibit 3.2 to Registration Statement on Form S-4
(Registration No. 333- 67617) dated November 20, 1998.4.1 Rights
Agreement, dated as of December 15, 1998, between Davel Communications,
Inc. and ChaseMellon Shareholder Services, L.L.C., as Rights Agent,
including the form of Certificate of Designation, Preferences and
Rights of Junior Participating Preferred Stock, Series A attached
thereto as Exhibit A, the form of Rights Certificate attached thereto
as Exhibit B and the Summary of Rights attached thereto as Exhibit C
(incorporated by reference to the Company's Registration Statement on
Form 8-A, filed with the Commission on December 23, 1998).
10.1 Credit Agreement, dated as of February 3, 1998, by and among Davel
Communications Group, Inc., NationsBank, N.A., as Administrative Agent,
SunTrust Bank, Tampa Bay, as Documentation Agent, LaSalle National
Bank, as Co-Agent, and the other Lenders party thereto (incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K filed with the
Commission on February 18, 1998).
10.2 Form of Revolving Note, dated February 3, 1998, made by Davel
Communications Group, Inc. in favor of NationsBank, N.A., in the
principal amount of $6,300,000 (incorporated by reference to Exhibit
10.2 to Current Report on Form 8-K filed with the Commission on
February 18, 1998).
10.3 Form of Revolving Note, dated February 3, 1998, made by Davel
Communications Group, Inc. in favor of SunTrust Bank, Tampa Bay, in the
principal amount of $6,300,000 (incorporated by reference to Exhibit
10.3 to Current Report on Form 8-K filed with the Commission on
February 18, 1998).
10.4 Form of Revolving Note, dated February 3, 1998, made by Davel
Communications Group, Inc. in favor of LaSalle National Bank, in the
principal amount of $2,400,000 (incorporated by reference to Exhibit
10.4 to Current Report on Form 8-K filed with the Commission on
February 18, 1998).
10.5 Form of Term Note, dated February 3, 1998, made by Davel Communications
Group, Inc. in favor of NationsBank, N.A., in the principal amount of
$46,200,000 (incorporated by reference to Exhibit 10.5 to Current
Report on Form 8-K filed with the Commission on February 18, 1998).
10.6 Form of Term Note, dated February 3, 1998, made by Davel Communications
Group, Inc. in favor of SunTrust Bank, Tampa Bay, in the principal
amount of $46,200,000 (incorporated by reference to Exhibit 10.6 to
Current Report on Form 8-K filed with the Commission on February 18,
1998).
10.7 Form of Term Note, dated February 3, 1998, made by Davel Communications
Group, Inc. in favor of LaSalle National Bank, in the principal amount
of $17,600,000 (incorporated by reference to Exhibit 10.7 to Current
Report on Form 8-K filed with the Commission on February 18, 1998).
10.8 Voting Agreement, dated June 11, 1998, between Davel Communications
Group, Inc. and ING (U.S.) Investment Corporation (incorporated by
reference to Exhibit 10.2 to Current Report on Form 8-K filed with the
Commission on June 23, 1998).
10.9 Stock Purchase Agreement, dated May 14, 1998, by and between Davel
Communications Group, Inc. and Samstock, L.L.C. (incorporated by
reference to Exhibit 10.1 to current report on Form 8K filed with the
commission on June 23, 1998).
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<PAGE>
10.10 Voting Agreement, dated June 11, 1998, between Davel Communications
Group, Inc. and Cerberus Partners, L.P. (incorporated by reference to
Exhibit 10.3 to Current Report on Form 8-K filed with the Commission on
June 23, 1998).
10.11 Voting Agreement, dated June 11, 1998, between Davel Communications
Group, Inc. and Mr. Peter Graf (incorporated by reference to Exhibit
10.4 to Current Report on Form 8-K filed with the Commission on June
23, 1998).
10.12 Voting Agreement, dated June 11, 1998, between Davel Communications
Group, Inc. and Mr. George Henry (incorporated by reference to Exhibit
10.5 to Current Report on Form 8-K filed with the Commission on June
23, 1998).
10.13 Voting Agreement, dated June 11, 1998, between Davel Communications
Group, Inc. and Mr. Steven Richman (incorporated by reference to
Exhibit 10.6 to Current Report on Form 8-K filed with the Commission on
June 23, 1998).
10.14 Voting Agreement, dated June 11, 1998, between Davel Communications
Group, Inc. and Mr. Aron Katzman (incorporated by reference to Exhibit
10.7 to Current Report on Form 8-K filed with the Commission on June
23, 1998).
10.15 Voting Agreement, dated June 11, 1998, between Davel Communications
Group, Inc. and Mr. Joseph Abrams (incorporated by reference to Exhibit
10.8 to Current Report on Form 8-K filed with the Commission on June
23, 1998).
10.16 Corporate Governance, Liquidity and Voting Agreement, dated as of
July 5, 1998, by and among UBS Capital II LLC, Davel Communications
Group, Inc., Davel Holdings, Inc. and Peoples Telephone Company, Inc.
(incorporated by reference to Exhibit 10.1 to Current Report on Form
8-K filed with the Commission on July 22, 1998).
10.17 Termination Option Agreement, dated as of July 5, 1998, by and among
Davel Communications Group, Inc. and Peoples Telephone Company, Inc.
(incorporated by reference to Exhibit 10.2 to Current Report on Form
8-K filed with the Commission on July 22, 1998).
10.18 Credit Agreement, dated as of December 23, 1998, among Davel Financing
Company, L.L.C., as Borrower, Davel Communications, Inc., the Domestic
Subsidiaries of the Borrower and Davel Communications, Inc., as
Guarantors, the Lenders identified therein, NationsBank, N.A., as
Administrative Agent, BancBoston Robertson Stephens Inc., as
Syndication Agent, The Chase Manhattan Bank, as Documentation Agent,
and NationsBanc Montgomery Securities, LLC, as Lead Arranger
(incorporated by reference to Exhibit 10.1 to Current Report on Form
8-K filed with the Commission on January 6, 1999).
10.19 First Amendment to Credit Agreement and Consent and Waiver, dated as of
April 8, 1999, among Davel Financing Company, L.L.C., Davel
Communications, Inc., NationsBank, N.A., as Administrative Agent, and
the other Lenders party thereto (incorporated by reference to Exhibit
10.1 to Quarterly Report on Form 10-Q filed with the Commission on
August 16, 1999).
10.20 Second Amendment to Credit Agreement and Consent and Waiver, dated as
of March 9, 2000, among Davel Financing Company, L.L.C., Davel
Communications, Inc., NationsBank, N.A., as Administrative Agent, and
the other Lenders party thereto (filed herewith).
10.21 Employment and Non-Competition Agreement, dated as of December 23,
1998, by and between Davel Communications, Inc. and Scott C. Ambler
(incorporated by reference to Exhibit 10.2 to Current Report on Form
8-K filed with the Commission on January 6, 1999).
10.22 Employment and Non-Competition Agreement, dated as of December 23,
1998, by and between Davel Communications, Inc. and David A. Arvizu
(incorporated by reference to Exhibit 10.3 to Current Report on Form
8-K filed with the Commission on January 6, 1999).
10.23 Employment and Non-Competition Agreement, dated as of December 23,
1998, by and between Davel Communications, Inc. and William A. Baum
(incorporated by reference to Exhibit 10.4 to Current Report on
75
<PAGE>
Form 8-K filed with the Commission on January 6, 1999).
10.24 Employment and Non-Competition Agreement, dated as of December 23,
1998, by and between Davel Communications, Inc. and Neil N. Snyder
(incorporated by reference to Exhibit 10.5 to Current Report on
Form 8-K filed with the Commission on January 6, 1999).
10.25 Employment and Non-Competition Agreement, dated as of December 23,
1998, by and between Davel Communications, Inc. and E. Craig Sanders
(incorporated by reference to Exhibit 10.6 to Current Report on Form
8-K filed with the Commission on January 6, 1999).
10.26 Employment and Non-Competition Agreement, dated as of December 23,
1998, by and between Davel Communications, Inc. and C. Keith Pressley
(incorporated by reference to Exhibit 10.7 to Current Report on Form
8-K filed with the Commission on January 6, 1999).
10.27 Employment and Non-Competition Agreement, dated as of December 23,
1998, by and between Davel Communications, Inc. and Robert E. Lund
(incorporated by reference to Exhibit 10.8 to Current Report on Form
8-K filed with the Commission on January 6, 1999).
10.28 Employment and Non-Competition Agreement, dated as of December 23,
1998, by and between Davel Communications, Inc. and Alan C. MacFarland
(incorporated by reference to Exhibit 10.9 to Current Report on Form
8-K filed with the Commission on January 6, 1999).
10.29 Employment and Non-Competition Agreement, dated as of December 23,
1998, by and between Davel Communications, Inc. and Bruce W. Renard
(incorporated by reference to Exhibit 10.10 to Current Report on Form
8-K filed with the Commission on January 6, 1999).
10.30 Employment and Non-Competition Agreement, dated as of December 23,
1998, by and between Davel Communications, Inc. and Lawrence T. Ellman
(incorporated by reference to Exhibit 10.11 to Current Report on Form
8-K filed with the Commission on January 6, 1999).
10.31 Investment Agreement dated April 19, 1999 among Davel Communications,
Inc., Samstock L.L.C. and EGI-Davel Investors, L.L.C. (filed herewith).
21.1 Subsidiaries of Davel Communications, Inc.
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
76
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to
Annual Report on Form 10-K/A to be signed on its behalf by the undersigned,
thereunto duly authorized.
DAVEL COMMUNICATIONS, INC.
Date: March 30, 2000
/s/ RAYMOND A. GROSS /s/ WILLIAM K. BREADEN
--------------------- ----------------------
Raymond A. Gross William K. Breaden
Chief Executive Officer Senior Vice President, Treasurer
and Chief Financial Officer
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature
appears below constitutes and appoints Raymond A. Gross and Michael E. Hayes,
and each of them, his true and lawful attorneys-in-fact and agents, each with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to this
Amendment No. 1 to Annual Report on Form 10-K/A with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents or their substitute or substitutes may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
<S> <C> <C>
/s/ SAMUEL ZELL Chairman of the Board of Directors March 29, 2000
- ----------------
Samuel Zell
/s/ RAYMOND A. GROSS President, Chief Executive Officer March 29, 2000
- -------------------------
Raymond A. Gross
/s/ MICHAEL E. HAYES President and Chief Operating Officer March 29, 2000
- ------------------------- and Director
Michael E. Hayes
/s/ DAVID R. HILL Director March 29, 2000
- -------------------------
David R. Hill
/s/ ROBERT D. HILL Director March 29, 2000
- -------------------------
Samuel Zell
/s/ F. PHILIP HANDY Director March 29, 2000
- -------------------------
F. Philip Handy
</TABLE>
77
<PAGE>
<TABLE>
<S> <C> <C>
Director
- -------------------------
Justin S. Maccarone
Director
- -------------------------
Thomas M. Vitale
/s/ A. JONES YORKE Director March 29, 2000
- -------------------------
A. Jones Yorke
</TABLE>
78
Exhibit 10.20
SECOND AMENDMENT TO CREDIT AGREEMENT
This SECOND AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is entered
into as of March 9, 2000 among DAVEL FINANCING COMPANY, L.L.C., a Delaware
limited liability company (the "Borrower"); DAVEL COMMUNICATIONS, INC., a
Delaware corporation (the "Parent"); the Parent and the Domestic Subsidiaries of
the Borrower, as Guarantors; the Lenders party to the "Credit Agreement"
(referred to and defined below); and BANK OF AMERICA, N.A. (formerly known as
NationsBank, N.A.), as Administrative Agent for the Lenders (the "Administrative
Agent"). Capitalized terms used herein and not otherwise defined shall have the
meanings set forth in the Credit Agreement.
RECITALS
WHEREAS, the Borrower, the Guarantors, the Lenders, the Administrative
Agent, BancBoston Robertson Stephens, Inc., as Syndication Agent and The Chase
Manhattan Bank, as Documentation Agent, entered into that certain Credit
Agreement, dated as of December 23, 1998 (as amended and modified by that
certain First Amendment to Credit Agreement and Consent and Waiver dated as of
April 8, 1999 among the Borrower, the Parent, the Domestic Subsidiaries of the
Borrower, the Lenders and the Administrative Agent, and as may be further
amended or modified from time to time, the "Credit Agreement");
WHEREAS, the Borrower has informed the Lenders that it anticipates
being unable to meet certain financial covenants in the future;
WHEREAS, the Borrower has requested that the Lenders amend certain
terms and provisions of the Credit Agreement, including, without limitation, the
financial covenants with respect to certain periods;
WHEREAS, the Lenders have agreed to do so, on the terms and subject to
the conditions set forth below.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
AGREEMENT
1. AMENDMENTS. Effective as of the date hereof, upon satisfaction of each of
the conditions set forth in PARAGRAPH 2 hereof, the Credit Agreement is hereby
amended as follows (unless otherwise specified, section references used below
refer to sections of the Credit Agreement):
(a) APPLICABLE PERCENTAGE. SECTION 1.1 is amended to delete the
definition of "Applicable Percentage" in its entirety and to replace such
definition with the following definition:
<PAGE>
"APPLICABLE PERCENTAGE" means, (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.
(b) FIXED CHARGE COVERAGE RATIO. SECTION 1.1 is further amended to
delete the definition of "Fixed Charge Coverage Ratio" in its entirety and
to replace such definition with the following definition:
"FIXED CHARGE COVERAGE RATIO" means, with respect to the
Credit Parties and their Subsidiaries determined on a consolidated
basis in accordance with GAAP, for any twelve month period, the
ratio of (in each case for such period) (a) EBITDA less Capital
Expenditures less cash income taxes to (b) cash Interest Expense
plus Scheduled Funded Debt Payments.
(c) INTEREST COVERAGE RATIO. SECTION 1.1 is further amended to
delete the definition of "Interest Coverage Ratio" in its entirety and to
replace such definition with the following definition:
"INTEREST COVERAGE RATIO" means, with respect to the Credit
Parties and their Subsidiaries determined on a consolidated basis
in accordance with GAAP, for any twelve month period, the ratio of
(in each case for such period) (a) EBITDA to (b) cash Interest
Expense.
(d) LEVERAGE RATIO. SECTION 1.1 is further amended to delete the
definition of "Leverage Ratio" in its entirety and to replace such
definition with the following definition:
"LEVERAGE RATIO" means, with respect to the Credit Parties and
their Subsidiaries determined on a consolidated basis and in
accordance with GAAP, for any twelve month period, the ratio of
(a) total Funded Debt less cash in excess of $7,000,000, in each
case as of the last day of such period to (b) EBITDA for such
period.
(e) PERMITTED ACQUISITIONS. SECTION 1.1 is further amended to
add the following phrase to the definition of "Permitted Acquisition"
immediately after the
2
<PAGE>
existing phrase "an Acquisition by the Borrower or any Subsidiary of the
Borrower" and prior to the semicolon following such existing phrase and to
delete clause (h) thereof in its entirety:
"which is completed prior to March 9, 2000"
(f) REVOLVING COMMITTED AMOUNT. SECTION 1.1 is further amended to
delete the definition of "Revolving Committed Amount" in its entirety and
to replace such definition with the following definition:
"REVOLVING COMMITTED AMOUNT" means FORTY-FIVE MILLION DOLLARS
($45,000,000), as such amount may be reduced pursuant to
Section 2.1(d) or 3.3(c).
(g) MAXIMUM INTEREST PERIOD; NEW LOANS. CLAUSE (C) of
SECTION 2.1(B) is deleted in its entirety and replaced with the
following provision:
(C) with respect to Revolving Loans that will be Eurodollar Loans,
the Interest Period applicable thereto (which shall not exceed one
month in duration in the case of any Eurodollar Loan made on or
after March 9, 2000)
(h) MAXIMUM INTEREST PERIOD; EXISTING LOANS. CLAUSE (Y) of SECTION
2.5 is deleted in its entirety and replaced with the following
provision:
(y) if the request is to continue a Eurodollar Loan or convert
a Base Rate Loan to a Eurodollar Loan, the Interest Period
applicable thereto (which shall not exceed one month in duration in
the case of any Eurodollar Loan continued or converted on or after
March 9, 2000).
(i) CONDITIONS TO BORROWING. CLAUSE (E) of SECTION 5.2 is deleted
in its entirety and replaced with the following provision:
(e) REQUIRED LENDERS' CONSENT. From and after March 9, 2000,
if after giving effect to the making of any requested Loan (and the
application of the proceeds thereof) or to the issuance of any
requested Letter of Credit, as the case may be, the sum of the
Revolving Loans outstanding plus LOC Obligations outstanding would
exceed $35,000,000, the Lenders shall not be obligated to make such
Loan nor shall the Issuing Lender be required to issue such Letter
of Credit, as applicable, unless the Required Lenders shall have
consented in writing to the making of such Loan or the issuance of
such Letter of Credit, as applicable.
3
<PAGE>
(j) INTERIM REPORTING. SECTION 7.1(B) is deleted in its entirety
and replaced with the following provisions:
(b) INTERIM FINANCIAL STATEMENTS. As soon as available, and in
any event within 45 days after the closing of each fiscal quarter of
the Borrower and within 30 days after the end of each calendar
month, a consolidated balance sheet and income statement of the
Credit Parties and their Subsidiaries as of the end of such fiscal
quarter or calendar month, as the case may be, together with related
consolidated statements of cash flows for such fiscal quarter or
calendar month, as applicable, in the case of the income statement
and statement of cash flow setting forth in comparative form, if
practical, consolidated figures for the corresponding period of the
preceding fiscal year and in the case of the balance sheet setting
forth in comparative form, if practical, consolidated figures for
the corresponding date of the prior fiscal year, all such financial
information described above to be in reasonable form and detail and
reasonably acceptable to the Administrative Agent, and accompanied
by a certificate of the chief financial officer of the Borrower to
the effect that such quarterly financial statements fairly present
in all material respects the financial condition of the Credit
Parties and their Subsidiaries and have been prepared in accordance
with GAAP (subject to normal year-end adjustments and the absence of
footnotes).
(k) OFFICER'S CERTIFICATE. SECTION 7.1(C) is amended to add the
following parenthetical to such section at the end of CLAUSE (I) of such
section:
(except in the case of certificates accompanying monthly financial
statements required to be delivered pursuant to Section 7.1(b) with
respect to months ending on or before November 30, 2000)
(l) FINANCIAL COVENANTS. SECTION 7.2 is deleted in its entirety and
replaced with the following provisions:
(a) LEVERAGE RATIO. The Leverage Ratio, for the twelve month
period ending as of each date set forth below, shall be less than or
equal to the applicable ratio set forth below opposite such date:
TWELVE MONTHS
ENDING RATIO
-------------- -----
March 31, 2000 6.00 to 1.00
June 30, 2000 6.00 to 1.00
September 30, 2000 6.50 to 1.00
4
<PAGE>
December 31, 2000 6.75 to 1.00
January 31, 2001 and
Each Twelve Month
Period Ending Thereafter 3.50 to 1.00.
(b) INTEREST COVERAGE RATIO. The Interest Coverage Ratio, for
the twelve month period ending as of each date set forth below,
shall be greater than or equal to the applicable ratio set forth
below opposite such date:
TWELVE MONTHS
ENDING RATIO
-------------- -----
March 31, 2000 1.50 to 1.00
June 30, 2000 1.50 to 1.00
September 30, 2000 1.25 to 1.00
December 31, 2000 1.25 to 1.00
January 31, 2001 and
Each Twelve Month
Period Ending Thereafter 3.75 to 1.00.
(c) FIXED CHARGE COVERAGE RATIO. The Fixed Charge Coverage
Ratio, for the twelve month period ending as of each date set forth
below, shall be greater than or equal to the applicable ratio set
forth below opposite such date:
TWELVE MONTHS
ENDING RATIO
-------------- -----
March 31, 2000 .50 to 1.00
June 30, 2000 .50 to 1.00
September 30, 2000 .40 to 1.00
December 31, 2000 .40 to 1.00
January 31, 2001 and
Each Twelve Month
Period Ending Thereafter 1.10 to 1.00.
(m) CAPITAL EXPENDITURES. CLAUSE (B) of SECTION 8.14 is
amended to delete the figure "$13,000,000" which appears in such clause and to
replace such figure with the figure "$10,000,000".
2. CONDITIONS PRECEDENT. The effectiveness of this Amendment is subject to
receipt by the Administrative Agent of each of the following:
(a) counterparts to this Amendment duly executed by each of
the Credit Parties and the Required Lenders;
5
<PAGE>
(b) certified copies of resolutions or similar authorizations
of each Credit Party approving and adopting this Amendment, the
transactions contemplated herein and authorizing such Credit
Party's execution and delivery hereof;
(c) an opinion or opinions from counsel to the Credit Parties
with respect to this Amendment, in form and substance satisfactory
to the Administrative Agent, addressed to the Administrative Agent
on behalf of the Lenders and dated as of the date hereof; and
(d) the "Amendment Fee" referred to and described in
PARAGRAPH 3 hereof, for the benefit of each Lender.
3. AMENDMENT FEE. The Borrower agrees to pay in cash or other immediately
available funds, on or before March 22, 2000, to the Administrative Agent for
the account of each Lender that executes this Amendment on or before such date,
a fee equal to the product of each such Lender's Commitment (determined after
giving effect to this Amendment) multiplied by .35%; provided, however, the
Borrower shall have no obligation to pay any such fee until this Amendment has
been executed and delivered by the Required Lenders (which fees shall be
thereupon fully-earned and non-refundable).
4. GOOD STANDING CERTIFICATES. Within 30 days after the date hereof, the
Borrower shall deliver to the Administrative Agent copies of certificates of
good standing, existence or their equivalent with respect to each Credit Party,
certified as of a recent date by the appropriate Governmental Authorities of the
state or other jurisdiction of such Credit Party's formation.
5. RATIFICATION OF CREDIT AGREEMENT. The term "Credit Agreement" as used in each
of the Credit Documents shall hereafter mean the Credit Agreement as amended and
modified by this Amendment. Except as herein specifically agreed, the Credit
Agreement, as amended by this Amendment, is hereby ratified and confirmed and
shall remain in full force and effect according to its terms, including, without
limitation, the liens granted pursuant to the Collateral Documents.
6. AUTHORITY/ENFORCEABILITY. Each of the Credit Parties, the Administrative
Agent and the Lenders represents and warrants as follows:
(a) It has taken all necessary action to authorize the
execution, delivery and performance of this Amendment.
(b) This Amendment has been duly executed and delivered by
such Person and constitutes such Person's legal, valid and binding
obligations, enforceable in accordance with its terms, except as
such enforceability may be subject to (i) bankruptcy, insolvency,
reorganization, fraudulent conveyance or transfer, moratorium or
similar laws affecting creditors' rights generally and (ii) general
principles of equity (regardless of whether such enforceability is
considered in a proceeding at law or in equity).
(c) No consent, approval, authorization or order of, or
filing, registration or qualification with, any court or
governmental authority or third party is required in connection
with the execution, delivery or performance by such Person of this
Amendment (other than that which may have been previously
obtained).
6
<PAGE>
7. NO DEFAULT. The Credit Parties represent and warrant to the Lenders that (a)
the representations and warranties of the Credit Parties set forth in SECTION 6
of the Credit Agreement (as amended by this Amendment) are true and correct in
all material respects as of the date hereof, (b) no event has occurred and is
continuing which constitutes a Default or an Event of Default and (c) they have
no claims, counterclaims, offsets, credits (other than any credit for
overpayment of interest or fees under the Credit Documents of which the Credit
Parties have no knowledge as of the date hereof (each an "Overpayment Credit"))
or defenses to their obligations under the Credit Documents or to the extent
they have any (other than any Overpayment Credit) they are hereby released in
consideration of the Lenders entering into this Amendment.
8. COUNTERPARTS/TELECOPY. This Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be an original,
but all of which shall constitute one and the same instrument. Delivery of
executed counterparts of this Amendment by telecopy shall be effective as an
original and shall constitute a representation that an original shall be
delivered.
9. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
* * * *
7
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart
of this Amendment to be duly executed and delivered and this Amendment shall be
effective as of the date first above written.
BORROWER: DAVEL FINANCING COMPANY, L.L.C.,
a Delaware limited liability company
By: DAVEL COMMUNICATIONS, INC.,
its sole managing member
By: _________________________________
Name: ___________________________
Title: __________________________
PARENT GUARANTOR: DAVEL COMMUNICATIONS, INC.,
a Delaware corporation
By: _________________________________
Name: ___________________________
Title: __________________________
SUBSIDIARY GUARANTORS: DAVEL COMMUNICATIONS GROUP, INC.,
an Illinois corporation
PEOPLES TELEPHONE COMPANY, INC.,
a New York corporation
PEOPLES TELEPHONE COMPANY, INC.,
a New Hampshire corporation
PEOPLES COLLECTORS, INC.,
a Delaware corporation
PTC CELLULAR, INC.,
a Delaware corporation
PTC SECURITY SYSTEMS, INC.,
a Florida corporation
TELELINK TELEPHONE SYSTEMS, INC.,
a Georgia corporation
SILVERADO COMMUNICATIONS CORP.,
a Colorado corporation
Signature Page to Second Amendment to
Credit Agreement
<PAGE>
PEOPLES ACQUISITION CORP.,
a Pennsylvania corporation
TELALEASING ENTERPRISES, INC.,
an Illinois corporation
ADTEC COMMUNICATIONS, INC.,
a Florida corporation
INTERSTATE COMMUNICATIONS, INC.,
a Georgia corporation
T.R.C.A., INC.,
an Illinois corporation
DAVELTEL, INC.,
an Illinois corporation
DAVEL MEXICO, LTD.,
an Illinois corporation
COMMUNICATIONS CENTRAL INC.,
a Georgia corporation
CENTRAL PAYPHONE SERVICES, INC.,
a Georgia corporation
COMMUNICATIONS CENTRAL
OF GEORGIA, INC.,
a Georgia corporation
INVISION TELECOM, INC.,
a Georgia corporation
By: _________________________________
Name: ___________________________
Title: __________________________
Signature Page to
Second Amendment to Credit Agreement
<PAGE>
AGENT:
- ----- BANK OF AMERICA, N.A. (FORMERLY,
NATIONSBANK, N.A.),
in its capacities as the
Administrative Agent and Collateral
Agent
By: _______________________________
Name: _________________________
Title: ________________________
Signature Page to Second Amendment to
Credit Agreement
<PAGE>
LENDERS:
- ------- BANK OF AMERICA, N.A. (FORMERLY,
NATIONSBANK, N.A.),
individually in its capacity as a
Lender, and in its capacity as the
Issuing Lender
By: _______________________________
Name: _________________________
Title: ________________________
Signature Page to
Second Amendment to Credit Agreement
<PAGE>
THE CHASE MANHATTAN BANK
By: _________________________________
Name: ___________________________
Title: __________________________
Signature Page to
Second Amendment to Credit Agreement
<PAGE>
THE BANK OF NEW YORK
By: _________________________________
Name: ___________________________
Title: __________________________
Signature Page to
Second Amendment to Credit Agreement
<PAGE>
FLEET BANK, N.A.
By: _________________________________
Name: ___________________________
Title: __________________________
Signature Page to
Second Amendment to Credit Agreement
<PAGE>
LASALLE BANK, NATIONAL ASSOCIATION
(AS SUCCESSOR TO LASALLE NATIONAL BANK)
By: _________________________________
Name: ___________________________
Title: __________________________
Signature Page to
Second Amendment to Credit Agreement
<PAGE>
U.S. BANK NATIONAL ASSOCIATION
By: _________________________________
Name: ___________________________
Title: __________________________
Signature Page to
Second Amendment to Credit Agreement
<PAGE>
CREDIT AGRICOLE INDOSUEZ
By: _________________________________
Name: ___________________________
Title: __________________________
By: _________________________________
Name: ___________________________
Title: __________________________
Signature Page to
Second Amendment to Credit Agreement
<PAGE>
BANK ONE N.A. (AS SUCCESSOR TO THE FIRST
NATIONAL BANK OF CHICAGO)
By: _________________________________
Name: ___________________________
Title: __________________________
Signature Page to
Second Amendment to Credit Agreement
<PAGE>
PNC BANK, NATIONAL ASSOCIATION
By: _________________________________
Name: ___________________________
Title: __________________________
Signature Page to
Second Amendment to Credit Agreement
<PAGE>
ALLSTATE LIFE INSURANCE COMPANY
By: _________________________________
Name: ___________________________
Title: __________________________
By: _________________________________
Name: ___________________________
Title: __________________________
Signature Page to
Second Amendment to Credit Agreement
<PAGE>
HELLER FINANCIAL, INC.
By: _________________________________
Name: ___________________________
Title: __________________________
Signature Page to
Second Amendment to Credit Agreement
<PAGE>
PARIBAS
By: _________________________________
Name: ___________________________
Title: __________________________
By: _________________________________
Name: ___________________________
Title: __________________________
Signature Page to
Second Amendment to Credit Agreement
<PAGE>
EATON VANCE SENIOR INCOME TRUST
By: EATON VANCE MANAGEMENT,
as Investment Advisor
By: _________________________________
Name: ___________________________
Title: __________________________
Signature Page to
Second Amendment to Credit Agreement
<PAGE>
SENIOR DEBT PORTFOLIO
By: BOSTON MANAGEMENT AND RESEARCH, as
Investment Advisor
By: _________________________________
Name: ___________________________
Title: ____________________________
Signature Page to
Second Amendment to Credit Agreement
<PAGE>
OXFORD STRATEGIC INCOME FUND
By: EATON VANCE MANAGEMENT, as Investment
Advisor
By: _________________________________
Name: ___________________________
Title: __________________________
Signature Page to
Second Amendment to Credit Agreement
<PAGE>
VAN KAMPEN SENIOR FLOATING
RATE FUND
By: _________________________________
Name: ___________________________
Title: __________________________
Signature Page to
Second Amendment to Credit Agreement
<PAGE>
KZH CYPRESSTREE-1 LLC
By: _________________________________
Name: ___________________________
Title: __________________________
Signature Page to
Second Amendment to Credit Agreement
<PAGE>
CYPRESSTREE INVESTMENT FUND, LLC
By: CYPRESSTREE INVESTMENT MANAGEMENT
COMPANY, INC., its Managing Member
By: _________________________________
Name: ___________________________
Title: __________________________
CYPRESSTREE INSTITUTIONAL FUND, LLC
By: CYPRESSTREE INVESTMENT MANAGEMENT
COMPANY, INC., its Managing Member
By: _________________________________
Name: ___________________________
Title: __________________________
NORTH AMERICAN SENIOR FLOATING RATE FUND
By: CYPRESSTREE INVESTMENT MANAGEMENT
COMPANY, INC., as Portfolio Manager
By: _________________________________
Name: ___________________________
Title: __________________________
Signature Page to
Second Amendment to Credit Agreement
<PAGE>
MORGAN STANLEY DEAN WITTER
PRIME INCOME TRUST
By: _________________________________
Name: ___________________________
Title: __________________________
Signature Page to
Second Amendment to Credit Agreement
<PAGE>
DRESDNER BANK AG, NEW YORK AND
GRAND CAYMAN BRANCHES
By: _________________________________
Name: ___________________________
Title: __________________________
By: _________________________________
Name: ___________________________
Title: __________________________
Signature Page to
Second Amendment to Credit Agreement
<PAGE>
EQUITY GROUP INVESTMENTS LLC
By: _________________________________
Name: ___________________________
Title: __________________________
Signature Page to
Second Amendment to Credit Agreement
EXHIBIT 10.31
INVESTMENT AGREEMENT
Investment Agreement dated April 19, 1999 (this "Agreement"), among
Davel Communications, Inc., a Delaware corporation (the "Company"), Samstock,
L.L.C., a Delaware limited liability company, and EGI-Davel Investors, L.L.C., a
Delaware limited liability company (collectively, "Investor"), David R. Hill, an
individual residing in the State of Florida ("Shareholder") and, solely for
purposes of consenting to the amendment and restatement of the Original Restated
Agreement (as defined below), Davel Communications Group, Inc., an Illinois
corporation ("Old Davel"). Investor, Shareholder and Old Davel are parties to an
Investment Agreement dated as of June 29, 1998 (the "Original Agreement"). The
Original Agreement was amended and restated on December 22, 1998, by an
agreement (the "Original Restated Agreement") entered into among the Company,
Investor Shareholder and Old Davel. The parties desire to amend and restate the
Original Restated Agreement as set forth herein.
W I T N E S S E T H:
WHEREAS, Investor and Old Davel are parties to a Stock Purchase
Agreement dated May 14, 1998 (the "Company Stock Purchase Agreement") pursuant
to which, among other things, the Company issued and sold, and Investor
purchased from the Company, 1,000,000 shares of common stock, no par value, of
Old Davel ("Old Davel Common Stock");
WHEREAS, Investor and Shareholder are parties to a Stock Purchase
agreement dated May 14, 1998 (the "Shareholder Stock Purchase Agreement")
pursuant to which, among other things, Shareholder has sold, and Investor
purchased from Shareholder, 500,000 shares of Old Davel Common Stock;
WHEREAS, Investor and certain directors and members of management of
the Company (the "Management Shareholders") are parties to a Stock Purchase
Agreement pursuant to which, among other things, the Management Shareholders
sold, and Investor purchased from the Management Shareholders, 123,900 shares of
Common Stock (such Stock Purchase Agreement, together with the Company Stock
Purchase Agreement and the Shareholder Stock Purchase Agreement, the "Stock
Purchase Agreements");
WHEREAS, the closing of the transactions contemplated by each of the
Stock Purchase Agreements occurred concurrently with the execution and delivery
of the Original Agreement;
WHEREAS, concurrently with the execution and delivery of the Original
Agreement, Investor and Shareholder have executed and delivered a Shareholders
Agreement of even date therewith (the "Shareholders Agreement");
WHEREAS, the Company Stock Purchase Agreement and the Shareholder Stock
Purchase Agreement required that the Original Agreement be executed and
delivered by the Company, Investor and Shareholder at or prior to the closing of
the transactions contemplated by such agreements;
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WHEREAS, as of the date of the Original Agreement, Old Davel
consummated a business combination (the "Business Combination") pursuant to
which it became an indirect, wholly owned subsidiary of the Company, all of the
outstanding shares of Old Davel Common Stock were exchanged for shares of common
stock, par value $.01 per share, of the Company (the "Common Stock") and the
Company succeeded to the business of Old Davel;
WHEREAS, the parties entered into the Original Restated Agreement on
December 22, 1998 and also amended and restated the Shareholders Agreement on
such date (such amended and restated agreement being referred to herein as the
"Restated Shareholders Agreement"); and
WHEREAS, the parties desire to amend and restate the Original Restated
Agreement in its entirety as set forth herein.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
1.1 "Affiliate" means, with respect to any person, any other person
that directly, or indirectly through one or more intermediaries, controls or is
controlled by or is under common control with such first person. As used in this
definition "control" (including, with correlative meanings, "controlled by" and
"under common control with") shall mean the possession, directly or indirectly,
of the power to direct or cause the direction of management or policies, whether
through the ownership of securities or partnership or other ownership interests,
by contract or otherwise.
1.2 The terms "beneficial ownership," "person" and "group" shall have
the respective meanings ascribed to such terms pursuant to Regulation 13D-G
adopted by the Securities and Exchange Commission (the "SEC") under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect
on the date hereof. The term "affiliate" shall have the meaning ascribed to such
term pursuant to Rule 12b-2 under the Exchange Act, as in effect on the date
hereof.
1.3 The "Combined Voting Power" at any measurement date shall mean the
total number of votes which could have been cast in an election of directors of
the Company had a meeting of the shareholders of the Company been duly held
based upon a record date as of the measurement date if all Company Voting
Securities then outstanding and entitled to vote at such meeting were present
and voted to the fullest extent possible at such meeting.
1.4 "Company Voting Securities" shall mean, collectively, Common Stock
(or any other security into which Common Stock is exchanged or converted), any
preferred stock of the Company (or any successor to the Company) that is
entitled to vote generally for the election of directors, any other class or
series of Company securities (or securities of any successor to the Company)
that is entitled to vote generally for the election of directors and any other
securities, warrants, options or
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rights of any nature (whether or not issued by the Company or any successor to
the Company) that are convertible into, exchangeable for, or exercisable for the
purchase of, or otherwise give the holder thereof any rights in respect of,
Common Stock (or any other security into which Common Stock is exchanged or
converted), preferred stock of the Company (or any successor to the Company)
that is entitled to vote generally for the election of directors of the Company
or any successor thereto, or any other class or series of Company securities
that is entitled to vote generally for the election of directors of the Company
or any successor thereto.
1.5 "Disinterested Director" means Independent Directors who, with
respect to any contract or transaction being considered or voted upon by the
Company's Board of Directors, have no financial interest in such contract or
transaction, either directly or by virtue of serving as an officer or director
of any other corporation, partnership, association or other organization that is
a party to such contract or transaction; PROVIDED, HOWEVER, an Independent
Director shall not be deemed to have a financial interest in any contract or
transaction by virtue of holding Common Stock or options to acquire Common
Stock.
1.6 "Effective Date" means the date of this Agreement.
1.7 "Independent Director" means a director of the Company who (i) is
not a current or former employee or officer of the Company, (ii) is not serving
as a designee of Investor or Shareholder pursuant to Section 4.3 or 4.4 hereof,
and (iii) does not beneficially own 5% or more of any class of capital stock of
the Company.
1.8 "Investor Group" means (i) Investor, (ii) any member of Investor
and (iii) any Affiliate of Investor (other than the Company) or any member of
Investor; provided, however, that publicly-held entities that would otherwise
fall within this definition (a "Public Investor Affiliate") shall not be treated
as members of the Investor Group hereunder unless any member of the Investor
Group (which, for purposes hereof, shall exclude such publicly-held entity) took
any action, directly or indirectly, to assist, encourage or induce such entity
in taking the relevant action to be attributed to the Investor Group hereunder.
1.9 "Shareholder Group" means (i) Shareholder and (ii) any Affiliate or
Shareholder Family Entity (as defined in the Shareholder's Agreement) of
Shareholder (other than the Company).
1.10 "Shares" means all shares of Company Voting Securities, whether
now owned or hereafter acquired.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2.1 Investor represents and warrants to the Company and Shareholder as
follows:
(a) Investor is a limited liability company duly organized, validly
existing and in good standing under the laws of the jurisdiction in which it is
organized. Investor has the requisite power and authority to enter into this
Agreement and perform its obligations hereunder.
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(b) This Agreement has been duly authorized by all necessary action on
the part of Investor, duly executed and delivered by Investor and constitutes
the legal, valid and binding obligation of Investor, enforceable against it in
accordance with its terms hereof.
(c) Neither the execution and delivery of this Agreement nor the
performance by Investor of its obligations hereunder will conflict with, or
result in any violation of, or default (with or without notice or lapse of time,
or both) under (i) the organizational documents of Investor, or (ii) any
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to Investor or its properties or assets, other than, in the case of clause (ii),
any such conflicts, violations or defaults that, individually or in the
aggregate, would not prevent Investor from performing its obligations under this
Agreement in any material respect.
(d) As of the Effective Date, Investor beneficially owns the number of
Shares set forth opposite Investor's name on EXHIBIT A attached hereto.
2.2 Shareholder represents and warrants to the Company and Investor as
follows:
(a) This Agreement has been duly authorized by all necessary action on
the part of Shareholder, duly executed and delivered by Shareholder and
constitutes a valid and binding obligation of Investor, enforceable against him
in accordance with its terms.
(b) Neither the execution and delivery of this Agreement nor the
performance by Shareholder of his obligations hereunder will conflict with, or
result in any violation of, or default (with or without notice or lapse or time,
or both) under any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to Shareholder or his properties or assets, other than any
such conflicts, violations or defaults that, individually or in the aggregate,
would not prevent Shareholder from performing his obligations under this
Agreement in any material respect.
(c) As of the Effective Date, Shareholder beneficially owned the number
of Shares and options to purchase Shares that are set forth opposite
Shareholder's name on EXHIBIT A attached hereto.
2.3 The Company represents and warrants to Investor and Shareholder as
follows:
(a) The Company is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction in which it is organized.
The Company has the requisite power and authority to enter into this Agreement
and perform its obligations hereunder.
(b) This Agreement has been duly authorized by all necessary action on
the part of the Company, duly executed and delivered by the Company and
constitutes a valid and binding obligation of the Company, enforceable against
it in accordance with its terms.
(c) Neither the execution and delivery of this Agreement nor the
performance by the Company of its obligations hereunder will conflict with, or
result in any violation of, or default (with or without notice or lapse or time,
or both) under any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Company or its properties or assets, other than any
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such conflicts, violations or defaults that, individually or in the aggregate,
would not prevent the Company from performing its obligations under this
Agreement in any material respect.
ARTICLE III
STANDSTILL AGREEMENT
3.1 ACQUISITION OF COMPANY VOTING SECURITIES. Except as the same may be
approved by a majority of the Disinterested Directors in a specific resolution
to that effect adopted prior to the taking of such action, prior to the third
anniversary of the date of the Original Agreement, neither the Investor Group
nor the Shareholder Group shall, directly or indirectly, acquire, offer to
acquire, agree to acquire, make any proposal to acquire, become the beneficial
owner of or obtain any rights in respect of any Company Voting Securities, by
purchase or otherwise, or take any action in furtherance thereof, if the effect
of such acquisition, agreement or other action would be (either immediately or
upon consummation of any such acquisition, agreement or other action, or
expiration of any period of time provided in any such acquisition, agreement or
other action) to increase the aggregate beneficial ownership of Company Voting
Securities by the Investor Group or the Shareholder Group to such number of
Company Voting Securities that represents or possesses greater than 24.0 percent
of the Combined Voting Power, in the case of the Investor Group, and 37.0
percent of the Combined Voting Power of all Company Voting Securities, in the
case of the Shareholder Group. Notwithstanding the foregoing maximum
limitations, (a) no member of the Investor Group or the Shareholder Group shall
be obligated to dispose of any Company Voting Securities beneficially owned that
exceed such maximum limitations if, and solely to the extent that, its
beneficial ownership is or will be increased solely as a result of (i) a
repurchase of any Company Voting Securities by the Company or any of its
subsidiaries if such repurchase was approved by a majority of the Disinterested
Directors or (ii) in the case of any member of the Investor Group, the purchase
of Company Voting Securities by any Public Investor Affiliate unless any member
of the Investor Group took any action, directly or indirectly, to assist,
encourage or induce such Public Investor Affiliate to make such purchase and (b)
the foregoing shall not prohibit any purchase of Company Voting Securities
directly from the Company pursuant to the exercise of any rights,
oversubscription rights or standby purchase obligations in connection with
rights offerings by the Company or exercise of any stock options granted by the
Company or pursuant to any rights set forth in the Restated Shareholders
Agreement. For purposes of calculating the maximum limitations specified above,
all Company Voting Securities that are the subject of an agreement, arrangement
or understanding pursuant to which the Investor Group (or any member thereof) or
the Shareholder Group (or any member thereof) has the right to obtain beneficial
ownership of such securities in the future shall also be deemed to be
outstanding and beneficially owned by the Investor Group (or the applicable
member thereof) or the Shareholder Group (or the applicable member thereof),
respectively.
3.2 PROXY SOLICITATIONS, ETC. Prior to the third anniversary of the
date of the Original Agreement, no member of the Investor Group or the
Shareholder Group shall, in any way, participate in, directly or indirectly, any
"solicitation" of "proxies" (as such terms are used in Regulation 14A
promulgated under the Exchange Act) to vote or consent with respect to any
Company Voting Securities or become a "participant" in an "election contest" (as
such terms are used in Rule 14a-11 under the Exchange Act) with respect to the
Company, except, in each case, with the prior approval
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of the Disinterested Directors; PROVIDED, HOWEVER, that members of the
Shareholder Group may participate in the solicitation of proxies with respect to
matters recommended by the Company's Board of Directors.
3.3 NO GROUPS, VOTING TRUSTS, ETC. Except as the same may be approved
by a majority of the Disinterested Directors in a specific resolution to that
effect adopted prior to the taking of such action, prior to the third
anniversary of the date of the Original Agreement, neither the Investor Group
nor the Shareholder Group shall (a) form, join in or participate in the
formation of a group with respect to any Company Voting Securities, other than
(i) in the case of the Investor Group, a group consisting solely of the members
of the Investor Group, (ii) in the case of the Shareholder Group, a group
consisting solely of the members of the Shareholder Group, and (iii) any group
that may be deemed to exist by virtue of the Restated Shareholders Agreement; or
(b) deposit any Company Voting Securities into a voting trust or subject any
Company Voting Securities to any arrangement or agreement with respect to the
voting thereof, other than (i) the Restated Shareholders Agreement, (ii) in the
case of the Investor Group, any such trust, arrangement or agreement the only
parties to, or beneficiaries of, which are members of the Investor Group or
Permitted Transferees (as defined in the Restated Shareholders Agreement) of
Investor and (iii) in the case of the Shareholder Group, any such trust,
arrangement or agreement the only parties to, or beneficiaries of, which are
members of the Shareholder Group or Permitted Transferees of Shareholder.
3.4 NO SOLICITATION OF BIDDERS. Prior to the third anniversary of the
date of the Original Agreement, neither the Investor Group nor the Shareholder
Group shall, directly or indirectly, assist, encourage or induce any other
person to bid for or acquire outstanding Company Voting Securities in any
transaction or series of related transactions, unless the consummation of such
transaction or series of related transactions requires approval of a majority of
the Board of Directors.
3.5 NON-CIRCUMVENTION. Except as the same may be approved by a majority
of the Disinterested Directors in a specific resolution to that effect adopted
prior to the taking of such action, prior to the third anniversary of the date
of the Original Agreement, neither the Investor Group nor the Shareholder Group
shall take any action, alone or in concert with any other person to circumvent
the limitations set forth in Sections 3.1, 3.2, 3.3 and 3.4 of this Agreement.
3.6 INVESTOR NOMINEES. If, for any reason, (i) any person designated by
Investor as a director of the Company pursuant to Article IV hereof is not
nominated by the Company's Board of Directors for election to the Company's
Board of Directors or the Company's Board of Directors does not recommend such
person to serve as a director of the Company, or (ii) the Board of Directors of
the Company shall change the size of the Board of Directors of the Company from
eight directors (or from seven directors after such time as Justin Maccarone no
longer serves as a director) at such time as Investor is entitled to designate
two directors of the Company's Board of Directors in accordance with the
provisions of Section 4.3 hereof or Shareholder is entitled to designate three
directors of such Board in accordance with Section 4.4 hereof, then, upon the
happening of such event, all of the provisions of this Article III shall lapse
and no longer be of any force or effect; PROVIDED, HOWEVER, that the obligations
of a party under this Article III shall not lapse and cease to be of any force
or effect with respect to either the Investor Group or the Shareholder Group if
any of its respective members shall have breached any provision of this
Agreement and as a result thereof, one of the events described in clause (i) or
(ii) above shall have occurred.
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3.7 SHAREHOLDER NOMINEES. If, for any reason, (i) any person designated
by Shareholder as a director of the Company pursuant to Article IV hereof is not
nominated by the Company's Board of Directors for election to the Company's
Board of Directors or the Company's Board of Directors does not recommend such
person to serve as a director of the Company, or (ii) the Board of Directors of
the Company shall change the size of the Board of Directors of the Company from
eight directors (or from seven directors after such time as Justin Maccarone no
longer serves as a director) at such time as Investor is entitled to designate
two directors of the Company's Board of Directors in accordance with the
provisions of Section 4.3 hereof or Shareholder is entitled to designate three
directors of such Board in accordance with Section 4.4 hereof, then, upon the
happening of such event, all of the provisions of this Article III shall lapse
and no longer be of any force or effect; provided, however, that the obligations
of a party under this Article III shall not lapse and cease to be of any force
or effect with respect to either the Investor Group or the Shareholder Group if
any of its respective members shall have breached any provision of this
Agreement and as a result thereof, one of the events described in clause (i) or
(ii) above shall have occurred.
3.8 ACQUISITIONS BY INVESTOR. Prior to the later of (i) such time as
Investor no longer has any rights under Section 4.3 or (ii) the third
anniversary of the date of the Original Agreement, the Investor Group shall not
solicit, encourage, enter into substantive discussions or negotiations with
respect to, or effect any acquisition of any entity the principal business of
which is the operation of a network of payphones or of any material amount of
assets of any such entity; PROVIDED, HOWEVER, that (i) the Investor Group may
solicit, encourage or enter into discussions or negotiations of which the
Company is generally aware with respect to any such acquisition with the intent
of effecting such acquisition through the Company and (ii) the Investor Group
shall not be prohibited from purchasing and owning equity securities of any such
entity so long as such securities in the aggregate represent no more than five
percent of the outstanding equity securities of such entity. Investor represents
and warrants that from May 14, 1998 through the date of the Original Agreement,
the Investor Group did not solicit, encourage or enter into substantive
discussions or negotiations with respect to any such acquisition except with the
intent of effecting such acquisition through the Company.
ARTICLE IV
VOTING OF COMPANY VOTING SECURITIES AND RELATED MATTERS
4.1 SHAREHOLDER MEETINGS. So long as Shareholder is entitled to
designate three directors of the Company's Board of Directors in accordance with
Section 4.4 hereof, each member of the Investor Group that is a holder of record
of Company Voting Securities shall be present, and each member of the Investor
Group that is a beneficial owner of Company Voting Securities shall cause the
holder of record of such Company Voting Securities to be present, in person or
by proxy, at all meetings of shareholders of the Company so that all Company
Voting Securities owned of record or beneficially by the Investor Group may be
counted for the purpose of determining the presence of a quorum at such
meetings. So long as Investor is entitled to designate two directors of the
Company's Board of Directors in accordance with Section 4.3 hereof, each member
of the Shareholder Group that is a holder of record of Company Voting Securities
shall be present, and each member of the Shareholder Group that is a beneficial
owner of Company Voting Securities shall
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cause the holder of record of such Company Voting Securities to be present, in
person or by proxy, at all meetings of shareholders of the Company so that all
Company Voting Securities owned of record or beneficially by the Shareholder
Group may be counted for the purpose of determining the presence of a quorum at
such meetings.
4.2 ELECTION OF BOARD OF DIRECTORS. (a) So long as Investor is entitled
to designate two directors of the Company's Board of Directors in accordance
with the provisions of Section 4.3 hereof, except to the extent otherwise
provided herein, the Company shall take all reasonably necessary or appropriate
action to assist in the nomination and election as directors of the two
individuals designated by Investor to be elected as directors of the Company.
(b) So long as Shareholder is entitled to designate three directors of
the Company's Board of Directors in accordance with the provisions of Section
4.4 hereof, except to the extent otherwise provided herein, the Company shall
take all reasonably necessary or appropriate action to assist in the nomination
and election as directors of the three individuals specified in Section 4.4
below designated by Shareholder to be elected as directors of the Company.
(c) So long as Investor is entitled to designate two directors of the
Company's Board of Directors in accordance with the provisions of Section 4.3
hereof or Shareholder is entitled to designate three directors of such Board
pursuant to Section 4.4 hereof, none of Investor, Shareholder or the Company
shall take any action to decrease the size of such Board to less than eight
directors (or from seven directors at such time as Justin Maccarone no longer
serves as a director) or to increase the size of such Board to more than eight
directors (or from seven directors at such time as Justin Maccarone no longer
serves as a director).
(d) So long as Shareholder, individually, or Shareholder and Investor,
acting jointly, are entitled to designate three Independent Directors (or two
Independent Directors at such time as Justin Maccarone no longer serves as a
director) in accordance with the provisions of Section 4.5 hereof, except to the
extent otherwise provided herein, the Company shall take all necessary or
appropriate action to assist in the nomination and election as directors of the
two persons designated by Shareholder or Shareholder and Investor, as the case
may be, to be elected as Independent Directors.
(e) So long as Investor is entitled to designate two directors of the
Company's Board of Directors in accordance with the provisions of Section 4.3
hereof (each such director, an "Investor Designee") and Shareholder is entitled
to designate three directors of the Company's Board of Directors in accordance
with Section 4.4 hereof (each such director, a "Shareholder Designee"), each
committee of the Board of Directors shall consist of at least three directors,
and (other than any committee consisting entirely of Independent Directors and
other than the Executive Committee) shall include no more than one Investor
Designee and no more than one Shareholder Designee. The Executive Committee
shall include no more than one Investor Designee, but may include more than one
Shareholder Designee.
4.3 INVESTOR BOARD NOMINEES. So long as the Investor Group beneficially
owns at least 10% of the Combined Voting Power of all Company Voting Securities,
Investor shall have the right to designate two directors of the Company;
PROVIDED, HOWEVER, that at such time as the Investor Group shall no longer
beneficially own at least 10% of the Combined Voting Power of all Company
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Voting Securities, (i) Investor shall cease to have the right to designate any
directors of the Company, (ii) Investor's rights under this Article IV shall
terminate and (iii) Investor shall cause its two designees to resign from the
Board of Directors of the Company.
4.4 SHAREHOLDER BOARD NOMINEES. So long as the Shareholder Group
beneficially owns at least 10% of the Combined Voting Power of all Company
Voting Securities, Shareholder shall have the right to designate three directors
of the Company; PROVIDED, HOWEVER, that at such time as the Shareholder Group
shall no longer beneficially own at least 10% of the Combined Voting Power of
all Company Voting Securities, (i) Shareholder shall cease to have the right to
designate any directors of the Company, (ii) Shareholder's rights under this
Article IV shall terminate and (iii) Shareholder shall cause its three designees
to resign from the Board of Directors of the Company.
4.5 INDEPENDENT DIRECTORS. Prior to the first anniversary of the date
of the Original Agreement, Shareholder shall be entitled to designate two
persons to be elected as Independent Directors, provided that such designees are
reasonably acceptable to Investor (it being understood that at least one
non-employee director of the Company holding such position as of May 14, 1998
shall be acceptable to Investor). Following the first anniversary of the date of
the Original Agreement, Investor and Shareholder shall jointly designate the two
persons to be elected as Independent Directors. Investor and Shareholder shall
cause their designees on the Board of Directors of the Company to take all
reasonably necessary or appropriate action to assist in the nomination and
election as directors of all such nominees as may be selected to serve as
Independent Directors in the manner described above. From and after the date of
the Original Restated Agreement and until the first anniversary of the date of
the Original Restated Agreement, Justin Maccarone will serve as a third
Independent Director as a designee of UBS Capital II LLC.
ARTICLE V
REGISTRATION RIGHTS
5.1 DEFINITIONS. For purposes of this Article V:
(a) The term "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act of 1933, as amended (the "Act").
(b) The term "Registrable Securities" means shares of Common Stock
held, from time to time, by any member of the Investor Group.
(c) The term "Holder" means any member of the Investor Group or (other
than for purposes of Section 5.2) the Shareholder Group that owns of record
Registrable Securities.
(d) The term "Rule 415 Offering" means an offering on a delayed or
continuous basis pursuant to Rule 415 (or any successor rule to similar effect)
promulgated under the Act.
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(e) The term "Shelf Registration Statement" means a registration
statement intended to effect a shelf registration in connection with a Rule 415
Offering.
5.2 SHELF REGISTRATIONS. No later than ninety (90) days after the
Company becomes eligible to use Form S-3 under the Act to register Shares for
resale by shareholders, the Company shall, upon the written request of Investor,
prepare and file with the SEC a Shelf Registration Statement (which shall
include pledgees of any selling shareholder under the caption "plan of
distribution" contained in such Shelf Registration Statement) with respect to
all Shares acquired by Investor pursuant to the Purchase Agreements and use its
reasonable efforts to cause such Shelf Registration Statement to become
effective and keep such registration statement effective until such time as such
Shares have been sold or disposed of thereunder or sold, transferred or
otherwise disposed of (other than pursuant to a pledge of such Registrable
Securities) to a person that is not a Holder. Notwithstanding the foregoing, if
the Company shall furnish to Investor a certificate signed by the Chief
Executive, Chief Operating, or Chief Financial Officer of the Company stating
that, in the good faith judgment of a majority of the Disinterested Directors,
it would be materially detrimental to the Company for such registration
statement to be filed, the Company shall have the right to defer such filing for
a period of not more than 120 days after receipt of Investor's request;
PROVIDED, HOWEVER, that the Company may not utilize this right more than once in
any 12-month period.
5.3 INCIDENTAL REGISTRATION. If the Company proposes to register any of
its voting securities ("Other Securities") for public sale under the Securities
Act, on a form and in a manner which would permit registration of Registrable
Securities for sale to the public under the Securities Act, it will give prompt
written notice to each Holder of its intention to do so, and upon the written
request of a Holder delivered to the Company within fifteen Business Days after
the giving of any such notice (which request shall specify the Registrable
Securities intended to be disposed of by such Holder and the intended method of
disposition thereof) the Company will use its best efforts to effect, in
connection with the registration of the Other Securities, the registration under
the Securities Act of all Registrable Securities which the Company has been so
requested to register by such Holder, to the extent required to permit the
disposition (in accordance with the intended method or methods thereof as
aforesaid) of the Registrable Securities so to be registered, PROVIDED that:
(a) if, at any time after giving such written notice of its intention
to register any Other Securities and prior to the effective date of the
registration statement filed in connection with such registration, the managing
underwriters of such offering or offerings determine that the aggregate amount
of shares to be registered by the Holders of the Registrable Securities could
materially and adversely affect such offering, then the Company may reduce the
number of Registrable Securities of such Holders to be included in such
offering; PROVIDED, that such Holders will be entitled to register the maximum
number of Registrable Securities, together with those shares of Common Stock
held by any other person exercising registration rights, which the underwriters
deem advisable and the Company will allocate the number of Registrable Shares to
be registered for each such Holder on a pro rata basis in accordance with the
number of shares each Holder initially requested to be sold;
(b) the Company shall not be required to effect any registration of
Registrable Securities under this Section 5.3 incidental to the registration of
any of its securities in connection with
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mergers, acquisitions, exchange offers, dividend reinvestment plans or stock
option or other employee benefit plans; and
(c) Holder, cumulatively, shall have the right to exercise registration
rights pursuant to this Section 5.3 without limit during the term hereof.
No registration of Registrable Securities effected under this Section 5.3 shall
relieve the Company of its obligation to effect registrations of Registrable
Securities pursuant to Section 5.2.
5.4 ADDITIONAL OBLIGATIONS OF THE COMPANY. Whenever the Company is
required to effect a registration statement pursuant to Section 5.2 or 5.3, the
Company shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith as
may be necessary to comply with the provisions of the Act with respect to the
disposition of all securities covered thereby.
(b) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities covered by such
registration statement owned by them.
(c) Use its reasonable best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such states or other jurisdictions as shall be reasonably
requested by the Holders, provided that the Company shall not be required to
qualify to do business or to file a general consent to service of process in any
such states or jurisdictions where it is not so subject.
(d) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing, and then
use its best efforts to promptly correct such statement or omission.
Notwithstanding the foregoing and anything to the contrary set forth in this
Section 5.4, each Holder acknowledges that the Company shall have the right to
suspend the use of the prospectus forming a part of a registration statement if
such offering would interfere with a pending corporate transaction or for other
reasons until such time as an amendment to the registration statement has been
filed by the Company and declared effective by the SEC, or until such time as
the Company has filed an appropriate report with the SEC pursuant to the
Exchange Act. Each Holder hereby covenants that it will (a) keep any such notice
strictly confidential, and (b) not sell any shares of Common Stock pursuant to
such prospectus during the period commencing at the time at which the Company
gives the Holder notice of the suspension of the use of such prospectus and
ending at the time the Company gives the Holder notice that it may thereafter
effect sales pursuant to such prospectus. The Company shall only be able to
suspend the use of such prospectus for periods aggregating no more than 90 days
in respect of any registration.
11
<PAGE>
5.5 FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Article V with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities and as may be required from time to time to keep such registration
current.
5.6 EXPENSES OF REGISTRATION. All expenses incurred by or on behalf of
the Company in connection with registrations, filings or qualifications pursuant
to Section 5.3 including, without limitation, all registration, filing and
qualification fees, printers' and accounting fees, and fees and disbursements of
counsel for the Company, shall be borne by the Company. In no event shall the
Company be obligated to bear any underwriting discounts or commissions or
brokerage fees or commissions relating to Registrable Securities or the fees and
expenses of counsel to the selling Holders.
5.7 INDEMNIFICATION. In the event registration of any Registrable
Securities hereunder:
(a) To the extent permitted by law, the Company will indemnify and hold
harmless each Holder and the affiliates of such Holder, and their respective
directors, officers, general and limited partners, agents and representatives
(and the directors, officers, affiliates and controlling persons thereof), and
each other person, if any, who controls such Holder within the meaning of the
Act, against any losses, claims, damages, or liabilities (joint or several) to
which they may become subject under the Act, the Exchange Act or other federal
or state law, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a "Violation"): (i) any untrue
statement or alleged untrue statement of a material fact contained in such
registration statement, including any preliminary prospectus (but only if such
statement is not corrected in the final prospectus) contained therein or any
amendments or supplements thereto, (ii) the omission or alleged omission to
state therein a material fact required to be stated therein, or necessary to
make the statements therein not misleading (but only if such omission is not
corrected in the final prospectus), or (iii) any violation or alleged violation
by the Company in connection with the registration of Registrable Securities
under the Act, the Exchange Act, any state securities law or any rule or
regulation promulgated under the Act, the Exchange Act or any state securities
law; and the Company will pay to each such Holder, affiliate or controlling
person, as incurred, any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; PROVIDED, HOWEVER, that the indemnity agreement contained
in this Section 5.7(a) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Company (which consent shall not be unreasonably withheld),
nor shall the Company be liable in any such case for any such loss, claim,
damage, liability or action to the extent that it arises out of or is based upon
a Violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration by
or on behalf of any such Holder or its Affiliates or controlling person. Each
indemnified party shall furnish such information regarding itself or the claim
in question as an indemnifying party may reasonably request in writing and as
shall be reasonably required in connection with defense of such claim and
litigation resulting therefrom.
12
<PAGE>
(b) To the extent permitted by law, each selling Holder will indemnify
and hold harmless the Company, each of its directors, each of its officers who
has signed the registration statement, each person, if any, who controls the
Company within the meaning of the Act, any underwriter, any other Holder selling
securities in such registration statement and any controlling person of any such
underwriter or other Holder, against any losses, claims, damages or liabilities
(joint or several) to which any of the foregoing persons may become subject,
under the Act, the Exchange Act or other federal or state law, insofar as such
losses, claims, damages or liabilities (or actions in respect thereto) arise out
of or are based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder expressly for use in connection
with such registration; and each such Holder will pay, as incurred, any legal or
other expenses reasonably incurred by any person intended to be indemnified
pursuant to this Section 5.7(b) in connection with investigating or defending
any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that the
indemnity agreement contained in this Section 5.7(b) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of such Holder, which consent shall
not be unreasonably withheld; PROVIDED, that, in no event shall any indemnity
under this Section 5.7(b) exceed the gross proceeds from the offering received
by such Holder.
(c) Promptly after receipt by an indemnified party under this Section
5.7 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 5.7, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties. The failure to deliver written notice to the
indemnifying party within a reasonable time after the commencement of any such
action, if materially prejudicial to its ability to defend such action, shall
relieve such indemnifying party of any liability to the indemnified party under
this Section 5.7 to the extent of such prejudice, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 5.7.
The indemnified party shall have the right, but not the obligation, to
participate in the defense of any action referred to above through counsel of
its own choosing and shall have the right, but not the obligation, to assert any
and all separate defenses, cross claims or counterclaims which it may have, and
the fees and expenses of such counsel shall be at the expense of such
indemnified party unless (i) the employment of such counsel has been
specifically authorized in advance by the indemnifying party, (ii) there is a
conflict of interest that prevents counsel for the indemnifying party from
adequately representing the interests of the indemnified party or there are
defenses available to the indemnified party that are different from, or
additional to, the defenses that are available to the indemnifying party, (iii)
the indemnifying party does not employ counsel that is reasonably satisfactory
to the indemnified party within a reasonable period of time, or (iv) the
indemnifying party fails to assume the defense or does not reasonably contest
such action in good faith, in which case, if the indemnified party notifies the
indemnifying party that it elects to employ separate counsel, the indemnifying
party shall not have the right to assume the defense of such action on behalf of
the indemnified party and the reasonable fees and expenses of such separate
counsel shall be borne by the indemnifying party; PROVIDED, HOWEVER, that, the
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm (in
13
<PAGE>
addition to, to the extent reasonably necessary to employ local counsel, one
firm acting as local counsel) for all indemnified parties.
(d) The obligations of the Company and the Holders under this Section
5.7 shall survive the completion of any offering of Registrable Securities in a
registration statement under this Article V.
(e) Notwithstanding the foregoing, to the extent that the provisions on
indemnification and contribution contained in the underwriting agreement (if
any) entered into in connection with any underwritten public offering of the
Registrable Securities are in conflict with the foregoing provisions, the
provisions in such underwriting agreement shall control.
5.8 REPORTS UNDER THE EXCHANGE ACT. With a view to making available to
the holders the benefits of Rule 144 and any other rule or regulation of the SEC
that may at any time permit a Holder to sell securities of the Company to the
public without registration or pursuant to a registration on Form S-3, the
Company agrees to:
(a) use its reasonable best efforts to make and keep public information
available, as those terms are understood and defined in Rule 144;
(b) use its reasonable best efforts to file with the SEC in a timely
manner all reports and other documents required under the Act and the Exchange
Act; and
(c) furnish to any Holder forthwith upon request (i) a written
statement by the Company as to its compliance with the reporting requirements of
Rule 144, or as to whether it qualifies as a registrant whose securities may be
resold pursuant to Form S-3, (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information (and the Company shall take such
action) as may be reasonably requested in availing any Holder of any rule or
regulation of the SEC which permits the selling of any such securities without
registration or pursuant to such form.
5.9 ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause the Company
to register Registrable Securities pursuant to this Article V may only be
assigned by a Holder to a transferee or assignee of any Registrable Securities
if such transferee or assignee is a member of the Investor Group or the
Shareholder Group, as the case may be.
5.10 WAIVER PROCEDURES. The observance by the Company of any provision
of this Article V may be waived (either generally or in a particular instance
and either retroactively or prospectively) with the written consent of the
Holders of a majority of the Registrable Securities, and any waiver effected in
accordance with this paragraph shall be binding upon each Holder of Registrable
Securities.
5.11 "MARKET STAND-OFF" AGREEMENT. Any Holder of Registrable
Securities, if requested by an underwriter of any registered public offering of
Company securities being sold in a firm commitment underwriting, agrees not to
sell or otherwise transfer or dispose of any Common Stock (or other Company
Voting Securities) held by such Holder other than shares of Registrable
Securities
14
<PAGE>
included in the registration during the seven days prior to, and during a period
of up to 180 days following, the effective date of the registration statement.
Such agreement shall be in writing in a form reasonably satisfactory to the
Company and such underwriter. The Company may impose stop-transfer instructions
with respect to the securities subject to the foregoing restriction until the
end of the required stand-off period.
ARTICLE VI
MISCELLANEOUS
6.1 TERM OF AGREEMENT; CERTAIN PROVISIONS REGARDING TERMINATION. Unless
this Agreement specifically provides for earlier or later termination with
respect to any particular right or obligation, this Agreement shall terminate
(a) in the case of the Investor Group, if the Investor Group beneficially owns
Company Voting Securities in the aggregate representing less than 5% of the
Combined Voting Power of all Company Voting Securities, and (b) in the case of
the Shareholder Group, if the Shareholder Group beneficially owns Company Voting
Securities in the aggregate representing less than 5% of the Combined Voting
Power of all Company Voting Securities.
6.2 LEGEND AND STOP TRANSFER ORDER. To assist in effectuating the
provisions of this Agreement, each of Investor and Shareholder hereby consents
to the placement, in connection with the transactions contemplated by the
Purchase Agreement or otherwise within 10 business days after any Company Voting
Securities become subject to the provisions of this Agreement, of the legend set
forth below on all certificates representing ownership of Company Voting
Securities owned of record or beneficially by any member of the Investor Group
or the Shareholder Group, until such shares are sold, transferred or disposed in
a manner permitted hereby to a person who is not then a member of either such
group:
"The shares represented by this certificate have not been registered
under the Federal Securities Act of 1933, as amended (the "Act") or any
state securities laws of any jurisdiction. No sale, offer to sell,
assignment, pledge, hypothecation, gift, transfer or other disposition
of the shares represented by this certificate may be made unless a
registration statement under the Act with respect to such shares is
then in effect or an exemption from the registration requirements of
the Act is available with respect to said transfer and the requirements
of applicable state laws are satisfied.
The sale, assignment, pledge, hypothecation, gift, transfer or other
disposition of the shares represented by this certificate is subject to
certain restrictions pursuant to an Investment Agreement dated April
19, 1999 and a Shareholders Agreement dated December 22, 1998, in each
case, by and among the Company and certain of its shareholders, copies
of which may be obtained from the Company upon request."
The Company agrees to remove promptly all legends and stop transfer orders with
respect to the transfer of Company Voting Securities being made to a person who
is not then a member of the Investor Group or the Shareholder Group in
compliance with the provisions of this Agreement.
15
<PAGE>
6.3 REMEDIES.
(a) Each party recognizes and acknowledges that a breach by it of
Article III, Article IV or Article V of this Agreement would cause the other
parties to sustain damages for which they would not have an adequate remedy at
law for money damages, and therefore each party agrees that in the event of any
such breach any of the other parties shall be entitled to seek the remedy of
specific performance of such Article III, Article IV or Article V and injunctive
relief and other equitable relief in addition to any other remedy to which it
may be entitled, at law or in equity.
(b) In addition to any other remedy the Company may have under this
Agreement or in law or equity, if any member of the Investor Group or the
Shareholder Group, as the case may be, shall acquire or transfer any Company
Voting Securities in violation of this Agreement, such Company Voting Securities
which are in excess of the number permitted to be owned or controlled by the
Investor Group or Shareholder Group, as the case may be, or which have been
transferred by a member of the Investor Group or the Shareholder Group in
violation of the provisions of this Agreement, will not be voted with respect to
any matter by such member either in person or by proxy.
6.4 ADDITIONAL INVESTOR GROUP PARTIES; SEVERAL OBLIGATIONS. Each member
of the Investor Group or the Shareholder Group that shall become or have the
right to become the record owner of Company Voting Securities shall, promptly
upon becoming such record owner, execute and deliver to the Company a joinder
agreement, agreeing to be legally bound by the terms of this Agreement to the
same extent as if it had signed this Agreement as an original signatory as
Investor or Shareholder, as the case may be; PROVIDED that failure to execute
such an agreement shall not excuse such member's non- compliance with any
provision of this Agreement. No member of the Investor Group or the Shareholder
Group shall transfer securities to another member of its group unless the
transferee shall agree to be bound by this Agreement in the manner specified
above in this Section 7.4.
6.5 NOTICES. All notices, and other communications hereunder shall be
in writing and shall be deemed given if delivered personally, sent by documented
overnight delivery service or, to the extent receipt is confirmed, telecopy, to
the appropriate address or telecopy number set forth below (or at such other
address or telecopy number for a party as shall be specified by like notice):
if to Investor:
Samstock, L.L.C.
Two N. Riverside Plaza
Chicago, IL 60606
Attention: F. Philip Handy
Telecopy Number: (312) 454-1671
16
<PAGE>
with a copy to:
Rosenberg & Liebentritt, P.C.
Two N. Riverside Plaza
Chicago, IL 60606
Attention: Jonathan D. Wasserman
Telecopy Number: (312) 454-0335
if to the Company:
Davel Communications, Inc.
10120 Windhorst Road
Tampa, Florida 33619
Attention: Robert D. Hill
Telecopy Number: (813) 626-9610
with a copy to:
Kirkland & Ellis
200 E. Randolph Drive
Chicago, IL 60601
Attention: R. Scott Falk
Telecopy Number: (312) 861-2200
with an additional copy to:
Davel Communications, Inc.
10120 Windhorst Road
Tampa, Florida 33619
Attention: Theodore C. Rammelkamp, Jr.
Telecopy Number: (813) 740-9406
If to Shareholder:
David R. Hill
10120 Windhorst Road
Tampa, Florida 33619
Telecopy Number: (813) 626-9610
6.6 SEVERABILITY. Any provision hereof which is invalid or
unenforceable shall be ineffective to the extent of such invalidity or
unenforceability, without affecting in any way the remaining provisions hereof.
6.7 AMENDMENTS; WAIVERS. (a) This Agreement may not be modified or
amended except by an instrument or instruments in writing signed by each party
hereto.
17
<PAGE>
(b) The failure of any party hereto to comply with any representation,
warranty, covenant or agreement contained in this Agreement may be waived only
by a written instrument signed by the party granting such waiver. No action
taken pursuant to this Agreement, including any investigation by or on behalf of
any party, shall be deemed to constitute a waiver by the party taking such
action of compliance with any representation, warranty, covenant or agreement
contained in this Agreement, and no failure by any party to take any action with
respect to any breach of this Agreement or default by any other party shall
constitute a waiver of such party's right to enforce any provision hereof or to
take any such action. The waiver by any party hereto of a breach of any
provision hereunder shall not operate as a waiver of any prior or subsequent
breach of the same or any other provision hereunder.
6.8 GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Illinois regardless of the laws
that might otherwise govern under applicable principles of conflicts of law
thereof.
6.9 INTERPRETATION. The headings contained in this Agreement are
inserted for convenience of reference only and shall not affect in anyway the
meaning or interpretation of this Agreement. All references to a Section,
Article, Schedule or Exhibit contained herein mean Sections, Articles, Schedules
or Exhibits of this Agreement unless otherwise stated. All capitalized terms
defined herein are equally applicable to both the singular and plural forms of
such terms.
Whenever the words "include", includes" or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation".
6.10 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same Agreement, and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other parties.
6.11 . Neither this Agreement nor any of the rights, interest or
obligations under this Agreement shall be assigned, in whole or in part, by
operation of law or otherwise by any of the parties without the prior written
consent of the other parties, except that Investor may assign any of or all of
its rights and obligations under this Agreement to any person that is an
Affiliate of Samuel Zell or an Affiliate of any one or more trusts established
for the benefit of Samuel Zell and/or members of his family without the consent
of any other party and Shareholder may assign any or all of his rights and
obligations under this Agreement to one or more Affiliates of Shareholder
(including any Shareholder Family Entity) without the consent of any other
party; provided that, in each case, such person or persons shall have executed
and delivered a joinder to this Agreement and agreed to be bound by the terms
and conditions hereof. Subject to the preceding sentence, this Agreement shall
be binding upon, and inure to the benefit of, the parties hereto and their
respective successors and assigns.
6.12 CONSENT TO JURISDICTION. Each party hereto irrevocably submits to
the nonexclusive jurisdiction of (a) the state courts of the State of Illinois
and (b) any federal district court located in the State of Illinois for the
purposes of any suit, action or other proceeding arising out of this Agreement
or any transaction contemplated hereby.
* * * * *
18
<PAGE>
IN WITNESS WHEREOF, each of Investor, Shareholder, the Company and Old
Davel have executed this Investment Agreement as of the date first above
written.
INVESTOR:
SAMSTOCK, L.L.C.
/s/ DONALD J. LIEBENTRITT
------------------------------------
By: Donald J. Liebentritt
Vice President
EGI-DAVEL INVESTORS, L.L.C.
/s/ DONALD J. LIEBENTRITT
------------------------------------
By: Donald J. Liebentritt
Vice President
SHAREHOLDER:
/s/ DAVID R. HILL
------------------------------------
David R. Hill, individually
COMPANY:
DAVEL COMMUNICATIONS, INC.
/s/ MICHAEL E. HAYES
------------------------------------
By: Michael E. Hayes
Chief Financial Officer
OLD DAVEL:
DAVEL COMMUNICATIONS GROUP, INC.
/s/ MICHAEL E. HAYES
------------------------------------
By: Michael E. Hayes
Chief Financial Officer
19
EXHIBIT 21.1
SUBSIDIARIES
<TABLE>
JURISDICTION OF
ENTITY INCORPORATION OWNER
- ------ ------------- -----
<S> <C> <C>
Adtec Communications, Inc. Florida
Call Communications, Inc. Virginia
Campus Telephone Texas Peoples Telephone Company, Inc.
Central Payphone Services, Inc. Georgia Communications Central Inc.
Communications Central Inc. Georgia Davel Communications Group, Inc.
Communications Central of Georgia, Inc. Georgia Communications Central Inc.
ComTel Computer Corporation Nevada
Davel Communications Group, Inc. Illinois Davel Financing Co., L.L.C.
Davel Financing Co., L.L.C. Delaware Davel Communications Group, Inc.
Davel Mexico, Ltd. Illinois Davel Communications Group, Inc.
DavelTel, Inc. Illinois Davel Communications Group, Inc.
Interstate Communications, Inc. Georgia Telaleasing Enterprises, Inc.
InVision Telecom, Inc. Georgia Communications Central Inc.
Jax Pay Phones, Inc. Florida
Peoples Acquisition Corp. Pennsylvania Peoples Telephone Company, Inc.
Peoples Collectors, Inc. Delaware Peoples Telephone Company, Inc.
Peoples Telephone Company, Inc. New York Davel Financing Co., L.L.C.
Peoples Telephone Company, Inc. of New New Hampshire Peoples Telephone Company, Inc.
Hampshire
Peoples Telephone Company, Inc. of South South Carolina Peoples Telephone Company, Inc.
Carolina
PT Merger Corp. Ohio
PTC Cellular, Inc. Florida Peoples Telephone Company, Inc.
PTC Global Link, Inc. Florida Peoples Telephone Company, Inc.
PTC Security Systems, Inc. Florida Peoples Telephone Company, Inc.
Silverado Communications, Inc. Colorado Peoples Telephone Company, Inc.
Southwest Inmate Pay Telephone Systems, Texas Peoples Telephone Company, Inc.
Inc.
T.R.C.A., Inc. Illinois Davel Communications Group, Inc.
Telaleasing Enterprises, Inc. Illinois Davel Communications Group, Inc.
Telink, Inc. Texas Peoples Telephone Company, Inc.
Telink Telephone Systems, Inc. Georgia Peoples Telephone Company, Inc.
Davel de Mexico, S.de R.L.de C.V. Mexico
Telefonos Publicos de Mexico, S.de R.L. Mexico
de C.V.
</TABLE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report included in Davel Communications, Inc.'s 1999 Form
10-K, into the Company's previously filed Registration Statement on Form S-8 No.
333-6717.
ARTHUR ANDERSEN LLP
Tampa, Florida
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<PERIOD-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<CASH> 7,950 17,162 25,401
<SECURITIES> 0 790 920
<RECEIVABLES> 22,983 30,838 26,166
<ALLOWANCES> 10,880 5,383 5,121
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 31,981 52,484 58,356
<PP&E> 115,558 130,099 84,890
<DEPRECIATION> 22,753 0 0
<TOTAL-ASSETS> 180,761 273,018 180,786
<CURRENT-LIABILITIES> 49,019 45,918 37,028
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 109 105 84
<OTHER-SE> (75,079) 1,649 20,290
<TOTAL-LIABILITY-AND-EQUITY> 180,761 273,018 180,786
<SALES> 175,846 194,818 158,411
<TOTAL-REVENUES> 175,846 194,818 158,411
<CGS> 232,435 220,600 152,368
<TOTAL-COSTS> 232,435 220,600 152,368
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 23,183 20,955 13,581
<INCOME-PRETAX> (80,001) (49,663) (7,041)
<INCOME-TAX> (1,755) 0 2,459
<INCOME-CONTINUING> (78,246) (49,663) 4,510
<DISCONTINUED> 0 607 0
<EXTRAORDINARY> 0 (17,856) 0
<CHANGES> 0 0 0
<NET-INCOME> (78,246) (66,912) (7,408)
<EPS-BASIC> (7.35) (7.59) (1.02)
<EPS-DILUTED> (7.35) (7.59) (1.02)
</TABLE>
