DAVEL COMMUNICATIONS INC - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(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, 2001

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
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DAVEL COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 59-3538257
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

10120 WINDHORST ROAD 33619
TAMPA, FLORIDA (Zip Code)
(address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(813) 628-8000

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

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 21, 2002 the aggregate market value of the voting and nonvoting
common equity held by non-affiliates of the registrant was approximately
$446,778 based upon the closing price on March 21, 2002 of $0.04. As of March
21, 2002, there were 11,169,440 shares of the registrant's Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
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DAVEL COMMUNICATIONS, INC.
FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

Recent Developments......................................... 1

PART I
Item 1 Business.................................................... 2
Item 2 Properties.................................................. 14
Item 3 Legal Proceedings........................................... 14
Item 4 Submission of Matters to a Vote of Security Holders......... 16

PART II
Item 5 Market for the Registrant's Common Stock and Related 17
Stockholder Matters.........................................
Item 6 Selected Consolidated Financial Data........................ 17
Item 7 Management's Discussion and Analysis of Financial Condition 18
and Results of Operations...................................
Item 7A Quantitative and Qualitative Disclosures About Market 33
Risk........................................................
Item 8 Financial Statements and Supplementary Data................. 34
Item 9 Changes In and Disagreements with Accountants on Accounting 63
and Financial Disclosure....................................

PART III
Item 10 Directors and Executive Officers............................ 64
Item 11 Executive Compensation...................................... 66
Item 12 Security Ownership of Certain Beneficial Owners and 73
Management..................................................
Item 13 Certain Transactions........................................ 74

PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 75
8-K.........................................................

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. A description
of 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." Readers of this Report are
encouraged to read these cautionary statements carefully.

RECENT DEVELOPMENTS

On February 21, 2002, Davel Communications, Inc. (the "Company" or "Davel")
announced that it had signed a definitive agreement to merge with PhoneTel
Technologies, Inc., the nation's second-largest publicly traded independent
payphone service provider ("PhoneTel"). In the merger (the "PhoneTel Merger"),
PhoneTel will become a wholly owned subsidiary of Davel. Davel also announced
that it had executed a Seventh Amendment to Credit Agreement and Consent and
Waiver (the "Seventh Amendment") with respect to its existing credit agreement
(the "Old Credit Agreement") and secured a new $10.0 million senior credit
facility with Madeleine L.L.C. and ARK CLO 2000-1, Limited (the "New Senior
Credit Facility"), of which, $5.0 million was made available to each of Davel
and PhoneTel, to help finance certain operating and transaction-related
expenses.

The merger agreement, which was unanimously approved by the boards of both
companies, is conditioned upon a substantial debt restructuring for each
company. In connection with the merger, Davel's existing secured lenders under
the Old Credit Facility (the "Junior Lenders") have agreed to exchange a
substantial amount of debt for Davel common stock, to make certain amendments to
restructure the remaining debt and to subordinate the existing debt to the New
Senior Credit Facility. The Seventh Amendment waived certain payments due July
15, 2001, October 15, 2001 and January 11, 2002 until August 31, 2002. Davel
currently anticipates that the payments due on August 31, 2002 under the Old
Credit Facility will be refinanced through the restructuring commitment
described below.

In connection with Davel's debt exchange, the Junior Lenders will own 93%
of Davel's outstanding common stock immediately prior to the merger, with the
remaining junior secured debt not to exceed $63.5 million (as compared to
approximately $276 million outstanding at the time of the signing of the merger
agreement). Existing shareholders of Davel common stock will own 3% of Davel's
outstanding shares, and 4% of the common stock will be reserved for the issuance
of stock options to Davel employees.

Immediately following the merger, current PhoneTel shareholders and
optionholders will own approximately 3.28% of the shares of Davel common stock
on a fully diluted basis and current Davel shareholders and optionholders will
own approximately 1.91%. Of the remaining shares, 4.00% are intended to be
reserved for issuance upon exercise of employee stock options, and the
companies' current lenders will own approximately 90.81% of Davel common stock.
Cash will be paid in lieu of fractional shares in the PhoneTel Merger.

The current lenders of Davel and PhoneTel have delivered a Commitment
Letter, dated as of February 19, 2002, pursuant to which the then outstanding
debt of both entities, which totaled approximately $340 million at the time of
the signing of the merger agreement, will be reduced to $100 million through the
debt-for-equity exchange to be effected at the time of the PhoneTel Merger. The
PhoneTel Merger is currently expected to close in the third quarter of 2002.

The PhoneTel Merger is subject to approval by the shareholders of both
companies and the receipt of material third party and governmental approvals and
consents. In conjunction with the transaction, the

1

Company will also seek shareholder approval to increase the number of authorized
shares of common stock from 50,000,000 to 1,000,000,000 and to increase the
number of shares issuable pursuant to the Company's 2000 Long-Term Equity
Incentive Plan. No date has been set for the Davel stockholders meeting.

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 Telephone 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 Telephone 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. 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, 2001, the Company owned and operated a network of
approximately 55,000 payphones in 44 states and the District of Columbia,
providing it with one of the broadest geographic ranges of coverage 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, collect, and
third-party billed calls using the Company's preselected operator services
providers such as Sprint and AT&T) and dial-around calls (utilizing a 1-800,
1010XXX or similar "toll free" dialing method to select a carrier other than the
Company's pre-selected carrier). A significant portion of the Company's
payphones are located in high-traffic areas such as convenience stores, shopping
centers, truck stops, service stations, and grocery stores.

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 use by the general public. Industry estimates
suggest that there are approximately 2.0 million payphones currently operating
in the United States, of which approximately 1.2 million are operated by the
Regional Bell Operating Companies ("RBOCs") and approximately 0.25 million are
operated by the smaller independent local exchange carriers ("LECs") and the
major long distance carriers such as Sprint and AT&T. The remaining
approximately 0.55 million payphones are owned or managed by the more than 1,000
IPPs currently operating in the United States.

The Company incurred losses of approximately $43.4 million, $111.5 million,
and $78.7 million, for the years ended December 31, 2001, 2000, and 1999,
respectively. These losses were primarily attributable to increased competition
from providers of wireless communication services and the impact on the
Company's revenue of certain changes in customer calling patterns in favor of
1-800 type calls. In addition, the Company was unable to make (i) debt
amortization payments of approximately $15.7 million and interest payments of
approximately $12.5 million, which would have been due and payable on January
12, 2001 but for the Company's signing a Sixth Amendment to its loan agreement
that extended the due date to January 11, 2002 and (ii) certain amortization
payments due July 15, 2001, October 15, 2001 and January 11, 2002, which were
extended pursuant to the Seventh Amendment to August 31, 2002. These factors,
among others, have raised substantial doubt about the Company's ability to
continue as a going concern.

The Company believes that, given the current state of the payphone
industry, the PhoneTel Merger provides the best opportunity to return to
going-concern status. Moreover, the Company believes that the PhoneTel Merger
will allow it to improve its market density and leverage its existing
infrastructure through more efficient service and collection routes, which will
lead to a lower overall cost structure. In order to pursue this strategy, the
Company has entered into the New Senior Credit Facility and agreed to the
debt-for-equity exchange with the Junior Lenders, which will be substantially
dilutive to existing shareholders.

2

Notwithstanding the New Senior Credit Facility, pursuant to which Davel
received new funding of $5 million on February 21, 2002, in the absence of
improved operating results and the successful completion of the PhoneTel Merger
and the debt-for-equity exchange, the Company may face liquidity problems and
might be required to dispose of material assets or operations to fund its
operations, to make capital expenditures and to meet its debt service and other
obligations. There can be no assurances as to the ability to execute such sales,
or the timing thereof, or the amount of proceeds that the Company could realize
from such sales. As a result, doubt exists about the Company's ability to
continue as a going concern.

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 and subsequent 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 and
subsequent FCC and state regulatory rulings, 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 typically provide payphone service
primarily in their own respective territories, and are now authorized to share
in the payphone revenues generated from telecommunications services between
LATAs ("interLATA"). Long-distance companies, such as Sprint, AT&T, MCI and
Worldcom, provide interLATA services, and in some circumstances, 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-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

Provide Customer Service. The Company is currently restricted from making
acquisitions (other than pursuant to the PhoneTel Merger, as to which all of
Davel's lenders have consented) by the New Senior Credit Facility and the Old
Credit Facility (see "Management's Discussion and Analysis of Financial

3

Condition and Results of Operations- Liquidity and Capital Resources"). However,
the Company will continue to seek key opportunities, as strategic combinations
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 such acquisition would require approval from the Company's lenders.
Concentrating its payphones in close proximity allows the Company to plot more
efficient collection and maintenance 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, the Company is able to leverage its
existing infrastructure through more efficient service and collection routes
which leads to a lower overall cost structure. Since the integration of Peoples
Telephone and the implementation of the previously announced Servicing Agreement
with PhoneTel, Davel has been able to increase the number of payphones per
technician as a result of greater payphone density, workforce rationalizations
and automation of its field route operations.

The Company's objective is to continue to rationalize its overall cost
structure, improve route density and service quality, monitor underperforming
telephones and place an emphasis on expanding in economically favorable
territories.

The Company has implemented the following strategy to meet its objective.

Utilize Advanced Payphone Technology. The Company's payphones utilize
"smart" technology which provides voice synthesized calling instructions,
detects and counts coins deposited during each call, informs the caller at
certain intervals of the time remaining on each call, identifies the need for
and the amount of an additional deposit in order to continue the call, and
provides other functions associated with the completion of calls. Through the
use of a non-volatile, electronically erasable, programmable 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 types of
calls to particular carriers. The Company's payphones can also distinguish coins
by size and weight, report to its central host computer 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 a blend of enterprise-class proprietary and non-proprietary
software that continuously tracks coin and non-coin revenues from each payphone,
as well as expenses relating to each payphone, including commissions payable to
the Location Owners. The Company's technology also allows it to efficiently
track and facilitate the activities of its field technicians via interactions
from the pay telephone with the Company's computer systems and technical support
personnel at the Company's headquarters.

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 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.

Consolidation of Carrier Services. As part of its strategy to reduce costs
and improve service quality, the Company has consolidated its coin and non-coin
services with a limited number of major carriers. This enables the Company to
maximize the value of its traffic volumes and has translated into more favorable
economic and service terms and conditions in these key aspects of its business.

Rationalization Of Low-Revenue Phones. In recent years, the Company has
experienced revenue declines as a result of increased competition from cellular
and other telecommunications products. As a result of declining revenues, the
Company's strategy is to remove low revenue payphones that do not meet the
Company's minimum criteria of profitability and to promote improved density of
the Company's payphone routes. During the most recent two years ending December
31, 2001 and 2000, the Company removed 13,500

4

and 10,800 payphones respectively. The Company has an ongoing program to
identify additional payphones to be removed in 2002 based upon low revenue
performance and route density considerations.

Pursue Regulatory Improvements. The Company continues to actively pursue
regulatory changes that will enhance its near and long-term performance and
viability. Notably, the Company is pressing, through regulatory channels, the
reduction in line and related charges and improvements to the dial around
compensation collection system that are critical to the economic viability of
the payphone business generally and the Company's operations specifically.

OPERATIONS

As of December 31, 2001 and December 31, 2000, the Company owned and
operated approximately 55,000 and 67,000 payphones, respectively.

Coin Calls

The Company's payphones generate coin revenues primarily from local calls.
Historically, the maximum rate that LECs and IPPs 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
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
and, beginning in November 2001, to $0.50. See "-- Regulation-Effect of Federal
Regulation of Local and Dial-Around Calls."

Long distance coin calls are typically carried by long distance carriers
that have contracted to provide transmission services to the Company's
payphones. The Company pays a charge to the long-distance carrier each time the
carrier transports a long-distance call for which the Company receives coin
revenue from an end user.

Non-Coin Calls

The Company also receives revenues from non-coin calls made from its
payphones. Traditional non-coin calls include credit card, calling card, prepaid
calling card, collect and third-party billed calls where the caller dials "0"
plus the number or simply dials "0" for an operator.

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 operator service providers to handle these calls and perform all
associated functions, while paying the Company a commission on the revenues
generated thereby.

The Company realizes additional non-coin revenue from various carriers
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
carrier company other than the one designated by the payphone operator or using
a traditional "toll free" number, generally by dialing a 1-800/888/877/866
number, a 950-XXXX number or a seven-digit "1010XXXX" code.

5

Payphone Base

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 decrease in Company payphones in operation.

The Company had approximately 55,000 payphones in operation in forty-four
states and the District of Columbia as of December 31, 2001, compared with
approximately 67,000 in operation as of December 31, 2000. The five states
possessing the greatest numbers of installed telephones as of December 31, 2001
were: Florida (9,376), New York (4,725), Virginia (4,115), Tennessee (3,445),
and North Carolina (3,078).

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 and shopping centers. 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. The Company recognizes, however, that recent changes in
payphone traffic volumes and usage patterns being experienced on an
industry-wide basis warrant a continued assessment of the locational deployment
of its payphones.

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.

In 2001, the Company continued its aggressive monitoring of the payphone
base, which began in 1999, and removed under-performing payphones, which are
available for relocation at sites with greater potential for profitability.

Service and Maintenance

The Company employs field service technicians, each of whom collects coin
boxes and cleans and maintains a route of 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 Company's polling and electronic tracking and trouble reporting systems 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 payphones as well as the number of employees needed to service the
payphones.

Customers, Sales and Marketing

The Location Owners with whom the Company contracts are a diverse group of
small, medium 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 stations, grocery stores and shopping
centers.

6

As of December 31, 2001, corporate payphone accounts of 50 or more payphones
represented approximately 60 percent 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 transmission and operator 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 some parts and equipment from various manufacturers
and otherwise utilizes parts from payphones removed from field service for
repair and installation of payphones. The Company primarily obtains local line
access from various LECs, including BellSouth, Verizon, SBC Communications,
Qwest 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, Qwest and others.

The Company expects the basic availability of such products and services to
continue in the future; however, the continuing availability of alternative
sources cannot be assured. Although the Company is not aware of any current
circumstances that would require the Company to seek alternative suppliers for
any material portion of the products or services used in the operation of its
business, transition from the Company's existing suppliers, if necessary, could
have a disruptive effect on the Company's operations and could give rise to
unforeseen delays and/or expenses.

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, refurbishes or replaces payphones from standard payphone
components either obtained from the Company's sizable inventory or 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. On the occasion when components are not available from
inventory, the components can be purchased by the Company from several
suppliers. The Company does not believe that the loss of any single 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 applicable regulatory authorities,
including free access to local emergency ("911") telephone numbers, dial-around
access to all available carriers, 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, 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.

7

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 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 assembly and repair support
operations provide materials, equipment, spare parts and accessories to the
field. Each of the Company's division offices and/or each of the technician's
vans maintains inventories for immediate deployment in the field.

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 a federal court
subsequently ruled that the FCC should have provided compensation for these toll
free calls.

In 1996, recognizing that IPPs 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:

- create a standard regulatory scheme for all public payphone service
providers;

- 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;

- terminate subsidies for LEC payphones from LEC regulated rate-base
operations;

- prescribe, at a minimum, nonstructural safeguards to eliminate
discrimination between LECs and IPPs and remove the LEC payphones from
the LEC's regulated asset base;

8

- provide for the RBOCs to have the same rights that IPPs 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;

- provide for the right of all PSPs 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;

- 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

- 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 interexchange
carriers ("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 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 (the "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

9

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's
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 may 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, which will be
adjusted to $0.238 effective April 21, 2002. Both PSPs and IXCs petitioned the
Court for review of the 1999 Payphone Order's determination of the dial-around
compensation rate. On June 16, 2000, the Court affirmed the 1999 Payphone Order
setting a 24-cent dial-around compensation rate. On all the issues, including
those raised by the IXCs and the payphone providers, the Court applied the
"arbitrary and capricious" standard of review, and found that the FCC's rulings
were lawful and sustainable under that standard. As a result of the Court's June
16, 2000 decision, the 24-cent dial-around compensation rate is likely to remain
in place until April 21, 2002, when it will be adjusted to $0.238. The FCC has
stated its intention to conduct a third-year review of the rate, but no review
has yet been commenced. There is pending a Petition for Reconsideration of the
1999 Payphone Order filed with the FCC by the IPPs, which has yet to be ruled on
by the FCC. In view of the Court's affirmation of the 1999 Payphone Order, it is
unlikely that the FCC will adopt material changes to the key components of the
Order (other than the pending retroactive application issue, discussed below)
pursuant to the pending Reconsideration Petition, although no assurances can be
given.

On April 5, 2001, the FCC released an order that is expected to have a
significant impact on the obligations of telecommunications carriers to pay
dial-around compensation to PSPs. The effect of the decision is to require that
the first long distance carrier to handle a dial-around call originating from a
pay telephone has the obligation to track and pay compensation on the call,
regardless of whether other carriers may subsequently transport or complete the
call. This modified rule became effective on November 23, 2001. The Company
believes that this modification to the dial-around compensation system will
result in a significant increase to the number of calls for which the Company is
able to collect such compensation. Because, however, the FCC ruling is subject
to a pending petition for court review and the system modification is as yet
untested, no assurances can be given as to the precise timing or magnitude of
revenue impact that may flow from the decision.
10

The new 24-cent rate became effective April 21, 1999. The 24-cent rate will
also be applied retroactively to the period beginning on October 7, 1997 and
ending on April 20, 1999 (the "intermediate period"), less a $0.002 amount to
account for FLEX ANI payphone tracking costs, for a net compensation of $0.238.
There is, however, a pending petition of reconsideration of this retroactive
application of the rate. The 1999 Payphone Order deferred a final ruling on the
treatment of the period beginning November 7, 1996 and ending on October 6, 1997
(the "interim period") to a later order. The FCC further ruled that, after the
establishment of an interim period compensation rate and an allocation of the
rate among carriers, a true-up may be made for all payments or credits (with
applicable interest) due and owing between the IXCs and the PSPs, including
Davel, for both the interim and intermediate periods.

In a decision released January 31, 2002, which remains subject to
reconsideration, the FCC partially addressed the remaining issues concerning
interim and intermediate period compensation. The FCC adjusted the per-call rate
to $0.229, for the interim period only, to account for a different method of
calculating the delay in IXC payments to PSPs for the interim period, and
determined that the total interim period compensation rate should be $33.89 per
payphone per month ($0.229 times an average of 148 calls per payphone per
month). The FCC deferred to a later, as yet unreleased, order its determination
of the allocation of this total compensation rate among the various carriers
required to pay compensation for the interim period. It is possible that the
final resolution of the timing and other issues relating to these retroactive
adjustments and the outcome of any related administrative or judicial review of
such adjustments 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 during 1997 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 for the year
ended December 31, 1997, related to reduced dial-around compensation, is
approximately $3.3 million. Based on the reduction in the per-call compensation
rate in the 1999 Payphone Order, the Company further reduced non-coin revenues
by $9.0 million during 1998. The adjustment included approximately $6.0 million
to adjust revenue recorded during the period November 7, 1996 to October 6, 1997
from $37.20 per-phone per-month to $31.18 per phone per month ($0.238 per call
multiplied by 131 calls). The remaining $3.0 million of the adjustment was to
adjust revenues recorded during the period October 7, 1997 through December 31,
1998 to actual dial-around call volumes for the period multiplied by $0.238 per
call.

The Company recorded dial-around compensation revenue, net of adjustments,
of approximately $19.1 million for the year ended December 31, 2001; $22.9
million for the year ended December 31, 2000; and approximately $35.9 million
for the year ended December 31, 1999.

The Company believes that it is legally entitled to fair compensation under
the 1996 Telcom Act for dial-around call 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 Telcom Act for this period 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 after April 21, 2002) constitutes the current level of "fair"
compensation, as determined by the FCC, certain carriers have asserted in the
past, are asserting and are expected to assert in the future that the
appropriate level of fair compensation should be lower than $0.238 per call. If
the level of fair compensation is ultimately determined to be an amount less
than $0.238 per call, such determination could have a material adverse effect on
the Company's results of operations and financial position.

Local Coin Call Rates. To ensure "fair compensation" for local coin calls,
the FCC previously determined that local coin rates from payphones should be
generally deregulated by October 7, 1997, but provided for possible
modifications or exemptions from deregulation upon a detailed showing by an
individual state that there are market failures within the state that would not
allow market-based rates to develop. On

11

July 1, 1997, a federal court issued an order that upheld the FCC's authority to
deregulate local coin call rates. In accordance with the FCC's ruling and the
court order, certain LECs and IPPs, including the Company, have increased rates
for local coin calls. Given the lack of direction on the part of the FCC on
specific requirements for obtaining a state exemption, the Company's inability
to predict the responses of individual states or the market, and the Company's
inability to provide assurance that deregulation, if and where implemented, will
lead to higher local coin call rates, the Company is unable to predict the
ultimate impact on its operations of local coin rate deregulation. The Company
has, however, experienced, and continues to experience, lower coin call volumes
on its payphones resulting from increased local coin calling rates, as well as
from the growth in wireless communication services, changes in call traffic and
the geographic mix of the Company's payphones.

Other Provisions of The 1996 Telecom Act and FCC Rules

As a whole, the 1996 Telecom Act and FCC Rules significantly altered 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, there are
numerous uncertainties in the implementation and interpretation of the 1996
Telecom Act that may moderate any long-term positive impact. The Company has
identified the following such uncertainties:

- 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.

- 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 existing 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
that were in effect as of February 8, 1996 were grandfathered and will
remain in effect pursuant to their terms.

- 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.

- 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 may be readdressed as
circumstances change.

Billed Party Preference and Rate Disclosure

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.

12

State and Local Regulation

State regulatory authorities have been primarily 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 2001, 2000 or 1999.

COMPETITION

The Company competes for payphone locations directly with LECs and other
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 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 that its principal competition is from 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 have negatively impacted the usage of payphones throughout the
nation.

13

The Company believes that the competitive factors among payphone providers
are (1) the commission payments to a Location Owner, (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.

EMPLOYEES

As of December 31, 2001, the Company had 377 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 56,000 square feet of space in Tampa,
Florida that includes two locations for executive office space and facilities
for the assembly and repair of payphones. The Company also leases space for its
17 division offices for payphone operations in various geographic locations
across the country.

ITEM 3. LEGAL PROCEEDINGS

In December 1995, Cellular World, Inc. filed suit in Dade County Circuit
Court against the Company's affiliates, Peoples Telephone and PTC Cellular,
Inc., alleging tortious interference with Cellular World's trade secrets. The
matter proceeded to trial, during which the Company and Cellular World agreed to
settle and resolve the dispute in its entirety. Pursuant to the parties'
agreement, the Company agreed to pay Cellular World a total of $1.5 million. Due
to the Company's subsequent default under the settlement agreement, the parties
entered into discussions for purposes of negotiating a revised payment schedule.
Notwithstanding the parties' negotiations, on April 12, 2001, Cellular World
obtained a judgment in the amount of $750,000 plus interest in accordance with
the settlement agreement. On or about June 11, 2001, the parties agreed to a
payment schedule, and, on or about October 15, 2001, the Company fully satisfied
the judgment.

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 (acquired by the Company on
December 23, 1998) alleging that Peoples Telephone 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 Telephone.

Effective February 19, 2002, the parties to the lawsuit signed a Settlement
Agreement and Mutual Release ("Settlement Agreement"). The Settlement Agreement
provides that, upon the closing of the PhoneTel Merger, all parties to the
lawsuit will release and discharge all claims and liability against all other
parties, without an admission of liability by any party. The Settlement
Agreement further provides that as promptly as possible after the closing of the
PhoneTel Merger, the parties will execute a Joint Stipulation and Order for
Dismissal with Prejudice requesting that the Delaware Chancery Court dismiss the
lawsuit in its entirety, with prejudice.

14

In December 1999, the Company and its affiliate Telaleasing Enterprises,
Inc. were sued in the United States District Court, Central District of
California, by Telecommunications Consultant Group, Inc. ("TCG") and U.S.
Telebrokers, Inc. ("UST"), two payphone consulting companies which allege to
have assisted the Company in obtaining a telephone placement agreement with CSK
Auto, Inc. The suit alleges that the Company breached its commission agreement
with the plaintiffs based on the Company's alleged wrongful rescission of its
agreement with CSK Auto, Inc. Plaintiffs' amended complaint alleges damages in
excess of $700,000. The Company moved to dismiss the complaint, and, on August
24, 2000, the Court denied the Company's motion. The Company subsequently
answered the complaint and asserted a counterclaim, seeking declaratory relief.
On October 13, 2000, plaintiffs answered the counterclaim, denying its material
allegations. The Company, during a mediation conference held on October 29,
2001, agreed to a confidential settlement of this case, pursuant to which the
case was dismissed with prejudice in exchange for payments to the plaintiffs,
the sum of which was not material to the Company and was recorded in the third
quarter.

In March 2000, the Company and its affiliate Telaleasing Enterprises, Inc.
were sued in a related action in Maricopa County, Arizona Superior Court by CSK
Auto, Inc. ("CSK"). The suit alleges that the Company breached a location
agreement between the parties. CSK's complaint alleges damages in excess of $5
million. The Company removed the case to the U.S. District Court for Arizona and
moved to have the matter transferred to facilitate consolidation with the
related case in California brought by TCG and UST. On October 16, 2000, the U.S.
District Court for Arizona denied the Company's transfer motion and ordered the
case remanded back to Arizona state court. On November 13, 2000, the Company
filed its Notice of Appeal of the remand order to the United States Court of
Appeals for the Ninth Circuit. The appeal and underlying suit are in their
initial stages, and discovery is underway. The Company intends to vigorously
defend itself in the case.

On or about December 15, 2000, the Company filed and served its Amended
Complaint against LDDS WorldCom, Inc., MCI WorldCom Network Services, Inc., MCI
WorldCom Communications, Inc., and MCI WorldCom Management Company, Inc.
(collectively "Defendants"), claiming a violation of the 1996 Telecom Act and
breach of contract and seeking damages and equitable and injunctive relief
associated with Defendants' wrongful withholding of approximately $3.1 million
in dial-around compensation due to the Company, based upon an alleged, unrelated
indebtedness. Although the Company believed it possessed meritorious claims in
the case, given the uncertainty of litigation, the parties agreed at a mediation
conference to a settlement agreement, which effected, in exchange for
consideration paid to the Company, the dismissal of this suit and preserved the
Company's 1996 Telecom Act claim for prosecution in an action currently pending
in another forum. On July 23, 2001, the Court dismissed the case.

In February 2001, Picus Communications, LLC, a debtor in Chapter 11
bankruptcy in the United States Bankruptcy Court for the Eastern District of
Virginia, brought suit against the Company and its wholly owned subsidiary,
Telaleasing Enterprises, Inc., in the United States District Court for the
Eastern District of Virginia, claiming unpaid invoices of over $600,000 for
local telephone services in Virginia, Maryland, and the District of Columbia.
The Company sought relief from the bankruptcy court to assert claims against
Picus and answered Picus' complaint in the district court, denying its material
allegations. On or about April 2, 2001, Picus moved the district court to
dismiss its case and indicated that it may file its claim as an adversary
proceeding with the bankruptcy court. As of the date hereof, Picus has yet to do
so. In such an event, the Company intends to reassert its counterclaim in
bankruptcy court. On March 13, 2001, the Company filed a proof of claim in the
bankruptcy court to recover damages based on Picus's breach of contract and
failure to secure and pay federally mandated dial-around compensation for the
Company's benefit. On September 21, 2001, the Company filed an application for
administrative payment with the bankruptcy court seeking approximately $1.5
million in post-petition damages incurred by the Company as a result of Picus's
actions. The Company believes it has meritorious defenses and counterclaims
against Picus and intends to vigorously defend itself and pursue recovery from
Picus on its counterclaims. The Company cannot at this time predict its
likelihood of success on the merits.

On or about January 27, 2002, Davel was served with a complaint, in an
action captioned Sanchez et al. v. DavelTel, Inc. d/b/a Davel Communications,
Inc. et al, brought in the district court for Cameron County, Texas. Plaintiffs
claim that defendants were negligent and such negligence proximately caused the

15

death of Thomas Sanchez, a former Davel employee. The matter has been forwarded
to Davel's insurance carrier for action. While Davel believes it possesses
adequate insurance coverage for the case and has meritorious defenses, the
matter is in its initial stages. Accordingly, Davel cannot at this time predict
its likelihood of success on the merits.

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

On January 10, 2002, the Company held its 2001 Annual Meeting of
Stockholders at the Company's headquarters in Tampa, Florida. At the Annual
Meeting, stockholders were asked to vote on the election of the nominated slate
of directors. It was the intention of the persons named in the form of proxy
accompanying the Company's 2001 Proxy Statement to vote the shares represented
by any completed proxies in favor of the six nominees named below.

The following nominees were proposed and elected to the Company's Board of
Directors, to serve until the next annual meeting of stockholders or until their
successors are elected and qualified:

Raymond A. Gross
David R. Hill
Robert D. Hill
Donald J. Liebentritt
William C. Pate
Theodore C. Rammelkamp, Jr.

The following votes were tabulated at the 2001 Annual Meeting with respect
to the election of directors:

16

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.

Market Information. Davel Common Stock trades on the NASDAQ
over-the-counter bulletin board under the symbol "DAVL.OB'. 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, or bulletin board system,
from January 1, 1999 through December 31, 2001.

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(1) The company ceased trading on the NASDAQ National Market System effective
May 15, 2000. Thereafter, the Company began trading on the NASDAQ
over-the-counter bulletin board.

As of March 21, 2002, there were approximately 865 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 21,
2002 was $0.04 per share.

Dividends. The Company did not pay any dividends on its Common Stock
during 2001 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 repay indebtedness and to finance the growth and development
of the Company's business. The payment of dividends is effectively prohibited by
the Company's Old Credit Facility and New 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. In the year ended December 31,
2001, the Company did not sell any securities that were not registered under the
Securities Act of 1933.

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 Annual Report on Form 10-K and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

17

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(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.

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.

18

GENERAL

During 2001, 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 deposited in the payphones.

Non-coin calls include credit card, calling card, collect, and third party
billed calls, handled by operator service providers selected by the Company.
Non-coin call revenues are recognized based upon the commission received by the
Company from the carriers of these calls.

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 or to make a traditional "toll free" call
(dial-around calls). Revenues from dial-around calls are recognized based on
estimates of calls made using most recent actual historical data and the Federal
Communications Commission mandated dial-around compensation rate in effect. This
is commonly referred to as "dial-around" access. See "Business-Regulation."

The principal costs related to the ongoing operation of the Company's
payphones include telephone charges, commissions, service, maintenance and
network costs. Telephone charges consist of payments made by the Company to LECs
and long distance carriers for line 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.

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 IPPs, including the Company,
increased rates for local coin calls from $0.25 to $0.35 after October 7, 1997
and, beginning in November 2001, to $0.50. In line with the industry standard,
substantially all of the Company's payphones now charge $0.50 per local coin
call. In 2001, 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

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 for
dial-around calls. The FCC applied a market-based,

19

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 (the "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's
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 may 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.

20

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, which will be
adjusted to $.238 effective April 21, 2002. Both PSPs and IXCs petitioned the
Court for review of the 1999 Payphone Order's determination of the dial-around
compensation rate. On June 16, 2000, the Court affirmed the 1999 Payphone Order
setting a 24-cent dial-around compensation rate. On all the issues, including
those raised by the IXCs and the payphone providers, the Court applied the
"arbitrary and capricious" standard of review, and found that the FCC's rulings
were lawful and sustainable under that standard. As a result of the Court's June
16, 2000 decision, the 24-cent dial-around compensation rate is likely to remain
in place until April 21, 2002, when it will be adjusted to $.238. The FCC has
stated its intention to conduct a third-year review of the rate, but no review
has yet been commenced. There is pending a Petition for Reconsideration of the
1999 Payphone Order filed with the FCC by the IPPs, which has yet to be ruled on
by the FCC. In view of the Court's affirmation of the 1999 Payphone Order, it is
unlikely that the FCC will adopt material changes to the key components of the
Order (other than the pending retroactive application issue, discussed below)
pursuant to the pending Reconsideration Petition, although no assurances can be
given.

On April 5, 2001, the FCC released an order that is expected to have a
significant impact on the obligations of telecommunications carriers to pay
dial-around compensation to PSPs. The effect of the decision is to require that
the first long distance carrier to handle a dial-around call originating from a
pay telephone has the obligation to track and pay compensation on the call,
regardless of whether other carriers may subsequently transport or complete the
call. This modified rule became effective on November 23, 2001. The Company
believes that this modification to the dial-around compensation system will
result in a significant increase to the number of calls for which the Company is
able to collect such compensation. Because, however, the FCC ruling is subject
to a pending petition for court review and the system modification is as yet
untested, no assurances can be given as to the precise timing or magnitude of
revenue impact that may flow from the decision.

The new 24-cent rate became effective April 21, 1999. The 24-cent rate will
also be applied retroactively to the period beginning on October 7, 1997 and
ending on April 20, 1999 (the "intermediate period"), less a $0.002 amount to
account for FLEX ANI payphone tracking costs, for a net compensation of $0.238.
There is, however, a pending petition for reconsideration of this retroactive
application of the rate. The 1999 Payphone Order deferred a final ruling on the
treatment of the period beginning November 7, 1996 and ending on October 6, 1997
(the "interim period") to a later order. The FCC further ruled that, after the
establishment of an interim period compensation rate and an allocation of the
rate among carriers, a true-up may be made for all payments or credits (with
applicable interest) due and owing between the IXCs and the PSPs, including
Davel, for both the interim and intermediate periods.

In a decision released January 31, 2002, which remains subject to
reconsideration, the FCC partially addressed the remaining issues concerning
interim and intermediate period compensation. The FCC adjusted the per-call rate
to $.229, for the interim period only, to reflect a different method of
calculating the delay in IXC payments to PSPs for the interim period, and
determined that the total interim period compensation rate should be $33.89 per
payphone per month ($.229 times an average of 148 calls per payphone per month).
The FCC deferred to a later, as yet unreleased, order its determination of the
allocation of this total compensation rate among the various carriers required
to pay compensation for the interim period. It is possible that the final
resolution of the timing and other issues relating to these retroactive
adjustments and the outcome of any related administrative or judicial review of
such adjustments could have a material adverse effect on the Company.

Market forces and factors outside the Company's control could significantly
affect the Company's dial-around compensation revenues. These factors include
the following: (i) the final resolution by the FCC of the "true up" of the
initial interim period flat-rate and "per call" assessment periods, (ii) the
possibility of administrative proceedings or litigation seeking to modify the
dial-around compensation rate, and

21

(iii) 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.

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 Annual Report on Form 10-K, expressed as a percentage of total
revenues.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

Total revenues decreased approximately $35.7 million, or 28.2%, from
approximately $126.3 million in the year ended December 31, 2000 to
approximately $90.6 million in the year ended December 31, 2001. This decrease
was primarily attributable to the removal of unprofitable phone locations, lower
call volumes on the Company's payphones resulting from the growth in wireless
and other public communication services, and changes in call traffic.

Coin call revenues decreased approximately $20.5 million, or 25.0%, from
approximately $82.2 million in the year ended December 31, 2000 to approximately
$61.7 million in the year ended December 31, 2001. The decrease in coin call
revenues was primarily attributable to an ongoing strategy to remove
unprofitable payphones as well as lower call volumes on the Company's payphones
due to increased competition from wireless and other public communication
services. The number of payphones removed from service declined from
approximately 67,000 at the beginning of 2001 to approximately 55,000 at
December 31, 2001.

Non-coin call revenues, which is comprised primarily of dial-around revenue
and operator service revenue, decreased approximately $15.1 million, or 34.3%,
from approximately $44.1 million in the year ended December 31, 2000 to
approximately $29.0 million in the year ended December 31, 2001. This decrease
was primarily attributable to the removal of unprofitable phone locations, lower
call volumes on the Company's payphones resulting from the growth in wireless
communication services, and changes in call traffic. Dial-around revenue
decreased approximately $3.8 million, from approximately $22.9 million in the
year ended December 31, 2000 to approximately $19.1 million in the year ended
December 31, 2001. The dial-around decrease is primarily attributable to the
removal of approximately 13,500 unprofitable payphones for the calendar year
2001 and continuing underpayments of dial-around revenues caused by deficiencies
in the established payment and tracking process. Long-distance revenues
decreased approximately $10.1 million,

22

from approximately $19.9 million in the year ended December 31, 2000 to
approximately $9.8 million in the year ended December 31, 2001. Operator
services are provided by third parties which pay Davel a commission on their
gross billings. Non-coin call revenues also includes other revenue, which
decreased approximately $1.2 million, or 92.4%, from approximately $1.3 million
in the year ended December 31, 2000 to approximately $0.1 million in the year
ended December 31, 2001. Non-carrier service revenues from Sprint declined $1.4
million due to the conclusion of a designated one-time program in the second
quarter of 2000.

Telephone charges decreased approximately $8.7 million, or 22.8%, from
approximately $38.3 million in the year ended December 31, 2000 to approximately
$29.6 million in the year ended December 31, 2001. The decrease is primarily due
to the removal of approximately 13,500 phones, regulatory changes resulting in
lower rates charged by the LECs, and management actions to attain lower rates.
Telephone charges would have been impacted by refunds totaling $3.1 million
received from BellSouth for prior period charges pursuant to a recently adopted
"New Service Test" in Tennessee. However, the Company has not yet recognized the
refunds in its Statement of Operations due to the pending court ruling on
BellSouth's appeal. In addition, the Company was the recipient of $2.4 million
of refunds from several other LECs, which are the result of favorable regulatory
rulings, partially offsetting normal operational telephone charges for the
period. A $0.7 million charge associated with the settlement of a dispute with
MCI partially offset these savings. The Company is currently negotiating
contracts and pursuing additional regulatory relief that it believes will
further reduce local access charges on a per-phone basis, but is unable to
estimate the impact of further telephone charge reductions at this time.

Commissions decreased approximately $12.4 million, or 36.0%, from
approximately $34.6 million in the year ended December 31, 2000 to approximately
$22.2 million in the year ended December 31, 2001. The results include a
favorable adjustment of $0.6 million resulting from a change in a contract.
Additionally, the decrease was primarily attributable to lower commissionable
revenues from the reduced number of Company payphones and management actions to
re-negotiate contracts with lower rates upon renewal. The Company continues to
actively review its strategies related to contract renewals in order to maintain
its competitive position while retaining its customer base.

Service, maintenance and network costs decreased approximately $11.6
million, or 33.8%, from approximately $34.3 million in the year ended December
31, 2000 to approximately $22.7 million in the year ended December 31, 2001. The
decrease was primarily attributable to reductions in headcount and wage related
costs of approximately $6.4 million generated from rationalization of field
offices, increased geographic and route density of the payphones, and the
Company's ability to improve efficiency on servicing the Company's payphones.
Reductions in service and collection expenses of approximately $1.6 million,
vehicle servicing expenses of approximately $1.1 million, and field office
expenses of approximately $0.8 million occurred as a result of lower phone count
and field office reorganizations. Network access savings of $2.6 million were
partially offset by a $0.5 million network expense increase associated with the
settlement of a dispute with MCI. Net increases of $0.4 million in a variety of
other expense items comprised the remaining changes.

In the third quarter of 2001, the Company began implementing the previously
announced PhoneTel Merger servicing agreement initiatives with regard to
service, maintenance, and network services. This resulted in the termination of
55 employees, including skilled service technicians and field office support
staff, late in the third quarter. The Company did not experience material
savings from this initiative in the third quarter of 2001, due to the timing of
employee terminations and the payment of severance pay; however, savings of
approximately $0.5 million were experienced in the fourth quarter and for the
year in total.

Depreciation and amortization expenses decreased $12.8 million, or 39.9%,
from $32.0 million in the year ended December 31, 2000 to $19.2 million in the
year ended December 31, 2001. The decrease in depreciation expense is primarily
a result of fewer payphones being in service and one-time impairment charges
recorded in the fourth quarter of 2000. The decrease in amortization is
primarily due to the adjustments to location contracts and goodwill recorded as
an impairment charge in the fourth quarter of 2000.

Selling, general and administrative expenses decreased approximately $9.5
million, or 42.3%, from approximately $22.4 million in the year ended December
31, 2000 to approximately $12.9 million in the year

23

ended December 31, 2001. The decrease in expense was primarily attributable to a
reduction in salaries and salary-related expenses of approximately $3.3 million,
which occurred as a result of continued reductions in headcount in light of the
lower number of payphones in service. In addition, there were decreases in
professional fees of $2.4 million, travel expenses of $0.4 million, association
and regulatory compliance expenses of $0.4 million, property taxes of $0.2
million, $0.9 million in maintenance expense for a computer system which was
replaced, and bad debts of $1.7 million. A variety of other expense items
provided a net reduction of $0.2 million as compared to last year.

Interest expense in the year ended December 31, 2001 increased
approximately $0.3 million, or 0.9%, from approximately $27.4 million in the
year ended December 31, 2000 to approximately $27.7 million in the year ended
December 31, 2001. This increase is attributable to slightly higher average
borrowing levels related to the Company's Old Credit Facility. See "-- Liquidity
and Capital Resources." Other income decreased approximately $22,000 to $260,000
in the year ended December 31, 2001 from $282,000 in the year ended December 31,
2000.

The Company did not recognize non-recurring charges in the year ending
December 31, 2001 as compared to recognizing non-recurring charges of
approximately $49.0 million for the year ending December 31, 2000. See "Notes to
Consolidated Financial Statements, No. 3 -- Summary of Significant Accounting
Policies -- Long Lived Assets". The charges incurred in the year ended December
31, 2000 reflected adjustments to the value of installed telephones ($13.9
million) and uninstalled telephones ($13.5 million), a write-down of location
contracts related to removed or unprofitable telephones ($10.2 million),
non-recurring items ($7.0 million) and a write-down of goodwill related to the
prior purchases of payphone assets ($4.4 million).

Net loss decreased approximately $68.1 million, or 61.1%, from
approximately $111.5 million in the year ended December 31, 2000 to
approximately $43.4 million in the year ended December 31, 2001. This decrease
in loss occurred because efforts to reduce operating expenses, as noted above,
exceeded the decline in revenues.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

Total revenues decreased approximately $49.6 million, or 28.2%, from
approximately $175.8 million in the year ended December 31, 1999 to
approximately $126.3 million in the year ended December 31, 2000. This decrease
was primarily attributable to the removal of unprofitable phone locations, lower
call volumes on the Company's payphones resulting from the growth in wireless
and other public communication services and changes in call traffic.

Coin call revenues decreased approximately $28.6 million, or 25.8%, from
approximately $110.8 million in the year ended December 31,1999 to approximately
$82.2 million in the year ended December 31, 2000. The decrease in coin call
revenues was primarily attributable to an ongoing strategy to remove
unprofitable payphones as well as lower call volumes on the Company's payphones
due to increased competition from wireless and other public communication
services. The number of payphones removed from service declined from
approximately 75,000 at the beginning of 2000 to approximately 67,000 at
December 31, 2000.

Non-coin call revenues, which is comprised primarily of dial-around revenue
and operator service revenue, decreased approximately $21.0 million, or 32.3%,
from approximately $65.1 million in the year ended December 31, 1999 to
approximately $44.1 million in the year ended December 31, 2000. This decrease
was primarily attributable to the removal of unprofitable phone locations, lower
call volumes on the Company's payphones resulting from the growth in wireless
communication services, and changes in call traffic. Dial-around revenue
decreased approximately $13.0 million, from approximately $35.9 million in the
year ended December 31, 1999 to approximately $22.9 million in the year ended
December 31, 2000. The dial-around decrease is primarily attributable to the
removal of approximately 10,800 unprofitable payphones for the calendar year
2000 and continuing underpayments of dial-around revenues caused by deficiencies
in the established payment and tracking process now under regulatory review by
the FCC. Long-distance revenues decreased approximately $5.5 million, from
approximately $25.4 million in the year ended December 31, 1999 to approximately
$19.9 million in the year ended December 31, 2000. During 1999, operator
services were

24

managed through the Company's switch. Revenue was recorded for the gross
billings and service, while maintenance and network costs were recorded for the
cost of the carrier services. The switch was phased out during 1999 and shut
down in November 1999. Operator services are now provided by third parties that
pay Davel a commission on their gross billings. These third parties incur the
expense related to their carrier services. Non-coin call revenues also include
other revenue, which decreased approximately $1.8 million, or 58.0%, from
approximately $3.1 million in the year ended December 31, 1999 to approximately
$1.3 million in the year ended December 31, 2000. Non-carrier service revenues
from Sprint declined $1.4 million due to the conclusion of a designated one-time
program in the second quarter of 2000. An additional $0.6 million of debit card
sales were realized in the year ended December 31, 1999 that did not take place
in year ended December 31, 2000 as the Company exited the debit card business.

Telephone charges increased approximately $1.5 million, or 4.1%, from
approximately $36.8 million in the year ended December 31, 1999 to approximately
$38.3 million in the year ended December 31, 2000. In the third quarter of 1999,
telephone charges were impacted favorably by state and federal regulatory
proceedings under section 276 of the Telecom Act. In addition, the Company was
the recipient of $2.4 million of refunds from two large LECs, the result of
favorable regulatory rulings, partially offsetting normal operational telephone
charges for the period. The Company is currently negotiating contracts and
pursuing additional regulatory relief that it believes will further reduce local
access charges on a per-phone basis, but is unable to estimate the impact of
further telephone charge reductions at this time.

Commissions decreased approximately $6.4 million, or 15.6%, from
approximately $41.0 million in the year ended December 31, 1999 to approximately
$34.6 million in the year ended December 31, 2000. The decrease was primarily
attributable to lower commissionable revenues from a reduced number of Company
payphones. Commissions as a percentage of revenues have begun to rise due to
revenue mix changes as well as the removal of payphones that had lower
commission rates. The shift in revenue mix to the higher commissioned-based
sources has given rise to higher average commissions per phone. The Company is
actively reviewing its strategies related to contract renewals in order to
maintain its competitive position while retaining its customer base. For many of
its "mass market" and smaller regional accounts, the Company changed its method
of paying commissions on approximately one-third of its payphones from a monthly
to a quarterly basis in 2000.

Service, maintenance and network costs decreased approximately $7.7
million, or 18.4%, from approximately $42.1 million in the year ended December
31, 1999 to approximately $34.3 million in the year ended December 31, 2000.
Service, maintenance and network costs increased from 23.9% of total revenues in
the year ended December 31, 1999 to 27.2% of total revenues in the year ended
December 31, 2000. Despite cost savings gained from consolidating offices
following the Peoples Telephone Merger, increased geographic concentration of
the payphones and improved efficiency in servicing Company payphones, the
decline in revenues more than offset the decline in expenses associated with the
Company's cost saving measures. Components of cost having the greatest impact on
year over year cost savings were salaries and wages ($3.1 million), network
billing costs ($1.7 million), regulatory compliance ($0.6 million) and service
and collection costs ($0.9 million). Certain staff reductions and office
closings initiated in the fourth quarter of 2000 served to increase short-term
expenses while realization of net expense savings will occur in 2001 and beyond.

Depreciation and amortization expenses decreased $7.2 million, or 18.4%,
from $39.2 million in the year ended December 31, 1999 to $32.0 million in the
year ended December 31, 2000. The decrease in depreciation expense is primarily
a result of fewer payphones being in service. The decrease in amortization
expense occurred despite an acceleration of site contract amortization of taken
out of service. Approximately 10,800 payphones were removed from service in
2000, compared with 16,800 payphones removed in 1999. Reductions in amortization
have also occurred due to the elimination of goodwill and site contract
intangible assets related to the 1998 CCI Acquisition. Write-offs of these CCI
assets occurred in the third quarter of 1999.

Selling, general and administrative expenses increased approximately $1.3
million, or 6.2%, from approximately $21.1 million in the year ended December
31, 1999 to approximately $22.4 million in the year ended December 31, 2000. The
increase was primarily attributable to fees for professional advisors and legal

25

services ($3.0 million), an adjustment for allowance for doubtful accounts on
trade receivables ($1.5 million) and operating software costs ($0.9 million)
placed in service in the year ended December 31, 2000. These cost increases were
partially offset by a reduction in salaries and related costs ($2.7 million) as
well as reductions in most other expense categories (net $1.6 million) related
to the consolidation of administrative functions in Tampa, Florida, subsequent
to the Peoples Telephone Merger.

Interest expense in the year ended December 31, 2000 increased
approximately $4.3 million, or 18.6%, from approximately $23.1 million in the
year ended December 31, 1999 to approximately $27.4 million in the year ended
December 31, 2000. This increase is attributable to higher average interest
rates and increased borrowing levels related to the Company's Old Credit
Facility. See "-- Liquidity and Capital Resources." Other income (expense)
increased approximately $511,000 to $282,000 in the year ended December 31, 2000
from $(229,000) in the year ended December 31, 1999.

The Company recognized non-recurring charges of approximately $49.0 million
and $51.2 million, for the years ending December 31, 2000 and 1999,
respectively. See "Notes to Consolidated Financial Statements, No. 3 -- Summary
of Significant Accounting Policies -- Long Lived Assets". The charges incurred
in the year ended December 31, 2000 reflected adjustments to the value of
installed telephones ($13.9 million) and uninstalled telephones ($13.5 million),
a write-down of location contracts related to removed or unprofitable telephones
($10.2 million) and a write-down of goodwill ($4.4 million) related to the prior
purchases of payphone assets. The charges incurred in the year ended December
31, 1999 reflected a $37.9 million write-down of goodwill and a $9.8 million
write-down of location contracts related to payphones acquired in the CCI
Acquisition, a $1.1 million writedown of uninstalled telephones, and $0.1
million of other assets.

Loss from continuing operations before extraordinary items and income taxes
increased approximately $31.0 million, or 38.5%, from approximately $80.5
million in the year ended December 31, 1999 to $111.5 million in the year ended
December 31, 2000.

Net loss increased approximately $32.7 million, or 41.6%, from the
prior-year period, from approximately $78.7 million in the year ended December
31, 1999 to approximately $111.5 million in the year ended December 31, 2000.
This increase in loss occurred because efforts to reduce operating expense
levels could not keep pace with the decline in revenues.

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. There was no stock issued in the most recent two years. For
2001, quarterly revenue as a percentage of total revenue was approximately
25.6%, 25.9%, 25.8%, and 22.7%, respectively, for the first through fourth
quarters of the year. In addition, for fiscal 2001, quarterly loss from
operations as a percentage of total loss from operations was approximately
(30.7%), (18.6%), (22.4)%, and (28.3)%, 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 payphones, 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. Payphones located in the southern
United States produce substantially higher call volume in the first and second
quarters than 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.

During the year ended December 31, 2001, operating activities generated
$1.6 million of net cash, compared to the use of $9.9 million in 2000. Cash
generation resulted from the fact that total uses, which included the operating
loss of $43.4 million, reductions in accounts payable and accrued expenses of
$2.6 million and other uses of $1.2 million, were more than offset by total
sources, which included depreciation

26

and amortization of $19.2 million, amortization of deferred financing charges of
$3.7 million, a reduction in trade receivables of $2.4 million and an increase
in accrued interest of $23.3 million.

Capital expenditures for 2001 were $0.5 million compared to $2.1 million
for 2000. These capital expenditures were primarily used to purchase payphone
parts, computers and software equipment.

The Company's principal sources of liquidity come from cash flow generated
from operating activities. The Company's principal uses of liquidity are to
provide working capital and, to the extent available, to meet debt service
requirements. At December 31, 2001, the Company had utilized all available
borrowing capacity under the revolving credit facility.

Financing activities used approximately $1.9 million in cash in 2001 to
repay long-term debt and capital lease obligations. All outstanding debt in
connection with the Old Credit Facility continues to be classed as a current
liability. In April 2001, the Company repaid approximately $1.1 million of the
Old Credit Facility. See "-- Old Credit Facility."

Old Credit Facility

In connection with the Peoples Telephone Merger, the Company entered into
the Old Credit Facility with Bank of America, formerly known as NationsBank,
N.A. (the "Administrative Agent"), and the other lenders named therein. The Old
Credit Facility provides for borrowings by Davel from time to time of up to
$245.0 million, including a $45 million revolving facility, for working capital
and other corporate purposes.

Indebtedness of the Company under the Old 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. In February 2002, pursuant to an Intercreditor and Subordination
Agreement entered into by the Junior Lenders and the lenders under the New
Senior Credit Facility, the Junior Lenders agreed to subordinate their security
interest in Company collateral to the security interest of the new Senior
lenders.

The Company's borrowings under the Old Credit Facility bore interest at a
floating rate and may be maintained as Base Rate Loans (as defined in the Old
Credit Facility) or, at the Company's option, as Eurodollar Loans (as defined in
the Old Credit Facility). Base Rate Loans 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 bear interest at the Eurodollar Rate (as defined in the
Old Credit Facility).

The Company is required to pay the lenders under the Old Credit Facility a
commitment fee, payable in arrears on a quarterly basis, on the average unused
portion of the Old 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 Old 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 Old Credit Facility requires the Company to meet certain financial
tests and contains certain covenants that, among other things, limit the
incurrence of additional indebtedness, prepayments of other indebtedness, liens
and encumbrances and other matters customarily restricted in such agreements.

First Amendment

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 Old Credit Facility. On April 8, 1999, the Company and the Junior 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 Old Credit Facility. In
addition, the First Amendment waived any event of default

27

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 Junior 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:

- Amendment of the applicable percentages for Eurodollar Loans for the
period between April 1, 1999 and June 30, 2000 at each pricing level to
0.25% higher than those in the previous pricing grid

- Payment of debt from receipt of dial-around compensation accounts
receivable related to the period November 1996 through October 1997

- Further limitations on permitted acquisitions as defined in the Old
Credit Facility through June 30, 2000

- During the period April 1, 1999 to June 30, 2000, required lenders'
consent for the making of loans or the issuance of letters of credit if
the sum of revolving loans outstanding plus letter of credit obligations
outstanding exceeds $50.0 million

- The introduction of a new covenant to provide certain operating data to
the Junior Lenders on a monthly basis

- Increases in the maximum allowable ratio of funded debt to EBITDA through
the quarter ended June 30, 2000

- Decreases in the minimum allowable interest coverage ratio through the
quarter ended June 30, 2000

- Decreases in the minimum allowable fixed charge coverage ratio through
the quarter ended June 30, 2000.

The First Amendment also places limits on capital expenditures and required
the payment of an amendment fee equal to the product of the Junior Lender
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 Old Credit Facility. Effective March 9, 2000, the Company and the Junior
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 (which
requires that all of the Junior Lenders be notified in order to access the final
$10.0 million of availability on that facility), a fee of 35 basis points of the
Junior Lenders' commitment and a moratorium on acquisitions. The Second
Amendment contained amendments that provided for the following:

- 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;

28

- After March 9, 2000, introduction of a new covenant requiring lenders'
consent for the making of loans or the issuance of letters of credit if
the sum of revolving loans outstanding plus letter of credit obligations
outstanding exceeds $35.0 million;

- The addition of a new covenant to provide financial statements to the
Junior Lenders on a monthly basis;

- Increases in the maximum allowable ratio of funded debt to EBITDA
through the maturity date of the loan;

- Decreases in the minimum allowable interest coverage ratio through the
maturity date of the loan;

- Decreases in the minimum allowable fixed charge coverage ratio through
the maturity date of the loan;

- Decreases in permitted capital expenditures to $10 million annually; and

- Reduction of the maximum interest period for Eurodollar loans to 30
days.

Third Amendment

In the second quarter of 2000, the Company gave notice to the
Administrative Agent that lower than expected performance during the first six
months of 2000 would result in the Company's inability to meet certain financial
covenants contained in the Old Credit Facility as well as the June 30, 2000 debt
amortization and interest payments. On June 22, 2000, the Company and the Junior
Lenders agreed to the Third Amendment to Credit Agreement (the "Third
Amendment"), which eliminated the financial covenant compliance test for the
fiscal quarter ended June 30, 2000, as was set forth in the Old Credit Facility.
The Third Amendment also provided for the following:

- Term Loan A amortization payments totaling $5.0 million scheduled for
June 30, 2000 would be due on September 30, 2000 together with the $5.0
million amortization payment scheduled for that date. The total Term A
amortization payments due on September 30, 2000 are $10.0 million;

- Term Loan B amortization payments totaling approximately $0.2 million
scheduled for June 30, 2000 would be due on September 30, 2000 together
with the approximately $0.2 million amortization payment scheduled for
that date. The total Term B amortization payments due on September 30,
2000 are approximately $0.5 million;

- Interest payments due on June 30, 2000 became due and were paid on July
10, 2000; and

- All interest otherwise due and payable on each interest payment date
occurring after June 30, 2000 and before September 30, 2000 shall
continue to accrue on the applicable loans from and after such interest
payment date and shall be due and payable in arrears on September 30,
2000.

Fourth Amendment

In the third quarter of 2000, the Company gave notice to the Administrative
Agent that lower than expected performance during the first nine months of 2000
would result in the Company's inability to meet certain financial covenants
contained in the Old Credit Facility as well as the September 30, 2000 debt
amortization and interest payments. On September 28, 2000, the Company and the
Junior Lenders agreed to the Fourth Amendment to Credit Agreement, which
eliminated the financial covenants in their entirety with respect to all periods
ending on and after September 30, 2000 and also provided for the following:

- Term Loan A, Term Loan B and Revolving Loan amortization payments
totaling $15.7 million will be due on January 12, 2001. In addition,
amortization payments of approximately $7.7 million are due on each of
March 31, June 30, September 30 and December 31, 2001, and the balance of
the then outstanding principal amount of all loan obligations is due on
January 11, 2002;

- Interest payments otherwise due and payable on any interest payment date
prior to January 12, 2001 will continue to accrue and be payable in
arrears on January 12, 2001;

29

- Applicable percentages for adjusted LIBOR interest rates after September
29, 2000 were generally lowered from those set forth in the Third
Amendment to 2.75% for all Loans, except that rates will continue to
equal 3.50% for all Letter of Credit Fees and 0.75% for all Commitment
Fees;

- Positive net cash on hand in excess of $2.0 million at the end of each
month will be paid to the Junior Lenders as a prepayment of the Loans;

- The Revolving Loan commitment was terminated;

- Capital expenditures for the period October 1, 2000 to January 12, 2001
are limited to $400,000; and

- The provision regarding the application of prepayments was modified, and
a new provision was added requiring the Company to submit to the Junior
Lenders bi-weekly cash flow forecasts and a revised business plan for the
2001 fiscal year.

Fifth Amendment

On November 29, 2000, the Borrower requested that the Junior Lenders waive
its noncompliance with the requirements of the Credit Agreement resulting from
the Borrower's non-delivery of a revised business plan to the Junior Lenders on
or before November 15, 2000. In exchange, the Borrower agreed to amend certain
provisions of the Old Credit Facility that had permitted the Borrower to dispose
of certain property outside the ordinary course of business and to make certain
investments outside the ordinary course of business so as to require, in each
case, the Junior Lenders' prior written approval for any such disposition or
investment.

Sixth Amendment

In the fourth quarter of 2000, the Company gave notice to the
Administrative Agent that the Company would not be able to make the January 12,
2001 debt amortization and interest payments. On March 23, 2001, the Company and
the Junior Lenders entered into the Sixth Amendment to Credit Agreement and
Waiver, effective as of January 12, 2001 (the "Sixth Amendment"), which provided
for the following:

- Amortization payments of $1.1 million would be made on April 15, 2001,
$2.2 million on July 15, 2001 and $3.3 million on October 15, 2001;

- The remaining outstanding principal amount of all loans, together with
all accrued and unpaid interest, will be due on January 11, 2002;

- The Company will provide monthly budget reconciliation reports to the
Junior Lenders;

- The Company will comply with an agreed-upon budget for expenses in 2001;

- The Company will be subject to a limit on capital expenditures and
certain location signing bonuses in 2001 and a minimum EBITDA covenant
for 2001; and

- The Company agreed to the substitution of a new administrative agent for
the Junior Lenders, to pay such new agent a monthly fee of $30,000 and to
pay certain earned fees of the professional advisors to the Junior
Lenders.

Seventh Amendment

Effective as of February 19, 2002, the Company and the Junior Lenders
entered into the Seventh Amendment, which provided for the following:

- The payment defaults arising out of the Company's failure to make
scheduled principal payments on July 15, 2001, October 15, 2001 and
January 11, 2002 were waived effective as of the dates such payments were
due;

30

- The covenant violations arising out of the Company's failure to comply
with its minimum cumulative EBITDA covenant from May to December 2001
were waived effective as of the dates of such violations; and

- The Junior Lenders' consent to the New Senior Credit Facility and the
transactions contemplated by the merger agreement with PhoneTel,
including the debt-for-equity exchange described above.

The Old 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 Old Credit Facility
to be in full force and effect, and defaults for a change of control of the
Company.

The Company has incurred losses of approximately $43.4 million, $111.5
million, and $78.7 million for the years ended December 31, 2001, 2000, and 1999
respectively. In addition, the Company was unable to make debt amortization
payments of approximately $245 million and interest payments of approximately
$36.3 million, which would have been due and payable on January 11, 2002 but for
the Company's signing a Seventh Amendment to its loan agreement that extended
the due date to August 31, 2002, unless earlier restructured pursuant to the
debt-for-equity exchange described above. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.

The Company's plans to increase liquidity include efforts to substantially
reduce costs, including through the PhoneTel Merger. Management believes this
will result in expansion of its market presence and further leveraging of its
infrastructure. In order to pursue this strategy, the Company has entered into
the New Senior Credit Facility and agreed to the debt-for-equity exchange with
the Junior Lenders, which will be substantially dilutive to existing
stockholders. Notwithstanding the $5 million of additional liquidity made
available to Davel pursuant to the New Senior Credit Facility, in the absence of
improved operating results and the successful completion of the PhoneTel Merger
and the debt-for-equity exchange, the Company may face liquidity problems and
might be required to dispose of material assets or operations to fund its
operations and make capital expenditures and to meet its debt service and other
obligations. There can be no assurances as to the ability to execute such sales,
or the timing thereof, or the amount of proceeds that the Company could realize
from such sales. As a result, doubt exists about the Company's ability to
continue as a going concern.

New Senior Credit Facility

Effective as of February 19, 2002, Madeleine L.L.C. and ARK CLO 2000-1,
Limited (the "New Senior Lenders") entered into the New Senior Credit Facility
with Davel Financing Company, L.L.C., PhoneTel and Cherokee Communications,
Inc., a wholly owned subsidiary of PhoneTel. The New Senior Credit Facility is
guaranteed by Davel and all of its domestic subsidiaries. Pursuant to the New
Senior Credit Facility, the New Senior Lenders loaned $10,000,000 in the
aggregate on February 21, 2002, $5,000,000 to each of Davel and PhoneTel. Davel
and PhoneTel agreed to remain jointly and severally liable for all amounts owing
under the New Senior Credit Facility.

Interest on the funds loaned pursuant to the New Senior Credit Facility
accrues at the rate of fifteen percent (15%) per annum and is payable monthly in
arrears. A principal amortization payment in the amount of $833,333 is owing on
the last day of each month, beginning July 31, 2002 and ending on the maturity
date of June 30, 2003. All amounts owing under the New Senior Credit Facility
will be due and owing on August 31, 2002 if the PhoneTel Merger shall not have
been consummated by such date (unless the New Senior Lenders shall have
consented to an extension of such date).

Pursuant to an Intercreditor and Subordination Agreement, dated as of
February 19, 2002, the Junior Lenders agreed to subordinate their security
interest in Company collateral to the security interest of the New Senior
Lenders in such collateral. Upon the repayment in full of the amounts owing
under the New Senior Credit Facility, the senior security interests of the New
Senior Lenders will terminate and the Junior Lenders will, once again, hold
first priority security interests in the Company collateral. Pursuant to the
Seventh Amendment, the Junior Lenders consented to the Company's entering into
the New Senior Credit Facility.

31

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.

NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended by
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of FASB Statement No. 133" and SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities, an amendment of FASB Statement No. 133". See "Notes to Financial
Statements No. 3". Statement 133 requires the Company to record all derivatives
on the balance sheet at fair value. Changes in derivative fair values will
either be recognized in earnings as offsets to the change in fair value of
related hedged assets, liabilities and firm commitments or, for forecasted
transactions, deferred and recorded as a component of other comprehensive loss
until the hedged transactions occur and are recognized in earnings. The
ineffective portion of a hedged derivative's change in fair value will be
immediately recognized in earnings. Adoption of these new accounting standards
on January 1, 2001 resulted in a cumulative after-tax reduction to other
comprehensive loss of $51,000 in the first quarter of 2001.

In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141, which eliminated the use of the pooling-of-interests
method of accounting for business combinations initiated after June 30, 2001, is
effective for any business combination accounted for by the purchase method that
is completed after June 30, 2001. SFAS No. 142, which includes the requirements
to test for impairment goodwill and intangible assets of indefinite life rather
than amortize them, is effective for fiscal years beginning after December 15,
2001. As discussed in Note 2, the Company has entered into a merger agreement
with PhoneTel that provides for the exchange of common stock. Pursuant to SFAS
No. 141, the merger will be accounted for as a purchase business combination.
The effects on the accounting for the initial recognition and determining
carrying value of goodwill, if any, that arise from the purchase have not yet
been determined by management. Davel will perform the first of the required
impairment tests of goodwill as of January 1, 2002, and has not yet determined
what the effects of these tests will be on the Company's financial statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of". SFAS No. 144 retains the fundamental provisions of
SFAS 121 for the recognition and measurement of the impairment of long-lived
assets to be held and used and the measurement of long-lived assets to be
disposed of by sale. Under SFAS No. 144, long-lived assets are measured at the
lower of carrying amount or fair value less cost to sell. The Company will be
required to adopt this statement no later than January 1, 2002. The Company is
currently assessing the impact of this statement on its results of operations,
financial position and cash flows.

32

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that could cause our actual results to be materially different
from historical results or from any future results expressed or implied by such
forward-looking statements. The factors that could cause actual results of
Davel, or a combined Davel and PhoneTel, to differ materially, many of which are
beyond the control of Davel, include, but are not limited to, the following: (1)
the businesses of Davel and PhoneTel may not be integrated successfully or such
integration may be more difficult, time-consuming or costly than expected; (2)
expected benefits and synergies from the combination may not be realized within
the expected time frame or at all; (3) revenues following the PhoneTel Merger
may be lower than expected; (4) operating costs, customer loss and business
disruption, including, without limitation, difficulties in maintaining
relationships with employees, customers, clients or suppliers, may be greater
than expected following the transaction; (5) generating incremental growth in
the customer base of the combined company may be more costly or difficult than
expected; (6) the effects of legislative and regulatory changes; (7) the tax
treatment of the proposed transactions; (8) an inability to retain necessary
authorizations from the FCC and state utility or telecommunications authorities;
(9) an increase in competition from cellular phone and other wireless products
and wireless service providers; (10) the introduction of new technologies and
competitors into the telecommunications industry; (11) changes in labor,
telephone line service, equipment and capital costs; (12) future acquisitions,
strategic partnership and divestitures; (13) general business and economic
conditions; and (14) other risks described from time to time in periodic reports
filed by Davel with the Securities and Exchange Commission. Statements that
include the words "may," "will," "would," "could," "should," "believes,"
"estimates," "projects," "potential," "expects," "plans," "anticipates,"
"intends," "continues," "forecast," "designed," "goal," or the negative of those
words or other comparable words should be considered to be uncertain and
forward-looking. This cautionary statement applies to all forward-looking
statements included in this Annual Report on Form 10-K.

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 Old Credit Facility and any future financing requirements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."

As of December 31, 2001, the Company was party to an interest rate collar
agreement with a large financial institution. The notional amount of the
interest rate collar is $25 million and the agreement has a cap rate of 6.5% and
a floor rate of 4.8% based on the U.S. one month LIBOR rate. This interest rate
collar agreement terminated in February 2002. The Company does not hold
derivatives for trading purposes.

Based upon the Company's variable rate indebtedness and weighted average
interest rates at December 31, 2001, a ten-percent increase or decrease in the
market rate of interest would have an immaterial effect on future earnings and
cash flows. A ten percent increase or decrease in the market rate of interest
would have an immaterial effect on the fair market value of the Company's debt.

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 arrangements or capital financial structure.

33

ITEM 8. FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

34

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of Davel Communications, Inc.:

We have audited the accompanying consolidated balance sheet of Davel
Communications, Inc. (the "Company") and Subsidiaries as of December 31, 2001,
and the related consolidated statements of operations, shareholders' equity
(deficit) and other comprehensive loss and cash flows for the year then ended.
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 audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provide a reasonable
basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Davel
Communications, Inc. and Subsidiaries at December 31, 2001, and the consolidated
results of their operations and their cash flows for year then ended, in
conformity with accounting principles generally accepted in the United States of
America.

As discussed in Note 2 to the financial statements, the Company has
incurred recurring losses and has a substantial working capital deficiency and
has been unable to comply with the terms of its debt agreements. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also discussed
in Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.

As discussed in Note 14 to the financial statements, dial-around revenues
during the period November 7, 1996 to April 20, 1999 are the subject of review
and reconsideration by the Federal Communications Commission ("FCC"). As a
result of the proceedings, the FCC has determined that there will be an
industry-wide reconciliation to reflect "true-up" underpayments and overpayments
made during that period as between the payphone providers, including the
Company, and the relevant dial-around carriers. While the timing and amounts of
such true-up payments, if any, are not currently determinable, in management's
opinion the final resolution and implementation of this reconciliation process,
and the outcome of any related administrative or judicial review of such
adjustments, could potentially have a material adverse effect on the Company.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.

AIDMAN PISER & COMPANY, P. A.

Tampa, Florida
March 8, 2002

35

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To Davel Communications, Inc.:

We have audited the accompanying consolidated balance sheet of Davel
Communications, Inc. (a Delaware corporation) and subsidiaries as of December
31, 2000 and the related consolidated statements of operations, shareholders'
equity (deficit), comprehensive loss, and cash flows for the years ended
December 31, 2000 and 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, 2000, and the results of their operations
and their cash flows for the years ended December 31, 2000 and 1999, in
conformity with accounting principles generally accepted in the United States.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the financial statements, the Company has suffered recurring losses from
operations, has a working capital deficit, and its liabilities exceed its assets
by $186.4 million, which raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
discussed in Note 2. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

ARTHUR ANDERSEN LLP
Tampa, Florida
March 30, 2001

36

DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

The accompanying Notes are an integral part of these consolidated financial
statements.
37

DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share and share data)

The accompanying Notes are an integral part of these consolidated financial
statements.

38

DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) AND OTHER
COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(In thousands, except share data)

The accompanying Notes are an integral part of these consolidated statements.

39

DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

The accompanying Notes are an integral part of these financial statements.
40

DAVEL COMMUNICATIONS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS

Davel Communications, Inc., and subsidiaries, (the "Company" or "Davel")
was incorporated on June 9, 1998 under the laws of the State of Delaware. The
Company is the largest domestic independent payphone service provider in the
United States of America. The Company operates in a single business segment
within the telecommunications industry, operating, servicing, and maintaining a
system of approximately 55,000 payphones in 44 states and the District of
Columbia. The Company's headquarters is located in Tampa, Florida, with
divisional operational facilities in 17 dispersed geographic locations.

2. LIQUIDITY AND MANAGEMENT'S PLANS

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. As shown in the accompanying consolidated financial
statements, the Company has incurred losses of approximately $43.4 million,
$111.5 million, and $78.7 million for the years ended December 31, 2001, 2000,
and 1999 respectively. These losses were primarily attributable to increased
competition from providers of wireless communication services and the impact on
the Company's revenue of certain regulatory changes. In addition, the Company
was unable to make debt payments of approximately $237.7 million and interest
payments of approximately $36.3 million, which became due and payable on January
11, 2002. However, the Company signed a Seventh Amendment to its loan agreement
that extended the due date of all payment obligations to August 31, 2002.
Notwithstanding the amended loan agreement, the Company's current liabilities
exceed its current assets by $280.1 million on December 31, 2001. These factors
raise substantial doubt about the Company's ability to continue as a going
concern.

During 2001, management commenced an aggressive plan to reduce operating
costs and expenses and to preserve liquidity. The execution of this plan
involved multiple measures, including the removal of approximately 13,500
payphones which had been identified as unprofitable toward the end of 2000 and
throughout 2001. Also, in addition to widespread cost and headcount reductions,
in June 2001 the Company and PhoneTel Technologies, Inc. ("PhoneTel") entered
into a shared services agreement for the administration and operation of certain
of the Company's and PhoneTel's branch offices across the United States of
America. Although the Servicing Agreement was executed in mid 2001, its effects
have been to reduce monthly operating costs substantially. As a result of
management's cost reduction activities during 2001, the Company realized
earnings before interest, impairment charge, taxes, depreciation and
amortization expense ("EBITDA") of $3.5 million compared to an EBITDA deficiency
of $3.1 million in 2000. In addition, the Company experienced positive net cash
flow from operations during 2001, although these results are affected greatly by
the continued willingness of the Company's banks to extend interest payment
terms.

In addition to the above measures, effective February 19, 2002, the Company
and PhoneTel entered into an agreement and plan of reorganization and merger
that will provide for the issuance of the Company's common stock to acquire the
issued and outstanding common stock of PhoneTel. PhoneTel is a payphone service
provider ("PSP") that maintains and operates a payphone system of 30,000
payphones in 44 states and the District of Columbia. Management believes this
merger will result in expansion of its market presence and further reduce its
operating costs by leveraging the combined infrastructure. In order to pursue
this strategy, the Company and PhoneTel have jointly entered into the New Senior
Credit Facility and agreed to a debt-for-equity exchange with the Junior
Lenders. The Senior Credit Facility, which became effective February 19, 2002,
provides for a combined $10 million line of credit which the Company and
PhoneTel share $5 million each. The Company and PhoneTel each drew its available
amounts under the line on February 20, 2002. In addition to interest payments
due monthly on the unpaid balance, the line is repayable in twelve equal
installments commencing July 31, 2002. The debt-for-equity exchange with the
Company's current Junior Lenders will immediately precede the merger with
PhoneTel and provides for the exchange of that amount of indebtedness that will
result in $63.5 million of debt remaining ($100 million on a merged basis) for

41

DAVEL COMMUNICATIONS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

380,612,730 shares of common stock. The terms of the remaining combined debt
will be modified and extended. Following the exchange of debt, the Company's
lenders will own 93% of the issued and outstanding common stock of the Company.
Following the exchange and the merger, the combined creditors of the Company and
PhoneTel will own 90.81% of the issued and outstanding common stock of the
Company.

Notwithstanding the aforementioned measures, the Company may face liquidity
shortfalls and, as a result, might be required to dispose of assets or
operations to fund its operations, to make capital expenditures and to meet its
debt service and other obligations. There can be no assurances as to the ability
to execute such disposals, or the timing thereof, or the amount of proceeds that
the Company could realize from such sales. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions are eliminated in consolidation.

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

Trade accounts receivable are concentrated with companies in the
telecommunications industry. Accordingly, the credit risk associated with the
trade accounts receivable will fluctuate with the overall condition of the
telecommunications industry. However, credit risk with respect to these
receivables is generally limited due to the widely dispersed customer base,
which includes a large number of companies. During all periods presented, credit
losses were within management's overall expectations.

Fair Value of Financial Instruments

The fair value of the Company's financial instruments approximates their
respective 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.

Derivative Financial Instruments and Hedging Activities

The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133" and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133". SFAS No. 133 requires the Company to record all derivatives on the balance
sheet at fair value. Changes in derivative fair values will either be recognized
in earnings as offsets to the change in fair value of related hedged assets,
liabilities and firm commitments or, for forecasted transactions, deferred and
recorded as a component of other comprehensive loss until the hedged
transactions occur and are recognized in earnings. The Company does not hold
derivatives for trading purposes. In 2001, the Company held a derivative
financial instrument, principally an
42

DAVEL COMMUNICATIONS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

interest rate collar contract, to hedge exposure to changes in interest rates on
debt obligations. For the interest rate collar, the interest rate collar
settlement differential is reflected as an adjustment to interest expense.
Adoption of these new accounting standards on January 1, 2001, resulted in a
cumulative after-tax reduction of other comprehensive loss of $51,000 in the
first quarter of 2001. This interest rate collar agreement terminated in
February 2002.

Property and Equipment

Property and equipment held and used in the Company's operations 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.

Uninstalled payphone equipment consists of replacement payphones and
related equipment and is carried at the lower of cost or fair market value.

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). Amortization
expense related to location contracts amount to $1.2 million, $10.3 million and
$11.0 million for the years ended December 31, 2001, 2000 and 1999 respectively.
Accumulated amortization as of December 31, 2001 and 2000 was approximately $4.0
million and $43.4 million, respectively.

Goodwill

Costs in excess of fair values of the net assets recorded in connection
with business acquisitions are recorded as goodwill in the accompanying
consolidated balance sheets. During periods where balances were outstanding,
goodwill was amortized on a straight-line basis over periods estimated to be
benefited, generally 15 years. Amortization expense related to goodwill amounted
to $1.8 million and $3.7 million during the years ended December 31, 2000 and
1999, respectively. During the fourth quarter of 2000, the Company determined
its goodwill was impaired and the unamortized balance was written-off. See
"Impairments of Long-lived Assets," below.

Impairments of Long-Lived Assets

The Company reviews long-lived assets to be held and used for impairment
whenever events or changes in circumstances indicate the asset may be impaired.
In the event that impairment indicators, including market or industry conditions
or financial conditions, are identified, the Company determines whether
impairments are present by comparing the net book value of assets to projected
undiscounted cash flows at the lowest discernible level for which cash flow
information can be projected. For this evaluation, the Company has determined
that certain groupings of payphones and their related location contracts within
individual branch locations constitute the lowest level of discernible cash
flows ("location basis"). In the event that undiscounted cash flow is
insufficient to recover the net carrying value, impairment charges are
calculated and recorded in the period identified and estimated based upon the
asset's fair values using discounted cash flows. For assets that the Company
intends to dispose of, depreciation is adjusted over the remaining estimated
service period to arrive at the net fair value or salvage value on the estimated
date of disposal.

43

DAVEL COMMUNICATIONS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

In 2001, 2000 and 1999, the Company reviewed its long-lived assets for
indications of impairment. The Company considered continued declines in
operating margin and lower than expected cash flow related to its payphones
during 2000 and 1999 to be indicators of potential impairment. Projections of
undiscounted cash flows that were prepared for groupings of payphones using the
location basis method further indicated, in certain instances, that such amounts
would be insufficient to recover the Company's carrying costs for the related
long-lived assets. In these instances, the Company measured the fair values of
the impaired assets as the discounted future cash flows generated by the
payphones and, as a result, recorded approximately $42.0 million and $48.9
million in 2000 and 1999, respectively, of non-recurring charges to state the
assets at fair value. No charges were incurred in 2001. The charges are included
in impairment charge and non-recurring items on the accompanying consolidated
statement of operations.

These impairment and non-recurring charges were as follows for the year
ended December 31, 2001, 2000, and 1999 (in thousands):

Management exercised considerable judgment to estimate undiscounted and
discounted future cash flows. The amount of future cash flows the Company will
ultimately realize remains under continuous review, but could differ materially
from the amounts assumed in arriving at the impairment loss.

Revenue Recognition

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 into the payphone. Coin call revenues are recorded in the amount of
coins deposited in the payphones and in the period deposited. Revenue from
non-coin calls, which includes dial-around compensation, as discussed in Note
14, and operator service revenue is recognized in the period in which the
customer places the call.

Operator Service Revenue: Prior to November 1999, the Company serviced
"operator service" calls through an "unbundled" service arrangement, where the
Company recognized non-coin operator service revenue equal to the total amount
charged the end user for the placement of the call. Utilizing an unbundled
services arrangement, the Company performed certain functions necessary to
service non-coin calls, incurring specific expenses using the long distance
company's switching equipment, operator services, billing arrangements and other
services on an as-needed basis to complete and bill for these calls. Subsequent
to November 1999, non-coin operator service calls are handled by independent
operator service providers. These carriers assume billing and collection
responsibilities for these calls and pay "commissions" to the Company.
Commencing with this arrangement, the Company recognizes operator service
revenues in an amount equal to the commission.

Dial-around Revenue: The Company also recognizes non-coin dial-around
revenues from calls that are dialed from its payphones to gain access to a long
distance company or to make a traditional "toll free" call (dial-around calls).
Revenues from dial-around calls are recognized based on estimates using the
Company's

44

DAVEL COMMUNICATIONS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

historical collection experience because a) the inter-exchange carriers (IXCs)
have historically paid for fewer dial-around calls than are actually made (due
to the reasons discussed in Note 14 to the financial statements) and b) the
collection period for dial-around revenue may be as long as a year. Davel's
estimate of revenue is based on historical analyses of calls placed versus
amounts collected. These studies are updated on a continuous basis. Recorded
amounts are adjusted to actual and estimates are updated once the applicable
dial-around compensation has been collected.

In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101), which clarified certain existing accounting principles for the timing of
revenue recognition and classification of revenues in the financial statements.
While Davel's existing revenue recognition policies are consistent with the
provisions of SAB 101, the new rules have resulted in some reclassifications
between revenues and costs. In the quarter ended December 31, 1999, Davel
adopted SAB 101 and the impact was a reduction in equal amounts to both
"Non-coin calls" revenues and "Service, maintenance, and network costs" of $4.9
million.

Regulated Rate Actions

The Federal Communications Commission ("FCC") possesses the authority
pursuant to the Telecommunications Act of 1996 (the "Telecom Act") to effect
rate actions related to dial-around compensation, including retroactive rate
adjustments and refunds (See Note 14). Rate adjustments arising from FCC rate
actions that require refunds to dial-around carriers are recorded in the first
period that they become both probable of payment and estimable in amount. Rate
adjustments that result in payments to the Company by dial-around carriers are
recorded when received.

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. Deferred tax assets and
liabilities are measured using enacted tax rates expected to be recovered and
settled. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in the period in which the change is enacted. Deferred
tax assets are reduced by a valuation allowance when it is deemed more likely
than not that the asset will not be utilized.

Stock-based compensation

The Company accounts for compensation costs associated with stock options
issued to employees under the provisions of Accounting Principles Board Opinion
No. 25 ("APB25") whereby compensation is recognized to the extent the market
price of the underlying stock at the date of grant exceeds the exercise price of
the option granted. The Company has adopted the disclosure provisions of
Financial Accounting Standard No. 123 -- Accounting for Stock-Based Compensation
("FAS 123"), which requires disclosure of compensation expense that would have
been recognized if the fair-value based method of determining compensation had
been used for all arrangements under which employees receive shares of stock or
equity instruments. Stock-based compensation to non-employees is accounted for
using the fair-value based method prescribed by FAS 123.

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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Such estimates, among others, include amounts relating to the
carrying value of the Company's accounts receivable and payphone location
contracts

45

DAVEL COMMUNICATIONS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

and the related revenues and expenses applicable to dial-around compensation and
asset impairment. Actual results could differ from those estimates.

Recent Accounting Pronouncements

In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141, which eliminated the use of the pooling-of-interests
method of accounting for business combinations initiated after June 30, 2001, is
effective for any business combination accounted for by the purchase method that
is completed after June 30, 2001. SFAS No. 142, which includes the requirements
to test for impairment goodwill and intangible assets of indefinite life rather
than amortize them, is effective for fiscal years beginning after December 15,
2001. As discussed in Note 2, the Company has entered into a merger agreement
with PhoneTel that provides for the exchange of common stock. Pursuant to SFAS
No. 141, the merger will be accounted for as a purchase business combination.
The effects on the accounting for the initial recognition and determining
carrying value of goodwill, if any, that arise from the purchase have not yet
been determined by management. Davel will perform the first of the required
impairment tests of goodwill as of January 1, 2002, and has not yet determined
what the effects of these tests will be on the Company's financial statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of". SFAS No. 144 retains the fundamental provisions of
SFAS 121 for the recognition and measurement of the impairment of long-lived
assets to be held and used and the measurement of long-lived assets to be
disposed of by sale. Under SFAS No. 144, long-lived assets are measured at the
lower of carrying amount or fair value less cost to sell. The Company will be
required to adopt this statement no later than January 1, 2002. The Company is
currently assessing the impact of this statement on its results of operations,
financial position and cash flows.

Reclassification

Certain reclassifications have been made to prior year balances to conform
to the current year presentation.

4. ALLOWANCE FOR DOUBTFUL ACCOUNTS

Activity in the allowance for doubtful accounts is summarized as follows
for the years ended December 31 (in thousands):

During 2000, the Company evaluated the allowance for doubtful accounts and
determined that certain amounts related to dial-around revenue were
uncollectible, and accordingly these amounts were written off against the
allowance for doubtful accounts.

46

DAVEL COMMUNICATIONS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

5. PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows at December 31, 2001 and
2000 (in thousands):

Depreciation expense was $17.7 million, $17.9 million and $22.8 million for
the years ended December 31, 2001, 2000 and 1999, respectively.

6. OTHER ASSETS

Other assets, net of accumulated amortization, consist of the following at
December 31, 2001 and 2000 (in thousands):

47

DAVEL COMMUNICATIONS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following at December
31, 2001 and 2000 (in thousands):

8. LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES

Following is a summary of long-term debt and obligations under capital
leases as of December 31, 2001 and 2000:

In connection with the Peoples Telephone Merger on December 23, 1998, the
Company entered into a senior credit facility ("Old Credit Facility") with Bank
of America, formerly NationsBank, N.A., (the "Administrative Agent") and the
other lenders named therein ("Lenders"). The Old Credit Facility provided for
borrowings by the Company from time to time of up to $280 million for working
capital and other corporate purposes. Upon consummation of the Peoples Telephone
Merger, the Company redeemed approximately $100.0 million in Senior Notes that
were scheduled to mature in 2002 and retired approximately $96.7 million in
notes payable prior to maturity.

The Old 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 Old Credit Facility. In addition,
the First Amendment waived any event of default related to two acquisitions made
by the

48

DAVEL COMMUNICATIONS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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.

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 approximately $245.0 million (through a permanent reduction of the
revolving line of credit) and placement of a block on the final $10.0 million of
revolver borrowing. The Second Amendment also placed a moratorium on
acquisitions and changed the calculation of interest rates for the Old Credit
Facility.

On June 22, 2000, the Company and the Lenders agreed to the Third Amendment
to Credit Agreement and Consent and Waiver, which eliminated the financial
covenant test for the fiscal quarter ended June 30, 2000. In addition to the
covenant relief, the Company agreed to make amortization payments scheduled for
June 30, 2000 due on September 30, 2000, along with the scheduled September 30,
2000 payments, and to make interest payments scheduled for June 30, 2000 on July
10, 2000 (which interest payments were paid).

On September 28, 2000, the Company and Lenders agreed to the Fourth
Amendment to Credit Agreement and Consent and Waiver, which eliminated the
financial covenants in their entirety with respect to all periods ending on and
after September 30, 2000. In addition, amortization payments of $15.7 million
would be due January 12, 2001. Amortization payments totaling $7.7 million would
be due March 31, June 30, September 30, and December 31, 2001, and the balance
of the outstanding principal would be due January 11, 2002. Interest payments
would continue to accrue and be payable January 12, 2001, and interest rates
were lowered. Positive net cash in excess of $2 million at the end of each month
would be paid to Lenders. The revolving credit loan commitment was terminated.
Capital expenditures would be limited to $400,000 for the period October 1, 2000
to January 12, 2001. The Lenders required bi-weekly cashflow forecasts and a
revised business plan.

On November 29, 2000, the Company and Lenders agreed to the Fifth Amendment
to Credit Agreement and Consent and Waiver, which extended the Company's
requirement to deliver a revised 2001 business plan to the Administrative Agent
from November 15, 2000 to December 15, 2000. The business plan was to be
delivered in a form that was reasonably acceptable to the Agent, in exchange for
amendments to the definitions of Permitted Investments, Permitted Ordinary
Course Dispositions (to include obsolete, slow-moving, idle or worn out assets)
and other Permitted Dispositions.

The Company was unable to meet its debt amortization payments of $15.7
million and interest payments of $12.5 million, which would have been due and
payable on January 12, 2001 but for the Company's signing the Sixth Amendment
effective as of January 12, 2001 (see below). Accordingly, all debt under the
Old Credit Facility was classified as a current liability as of December 31,
2000 in the consolidated balance sheet.

On March 23, 2001, the Company and the Lenders entered into the Sixth
Amendment to Credit Agreement and Waiver, effective as of January 12, 2001 (the
"Sixth Amendment"). The Sixth Amendment extended the maturity date of the
principal and interest payments under the Old Credit Facility to January 11,
2002, with required interim amortization payments of $1.1 million on April 15,
2001, $2.2 million on July 15, 2001 and $3.3 million on October 15, 2001. In
addition, the Sixth Amendment added certain new covenants, including a minimum
cumulative EBITDA covenant, a maximum limit on location signing bonuses, a
maximum limit on capital expenditures, and a budget compliance covenant.
Pursuant to the Sixth Amendment, the parties agreed that PNC Bank, National
Association, would become the new administrative agent for the Lenders and that
the Company would pay certain earned fees of the Lenders' professional advisors.

Effective as of February 19, 2002, the Company and the Lenders entered into
a Seventh Amendment to Credit Agreement and Consent and Waiver (the "Seventh
Amendment"). The Seventh Amendment waived the payment defaults arising out of
the Company's failure to make scheduled principal payments on July 15,

49

DAVEL COMMUNICATIONS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

2001, October 15, 2001 and January 11, 2002, effective as of the dates such
payments were due. In addition, the Seventh Amendment waived the covenant
violations arising out of the Company's failure to comply with its minimum
cumulative EBITDA covenant from May to December 2001, effective as of the dates
of such violations, and provided the Lenders' consent to the New Senior Credit
Facility and the transactions contemplated by the merger agreement with
PhoneTel, including the debt-for-equity exchange described below (see Note 18).

Indebtedness of the Company under the amended Old 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.
In February 2002, pursuant to an Intercreditor and Subordination Agreement
entered into by the Lenders and the lenders under the New Senior Credit
Facility, the Lenders agreed to subordinate their security interest in the
Company collateral to the security interest of the new senior lenders.

The Company's borrowings under the Credit Facility bear interest at a
floating rate and may be maintained as Base Rate Loans (as defined in the Old
Credit Facility, as amended) or, at the Company's option, as Eurodollar Loans
(as defined in the Old Credit Facility, as amended). Base Rate Loans bear
interest at the Base Rate (defined as the higher of (i) the applicable prime
lending rate or (ii) the Federal Reserve reported certificate of deposit rate
plus 1%). Eurodollar Loans bear interest at the Eurodollar Rate (as defined in
the Old Credit Facility, as amended).

The Company is required to pay the Lenders under the Old Credit Facility a
commitment fee of 0.5%, payable in arrears on a quarterly basis, on the average
unused portion of the Old Credit Facility during the term of the facility. The
Company is also required to pay an annual agency fee to the Administrative
Agent. In addition, the Company was also required to pay an arrangement fee for
the account of each bank in accordance with the banks' respective pro rata share
of the Old Credit Facility. The Administrative Agent and the Lenders will
receive such other fees as have been separately agreed upon with the
Administrative Agent.

The Old Credit Facility requires the Company to meet certain financial
tests and also contains certain covenants which, among other things, will limit
the incurrence of additional indebtedness, prepayments of other indebtedness,
liens and encumbrances and other matters customarily restricted in such
agreements.

The Old Credit Facility contains customary events of default, including,
without limitation, payment defaults, breaches of representations and
warranties, covenant defaults, cross-defaults to certain other indebtedness,
certain events of bankruptcy and insolvency, judgment defaults, failure of any
guaranty or security document supporting the Old Credit Facility to be in full
force and effect, and a change of control of the Company.

As of December 31, 2000, the Company had an interest rate swap agreement
with an aggregate notional amount of $7.5 million with a termination date of
June 2001. The interest rate swap requires the Company to pay fixed rates of
5.9% in exchange for variable rate payments based on the U.S. three month LIBOR
(6.4% as of December 31, 2000). Interest rate differentials are paid or received
every three months and are recognized as adjustments to interest expense.

As of December 31, 2000, the Company had an interest rate cap agreement
with a notional amount of $15 million with a termination date of September 2001.
The interest rate cap agreement requires 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 6.5%. 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

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DAVEL COMMUNICATIONS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

agreement has a cap rate of 7.0% and a floor rate of 4.8% based on the U.S.
one-month LIBOR rate (6.6% as of December 31, 2000).

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.

9. LEASE COMMITMENTS

The Company conducts a portion of its operations in leased facilities under
noncancellable operating leases expiring at various dates through 2006. 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 2006.

The annual minimum rental commitments under operating and capital leases
are as follows (in thousands):

Rent expense for operating leases for the years ended December 31, 2001, 2000,
and 1999 was $2,640,000, $2,603,000, and $2,566,000 respectively.

10. INCOME TAXES

No provision for income taxes was required and no income taxes were paid
for the years ended December 31, 2001, 2000 and 1999 because of operating losses
generated by the Company.

The components of the provision for income taxes are as follows (in
thousands):

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DAVEL COMMUNICATIONS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

A reconciliation of federal statutory income taxes to the Company's
effective tax provision is as follows (in thousands):

The tax effects of significant temporary differences representing deferred
tax assets and liabilities are as follows (in thousands):

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. 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, 2001, the Company had capital losses of $2,190,000 and tax
net operating loss carryforwards of approximately $245,858,000, which expire in
various amounts in the years 2002 to 2021. Following the Peoples Telephone
Merger and the CCI Acquisition in 1998, recognition of net operating loss
carryforwards incurred prior to 1998, are limited to approximately $5.8 million
and $3.5 million, respectively, each year under the rules of Internal Revenue
Code Section 382. Approximately $134,353,000 of the net operating loss
carryforwards relate to multiple business acquisitions for which annual
utilization will be limited under these rules. Additionally, the net operating
losses and capital losses will be subject to limitations if

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DAVEL COMMUNICATIONS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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.

11. CAPITAL STOCK TRANSACTIONS

Preferred Stock

The Company's certificate of incorporation authorizes 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 Telephone's articles of incorporation authorized 5,000,000 share 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 could
have accumulated. In connection with the Peoples Telephone Merger, the Company
issued 892,977 shares of common stock for the outstanding Series C Preferred
Stock and cumulative dividends and canceled the 5,000,000 authorized shares of
Peoples Preferred Stock.

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 $28,000,000 in the Company as payment for 1,000,000 shares of
newly issued common stock and warrants to purchase an additional 299,513 shares,
which are exercisable at a price of $32.00 per share and expire on June 29,
2002. Proceeds of the sale were used for working capital and payment of costs
incurred in connection with the Peoples Telephone Merger.

Stock Options and Warrants

On October 4, 2000, the board of directors approved the Davel
Communications, Inc. 2000 Long-Term Equity Incentive Plan (the "Plan"). The plan
was approved by the Company's stockholders at its 2000 Annual Meeting on
November 2, 2000. The Plan provides for the grants of stock options, stock
appreciation rights, restricted stock, performance awards and any combination of
the foregoing to employees, officers and directors of, and certain other
individuals who perform significant services for, the Company and its
subsidiaries. A total of 1,000,000 shares of common stock will be available for
issuance pursuant to the Plan and the maximum number of stock options granted to
any individual in any fiscal year cannot exceed 100,000. No shares or options
were issued under the Plan during the year ended December 31, 2001 and 2000.

The Company also has several pre-existing stock option plans under which
options to acquire up to 2,234,525 shares were available to be granted to
directors, officers and certain employees of the Company, including the stock
option plans acquired in the Peoples Telephone 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 issuance of
restricted common stock.

In 2001, no shares of restricted stock were issued. In the year ended
December 31, 2000 and 1999, 171,592 and 28,222 shares of restricted stock were
issued, of which grants of approximately 36,000 shares have since been
rescinded. The Company records compensation based on the fair market value of
the Company's common stock on the day the restricted shares are granted. This
compensation expense is recorded ratably over the vesting period of the
restricted stock.

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DAVEL COMMUNICATIONS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The exercise price of options 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 to employees 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 loss and loss per share would have
been reduced to the pro forma amounts indicated below (in thousands):

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 2001, 2000, and 1999: dividend yield of 0% for
all years; expected volatility of 424.6%, 264.1%, and 84.7%, respectively,
risk-free interest rates of 2.0%, 6.16%, and 5.0%, respectively, and expected
life of approximately five years.

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):

The following information applies to options outstanding at December 31,
2001:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

At December 31, 2001, approximately 928,000 shares of Common Stock were
reserved pursuant to Plan.

12. 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 "Earnings Per Share". 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 loss per share (in
thousands, except share and per share data):

Diluted loss per share is equal to basic loss per share since the exercise
of 835,000, 1405,000 and 1,365,000 outstanding options and 299,513 warrants for
the years ended December 31, 2001, 2000 and 1999 would be anti-dilutive for all
periods presented.

13. RESTRUCTURING CHARGE

During the year ended December 31, 1998, the Company overestimated
restructuring charges related to facilities closing costs and merger-related
closing costs. The Company underestimated restructuring charges related to
employee terminations. Accordingly, during 1999, the Company reversed
approximately $647,000 of the restructuring reserve related to facility closing
costs and $664,000 of the reserve related to merger closing costs. Also during
1999, the Company incurred an additional $1,311,000 of restructuring charges
related to employee termination costs.

During 1999, the Company incurred and paid restructuring charges and other
merger-related expenses with respect to the Peoples Telephone Merger of
approximately $1,570,000 related to integration and restructuring activities.
The restructuring charges and other merger-related expenses were primarily
related to severance pay for terminated employees, relocation costs and costs
related to the closing of redundant facilities. As of December 31, 2001, there
was no outstanding balance in the reserve.

14. 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 Telecom 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

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DAVEL COMMUNICATIONS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

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.

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. 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 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 for the year
ended December 31, 1997 related to reduced dial-around compensation is
approximately $3.3 million.

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 may 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

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DAVEL COMMUNICATIONS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

dial-around compensation rate and instead adopted a "cost-based" rate of $0.24
per dial-around call, which will be adjusted to $.238 effective April 21, 2002.
Both PSPs and IXCs petitioned the Court for review of the 1999 Payphone Order's
determination of the dial-around compensation rate. On June 16, 2000, the Court
affirmed the 1999 Payphone Order setting a 24-cent dial-around compensation
rate. On all the issues, including those raised by the IXCs and the payphone
providers, the Court applied the "arbitrary and capricious" standard of review,
and found that the FCC's rulings were lawful and sustainable under that
standard. As a result of the Court's June 16, 2000 decision, the 24-cent
dial-around compensation rate is likely to remain in place until April 21, 2002,
when it will be adjusted to $.238. The FCC has stated its intention to conduct a
third-year review of the rate, but no review has yet been commenced. There is
pending a Petition for Reconsideration of the 1999 Payphone Order filed with the
FCC by the IPPs, which has yet to be ruled on by the FCC. In view of the Court's
affirmation of the 1999 Payphone Order, it is unlikely that the FCC will adopt
material changes to the key components of the Order (other than the pending
retroactive issue, discussed below) pursuant to the pending Reconsideration
Petition, although no assurances can be given.

On April 5, 2001, the FCC released an order that is expected to have a
significant impact on the obligations of telecommunications carriers to pay
dial-around compensation to PSPs. The effect of the decision is to require that
the first long distance carrier to handle a dial-around call originating from a
pay telephone has the obligation to track and pay compensation on the call,
regardless of whether other carriers may subsequently transport or complete the
call. This modified rule became effective on November 23, 2001. The Company
believes that this modification to the dial-around compensation system will
result in a significant increase to the number of calls for which the Company is
able to collect such compensation. Because, however, the FCC ruling is subject
to a pending petition for court review and the system modification is as yet
untested, no assurances can be given as to the precise timing or magnitude of
revenue impact that may flow from the decision.

The new 24-cent rate became effective April 21, 1999. The 24-cent rate will
also be applied retroactively to the period beginning on October 7, 1997 and
ending on April 20, 1999 (the "intermediate period"), less a $0.002 amount to
account for FLEX ANI payphone tracking costs, for a net compensation of $0.238.
There is, however, a pending petition for reconsideration of this retroactive
application of the rate. The 1999 Payphone Order deferred a final ruling on the
treatment of the period beginning on November 7, 1996 and ending on October 6,
1997 (the "interim period") to a later order. The FCC further ruled that, after
the establishment of an interim period compensation rate and an allocation of
the rate among carriers, a true-up may be made for all payments or credits (with
applicable interest) due and owing between the IXCs and the PSPs, including
Davel, for both the interim and intermediate periods. Based on the reduction in
the per-call compensation rate in the 1999 Payphone Order, the Company further
reduced non-coin revenues by $9.0 million during 1998. The adjustment included
approximately $6.0 million to adjust revenue recorded during the period November
7, 1996 to October 6, 1997 from $37.20 per phone per month to $31.18 per phone
per month ($0.238 per call multiplied by 131 calls). The Company recorded
dial-around compensation revenue, net of adjustments from the 1997 Payphone
Order and the 1999 Payphone Order of approximately $22.9 million and $35.9
million for 2000 and 1999, respectively.

In a decision released January 31, 2002, which remains subject to
reconsideration, the FCC partially addressed the remaining issues concerning
interim and intermediate period compensation. The FCC adjusted the per-call rate
to $.229, for the interim period only, to reflect a different method of
calculating the delay in IXC payments to PSPs for the interim period, and
determined that the total interim period compensation rate should be $33.89 per
payphone per month ($.229 times an average of 148 calls per payphone per month).
The FCC deferred to a later, as yet unreleased, order its determination of the
allocation of this total compensation rate among the various carriers required
to pay compensation for the interim period. It is possible that the final
resolution of the timing and other issues relating to these retroactive
adjustments and the outcome of any related administrative or judicial review of
such adjustments could have a material adverse effect on the Company.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Market forces and factors outside the Company's control could significantly
affect the Company's dial-around compensation revenues. These factors include
the following: (i) the final resolution by the FCC of the "true up" of the
initial interim period flat-rate and "per call" assessment periods, (ii) the
possibility of administrative proceedings or litigation seeking to modify the
dial-around compensation rate, and (iii) 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.

15. 401(k) PROFIT SHARING PLAN

Certain subsidiaries created 401(k) profit sharing plans (the "Plans"). The
Plans provided 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 $159,000, $186,000, and $456,000 for the years ended December 31,
2001, 2000 and 1999, respectively. During 1999, the Plans were merged into the
Davel Communications Group, Inc. Profit Sharing Plan.

16. RELATED-PARTY NOTES AND TRANSACTIONS

Transactions with Major Shareholder and Director

The Company engaged in the following transactions with Mr. David Hill, the
Company's largest shareholder (a Director) and former Chairman of the Board
during the years ended December 31 (in thousands):

On July 6, 1999, the Company and Mr. Hill entered into an arrangement by
which Mr. Hill agreed to resign as the Chairman of the Davel Board of Directors
and of the Board's Executive Committee. On December 14, 2001, Davel and Mr. Hill
agreed to modify certain arrangements governing the terms of Mr. Hill's
resignation. The Company has now satisfied those obligations to Mr. Hill, as
modified.

The Company received management advisory services from Equity Group
Corporate Investments, Inc. ("EGI"), an affiliate of the Company. 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 Peoples Telephone and any other
merger, payable upon consummation of such merger. Effective August 31, 2000, the
Company and EGI entered into an Amended and Restated Advisory Agreement,
pursuant to which EGI became a non-exclusive financial advisor to the Company.
At the same time, the Company entered into a Settlement Agreement with EGI
pursuant to which the Company agreed to pay EGI $375,000 in accrued advisory
fees that had been earned under a predecessor advisory agreement. The parties
agreed that Davel would pay such fees by December 31, 2000 or such later date on
which cash is available to pay such amount. As of December 31, 2001, the Company
had an accrued liability to EGCI of $375,000 for advisory services rendered to
date.

Also during 1999, the Company sold to Mr. David Hill a building located in
Miami, Florida for $2.3 million. The Company believes that the terms of the sale
approximate fair value for the property.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

17. COMMITMENTS AND CONTINGENCIES

In December 1995, Cellular World, Inc. filed suit in Dade County Circuit
Court against the Company's affiliates, Peoples Telephone and PTC Cellular,
Inc., alleging tortious interference with Cellular World's trade secrets. The
matter proceeded to trial, during which the Company and Cellular World agreed to
settle and resolve the dispute in its entirety. Pursuant to the parties'
agreement, the Company agreed to pay Cellular World a total of $1.5 million. Due
to the Company's subsequent default under the settlement agreement, the parties
entered into discussions for purposes of negotiating a revised payment schedule.
Notwithstanding the parties' negotiations, on April 12, 2001, Cellular World
obtained a judgment in the amount of $750,000 plus interest in accordance with
the settlement agreement. On or about June 11, 2001, the parties agreed to a
payment schedule, and, on or about October 15, 2001, the Company fully satisfied
the judgment.

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, 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 (acquired by the Company on December 23, 1998) alleging that
Peoples Telephone 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
Telephone. Effective February 19, 2002, the parties to the lawsuit signed a
Settlement Agreement and Mutual Release ("Settlement Agreement"). The Settlement
Agreement provides that, upon the closing of the PhoneTel Merger, all parties to
the lawsuit will release and discharge all claims and liability against all
other parties, without an admission of liability by any party. The Settlement
Agreement further provides that as promptly as possible after the closing of the
PhoneTel Merger, the parties will execute a Joint Stipulation and Order for
Dismissal with Prejudice requesting that the Delaware Chancery Court dismiss the
lawsuit in its entirety, with prejudice.

In December 1999, the Company and its affiliate Telaleasing Enterprises,
Inc. were sued in the United States District Court, Central District of
California, by Telecommunications Consultant Group, Inc. ("TCG") and U.S.
Telebrokers, Inc. ("UST"), two payphone consulting companies which allege to
have assisted the Company in obtaining a telephone placement agreement with CSK
Auto, Inc. The suit alleges that the Company breached its commission agreement
with the plaintiffs based on the Company's alleged wrongful rescission of its
agreement with CSK Auto, Inc. Plaintiffs' amended complaint alleges damages in
excess of $700,000. The Company moved to dismiss the complaint, and, on August
24, 2000, the Court denied the Company's motion. The Company subsequently
answered the complaint and asserted a counterclaim, seeking declaratory relief.
On October 13, 2000, plaintiffs answered the counterclaim, denying its material
allegations. The Company, during a mediation conference held on October 29,
2001, agreed to a confidential settlement of this case, pursuant to which the
case was dismissed with prejudice in exchange for payments to the plaintiffs,
the sum of which was not material to the Company and was recorded in the third
quarter.

In March 2000, the Company and its affiliate Telaleasing Enterprises, Inc.
were sued in a related action in Maricopa County, Arizona Superior Court by CSK
Auto, Inc. ("CSK"). The suit alleges that the Company breached a location
agreement between the parties. CSK's complaint alleges damages in excess of $5
million. The Company removed the case to the U.S. District Court for Arizona and
moved to have the matter transferred to facilitate consolidation with the
related case in California brought by TCG and UST. On October 16, 2000, the U.S.
District Court for Arizona denied the Company's transfer motion and ordered the
case remanded back to Arizona state court. On November 13, 2000, the Company
filed its Notice of Appeal of the remand order to the United States Court of
Appeals for the Ninth Circuit. The appeal and underlying suit

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

are in their initial stages, and discovery is underway. The Company intends to
vigorously defend itself in the case.

On or about December 15, 2000, the Company filed and served its Amended
Complaint against LDDS WorldCom, Inc., MCI WorldCom Network Services, Inc., MCI
WorldCom Communications, Inc., and MCI WorldCom Management Company, Inc.
(collectively "Defendants"), claiming a violation of the 1996 Telecom Act and
breach of contract and seeking damages and equitable and injunctive relief
associated with Defendants' wrongful withholding of approximately $3.1 million
in dial-around compensation due to the Company, based upon an alleged, unrelated
indebtedness. Although the Company believed it possessed meritorious claims in
the case, given the uncertainty of litigation, the parties agreed at a mediation
conference to a settlement agreement, which effected, in exchange for
consideration paid to the Company, the dismissal of this suit and preserved the
Company's 1996 Telecom Act claim for prosecution in an action currently pending
in another forum. On July 23, 2001, the Court dismissed the case.

In February 2001, Picus Communications, LLC, a debtor in Chapter 11
bankruptcy in the United States Bankruptcy Court for the Eastern District of
Virginia, brought suit against the Company and its wholly owned subsidiary,
Telaleasing Enterprises, Inc., in the United States District Court for the
Eastern District of Virginia, claiming unpaid invoices of over $600,000 for
local telephone services in Virginia, Maryland, and the District of Columbia.
The Company sought relief from the bankruptcy court to assert claims against
Picus and answered Picus' complaint in the district court, denying its material
allegations. On or about April 2, 2001, Picus moved the district court to
dismiss its case and indicated that it may file its claim as an adversary
proceeding with the bankruptcy court. As of the date hereof, Picus has yet to do
so. In such an event, the Company intends to reassert its counterclaim in
bankruptcy court. On March 13, 2001, the Company filed a proof of claim in the
bankruptcy court to recover damages based on Picus's breach of contract and
failure to secure and pay federally mandated dial-around compensation for the
Company's benefit. On September 21, 2001, the Company filed an application for
administrative payment with the bankruptcy court seeking approximately $1.5
million in post-petition damages incurred by the Company as a result of Picus's
actions. The Company believes it has meritorious defenses and counterclaims
against Picus and intends to vigorously defend itself and pursue recovery from
Picus on its counterclaims. The Company cannot at this time predict its
likelihood of success on the merits.

On or about January 27, 2002, Davel was served with a complaint, in an
action captioned Sanchez et al. v. DavelTel, Inc. d/b/a Davel Communications,
Inc. et. al., brought in the district court for Cameron County, Texas.
Plaintiffs claim that defendants were negligent and such negligence proximately
caused the death of Thomas Sanchez, a former Davel employee. The matter has been
forwarded to Davel's insurance carrier for action. While Davel believes it
possesses adequate insurance coverage for the case and has meritorious defenses,
the matter is in its initial stages. Accordingly, Davel cannot at this time
predict its likelihood of success on the merits.

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.

18. SUBSEQUENT EVENTS:

On February 21, 2002, Davel announced that it had signed a definitive
agreement to merger with PhoneTel Technologies, Inc., the nation's
second-largest publicly traded independent payphone service ("PhoneTel"). In the
merger (the "PhoneTel Merger"), PhoneTel will become a wholly owned subsidiary
of Davel. Davel also announced that it had executed a Seventh Amendment to
Credit Agreement and Consent and Waiver (the "Seventh Amendment") with respect
to its existing credit agreement (the "Old Credit Agreement") and secured a new
$10.0 million senior credit facility with Madeleine L.L.C. and ARK CLO 2000-1,
Limited (the "New Senior Credit Facility"), of which $5.0 million was made
available to each of Davel and PhoneTel, to help finance certain operating and
transaction-related expenses.
60

DAVEL COMMUNICATIONS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

The merger agreement, which was unanimously approved by the boards of both
companies, is conditioned upon a substantial debt restructuring for each
company. In connection with the merger, Davel's existing secured lenders under
the Old Credit Facility (the "Junior Lenders") have agreed to exchange a
substantial amount of debt for Davel common stock, to make certain amendments to
restructure the remaining debt and to subordinate the existing debt to the New
Senior Credit Facility. The Seventh Amendment waived certain payments due July
15, 2001, October 15, 2001 and January 11, 2002 until August 31, 2002. Davel
currently anticipates that the payments due on August 31, 2002 under the Old
Credit Facility will be refinanced through the restructuring commitment
described below.

In connection with Davel's debt exchange, the Junior Lenders will own 93%
of Davel's outstanding common stock immediately prior to the merger, with the
remaining junior secured debt not to exceed $63.5 million (as compared to
approximately $276 million outstanding at the time of the signing of the merger
agreement). Existing shareholders of Davel common stock will own 3% of Davel's
outstanding shares, and 4% of the common stock will be reserved for the issuance
of stock options to Davel employees.

Immediately following the merger, current PhoneTel shareholders and
optionholders will own approximately 3.28% of the shares of Davel common stock
and current Davel shareholders and optionholders will own approximately 1.91%.
Of the remaining shares, 4.00% are intended to be reserved for issuance upon
exercise of employee stock options, and the companies' current lenders will own
approximately 90.81% of Davel common stock. Cash will be paid in lieu of
fractional shares in the PhoneTel Merger.

The current lenders of Davel and PhoneTel have delivered a Commitment
Letter, dated as of February 19, 2002, pursuant to which the then outstanding
debt of both entities, which totaled approximately $340 million at the time of
the signing of the merger agreement, will be reduced to $100 million through the
debt-for-equity exchange to be effected at the time of the PhoneTel Merger. The
PhoneTel Merger is currently expected to close in the third quarter of 2002.

The PhoneTel Merger is subject to approval by the shareholders of both
companies and the receipt of material third party and governmental approvals and
consents. In conjunction with the transaction, the Company will also seek
shareholder approval to increase the number of authorized shares of common stock
from 50,000,000 to 1,000,000,000 and to increase the number of shares issuable
pursuant to the Company's 2000 Long-Term Equity Incentive Plan. No date has been
set for the Davel stockholders meeting.

The impending debt exchange includes a partial settlement of the Company's
existing debt balances and significant modifications to the terms applicable to
the remaining balance. The accounting for the debt exchange, which will be based
upon the relevant amounts and terms in place on the date of closing, will result
in the recognition of an extinguishment gain to the extent that the current
carrying amount of the debt ($237.7 million on December 31, 2001) exceeds the
combined amount of (i) the fair value of the common stock delivered to the
creditors and (ii) the future cash payments (including both principal and
interest) required under the modified terms of the remaining balance. If the
exchange had occurred on December 31, 2001, such gain would have amounted to
$169.2 million. In addition, following the debt exchange, had it occurred on
December 31, 2001, all cash payments under the modified terms of the remaining
balance would be accounted for as reductions of the adjusted carrying amount of
the debt, and no interest expense would be recognized on the remaining debt for
any period between the restructuring and the modified maturity date.

The impending merger will be accounted for as a purchase business
combination, where the purchase price, including the fair values of common stock
issued, liabilities assumed and direct expenses, will be allocated to the fair
values of assets of PhoneTel on the date acquired. The excess of the purchase
price over the fair values, if any, will be recorded as goodwill.

61

DAVEL COMMUNICATIONS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

Certain unaudited quarterly financial information for the year ended
December 31, 2001 and 2000, is as follows (in thousands except per share data):

The decrease in revenues in the fourth quarter of 2000 is due to
seasonality and a $4.4 million adjustment to dial-around revenue based on
management's downward revised estimate of the number of dial-around calls per
phone per month.

During the fourth quarter of 2000, the Company recorded a loss on disposal
of fixed assets of $5.2 million, related to a book to physical loss from a
physical inventory of its uninstalled equipment. The Company cannot determine
what the effect of the loss on previous quarters may have been, if any. In
addition, the Company recorded an impairment charge and non-recurring items of
$43.8 million in the fourth quarter of 2000 (see Note 3).

62

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, 2001.

Effective December 3, 2001, the Company, through action of its Audit
Committee, engaged Aidman, Piser & Company, P.A. as its independent auditors for
the fiscal year ended December 31, 2001. The Company dismissed its previous
independent accountants, Arthur Andersen LLP, effective December 3, 2001. In
connection with the audits of the two fiscal years ending December 31, 2000 and
during subsequent interim periods, there have been no disagreements on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope and procedures which, if not resolved to the satisfaction of
Arthur Andersen LLP, would have caused Arthur Andersen LLP to make reference to
the matter in their report.

The reports of Arthur Andersen LLP on the consolidated financial statements
for the past two fiscal years did not contain an adverse opinion or a disclaimer
of opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principles, except that (i) the report of Arthur Andersen dated March
16, 2000 (except with respect to the matters discussed in Note 20, as to which
the date is December 20, 2000), relating to the consolidated financial
statements of the Company as of December 31, 1999, contained an emphasis of
matter paragraph related to potential going concern issues arising after the
twelve-month reporting window and (ii) the report of Arthur Andersen dated March
30, 2001, relating to the consolidated financial statements of the Company as of
December 31, 2000, contained a going concern modification. The Company requested
Arthur Andersen LLP to furnish it a letter stating whether it agrees with the
above statement. A copy of that letter, dated December 3, 2001, was filed as
Exhibit 16.1 to the Company's Current Report on Form 8-K dated December 3, 2001.

63

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

DIRECTORS

The Company has six 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.

Raymond A. Gross has been Chairman of the Board of Directors since November
2000. Mr. Gross joined the Company on February 28, 2000 and served as Chief
Executive Officer until July 11, 2001. He became President and Chief Executive
Officer of Security Associates International, Inc. on August 6, 2001. 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 negotiation of
strategic business alliances. From 1993 to 1996, Mr. Gross was President and
Chief Executive Officer of Alert Centre, Inc. Prior to 1993, Mr. Gross held
various executive positions in the telecommunications and computer services
industries.

David R. Hill founded the Company's predecessor, Davel Communications
Group, Inc. He served as the Chief Executive Officer of the Company from October
1993 to December 1994 and as Chairman of the Board until July 1999. Mr. Hill is
a self-appointed Board designee pursuant to the Investment Agreement dated April
19, 1999 among the Company, EGI-DM Investments, L.L.C. and Mr. Hill (the
"Investment Agreement") which amends and restates a prior agreement among Davel
Communications Group, Inc., David Hill and Samstock/SIT, L.L.C. 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
now serves as President of New Age Moving & Storage, L.L.C., a storage and
moving company. Mr. Hill is a Board designee of David Hill pursuant to the
Investment Agreement.

Donald J. Liebentritt has been President of Equity Group Investments,
L.L.C. ("EGI") since January 2000, was Vice President and General Counsel of EGI
from September 1996 to December 1999, and was a former Principal and Chairman of
Rosenberg & Liebentritt, P.C., a "captive" Chicago law firm that provided legal
services to EGI and its portfolio companies before its dissolution in 1999. Mr.
Liebentritt is an officer and director of numerous private entities associated
with EGI. Mr. Liebentritt is a Board designee of Samstock/SIT, L.L.C. pursuant
to the Investment Agreement.

William C. Pate has been employed by EGI or its predecessor since February
1994. Mr. Pate serves on the Board of Directors of Danielson Holding
Corporation, an insurance company. Prior to February 1994, Mr. Pate was an
associate at Credit Suisse First Boston. Mr. Pate is a Board designee of
Samstock/SIT, L.L.C. pursuant to the Investment Agreement.

Theodore C. Rammelkamp, Jr. has practiced law in Jacksonville, Illinois
since September 1, 2000 in a general business and commercial practice known as
the Law Offices of Teddy Rammelkamp. He served as

64

Senior Vice President and General Counsel for the Company from 1994 through June
1999. Prior to joining the Company in 1994, he was a general partner in a
prominent west central Illinois law firm. Mr. Rammelkamp has also served as a
director of Elliott State Bank and the American Public Communications Council.

EXECUTIVE OFFICERS

The following table sets forth the names and ages of the Company's
executive officers and their positions with the Company:

Bruce W. Renard became President of the Company on July 11, 2001. Mr.
Renard joined the Company in December 1998 as Senior Vice President of
Regulatory & External Affairs and Associate General Counsel, and was later named
General Counsel in August 1999. Prior to joining the Company, Mr. Renard served
as General Counsel, Executive Vice President, and Vice President of Regulatory
Affairs for Peoples Telephone from January 1992 to December 1998. Prior to
joining Peoples Telephone, Mr. Renard provided legal and consulting services to
the telecommunications industry from 1984 to 1991. Prior to that time, Mr.
Renard served as Associate General Counsel for the Florida Public Service
Commission from 1979 to 1983. Mr. Renard currently serves as Vice Chairman and
Director of the American Public Communications Council, the national public
communications industry association, and as a Director of several state public
communications trade associations.

Lawrence T. Ellman has been Senior Vice President of Sales and Account
Management since December 1998 when he joined the Company following the Peoples
Telephone Merger. Mr. Ellman was at Peoples Telephone from 1994 to 1998, where
he served as Executive Vice President/President National Accounts. Prior to
joining Peoples Telephone, Mr. Ellman was an Owner and President of Atlantic
Telco, Inc., an independent payphone provider operating in the northeastern
United States, which Peoples Telephone purchased in 1994. Mr. Ellman was a
founding member and has served as Treasurer and a member of the board of
directors of the American Public Communications Council as well as President and
Chairman of the Board for the Mid-Atlantic Payphone Association.

Marc S. Bendesky joined the Company in October 2000 as Chief Financial
Officer and Treasurer. Mr. Bendesky is also a Partner of Tatum CFO Partners,
L.L.P., a national partnership of career CFOs providing CFO services to
companies. His business career spans over 30 years and includes a diversified
financial background with extensive experience and expertise in capital markets,
finance, accounting, taxation and operations. Mr. Bendesky's most recent work
experience includes 2 years as a Tatum partner, during which time he served 4
clients prior to joining the Company. He served 4 years with Tunstall
Consulting, Inc., a corporate financial consulting firm specializing in the
capital markets. Prior to Tunstall, he served for 16 years (initially as
Controller and later as Vice President) at General Media International, Inc., a
diversified domestic and international consumer publishing company, and 11 years
with 2 international CPA firms, PricewaterhouseCoopers and Laventhol & Horwath.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 and related
regulations 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 Commission. 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 2001. To its knowledge, all
reporting persons of the Company satisfied these filing requirements in 2001.

65

In making this disclosure, the Company has relied on written
representations of reporting persons and filings made with the Commission.

ITEM 11. EXECUTIVE COMPENSATION:

The following tables and notes set forth the compensation of the Company's
Chief Executive Officer and the four highest paid executive officers whose
salary and bonuses exceeded $100,000 in the fiscal year ended December 31, 2001.

SUMMARY COMPENSATION TABLE

- ---------------

(1) All other compensation represents severance payments from Peoples Telephone
in 1999.

(2) Mr. Bendesky was appointed Chief Financial Officer in October 2000, at an
annual salary of $200,000.

(3) All other compensation represents reimbursed relocation expenses in 2000.

(4) In 1999, options were granted to both Mr. Renard and Mr. Ellman for: (i)
signing bonus of 30,000 options; (ii) a June bonus of 12,750 options; and
(iii) a year end bonus of 5,000 options.

(5) All other compensation represents severance pay in 2001 for Mr. Gross, who
resigned as the Company's Chief Executive Officer on July 11, 2001.

(6) All other compensation represents contract buyouts in 2001 for Mr. Renard
and Mr. Ellman.

(7) A fee of $56,667 was also paid to Tatum CFO Partners, LLP as compensation
for Mr. Bendesky's services to Davel in 2001. In addition, Davel paid Tatum
CFO Partners, LLP fees totaling $125,000 in 2001 for other finance support
services. Mr. Bendesky is a partner of Tatum CFO Partners, LLP.

OPTION GRANTS IN LAST FISCAL YEAR

66

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES

- ---------------

(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,
2001, at which date the closing price of the Common Stock as quoted on the
Nasdaq over-the-counter bulletin board was $0.03 per share. The above
valuations may not reflect the actual value of unexercised options as the
value of unexercised options fluctuates with market activity.

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. At
its November 2, 2000 regular meeting, the Board approved a resolution that the
directors of the Company who are not employees receive, as their sole and
exclusive compensation for their service to the Company, the following: (i)
options exercisable for 12,000 shares of Common Stock of the Corporation
pursuant to the Davel Communications, Inc. 2000 Long-Term Equity Incentive Plan,
to be granted at the beginning of each year of service on the date of the Annual
Meeting of Stockholders, and (ii) a cash payment equal to $1,000 for each
meeting of the Board of Directors or any committee thereof, plus reimbursement
of any reasonable travel expenses; and (iii) medical/health insurance for those
requesting same; and, that any previously existing director compensation policy
was thereby terminated and abandoned.

INCENTIVE COMPENSATION

The Company has implemented a bonus plan that allows each executive officer
to receive an annual cash incentive. Under the plan, Messrs. Ellman and Renard
had potential maximum bonuses in 2000 of 60% of base pay and target bonuses of
30% of base pay. The bonuses are comprised of three parts: company objectives,
departmental objectives and personal objectives. The company objectives are
based upon growth in earnings per share and EBITDA, and the departmental and
personal goals are determined with respect to objectives established for each
executive officer by January 30 of the applicable year.

The Company also maintains a Long-Term Equity Incentive Plan pursuant to
which the executive officers are granted options to purchase common stock at the
latest closing price that is available prior to the date the options are
awarded. Under the employment agreements, each Executive is awarded a minimum of
5,000 stock options each year of his employment and may be awarded a greater
number at the discretion of the Compensation Committee. Under the Long-Term
Equity Incentive Plan, other employees may be granted restricted stock or
options to purchase shares of Common Stock. The Compensation Committee of the
Board

67

currently administers the Stock Option Plan. The Compensation Committee
determines which individuals will be granted options, the number of shares to be
subject to options and other terms and conditions applicable to the grants.

401(K) PLAN

The Company maintains a 401(k) Plan which is available to all employees of
the Company, including its executive officers. The Company provides a matching
contribution to the Plan up to a maximum of 1.5% of the salary of the
contributing employee. The Company's contribution to an employee's account vests
over a period of five years. In 1999, the 401(k) plan of the Company was merged
with the plans of Peoples Telephone and Communications Central Inc.,
subsidiaries of the Company.

EMPLOYMENT AGREEMENTS

The Company and Raymond A. Gross entered into an Employment Agreement,
dated as of February 28, 2000. Pursuant to the Agreement, Mr. Gross was to serve
as the Chief Executive Officer of the Company for a term of two years, subject
to automatic renewal each year unless notice of non-renewal is given by one of
the parties at least 90 days prior to any such renewal date. The Company also
agreed to propose the addition of Mr. Gross to its board of directors subject to
nomination by the Board and stockholder approval.

During the employment period, the base salary under the Agreement was set
at $325,000 per year, subject to annual review by the Board, and Mr. Gross was
entitled to participate in the Company's benefit programs generally available to
executive officers. In addition, the Board could award an incentive cash bonus
of up to 100% of Mr. Gross's base salary based upon achievement of mutually
agreed goals and the Company's profitability; provided that the bonus was to
equal 25% of base salary for the first two fiscal quarters during the term of
the Agreement. Subject to necessary stockholder approval, the Company agreed to
grant Mr. Gross a total of 650,000 non-qualified stock options at a purchase
price to be set as the price of the Company's common stock on the day before the
announcement of his hiring, with 275,000 of the options granted as of the
execution of the Agreement. All options to be granted under the Agreement are
subject to a ten-year vesting schedule, with earlier vesting of a portion of
such options upon a change of control of the Company or upon achievement of
certain common stock trading prices. The Agreement also contains certain
confidentiality, non-competition and non-solicitation provisions.

If the Company terminates Mr. Gross other than for "cause" or "disability"
or if Mr. Gross terminates his employment for "good reason," the Company shall
pay severance in an amount equal to the base salary for one full calendar year
plus the targeted bonus for such year. Under the Agreement, severance shall be
payable over a period of one year and during such time the Company shall provide
medical insurance for Mr. Gross and his family. The Company will also make
available one year of medical insurance coverage in the event Mr. Gross's
employment is terminated by death or disability. Upon his voluntary termination,
vested options will expire 90 days from the effective date of his resignation.

Effective July 11, 2001, Mr. Gross resigned as Chief Executive Officer and
agreed to terminate his employment agreement but continue to serve as
non-executive Chairman of the Board of Directors. Mr. Gross's coverage under the
Company's healthcare and medical plans terminated on September 30, 2001. Mr.
Gross has agreed, in the event of and effective upon the consummation of the
previously disclosed merger with PhoneTel Technologies, Inc., to retire as
Chairman of the Board. In consideration of forgoing any severance or other
compensation owing to him under the Agreement, Mr. Gross received an aggregate
payment of $325,000, paid in installments between January 2001 and June 2001.
Mr. Gross also agreed to provide consulting services to the Company on an
as-needed basis at the per diem rate of $1,750.

Following the Peoples Telephone Merger, the Company also entered into
employment agreements with Lawrence T. Ellman and Bruce W. Renard. (Messrs.
Ellman and Renard for purposes hereof shall hereafter be collectively referred
to as the "Executives".

The employment agreements provided for an initial employment period through
December 31, 2000, with automatic one-year renewals unless either party notified
the other at least 60 days prior to the end of any term.

68

The employment agreements provided for an annual base salary of at least
$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.

Effective November 1, 2001, the Executives entered into letter agreements
with Davel that had the effect of terminating the existing employment
agreements. Pursuant to his November 1, 2001 letter agreement, Mr. Renard
received a $260,000 one-time payment in exchange for (i) a termination of his
employment agreement, including the right to any severance payment upon a change
of control of the Company, (ii) a covenant not to compete, (iii) a covenant not
to solicit employees or customers, (iv) a covenant to protect the
confidentiality of Company information and (v) a mutual release and waiver of
claims. Pursuant to his November 1, 2001 letter agreement, Mr. Ellman received a
$240,500 one-time payment in exchange for (i) a termination of his employment
agreement, including the right to any severance payment upon a change of control
of the Company, (ii) a covenant not to compete, (iii) a covenant not to solicit
employees or customers, (iv) a covenant to protect the confidentiality of
Company information and (v) a mutual release and waiver of claims. Pursuant to
their letter agreements, the Executives have agreed to continue to be employed
by the Company, on an at-will basis, in their current capacities and at the same
salary and bonus levels as are set forth in their terminated employment
agreements.

On October 4, 2000, the Company entered into an employment agreement with
Marc S. Bendesky. Pursuant to the agreement, Mr. Bendesky was to serve as the
Chief Financial Officer of the Company until December 31, 2001. During the
employment period, the base salary under the agreement is set at $200,000 per
year, plus a 20% retainer to Tatum CFO Partners. In addition, the Board may
award an incentive cash bonus up to $50,000. If the Company terminates Mr.
Bendesky other than for "cause" or "disability," the Company shall pay severance
in an amount equal to two months' base salary. Effective January 1, 2002, the
Company extended the agreement until December 2002 on substantially the same
terms and conditions as those set forth in the original agreement.

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 awarded 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. On July 6, 1999, the Company and Mr.
David Hill entered into an arrangement by which Mr. Hill agreed to resign as the
Chairman of the Davel Board of Directors and of the Board's Executive Committee.
By amendment on December 14, 2001, Davel and Mr. Hill agreed to modify certain
arrangements governing the terms of Mr. Hill's resignation. The Company has now
satisfied those obligations to Mr. Hill as modified in the amendment.

COMPENSATION COMMITTEE REPORT

The Compensation Committee of the Board of Directors is responsible for
determining the compensation of all executive officers of the Company.

Compensation Philosophy

The Committee's objectives in its compensation decisions are to establish
incentives for the Company's executive officers to achieve optimal short-term
and long-term operating performance for the Company and to link executive and
stakeholder interests. The Company determines the elements of each executive
officer's compensation package by evaluating the responsibilities of his
position, his performance and that of the Company, as well as his contribution
to the Company's overall performance. Compensation for the Chief Executive
Officer of the Company is determined by the other two members of the Committee
through a process based on considerations similar to those for executive
officers generally.

69

2001 Compensation

The 2001 compensation of executive officers was generally established in
their employment agreements with the Company. The Committee has reviewed the
terms of the employment agreements and found them to be generally consistent
with the Committee's policies regarding executive compensation.

There were four potential elements of compensation of the executive
officers for 2001: base salary, an annual cash bonus, stock options granted
under the Stock Option Plan and annual stock grants.

Each executive officer's 2001 base salary was established at the beginning
of the term of his employment or consulting agreement. Base salaries of all
officers were intended to be relatively moderate and are believed to be at or
below the median of the base salaries paid in 2001 by public telecommunications
companies of a size comparable to the Company. The employment agreements did not
provide for automatic increases in the base salary of any of the executive
officers.

Each executive officer was entitled to a bonus determined by reference to
his employment agreement based on his efforts to help the Company reach its
goals and objectives.

In an effort to provide a long-term incentive for future performance that
aligns the executive officers' interests with the interests of stockholders,
executive officers are eligible for participation in the Company's Stock Option
Plan and, effective as of the date of adoption by stockholders on November 2,
2000, the Company's 2000 Long-Term Equity Incentive Plan. Stock options are
intended to provide an incentive for the creation of stockholder value over the
term of several years since the full benefit of options will be realized only if
the price of common stock appreciates over that term. In 2001, no stock options
were granted to the executive officers of the Company with respect to the
Company's performance in 2000. The Company also may award stock grants under the
Stock Option Plan or 2000 Long-Term Equity Incentive Plan. Stock awarded under
either plan would contain certain restrictions on transfer. Awarding stock with
restriction on its transfer provides further long-term incentives that align the
interests of the executive officers with the interests of stockholders.

Deductibility of Compensation

Section 162(m) of the Internal Revenue Code of 1986, as amended, generally
establishes, with certain exceptions, a $1 million deduction limit on executive
compensation for public companies. The Committee believes that it is in the best
interests of the Company's stockholders to structure its compensation plans to
achieve maximum deductibility under Section 162(m) to the extent consistent with
the Company's need to attract and retain qualified executives.

This Report of the Compensation Committee on Executive Compensation shall
not be deemed incorporated by reference by any general statement incorporating
by reference this Annual Report or any portion hereof into any of the Company's
filings with the Securities and Exchange Commission, and such information shall
not be deemed filed with the Securities and Exchange Commission, except as
specifically otherwise provided in such other filings or to the extent required
by Item 402 of Regulation S-K.

Robert D. Hill, Chairman
Raymond A. Gross
William C. Pate

70

AUDIT COMMITTEE REPORT

The Audit Committee obtained a letter from Aidman Piser & Company, P.A.,
the Company's independent auditors, containing a description of all
relationships between the auditors and the Company, discussed with the auditors
any of those relationships that may impact their objectivity and independence
and satisfied itself as to the auditors' independence. Aidman Piser & Company,
P.A. has confirmed in its letter that, in its professional judgment, it is
independent of the Company within the meaning of the Federal securities laws.

The Audit Committee discussed and reviewed with the independent auditors
all matters required by auditing standards generally accepted in the United
States of America, including those described in SAS 61, "Communication with
Audit Committees." With and without management present, the Audit Committee
discussed and reviewed the results of the independent auditors' examination of
the financial statements. The Audit Committee also discussed the results of the
internal audit examinations.

The Audit Committee reviewed the audited financial statements of the
Company as of and for the fiscal year ended December 31, 2001 with management
and the independent auditors. Management has the responsibility for the
preparation and integrity of the Company's financial statements and the
independent auditors have the responsibility for the examination of those
statements. Based on the above-mentioned review and discussions with management
and the independent auditors, the Audit Committee recommended to the Board that
the Company's audited financial statements be included in this Annual Report on
Form 10-K for the fiscal year ended December 31, 2001, for filing with the
Securities and Exchange Commission.

Donald J. Liebentritt, Chairman
William C. Pate
Theodore C. Rammelkamp, Jr.

71

PERFORMANCE GRAPH

The comparative stock performance graph below compares the cumulative
stockholder return on the common stock of the Company for the period from
December 27, 1996 through December 28, 2001 with the cumulative total return on
(i) the Total Return Index for the Nasdaq Stock Market (U.S. Companies) (the
"Nasdaq Composite Index") and (ii) a peer group of companies that compete with
the Company in the operation of independently owned pay telephones (the "Peer
Group"), in each case assuming the reinvestment of dividends. None of the
companies in the Peer Group offers a range of products and services fully
comparable to those of the Company, although each competes with the Company with
respect to certain of the Company's significant business segments. The returns
of each company have been weighted according to their respective stock market
capitalization for purposes of arriving at a peer group average. The members of
the Peer Group are Peoples Telephone, PhoneTel Technologies, Inc. and Choicetel
Communications, Inc. Due to the Company's acquisition of Peoples Telephone in
the Peoples Telephone Merger, Peoples has not been separately reflected in the
Peer Group since 1998.

TOTAL RETURN ANALYSIS

Source: Carl Thompson Associates www.ctaonline.com (800) 959-9677. Data from
BRIDGE Information Systems, Inc.

72

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

OWNERSHIP OF COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS AND BENEFICIAL
OWNERS

The following table sets forth information regarding shares of the
Company's common stock, par value $0.01 per share, beneficially owned, as of
March 15, 2002, by the Company's directors, named executive officers and 5%
stockholders.

- ---------------

* 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 12,000 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.

(5) Includes 126,412 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.

(6) Includes 133,250 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.

(7) Includes 56,565 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.

(8) Includes 73,015 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.

(9) Includes 24,000 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan and warrants
to purchase 231 shares with an exercise price of $32.00 per share from the
Company.

(10) Includes 24,000 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.

(11) Includes 49,000 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.

73

(12) Includes 1,773,800 shares beneficially owned (including warrants to acquire
299,513 shares with an exercise price of $32.00 per share from the Company
and certain individual shareholders). 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. Samuel 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.

(13) Based on a Schedule 13D/A filed on January 14, 1999. Includes 26,000 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.

(14) Includes 524,242 shares that could be acquired within 60 days upon the
exercise of options and 299,744 shares that could be acquired within 60
days upon the exercise of warrants.

(15) The address of such officers, unless otherwise noted, is 10120 Windhorst
Road, Tampa, Florida 33619.

ITEM 13. CERTAIN TRANSACTIONS

The Company has entered into certain transactions with Mr. David R. Hill,
who is a director. The Company leased office space in Jacksonville, Illinois
from Mr. Hill, to whom it paid aggregate amounts of $269,625, $129,420, and
$118,600 in 2001, 2000 and 1999, respectively.

In addition, the Company received payments from Mr. David Hill for
administrative services provided to him by certain employees of the Company in
the aggregate amounts of $202,900, $84,000 and $45,900 in 2001, 2000 and 1999,
respectively.

On July 6, 1999, the Company and Mr. Hill entered into an arrangement by
which Mr. Hill agreed to resign as the Chairman of the Davel Board of Directors
and of the Board's Executive Committee. On December 14, 2001, Davel and Mr. Hill
agreed to modify certain arrangements governing the terms of Mr. Hill's
resignation. The Company has now satisfied those obligations to Mr. Hill, as
modified.

Effective August 31, 2000, the Company and EGI entered into an Amended and
Restated Advisory Agreement, pursuant to which EGI became a non-exclusive
financial advisor to the Company. At the same time, the Company entered into a
Settlement Agreement with EGI pursuant to which the Company agreed to pay EGI
$375,000 in accrued advisory fees that had been earned under a predecessor
advisory agreement. The parties agreed that Davel would pay such fees by
December 31, 2000 or such later date on which cash is available to pay such
amount. Such fees have not yet been paid.

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.

74

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 Annual
Report on Form 10-K.

1. FINANCIAL STATEMENTS

See Part II.

2. FINANCIAL STATEMENT SCHEDULES

None

3. EXHIBITS

See Exhibit Index on the following page.

(b) Reports on Form 8-K.
On December 3, 2001, the Company filed a Current Report on Form 8-K
with respect to the dismissal of Arthur Andersen LLP, and the
engagement of Aidman, Piser & Company, P.A., as the Company's
independent public accountants.

75

EXHIBIT INDEX

2.1 Agreement and Plan of Reorganization and Merger, dated as of
February 19, 2002, by and among Davel Communications, Inc.,
Davel Financing Company, L.L.C., DF Merger Corp., PT Merger
Corp., and PhoneTel Technologies, Inc. (incorporated by
reference to Exhibit 2.1 to the Company's Current Report on
Form 8-K filed with the Commission on February 27, 2002).
2.2 Exchange Agreement, dated as of February 19, 2002, by and
among Davel Communications, Inc., Davel Financing Company,
L.L.C., DF Merger Corp., PhoneTel Technologies, Inc.,
Cherokee Communications, Inc., and the lenders named therein
(incorporated by reference to Exhibit 2.2 to the Company's
Current Report on Form 8-K filed with the Commission on
February 27, 2002).
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.
10.1 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).
10.2 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).
10.3 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
(incorporated by reference to Exhibit 10.20 to Amendment No.
1 to Annual Report on Form 10-K/A filed with the Commission
on March 29, 2000).
10.4 Third Amendment to Credit Agreement, dated as of June 22,
2000, among Davel Financing Company, L.L.C., Davel
Communications, Inc., Bank of America, N.A., (formerly known
as 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 14, 2000).
10.5 Fourth Amendment to Credit Agreement, dated as of September
28, 2000, among Davel Financing Company, L.L.C., Davel
Communications, Inc., Bank of America, N.A., (formerly known
as 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 November 14, 2000).
10.6 Fifth Amendment to Credit Agreement, dated as of November
29, 2000, among Davel Financing Company, L.L.C., Davel
Communications, Inc., Bank of America, N.A., (formerly known
as NationsBank, N.A.), as administrative agent, and the
other Lenders party thereto.
10.7 Sixth Amendment to Credit Agreement and Waiver, dated as of
March 23, 2001, among Davel Financing Company, L.L.C., Davel
Communications, Inc., Bank of America, N.A. (formerly known
as NationsBank, N.A.), as administrative agent, PNC Bank,
National Association, as successor administrative agent, and
the other Lenders party thereto.
10.8 Seventh Amendment to the Credit Agreement and Consent and
Waiver, dated as of February 19, 2002, by and among Davel
Communications, Inc., Davel Financing Company, L.L.C., as
Borrower, the Domestic Subsidiaries of the Borrower, as
Guarantors, the lenders named therein, and PNC Bank,
National Association (incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K filed with
the Commission on February 27, 2002).

76

10.9 Credit Agreement, dated as of February 19, 2002, by and among Davel Communications, Inc., Davel Financing
Company, L.L.C., the Domestic Subsidiaries of Davel Financing Company, L.L.C., PhoneTel Technologies,
Inc., Cherokee Communications, Inc., Madeleine L.L.C., and ARK CLO 2000-1, Limited (incorporated by
reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the Commission on
February 27, 2002).
10.10 Security Agreement, dated as of February 19, 2002, by and among Davel Communications, Inc., Davel
Financing Company, L.L.C., the Domestic Subsidiaries of Davel Financing Company, L.L.C., PhoneTel
Technologies, Inc., Cherokee Communications, Inc., Madeleine L.L.C., and ARK CLO 2000-1, Limited
(incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed with the
Commission on February 27, 2002).
10.11 Commitment Letter, dated as of February 19, 2002, by and among Davel Communications, Inc., PhoneTel
Technologies, Inc., and the lenders named therein (incorporated by reference to Exhibit 10.4 to the
Company's Current Report on Form 8-K filed with the Commission on February 27, 2002).
10.12 Voting Agreement, effective as of November 1, 2001, by and among AXP Bond Fund, Inc., AXP Variable
Portfolio-Bond Fund, a series of AXP Variable Portfolio Income Series, Inc., AXP Variable
Portfolio-Managed Fund, a series of AXP Variable Portfolio Managed Series, Inc., Income Portfolio, a
series of IDS Life Series Fund, Inc., Managed Portfolio, a series of IDS Life Series Fund, Inc., AXP
Variable Portfolio-Extra Income Fund, a series of AXP Variable Portfolio Income Series, Inc. and High
Yield Portfolio, a series of Income Trust, and Davel Communications, Inc. (incorporated by reference to
Exhibit 10.5 to the Company's Current Report on Form 8-K filed with the Commission on February 27, 2002).
10.13 Voting Agreement, effective as of July 10, 2001, by and between CIBC World Markets Corp. and Davel
Communications, Inc. (incorporated by reference to Exhibit 10.6 to the Company's Current Report on Form
8-K filed with the Commission on February 27, 2002).
10.14 Voting Agreement, effective as of July 31, 2001, by and between Pacholder Associates, Inc. and Davel
Communications, Inc. (incorporated by reference to Exhibit 10.7 to the Company's Current Report on Form
8-K filed with the Commission on February 27, 2002).
10.15 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).
10.16 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).
10.17 Investment Agreement, dated April 19, 1999, among Davel Communications, Inc., Samstock L.L.C. and
EGI-Davel Investors, L.L.C. (incorporated by reference to Exhibit 10.31 to Amendment No. 1 to Annual
Report on Form 10-K/A filed with the Commission on March 29, 2000).
10.18 Davel Communications, Inc. Amended and Restated 2000 Long-Term Equity Incentive Plan, as amended through
February 11, 2002.
21.1 Subsidiaries of Davel Communications, Inc.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Aidman, Piser & Company, P.A.

77

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

DAVEL COMMUNICATIONS, INC.

/s/ MARC S. BENDESKY
By:
--------------------------------------

Marc S. Bendesky
Chief Financial Officer

Date: March 29, 2002

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.