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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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: 000-25207
DAVEL COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-3538257
(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) I.D. No.)
1001 LAKESIDE AVENUE, CLEVELAND, OH 44114
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (216) 241-2555
Indicate by check mark whether the Registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
As of November 10, 2002, there were 615,020,084 shares of the Registrant's
Common Stock outstanding.
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DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
ITEM 1
Financial Statements:
Consolidated Balance Sheets ................................................................... 1
Consolidated Statements of Operations ......................................................... 2
Consolidated Statements of Cash Flows ......................................................... 4
Consolidated Statements of Shareholders' Deficit and Other Comprehensive Income ............... 6
Notes to Consolidated Financial Statements .................................................... 7
ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of Operations ......... 19
Liquidity and Capital Resources ............................................................... 28
ITEM 3
Quantitative and Qualitative Disclosures about Market Risk .................................... 30
ITEM 4
Controls and Procedures ....................................................................... 30
PART II OTHER INFORMATION
ITEM 1
Legal Proceedings ............................................................................. 32
ITEM 6
Exhibits and Reports on Form 8-K .............................................................. 33
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,982 $ 5,333
Trade accounts receivable, net of allowance for doubtful accounts of
$1,672 at September 30, 2002 12,394 11,757
Other current assets 3,637 629
--------- ---------
TOTAL CURRENT ASSETS 25,013 17,719
Property and equipment, net 45,602 47,448
Location contracts, net 19,907 1,983
Goodwill 17,455 --
Other assets 2,494 1,175
--------- ---------
TOTAL ASSETS $ 110,471 $ 68,325
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Current maturities of long-term debt and
obligations under capital leases $ 10,659 $ 237,726
Accrued interest 165 36,320
Accrued commissions payable 11,800 11,498
Accounts payable and other accrued expenses 16,211 12,286
--------- ---------
TOTAL CURRENT LIABILITIES 38,835 297,830
--------- ---------
Long-term debt and obligations under capital leases 120,328 308
--------- ---------
TOTAL LIABILITIES 159,163 298,138
--------- ---------
Shareholders' Deficit
Preferred stock - $0.01 par value, 1,000,000 shares authorized,
no shares outstanding -- --
Common stock - $0.01 par value, 1,000,000,000
shares authorized, 615,020,084 shares and 11,169,440 shares
issued and outstanding at September 30, 2002 and December 31, 2001, respectively 6,150 112
Additional paid-in capital 144,210 128,503
Accumulated other comprehensive loss
-- (7)
Accumulated deficit (199,052) (358,421)
--------- ---------
TOTAL SHAREHOLDERS' DEFICIT (48,692) (229,813)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 110,471 $ 68,325
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
1
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE THREE MONTHS
ENDED SEPTEMBER 30
-------------------------------
2002 2001
---- ----
REVENUES:
Coin calls $ 15,829 $ 16,020
Non-coin calls 7,062 7,325
------------- ------------
Total revenues 22,891 23,345
------------- ------------
COSTS AND EXPENSES:
Telephone charges 6,563 7,305
Commissions 4,401 5,802
Service, maintenance and network costs 6,143 5,919
Depreciation and amortization 4,803 4,511
Selling, general and administrative 3,503 3,399
Exit and disposal activities 2,792 --
------------- ------------
Total operating costs and expenses 28,205 26,936
------------- ------------
Operating loss (5,314) (3,591)
OTHER INCOME (EXPENSE):
Interest expense, net (2,072) (6,878)
Gain on debt extinguishment 180,977 --
Other income 103 180
------------- ------------
NET INCOME (LOSS) $ 173,694 $ (10,289)
============= ============
BASIC AND DILUTED INCOME (LOSS) PER SHARE $ 0.38 $ (0.92)
============= ============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 457,493,829 11,169,440
============= ============
The accompanying notes are an integral part of these consolidated
financial statements.
2
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30
-------------------------------
2002 2001
---- ----
REVENUES:
Coin calls $ 41,158 $ 47,400
Non-coin calls 16,395 22,674
------------- ------------
Total revenues 57,553 70,074
------------- ------------
COSTS AND EXPENSES:
Telephone charges 15,444 23,029
Commissions 11,309 17,574
Service, maintenance and network costs 15,641 17,516
Depreciation and amortization 14,560 13,765
Selling, general and administrative 8,227 9,667
Exit and disposal activities 2,792 --
------------- ------------
Total operating costs and expenses 67,973 81,551
------------- ------------
Operating loss (10,420) (11,477)
OTHER INCOME (EXPENSE):
Interest expense, net (11,338) (21,880)
Gain on debt extinguishment 180,977 --
Other income 150 289
------------- ------------
NET INCOME (LOSS) $ 159,369 $ (33,068)
============= ============
BASIC AND DILUTED INCOME (LOSS) PER SHARE $ 0.99 $ (2.96)
============= ============
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 161,579,124 11,169,500
============= ============
The accompanying notes are an integral part of these consolidated
financial statements.
3
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30
----------------------------
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 159,369 $ (33,068)
Adjustments to reconcile net loss to cash flows
from operating activities:
Depreciation and amortization 14,560 13,765
Amortization of deferred financing costs and non-cash interest 10,429 2,774
Gain from debt extinguishment (180,977) --
Non-cash exit and disposal activities 1,309 --
Loss (gain) on disposal of assets (105) 88
Increase in allowance for doubtful accounts 1,044 --
Deferred revenue (150) (145)
Changes in current assets and liabilities
Accounts receivable 2,931 1,512
Other current assets (1,456) (368)
Accrued commissions payable (3,065) 2,538
Accounts payable and accrued liabilities (5,162) (3,224)
Accrued interest 165 18,583
--------- ---------
Net cash flows from operating activities (1,108) 2,455
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received in PhoneTel Merger, net of acquisition costs 2,812 --
Proceeds from sale of assets 115 --
Capital expenditures (207) (508)
Payment of acquisition costs (613) --
Payments for location contracts (314) (454)
Increase in other assets (142) --
--------- ---------
Net cash flows from investing activities 1,651 (962)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Senior Credit Facility 5,000 --
Debt issuance costs (237) --
Payments on long-term debt (1,250) (941)
Payments under revolving line of credit -- (159)
Principal payments under capital leases (407) (580)
--------- ---------
Net cash flows from financing activities 3,106 (1,680)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,649 (187)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,333 6,104
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,982 $ 5,917
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
(CONTINUED)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30
-----------------------
2002 2001
---- ----
SUPPLEMENTAL CASH FLOW INFORMATION
INTEREST PAID $ 994 $ --
========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
PhoneTel Merger:
Common stock and options issued $ (8,043) $ --
Net assets acquired, net of cash and acquisition costs 4,159 --
Debt-for-equity exchange:
Common stock issued (13,702) --
Issuance of Junior Credit Facility (88,245) --
Retirement of Old Credit Facility 237,255 --
Accrued interest - Old Credit Facility 45,704 --
The accompanying notes are an integral part of these consolidated
financial statements.
5
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT AND
OTHER COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND THE YEAR ENDED
DECEMBER 31, 2001
(In thousands, except share data)
Accumulated
Common Stock Additional Other Total Comprehensive
------------ Paid-in Accumulated Comprehensive Shareholders' Income
Shares Amount Capital Deficit Income (Loss) (Deficit) (Loss)
------ ------ ------- ------- ------------- --------- ------
BALANCES, December 31, 2000 11,169,540 $ 112 $128,503 $(315,007) $ -- $(186,392) $(111,480)
Rescission of common stock (100) -- -- -- -- -- --
Market change on interest collar -- -- -- -- (7) (7) (7)
Net income (loss) -- -- -- (43,414) -- (43,414) (43,414)
------------ ------ -------- --------- --------- --------- ---------
BALANCES, December 31, 2001 11,169,440 112 128,503 (358,421) (7) (229,813) (43,421)
Issuance of common stock -
debt exchange 380,612,730 3,806 9,896 -- -- 13,702 --
Issuance of common stock -
PhoneTel merger 223,237,914 2,232 5,805 -- -- 8,037 --
Issuance of stock options -
PhoneTel merger -- -- 6 -- -- 6 --
Market change on interest collar -- -- -- -- 7 7 7
Net income (loss) -- -- -- 159,369 -- 159,369 159,369
------------ ------ -------- --------- --------- --------- ---------
BALANCES, September 30, 2002 615,020,084 $6,150 $144,210 $(199,052) $ -- $ (48,692) $ 159,376
============ ====== ======== ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
6
DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
1. BASIS OF PRESENTATION
Davel Communications, Inc. ("Davel" or the "Company") was incorporated on
June 9, 1998 under the laws of the State of Delaware. The Company is the largest
independent payphone service provider in the United States. The Company operates
in a single business segment within the telecommunications industry, operating,
servicing, and maintaining a system of approximately 72,000 payphones in 48
states and the District of Columbia. The Company's headquarters is located in
Cleveland, Ohio (having been relocated from Tampa, Florida after completion of
the PhoneTel Merger - see Note 4 for exit and disposal activities), with field
service offices in 36 geographically dispersed locations.
The accompanying consolidated balance sheet of Davel Communications, Inc.
and its subsidiaries at September 30, 2002 and the related consolidated
statements of operations and cash flows for the three and nine month periods
ended September 30, 2002 and 2001 and the consolidated statements of
shareholders' deficit and other comprehensive income (loss) for the period ended
September 30, 2002 are unaudited. The accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management, all adjustments necessary for a fair presentation of such
consolidated financial statements have been included. Such adjustments consist
only of normal, recurring items. Certain information and footnote disclosures
normally included in audited financial statements have been omitted, in
accordance with generally accepted accounting principles for interim financial
reporting. These interim consolidated financial statements should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations appearing elsewhere in this Form 10-Q and with the
Company's audited consolidated financial statements and the notes thereto in the
Company's Form 10-K for the year ended December 31, 2001. The results of
operations for the three and nine month periods ended September 30, 2002 are not
necessarily indicative of the results for the full year.
On July 24, 2002, the Company restructured its long-term debt by
completing the debt-for-equity exchange described in Note 3. Immediately
thereafter, on that same date, the Company and PhoneTel Technologies, Inc.
("PhoneTel") completed the merger described in Note 4 (the "PhoneTel Merger"),
which has been accounted for as a purchase business combination. Accordingly,
the results of operations of PhoneTel are included in the accompanying financial
statements since the date of acquisition.
2. LIQUIDITY
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Excluding the gain
on debt extinguishment of $181.0 million (see Note 3), the Company has incurred
losses of approximately $43.4 million and $21.6 million for the year ended
December 31, 2001 and for the nine months ended September 30, 2002,
respectively. As of September 30, 2002, the Company had a working capital
deficit of $13.8 million and its liabilities exceeded it assets by $48.7
million.
As discussed in Note 7, the Company was not in compliance with the
minimum EBITDA (earnings before interest, taxes, depreciation and amortization)
and Adjusted EBITDA financial covenants included in the Company's Senior Credit
Facility in the third quarter of 2002. As a result, the Company was also in
default under the cross-default provision of its Junior Credit Facility. The
Company has obtained waivers from its lenders that waive all defaults under the
Company's Senior Credit Facility and its Junior Credit Facility as a result of
not complying with these financial covenants.
Notwithstanding the PhoneTel Merger and the debt-for-equity exchange, the
Company may face liquidity shortfalls and, as a result, might be required to
dispose of assets to fund its operations or curtail its capital and other
expenditures and to meet its debt service and other obligations. There can be no
assurances as to the Company's ability to execute such dispositions, or the
timing thereof, or the amount of proceeds that
7
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. DEBT RESTRUCTURING
On July 24, 2002 (the "closing date"), the existing PhoneTel junior
lenders exchanged an amount of indebtedness that reduced the junior indebtedness
of PhoneTel to $36.5 million for 112,246,511 shares of PhoneTel common stock,
which was subsequently exchanged for 204,659,064 shares of the Company in the
PhoneTel Merger. Also, on this date, the existing Davel junior lenders exchanged
$237.2 million of outstanding indebtedness and $45.7 million of related accrued
interest for 380,612,730 shares of common stock (with a value of $13.7 million,
based upon market prices around the closing date), which reduced Davel's junior
indebtedness to $63.5 million. Upon completion of the debt exchanges, Davel and
PhoneTel amended, restated and consolidated their respective junior credit
facilities into a combined restructured junior credit facility with a face value
of $100.0 million (the "Junior Credit Facility") due December 31, 2005 (the
"maturity date").
Davel has accounted for its debt-for-equity exchange as a troubled debt
restructuring. Accordingly, the Company has recognized a gain on extinguishment
of the old debt based upon the difference between the carrying value of its old
credit facility and the amount of the equity interest and new debt, including
interest, issued by Davel to its lenders. The gain on debt extinguishment,
included in other income (expense) in the accompanying consolidated statements
of operations, is as follows (in thousands):
Old Credit Facility: (see Note 7)
Principal balance $ 237,255
Accrued interest 45,704
---------
Carrying value 282,959
Common stock issued (380,612,730 shares at $0.036) (13,702)
Principal balance of new debt (63,500)
Interest, costs and fees on new debt (payable through maturity) (24,780)
---------
Gain on debt extinguishment $ 180,977
=========
Following the PhoneTel Merger and the debt exchanges, the combined junior
indebtedness of the Company has a face value of $100.0 million, which amount may
be prepaid without penalty. However, for accounting and reporting purposes, with
respect to Davel's portion of the debt exchange, all future cash payments under
the modified terms will be accounted for as reductions of indebtedness and no
interest expense will be recognized for any period between the closing date and
the maturity date.
In addition, the remaining amounts payable with respect to the PhoneTel
portion has been recorded at the net present value of such payments in
accordance with the purchase method of accounting. Interest expense is
recognized on the PhoneTel portion of the restructured debt over the term of the
debt using the interest method of accounting, at a fair market rate of 15%.
Following the exchange and the merger, the creditors of the Company in the
aggregate own 90.81% of the common stock of the Company on a fully diluted
basis.
8
4. ACQUISITION
On July 24, 2002, a wholly owned subsidiary of Davel merged with and into
PhoneTel pursuant to the Agreement and Plan of Reorganization and Merger, dated
February 19, 2002, between the Company and PhoneTel and its subsidiary (the
"PhoneTel Merger"). PhoneTel was a payphone service provider, based in
Cleveland, Ohio, that operated an installed base of approximately 28,000
payphones in 45 states and the District of Columbia. Management believes the
PhoneTel Merger will result in expansion of its market presence and further
reduce its operating costs by leveraging the combined infrastructure. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combination", the results of operations of PhoneTel are included in
the accompanying financial statements since the date of acquisition.
In connection with the PhoneTel Merger, 100% of the voting shares in
PhoneTel were acquired and each share of common stock of PhoneTel was converted
into 1.8233 shares of common stock of the Company, or an aggregate of
223,238,000 shares with a fair value of approximately $8.0 million. The fair
value of the Davel common stock was derived using an average market price per
share of Davel common stock of $0.036, which was based on an average of the
closing prices for a range of trading days (July 19, 2002 through July 29, 2002)
around the closing date of the acquisition. In addition 1,077,024 warrants and
339,000 options of PhoneTel were converted into 1,963,738 warrants and 618,107
stock options of the Company, respectively, with an aggregate value of $6,000.
Direct costs and expenses of the merger amounted to $1.1 million and were
included in the purchase price.
In accordance with SFAS No. 141, Davel allocates the purchase price of its
acquisitions to tangible assets and liabilities and identifiable intangible
assets acquired based on their estimated fair values. The excess of the purchase
price over those fair values is recorded as goodwill. The fair value assigned to
intangible assets acquired is based upon estimates and assumptions of
management. Certain aspects of our valuation, as discussed further below are
preliminary at this time. The goodwill recorded is not expected to be deductible
for tax purposes. In accordance with SFAS No. 142, the goodwill acquired after
June 30, 2001 will not be amortized but will be reviewed annually for
impairment. The first impairment review was completed as of September 30, 2002
and no impairment was present. Purchased intangibles will be amortized on a
straight-line basis over their respective useful lives.
The PhoneTel Merger has been accounted for as a purchase business
combination and the purchase price has been preliminarily allocated as follows,
pending a corporate valuation of the location contracts and a preacquisition
contingency as discussed below (in thousands):
Cash and cash equivalents $ 3,884
Accounts receivable 4,612
Other current assets 1,552
Property and equipment 11,347
Intangible assets (location contracts) 19,821
Goodwill 17,455
Other assets 765
--------
Assets acquired 59,436
--------
Accounts payable and other accrued expenses (9,238)
Accrued commissions payable (3,367)
Senior credit facility (See note 3) (4,583)
Junior credit facility (See note 3) (32,206)
Other long term debt (See note 3) (928)
--------
Liabilities assumed (50,322)
--------
Net assets acquired $ 9,114
========
9
Preliminary purchase allocation
The Company's allocation of the purchase price is preliminary for (i) the
final valuation of location contracts based upon projections of cash flow and
(ii) any potential liability arising from the true-up order addressing
dial-around compensation issued in October 2002 by the Federal Communications
Commission. The final valuation of location contracts is expected to be
completed during the fourth quarter of 2002 with no material change in
amortization. The Company is consulting with the APCC, its principal clearing
house for dial-around compensation, and is analyzing its internal records for
1997 through 1999 to determine the amount of the adjustment, if any, to
dial-around compensation revenues recognized by PhoneTel during that period. Any
adjustment for the dial-around preacquisition contingency will result in an
increase or decrease to goodwill associated with the PhoneTel acquisition.
Management currently expects the estimate of any adjustment resulting from the
true-up order will be completed before the end of 2003.
Amortizable intangible assets
Of the total purchase, $19,821,000 has been allocated to amortizable
intangible assets for commission agreements with owners of facilities where the
Company's payphones are located ("Location Contracts"). The Company will
amortize the fair value of these assets over the weighted average estimated term
of these contracts, including certain renewals, of approximately 4 years.
Pro forma results
The following pro forma financial information (in thousands of dollars,
except for per share amounts) gives effect to the PhoneTel Merger and the debt
exchanges described in Notes 3 and 4 as if they had occurred at the beginning of
the periods presented. Pro forma financial information is not intended to be
indicative of the results of operations that the Company would have reported had
the transactions been consummated as of the beginning of the respective periods.
PRO FORMA INFORMATION
For the Three Months Ended For the Nine Months Ended
September 30 September 30
-------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenue $ 25,232 $ 35,162 $ 77,186 $ 105,527
Loss from operations before gain
on debt extinguishment (10,857) (17,656) (38,852) (59,437)
Gain on debt extinguishment 180,977 175,649 180,977 175,649
--------- -------- --------- ---------
Net Income $ 170,120 $157,993 $ 142,725 $ 116,112
========= ======== ========= =========
Income per common share, basic
and diluted: $ 0.37 $ 0.35 $ 0.88 $ 0.72
========= ======== ========= =========
Exit and disposal activities
10
In connection with the PhoneTel acquisition, the Company terminated its
headquarters facility lease, abandoned or disposed of certain furniture,
fixtures and leasehold impairments and incurred severance costs related to
terminated employees. Exit activities related to the Company were expensed as
incurred or as otherwise provided in SFAS 146 (see above note 4). Substantially
all exit activities were completed prior to September 30, 2002 and, accordingly,
management does not currently expect that any significant additional amounts
will be incurred in connection with the closing of the Company's former
headquarters facility. The following table reflects the components of exit and
disposal activities shown as a separate line item in the Company's consolidated
statements of operations (in thousands):
Abandonment or disposals of
property and equipment $ 1,309
Lease termination 600
Employee severance 668
Other merger related expenses 215
--------
$ 2,792
========
5. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued SFAS No. 145 covering, among other things,
the rescission of SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt". Under SFAS No. 4, all gains and losses from the extinguishment of debt
were required to be aggregated and, if material, classified as an extraordinary
item in the statement of operations. By rescinding SFAS 4, SFAS No. 145
eliminates the requirement for treatment of extinguishments as extraordinary
items. The new standard is effective for companies with fiscal years beginning
after May 15, 2002. However, the Company has elected to adopt the standard as to
the restructuring gain in the current period, as permitted by SFAS No. 145.
In July 2002, the FASB issued SFAS No. 146, "Accounting Costs Associated
with Exit or Disposal Activities". SFAS No. 146 covers a wide range of exit and
disposal activities, including restructurings planned and controlled by
management that materially change the scope of the business undertaken by an
enterprise and disposal activities such as costs of terminating certain
contracts, costs of consolidating facilities and some types of termination
benefits provided to employees. SFAS No. 146 will be effective for exit and
disposal activities initiated after December 31, 2002. As permitted by SFAS No.
146, the Company has adopted this standard in the current quarter in connection
with the exit activities described in Note 4. The accounting results under SFAS
No. 146 were not materially different than results that would have been achieved
under previous standards.
6. DIAL-AROUND COMPENSATION
On September 20, 1996, the Federal Communications Commission (the
"FCC") adopted rules in a docket entitled In the Matter of Implementation of the
Payphone Reclassification and Compensation Provisions of the Telecommunications
Act of 1996, FCC 96-388 (the "1996 Payphone Order"), implementing the payphone
provisions of Section 276 of the Telecommunications Act of 1996 (the "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 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 (the "IXCs") would be required to
compensate PSPs. 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 explain its conclusion that the costs to provide local coin calls
are similar to those of 800 subscriber and access code calls and (ii) the
allocation of the dial-around payment obligations among the IXCs for the period
November 7, 1996 to October 6, 1997.
11
In accordance with the Court's mandate, on October 9, 1997 the FCC
adopted and released its Second Report and Order in the same docket, FCC 97-371
(the "1997 Payphone Order"). This order addressed the per-call compensation rate
for 800 subscriber and access code calls that originate from payphones in light
of the decision of the Court which vacated and remanded certain portions of the
FCC's 1996 Payphone Order. The FCC concluded that the rate for per-call
compensation for 800 subscriber and access code calls from payphones is the
deregulated local coin rate adjusted for certain cost differences. Accordingly,
the FCC established a rate of $0.284 ($0.35 - $0.066) per call for the first two
years of per-call compensation,(October 7, 1997 to 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 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 for reduced dial-around compensation was 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 local exchange carriers ("LECs") of payphone-specific coding digits,
which identify a call as originating from a payphone. Without the transmission
of payphone-specific coding digits, some of the IXCs have claimed they are
unable to identify a call as a payphone call eligible for dial-around
compensation. With the stated purpose of ensuring the continued payment of
dial-around compensation, the FCC, by Memorandum and Order issued on April 3,
1998, left in place the requirement for payment of per-call compensation for
payphones on lines that do not transmit the requisite payphone-specific coding
digits, but gave the IXCs a choice for computing the amount of compensation for
payphones on LEC lines not transmitting the payphone-specific coding digits of
either accurately computing per-call compensation from their databases or paying
per-phone, flat-rate compensation computed by multiplying the $0.284 per call
rate by the nationwide average number of 800 subscriber and access code calls
placed from 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 determined 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 was 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 $0.24 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.
12
On April 5, 2001, the FCC released an order which makes the first long
distance carrier to handle a dial-around call originating from a payphone
responsible to track and pay compensation on the call, regardless of whether
other carriers may subsequently transport or complete the call. This order was
issued to address the serious difficulties encountered by payphone service
providers in identifying and collecting dial-around compensation from
telecommunications resellers. The modified rule adopted coincident with the
order became effective on November 23, 2001. Although the Company originally
believed that this modification to the dial-around compensation system would
result in a significant increase to the number of calls for which the Company is
able to collect such compensation, the increase did not materialize to the
originally estimated levels. The Company believes that the resulting shortfall
is due in large measure to the continued reliance upon data from the resale
carriers as to what is a "completed" call on their systems, and ongoing
fundamental issues with respect to LEC and IXC networks properly identifying and
capturing dial around calls upon which compensation is due.
In a decision released January 31, 2002 (the "2002 Payphone Order") the
FCC partially addressed the remaining issues concerning the "true-up" required
for 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 2002 Payphone Order deferred to a later order its determination of the
allocation of this total compensation rate among the various carriers required
to pay compensation for the interim period.
On October 23, 2002 the FCC released its Fifth Order on Reconsideration
and Order on Remand (the "Interim Order"), which resolved the remaining issues
surrounding the interim/intermediate period true-up and specifically how monthly
per-phone compensation owed to PSPs is to be allocated among the relevant
dial-around carriers. The Interim Order also resolves how certain offsets to
such payments will be handled and a host of other issues raised by parties in
their remaining FCC challenges to the 1999 Payphone Order and the 2002 Payphone
Order. In the Interim Order, the FCC ordered a true-up for the interim period
and increased the adjusted monthly rate to $35.22 per payphone per month, to
compensate for the three-month payment delay inherent in the dial-around payment
system. The new rate of $35.22 per payphone per month is a composite rate,
allocated among approximately five hundred carriers based on their estimated
dial-around traffic during the interim period. The FCC also ordered a true-up
requiring the PSPs, including the Company, to refund an amount equal to $.046
(the difference between the old $.284 rate and the current $.238 rate) to each
carrier that compensated the PSP on a per-call basis during the intermediate
period. Interest on additional payments and refunds is to be computed from the
original payment date, at the IRS prescribed rate applicable to late tax
payments. The FCC further ruled that a carrier claiming a refund from a PSP for
the Intermediate Period must first offset the amount claimed against any
additional payment due to the PSP from that carrier. Finally, the Interim Order
provides that any net claimed refund amount owing to carriers cannot be offset
against future dial around payments (1) without prior notification and an
opportunity to contest the claimed amount in good faith (only uncontested
amounts may be withheld); and (2) absent an opportunity to "schedule" payments
over a reasonable period of time. The Company and its billing and collection
clearinghouse are currently reviewing the order and preparing the data necessary
to determine the precise dollar impact of the Interim Order on the Company.
On August 2, 2002 and September 2, 2002 respectively, the APCC and the
RBOCs filed petitions with the FCC to revisit and increase the dial around
compensation rate level. Using the FCC's existing formula, as approved by the
Court in its June 26, 2000 order, and adjusted only to reflect current costs and
call volumes, the APCC and RBOCs petitions support an approximate doubling of
the current $0.24 rate. In response to the petitions, on September 2, 2002 the
FCC put them out for comment and reply comment by interested parties, seeking
input on how the Commission should proceed to address the issues raised by the
filings. The Company believes that the "fair compensation" requirements of
Section 276 of the Telecom Act mandate that the FCC promptly review and adjust
the dial around compensation rate level. While no assurances can be given as to
13
the timing or amount of any increase in the dial around rate level, the Company
believes an increase in the rate is reasonably likely given the significant
reduction in payphone call volumes, continued collection difficulties and other
relevant changes since the FCC set the $0.24 rate level.
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 determination of the effect of the
Interim Order on the Company, (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.
7. LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES
Following is a summary of long-term debt and obligations under capital
leases as of September 30, 2002 and December 31, 2001(in thousands):
September 30 December 31
2002 2001
---- ----
SENIOR CREDIT FACILITY, due in monthly installments of $833.3 plus $ 8,333 --
interest at 15% through June 30, 2003
JUNIOR CREDIT FACILITY, due December 31, 2005:
TERM NOTE A, plus unamortized premium, discount and 59,275 --
capitalized interest of $9,275 at September 30, 2002
TERM NOTE B, plus unamortized premium, discount and 62,054 --
capitalized interest and fees of $12,054 at September 30, 2002
OLD CREDIT FACILITY:
TERM A note payable to banks at an adjusted LIBOR rate -- $ 109,492
(7.5% at December 31, 2001)
TERM B note payable to the banks at an adjusted LIBOR rate -- 93,380
(7.5% at December 31, 2001)
REVOLVING ADVANCE on bank's line of credit at the bank's -- 34,383
adjusted LIBOR rate (7.5% at December 31, 2001)
NOTE PAYABLE, due November 16, 2004 953 --
CAPITAL LEASE obligations and other notes with various interest rates and
various maturity dates through 2006 372 779
--------- ---------
130,987 238,034
Less - Current maturities (10,659) (237,726)
--------- ---------
$ 120,328 $ 308
========= =========
Senior Credit Facility
Effective as of February 19, 2002, Madeleine L.L.C. and ARK CLO 2000-1,
Limited (the "Senior Lenders") entered into a credit agreement (the "Senior
Credit Facility") with Davel Financing Company, L.L.C., PhoneTel and Cherokee
Communications, Inc., a wholly owned subsidiary of PhoneTel. On that date, the
existing junior lenders of the Company and PhoneTel also agreed to a substantial
debt-for-equity exchange with respect to their outstanding indebtedness (see
note 3). The Senior Credit Facility provided for a combined $10 million line of
credit which the Company and PhoneTel shared $5 million each. The Company and
PhoneTel each borrowed the amounts available under their respective lines of
credit on February 20, 2002, which amounts were used to pay merger related
expenses and accounts payable. Davel and PhoneTel agreed to remain jointly and
severally liable for all amounts due under the Senior Credit Facility.
14
Interest on the funds loaned pursuant to the 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 due on
the last day of each month, beginning July 31, 2002 and ending on the maturity
date of June 30, 2003. The Senior Credit Facility includes covenants that
require the Company and PhoneTel to maintain a minimum level of combined
earnings (EBITDA and Adjusted EBITDA, as defined in the Senior Credit Facility)
and limits the incurrance of cash and capital expenditures, the payment of
dividends and certain asset disposals.
Pursuant to an Intercreditor and Subordination Agreement, dated as of
February 19, 2002 and reaffirmed on July 24, 2002, the existing junior lenders
agreed to subordinate their security interest in Company collateral to the
security interest of the Senior Lenders in such collateral. Upon the repayment
in full of the amounts owing under the Senior Credit Facility, the senior
security interests of the Senior Lenders will terminate and the junior lenders
will, once again, hold first priority security interests in the Company
collateral.
On May 14 and July 23, 2002, the Company and PhoneTel executed amendments
to the Senior Credit Facility that reduced the minimum level of combined
earnings that the companies were required to maintain. As of August 31, 2002
the Company was not in compliance with the minimum EBITDA financial covenant
under the Senior Credit Agreement. At September 30, 2002, the Company was not
in compliance with the minimum EBITDA and Adjusted EBITDA financial covenants
and obtained a waiver from its Senior Lenders which waives all defaults through
September 30, 2002.
Junior Credit Facility
On July 24, 2002, immediately prior to the PhoneTel Merger, Davel and
PhoneTel amended, restated and consolidated their respective junior credit
facilities. The combined restructured Junior Credit Facility of $100.0 million
due December 31, 2005 (the "maturity date") consists of: (i) a $50.0 million
cash-pay term loan ("Term Note A") with interest payable in kind monthly through
June 30, 2003, and thereafter to be paid monthly in cash from a required payment
of $1.25 million commencing on August 1, 2003, with such monthly payment
increasing to $1.5 million beginning January 1, 2005, and the unpaid balance to
be repaid in full on the maturity date; and (ii) a $50.0 million payment-in-kind
term loan (the "PIK term loan" or "Term Note B") to be repaid in full on the
maturity date. Amounts outstanding under the term loans will accrue interest
from and after the closing date at the rate of ten percent (10%) per annum.
Interest on the PIK term loan will accrue from the closing date and will be
payable in kind. All interest payable in kind will be added to the principal
amount of the respective term loan on a monthly basis and thereafter treated as
principal for all purposes (including the accrual of interest upon such
amounts). Upon the occurrence and during the continuation of an event of
default, interest accrues at the rate of 14% per annum.
As discussed in Note 3, the Company has accounted for the debt exchange as
a troubled debt restructuring and recorded a $181.0 million gain on debt
extinguishment relating to its Old Credit Facility. For accounting and reporting
purposes, with respect to Davel's portion of the debt exchange, all future cash
payments under the modified terms will be accounted for as reductions of
indebtedness and no interest expense will be recognized for any period between
the closing date and the maturity date. In addition, the remaining amounts
payable with respect to the PhoneTel portion have been recorded at the net
present value of such payments in accordance with the purchase method of
accounting. Interest expense is recognized on the PhoneTel portion of the
restructured debt over the term of the debt using the interest method of
accounting at a fair market rate of 15%.
The Junior Credit Agreement is secured by substantially all assets of the
Company and is subordinate in right of payment to the Senior Credit Facility.
The Junior Credit Facility also provides for the payment of a 1% loan fee and
requires advanced payments of principal from excess cash flow and certain types
of cash receipts. The Junior Credit Facility includes covenants that require the
Company to maintain a minimum level
15
of combined earnings (EBITDA and Adjusted EBITDA, as defined in the Junior
Credit Facility) and limits the incurrance of cash and capital expenditures, the
payment of dividends and certain asset disposals. The Junior Credit Agreement
also has a cross default provision that results in a default if the Company is
in default under its Senior Credit Facility.
As discussed above, the Company was not in compliance with certain
financial covenants under its Senior Credit Facility and, as a result, was in
default under its Junior Credit Facility at August 31 and September 30, 2002.
The Company has obtained a waiver from its Junior Lenders that waives all
defaults through September 30, 2002.
Note Payable
In connection with the PhoneTel Merger, the Company assumed a $1.0 million
note payable that provides for payment of principal, together with deferred
interest at 5% per annum, on November 17, 2004. The note is secured by
substantially all of the assets of the PhoneTel and is subordinate in right of
payment to the Company's Senior Credit Facility and the Junior Credit Facility.
The note has been recorded at the net present value of the note, including
capitalized interest, in accordance with the purchase method of accounting.
Interest expense is recognized over the term of the note using the interest
method of accounting, at a fair market rate of 15%.
Old Credit Facility
In connection with the merger with Peoples Telephone Company in 1998, the
Company entered into a secured credit facility ("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 originally provided
for borrowings by the Company's wholly owned subsidiary, Davel Financing
Company, L.L.C., 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 was 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 was guaranteed by the Company and all
of its subsidiaries.
The Company's borrowings under the original Old Credit Facility bore
interest at a floating rate and could 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 bore 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 bore interest at
the Eurodollar Rate (as defined in the Old Credit Facility, as amended).
The Old Credit Facility required the Company to meet certain financial
tests and contained certain covenants that, among other things, limited the
incurrence of additional indebtedness, prepayments of other indebtedness, liens
and encumbrances and other matters customarily restricted in such agreements.
The Old Credit Facility was amended from time to time to amend or waive
compliance with certain financial covenants, to impose additional restrictions
or reporting requirements on the Company, to waive or modify scheduled principal
or interest payments, and to extend the maturity date of the loan. Effective as
of February 19, 2002, the Company and its 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, 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 Senior Credit Facility and the transactions
contemplated by the PhoneTel Merger, including the debt-for-equity exchange. On
July 24, 2002, the Old Credit Facility was extinguished in connection with the
debt-for-equity exchange described in Note 3.
16
8. EARNINGS PER SHARE
The treasury stock method was used to determine the dilutive effect of the
options and warrants on earnings per share data. Diluted income (loss) per share
is equal to basic income (loss) per share since the exercise of the outstanding
options and warrants would be anti-dilutive and resulted in no dilution for all
periods presented. In accordance with SFAS No. 128 and the requirement to report
"Earnings Per Share" data, the basic and diluted income (loss) from continuing
operations per weighted average common share outstanding were $0.38 and $(0.92)
for the three months ended September 30, 2002 and 2001, respectively, and $0.99
and $(2.96) for the nine months ended September 30, 2002 and 2001, respectively.
9. COMMITMENTS & CONTINGENCIES
Litigation
In March 2000, the Company and its wholly owned subsidiary Telaleasing
Enterprises, Inc. were sued in Maricopa County, Arizona Superior Court by CSK
Auto, Inc. ("CSK"). The suit alleges that the Company breached a location
agreement between the parties. CSK's complaint alleges damages in excess of $5
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 a related
case in California, which was settled in the third quarter of 2001. 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 with the
United States Court of Appeals for the Ninth Circuit. On May 17, 2002, the Court
of Appeals affirmed the remand order, thus allowing the case to proceed in
Arizona state court. The underlying suit is now in the pretrial discovery phase,
and no trial date has been set. The Company intends to vigorously defend itself
in the case. While the Company believes it possesses certain meritorious
defenses to the claims, the matter remains in its initial stages. Accordingly,
the Company cannot at this time predict the likelihood of an unfavorable result
or the amount or range of potential loss.
In February 2001, Picus Communications, LLC ("Picus"), a debtor in Chapter
11 bankruptcy in the United States Bankruptcy Court for the Eastern District of
Virginia, brought suit against Davel 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. On March 13, 2001, the Company filed a
proof of claim in the bankruptcy court to recover damages based on Picus'
breach of contract and failure to secure and pay federally mandated dial-around
compensation. On May 10, 2001, the district court entered an order dismissing
Picus' complaint without prejudice. 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' actions. On May 9, 2002, Picus filed an objection to the
Company's administrative claim and a counterclaim seeking to recover
approximately $717,000 in damages.
The various pleadings and claims in this matter were consolidated in an
adversary proceeding and set for trial to begin on October 21, 2002. Prior to
the commencement of the trial, on October 9, 2002 Picus filed a motion in the
bankruptcy court to seek court approval of a settlement of all outstanding
claims between the parties. The settlement provides that (i) Picus will
cooperate with the Company to recover certain dial-around compensation
potentially owed to the Company for the calendar year of 2000 and the first
calendar quarter of 2001, (ii) within ten days after entry of an order approving
the settlement and December 15, 2002, the Company will pay Picus $79,500, (iii)
the Company will pay Picus an additional $150,000 no later than May 15, 2003,
but potentially earlier, depending upon the receipt of first quarter 2001
dial-around compensation attributable to the Picus lines, and (iv) the
17
Company will pay Picus forty percent (40%) of the dial-around compensation
received for the calendar year of 2000 attributable to the Picus lines, if any.
If any of the aforementioned payments are not timely paid by the Company, Picus
will be entitled to obtain a judgment against Davel for the full amount of its
claim against the Company, plus interest, less any amounts actually paid to
Picus under the settlement agreement.
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 accuse the defendants of negligence in the death of the father of
Thomas Sanchez, a former Davel employee. The matter fell within the parameters
of its insurance coverage, therefore, Davel's insurance carrier maintained
responsibility for the defense and associated costs related to this matter. On
or about October 25, 2002 the matter was settled within the limits of the
Company's liability insurance coverage.
On June 12, 2002, the Company settled outstanding litigation with Sprint
Corporation related to certain telephone line charges. The settlement provides
for a cash payment to the Company of $578,000. This amount has been received and
recorded in the accompanying financial statements as a reduction of telephone
charges.
The Company, in the course of its normal operations is subject to
regulatory matters, disputes, claims and other litigation. In management's
opinion, all such other matters of which the Company has knowledge, have been
reflected in the financial statements or will not have a material adverse effect
on the Company's financial position, results of operations or cash flows.
Operator Services Contract
The Company is a party to a contract with Sprint Communications Company,
L.P. ("Sprint") that provides for the servicing of operator-assisted calls.
Under this arrangement, Sprint has assumed responsibility for tracking, rating,
billing and collection of these calls and remits a percentage of the gross
proceeds to the Company in the form of a monthly commission payment, as defined
in the contract. The contract also requires the Company to achieve certain
minimum gross annual operator service revenue, measured for the twelve-month
period ended June 30 of each year. In making its June 30, 2002 compliance
calculation under the minimum gross annual operator service revenue provision,
the Company identified certain discrepancies between its calculations and the
underlying call data information provide directly by Sprint. If the data, as
presented by Sprint, is utilized in the calculation, a shortfall could result.
The Company has provided Sprint with notification of its objections to the
underlying data, and upon further investigation, has discovered numerous
operational deficiencies in Sprint's provision of operator services that have
resulted in a loss of revenue to the Company, thus negatively impacting the
Company's performance relating to the gross annual operator service revenue
requirement set forth in the contract. Furthermore, the Company advised Sprint
that its analysis indicated that not only had it complied with the provisions of
the gross annual operator service revenue requirement, it also believed that
Sprint had underpaid commissions to the Company during the same time period. The
Company notified Sprint of the details surrounding the operational deficiencies
and advised that its failure to correct such operational deficiencies would
result in a material breach of the contract.
Notwithstanding the Company's objections, Sprint advised the Company,
based upon its calculation of the Company's performance in connection with the
gross annual operator services revenue requirement, it would retroactively
reduce the percentage of commission paid to the Company in connection with the
contract for the twelve-month period ended June 30, 2002. Sprint withheld
$418,000 from the commission due and owing the Company in the month of September
2002 and failed to address the operational deficiencies discovered by the
Company. As a result of these actions, during the month of October 2002, the
Company advised Sprint that the contract was terminated due to Sprint's
continuing and uncured breaches and the Company shifted its traffic to an
alternative operator service provider. In response, Sprint withheld $380,170
from the commissions due and owing the Company in the month of October 2002.
Thereafter, the Company made a demand for any and all amounts due it under the
terms of the contract. In response, Sprint
18
has asserted its claim for payment of approximately $5.9 million representing
the amount it had calculated as owing under the gross annual operator services
revenue requirement for the twelve-month period ended June 30, 2002.
The parties are continuing to attempt to negotiate a mutually agreeable
resolution to this matter. While the Company believes that its objections to
Sprint's calculation of the gross annual operator service revenue requirement
are justifiable and has not recorded any amounts associated with any minimum
liability, it is possible that some liability or receivable for this matter may
ultimately be determined as a result of the dispute, the amount of which, if
any, is not presently determinable.
Estimated Effects of the WorldCom, Inc. Bankruptcy:
On July 21, 2002, WorldCom, Inc., whose subsidiary MCI is one of the major
payors of dial-around revenue to the Company, filed for protection under Chapter
11 of the United States Bankruptcy Code. As a result of this filing, the Company
reduced its accrual of dial-around revenues for the second quarter of 2002 by
$0.9 million from the amount it would have normally accrued, as the bankruptcy
may impair the Company's ability to receive pre-petition dial-around payments
for the quarter from MCI. Although the Company did not receive its second
quarter 2002 dial-around payment that was due in October 2002, the Company is
actively pursuing its rights in the Bankruptcy Court to receive such quarterly
payment from MCI. No assurance can be given at this time regarding the ultimate
outcome of this action. The Company does not believe that the WorldCom
bankruptcy filing will materially impair the Company's ability to collect
dial-around payments from MCI post-petition. For post-petition periods, the
Company has resumed its normal accrual of dial-around revenue attributable to
MCI.
Dial-around Compensation:
As discussed in Note 6, dial-around revenues during the period of
November 7, 1996 to April 20, 1999 are subject to an industry-wide
reconciliation to reflect a true-up of underpayments and overpayments made
during that period as between payphone providers, including the Company and its
subsidiaries, and the relevant dial-around carriers. While the timing and amount
of such true-up payments, if any, are not currently determinable, in
management's opinion the final resolution of such reconciliation on a
carrier-by-carrier basis 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.
10. RELATED PARTY TRANSACTIONS
In connection with the PhoneTel Merger, discussed in Note 4, a former
major shareholder agreed to forego payment on certain accrued management fees
amounting to $436,000, which was accounted for in the second quarter of 2002.
Such amount is reflected in the accompanying financial statements as a reduction
of selling, general and administrative expenses.
The Company's Chief Executive Officer is a Director, Executive Vice
President and a 49% shareholder of Urban Telecommunications, Inc. ("Urban").
During the nine months ended September 30, 2002, the Company earned revenue of
$543,709 from various telecommunication contractor services provided to Urban,
principally residence and small business facility provisioning and inside
wiring. The net amount of accounts receivable due from Urban, including the
remaining outstanding amount acquired in the PhoneTel Merger, was $732,763 at
September 30, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes thereto appearing
elsewhere herein.
With the exception of historical information (information relating to the
Company's financial condition and results of operations at historical dates or
for historical periods), the matters discussed in this Management's Discussion
and Analysis of Financial Condition and Result of Operations ("MD&A") are
forward-looking statements that necessarily are based on certain assumptions and
are subject to certain risks and uncertainties. The forward-looking statements
are based on management's expectations as of the date hereof. Actual future
performance and results could differ materially from that contained in or
suggested by
19
these forward-looking statements as a result of the factors set forth in this
MD&A and its other filings with the SEC. The Company assumes no obligation to
update any such forward-looking statements.
GENERAL
During the first nine months of 2002, 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 Company's payphones. 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, net of applicable tax, which are 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
Company's presubscribed carrier to make a traditional "toll free" calls
(dial-around calls). Revenues from dial-around calls are recognized based on
estimates of calls made using most recent actual historical data and the FCC
mandated dial-around compensation rate in effect.
The principal costs related to the ongoing operation of the Company's
payphones include telephone charges, commissions, and service, maintenance and
network costs. Telephone charges consist of payments made by the Company to
local exchange carriers and long distance carriers for line charges and use of
their networks. Commission expense represents payments to owners of locations at
which the Company's payphones are installed ("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 Independent Payphone Providers
("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
2002, the Company experienced lower coin call volumes on its payphones resulting
from the increased rates, as well as from continued growth in wireless
communication services, changes in call traffic and the geographic mix of the
Company's payphones.
Dial-around Compensation
On September 20, 1996, the Federal Communications Commission (the
"FCC") adopted rules in a docket entitled In the Matter of Implementation of the
Payphone Reclassification and Compensation Provisions of the Telecommunications
Act of 1996, FCC 96-388 (the "1996 Payphone Order"), implementing the payphone
provisions of Section 276 of the Telecommunications Act of 1996 (the "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 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 (the "IXCs") would be required to
compensate PSPs. 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 explain its conclusion that the costs to provide local coin calls
are similar to those of 800 subscriber and access code calls and (ii) the
allocation of the dial-around payment obligations among the IXCs for the period
November 7, 1996 to October 6, 1997.
20
In accordance with the Court's mandate, on October 9, 1997 the FCC
adopted and released its Second Report and Order in the same docket, FCC 97-371
(the "1997 Payphone Order"). This order addressed the per-call compensation rate
for 800 subscriber and access code calls that originate from payphones in light
of the decision of the Court which vacated and remanded certain portions of the
FCC's 1996 Payphone Order. The FCC concluded that the rate for per-call
compensation for 800 subscriber and access code calls from payphones is the
deregulated local coin rate adjusted for certain cost differences. Accordingly,
the FCC established a rate of $0.284 ($0.35 - $0.066) per call for the first two
years of per-call compensation,(October 7, 1997 to 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 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 for reduced dial-around compensation was 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 local exchange carriers ("LECs") of payphone-specific coding digits,
which identify a call as originating from a payphone. Without the transmission
of payphone-specific coding digits, some of the IXCs have claimed they are
unable to identify a call as a payphone call eligible for dial-around
compensation. With the stated purpose of ensuring the continued payment of
dial-around compensation, the FCC, by Memorandum and Order issued on April 3,
1998, left in place the requirement for payment of per-call compensation for
payphones on lines that do not transmit the requisite payphone-specific coding
digits, but gave the IXCs a choice for computing the amount of compensation for
payphones on LEC lines not transmitting the payphone-specific coding digits of
either accurately computing per-call compensation from their databases or paying
per-phone, flat-rate compensation computed by multiplying the $0.284 per call
rate by the nationwide average number of 800 subscriber and access code calls
placed from 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 determined 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 was 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 $0.24 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.
21
On April 5, 2001, the FCC released an order which makes the first long
distance carrier to handle a dial-around call originating from a payphone
responsible to track and pay compensation on the call, regardless of whether
other carriers may subsequently transport or complete the call. This order was
issued to address the serious difficulties encountered by payphone service
providers in identifying and collecting dial-around compensation from
telecommunications resellers. The modified rule adopted coincident with the
order became effective on November 23, 2001. Although the Company originally
believed that this modification to the dial-around compensation system would
result in a significant increase to the number of calls for which the Company is
able to collect such compensation, the increase did not materialize to the
originally estimated levels. The Company believes that the resulting shortfall
is due in large measure to the continued reliance upon data from the resale
carriers as to what is a "completed" call on their systems, and ongoing
fundamental issues with respect to LEC and IXC networks properly identifying and
capturing dial around calls upon which compensation is due.
In a decision released January 31, 2002 (the "2002 Payphone Order") the
FCC partially addressed the remaining issues concerning the "true-up" required
for 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 2002 Payphone Order deferred to a later order its determination of the
allocation of this total compensation rate among the various carriers required
to pay compensation for the interim period.
On October 23, 2002 the FCC released its Fifth Order on Reconsideration
and Order on Remand (the "Interim Order"), which resolved the remaining issues
surrounding the interim/intermediate period true-up and specifically how monthly
per-phone compensation owed to PSPs is to be allocated among the relevant dial-
around carriers. The Interim Order also resolves how certain offsets to such
payments will be handled and a host of other issues raised by parties in their
remaining FCC challenges to the 1999 Payphone Order and the 2002 Payphone Order.
In the Interim Order, the FCC ordered a true-up for the interim period and
increased the adjusted monthly rate to $35.22 per payphone per month, to
compensate for the three-month payment delay inherent in the dial-around payment
system. The new rate of $35.22 per payphone per month is a composite rate,
allocated among approximately five hundred carriers based on their estimated
dial-around traffic during the interim period. The FCC also ordered a true-up
requiring the PSPs, including the Company, to refund an amount equal to $.046
(the difference between the old $.284 rate and the current $.238 rate) to each
carrier that compensated the PSP on a per-call basis during the intermediate
period. Interest on additional payments and refunds is to be computed from the
original payment date, at the IRS prescribed rate applicable to late tax
payments. The FCC further ruled that a carrier claiming a refund from a PSP for
the Intermediate Period must first offset the amount claimed against any
additional payment due to the PSP from that carrier. Finally, the Interim Order
provides that any net claimed refund amount owing to carriers cannot be offset
against future dial around payments (1) without prior notification and an
opportunity to contest the claimed amount in good faith (only uncontested
amounts may be withheld); and (2) absent an opportunity to "schedule" payments
over a reasonable period of time. The Company and its billing and collection
clearinghouse are currently reviewing the order and preparing the data necessary
to determine the precise dollar impact of the Interim Order on the Company.
On August 2, 2002 and September 2, 2002 respectively, the APCC and the
RBOCs filed petitions with the FCC to revisit and increase the dial around
compensation rate level. Using the FCC's existing formula, as approved by the
Court in its June 26, 2000 order, and adjusted only to reflect current costs and
call volumes, the APCC and RBOCs petitions support an approximate doubling of
the current $0.24 rate. In response to the petitions, on September 2, 2002 the
FCC put them out for comment and reply comment by interested parties, seeking
input on how the Commission should proceed to address the issues raised by the
filings. The Company believes that the "fair compensation" requirements of
Section 276 of the Telecom Act mandate that the FCC promptly review and adjust
the dial around compensation rate level. While no assurances can be given as to
22
the timing or amount of any increase in the dial around rate level, the Company
believes an increase in the rate is reasonably likely given the significant
reduction in payphone call volumes, continued collection difficulties and other
relevant changes since the FCC set the $0.24 rate level.
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 determination of the effect of the
Interim Order on the Company , (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.
Operator Services Contract
The Company is a party to a contract with Sprint Communications Company,
L.P. ("Sprint") that provides for the servicing of operator-assisted calls.
Under this arrangement, Sprint has assumed responsibility for tracking, rating,
billing and collection of these calls and remits a percentage of the gross
proceeds to the Company in the form of a monthly commission payment, as defined
in the contract. The contract also requires the Company to achieve certain
minimum gross annual operator service revenue, measured for the twelve-month
period ended June 30 of each year. In making its June 30, 2002 compliance
calculation under the minimum gross annual operator service revenue provision,
the Company identified certain discrepancies between its calculations and the
underlying call data information provided directly by Sprint. If the data, as
presented by Sprint, is utilized in the calculation, a shortfall could result.
The Company has provided Sprint with notification of its objections to the
underlying data, and upon further investigation, has discovered numerous
operational deficiencies in Sprint's provision of operator services that have
resulted in a loss of revenue to the Company, thus negatively impacting the
Company's performance relating to the gross annual operator service revenue
requirement set forth in the contract. Furthermore, the Company advised Sprint
that its analysis indicated that not only had it complied with the provisions of
the gross annual operator service revenue requirement, it also believed that
Sprint had underpaid commissions to the Company during the same time period. The
Company notified Sprint of the details surrounding the operational deficiencies
and advised that its failure to correct such operational deficiencies would
result in a material breach of the contract.
Notwithstanding the Company's objections, Sprint advised the Company,
based upon its calculation of the Company's performance in connection with the
gross annual operator services revenue requirement, it would retroactively
reduce the percentage of commission paid to the Company in connection with the
contract for the twelve-month period ended June 30, 2002. Sprint withheld
$418,000 from the commission due and owing the Company in the month of September
2002 and failed to address the operational deficiencies discovered by the
Company. As a result of these actions, during the month of October 2002, the
Company advised Sprint that the contract was terminated due to
Sprint's continuing and uncured breaches and the Company shifted its traffic to
an alternative operator service provider. In response, Sprint withheld $380,170
from the commissions due and owing the Company in the month of October 2002.
Thereafter, the Company made a demand for any and all amounts due it under the
terms of the contract. In response, Sprint has asserted its claim for payment of
approximately $5.9 million representing the amount it had calculated as owing
under the gross annual operator services revenue requirement for the
twelve-month period ended June 30, 2002.
The parties are continuing to attempt to negotiate a mutually agreeable
resolution to this matter. While the Company believes that its objections to
Sprint's calculation of the gross annual operator service revenue requirement
are justifiable and has not recorded any amounts associated with any minimum
liability, it is possible that some liability or receivable for this matter may
ultimately be determined as a result of the dispute, the amount of which, if
any, is not presently determinable.
23
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
On July 24, 2002 the Company acquired approximately 28,000 phones in the
PhoneTel Merger. The revenue and expense increases associated with these phones
for the period of July 24, 2002 to September 30, 2002 are included in these
financial statements. Offsetting these revenue and expense increases is the
reduction in revenues and expenses resulting from the impact of the Company's
ongoing program to remove unprofitable phones. The Company operated
approximately 12,000 more phones on September 30, 2002 than on September 30,
2001, net of the phones acquired in the PhoneTel Merger and the program to
remove unprofitable phones. The Company had approximately 72,000 phones in
service on September 30, 2002 and approximately 60,000 phones in service on
September 30, 2001. The average number of phones in service for the quarter
ended September 30, 2002 was approximately 65,000 and for the quarter ended
September 30, 2001 was approximately 62,000.
For the three months ended September 30, 2002, total revenues decreased
approximately $0.4 million, or 1.9%, to approximately $22.9 million from
approximately $23.3 million in the same period of 2001. This decrease was
attributable to the increases in the number of phones operated by the Company,
and associated revenues as noted above, offset by lower call volumes per phone
due to increased competition from the wireless communications industry and
changes in call traffic.
Coin call revenues decreased approximately $0.2 million, or 1.2%, to
approximately $15.8 million in the three months ended September 30, 2002 from
approximately $16.0 million in the third quarter of 2001. The decrease in coin
call revenues was primarily attributable to the increases in the number of
phones operated by the Company, and associated revenues as noted above, offset
by lower call volumes per phone resulting from increased competition from
wireless communication services and changes in call traffic.
Non-coin call revenues, which is comprised primarily of dial-around
revenue and operator service revenue, decreased approximately $0.2 million, or
3.6%, to approximately $7.1 million in the three months ended September 30, 2002
from approximately $7.3 million in the three months ended September 30, 2001.
The decrease was primarily attributable to the increases in the number of phones
operated by the Company, and associated revenues as noted above, and 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 $0.5 million, to approximately $4.3 million in the three
months ended September 30, 2002 from approximately $4.8 million in the third
quarter of 2001. The dial-around decrease is primarily attributable to the phone
count and revenue changes noted above and lower calls per phone due to increased
competition from wireless services. Operator service revenues decreased
approximately $0.3 million, to approximately $2.2 million in the third quarter
of 2002 from approximately $2.5 million in the three months ended September 30,
2001. The decrease is attributable to more payphones in service, as noted above,
offset by fewer long distance calls made per phone, and reduced call time per
call. Non-carrier revenues increased $0.5 million during the period.
Telephone charges decreased approximately $0.7 million, or 10.1%, to
approximately $6.6 million for the quarter ended September 30, 2002 from
approximately $7.3 million in the three months ended September 30, 2001. This
decrease was primarily due to the impact of the phone count and associated
telephone charge expense increases noted above offset by the on-going favorable
impact on monthly phone bills resulting from recent regulatory changes and a
$0.8 million favorable adjustment relating to a litigation settlement. Telephone
charges in the third quarter of 2001 were favorably affected by the receipt of
$0.7 million of refunds relating to New Service Test ("NST") regulations of the
FCC. Excluding the impact of this item and the favorable litigation adjustment
in the current quarter, telephone charges decreased by $0.6 million, or 8.2%,
from the third quarter of 2001. The Company is continuing to negotiate contracts
and pursue 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.
24
Commissions decreased approximately $1.4 million, or 24.2%, to
approximately $4.4 million in the three months ended September 30, 2002 from
approximately $5.8 million in the three months ended September 30, 2001. The
decrease was primarily attributable to increased expenses associated with the
phone count and expense increases noted above, offset by the impact of
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 increased approximately $0.2
million, or 3.4%, to approximately $6.1 million in the three months ended
September 30, 2002 from approximately $5.9 million in the three months ended
September 30, 2001. The increase was primarily attributable to the higher phone
count and associated expenses noted above.
Depreciation and amortization expense in the three months ended September
30, 2002 increased by $0.3 million to approximately $4.8 million from
approximately $4.5 million recorded in the three months ended September 30, 2001
due to the impact of depreciation and amortization expense on the assets
acquired in the PhoneTel Merger.
Selling, general and administrative expenses increased approximately $0.1
million, or 3.1%, to approximately $3.5 million in the three months ended
September 30, 2002 from approximately $3.4 million in the three months ended
September 30, 2001. The increase in expense was primarily attributable to higher
bank fees and insurance costs.
Interest expense in the three months ended September 30, 2002 declined
approximately $4.8 million, or 69.9%, compared to the prior-year period, to
approximately $2.1 million in the third quarter of 2002 from approximately $6.9
million in the third quarter of 2001. The decrease in recorded interest is due
to the lower principal balances resulting from the debt-for-equity exchange
consumated at the time of the PhoneTel purchase, lower interest rates and a
reduction of $0.9 million for the amortization of loan origination fees charged
to interest expense, offset by interest on PhoneTel debt assumed in the PhoneTel
Merger.
The three months ended September 30, 2002 included a $181.0 million gain
resulting from the debt restructuring related to the completion of the PhoneTel
merger. The Company also incurred $2.8 million of exit and disposal activity
costs which included a $0.6 million lease termination fee, $0.7 million of
employee severance costs, $0.2 million of other merger related costs and a $1.3
million charge for assets written-off as a result of moving the corporate office
from Tampa, Florida to Cleveland, Ohio after the completion of the PhoneTel
Merger.
The Company has not accrued any provision for Federal and State income
taxes because it has tax loss carryforward balances which exceed the amount of
income for the quarter.
For the three months ended September, 30 2002 net income of $173.7 million
was $184.0 million greater than the net loss of approximately $10.3 million for
the three months ended September 30, 2001 primarily due to the $181.0 million
gain resulting from the debt restructuring related to the completion of the
PhoneTel merger. Excluding the gain on the debt restructuring and $2.8 million
of exit and disposal activity costs relating to the relocation of the corporate
headquarters, the Company incurred a net loss of $4.5 million in the three
months ended September 30, 2002, a reduction of $5.8 million from the loss of
$10.3 million in the three months ended September 30, 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001
On July 24, 2002 the Company acquired approximately 28,000 phones in the
PhoneTel Merger. The revenue and expense increases associated with these phones
for the period of July 24, 2002 to September 30,
25
2002 are included in these financial statements. Offsetting these revenue and
expense increases is the reduction in revenues and expenses resulting from the
impact of the Company's ongoing program to remove unprofitable phones. The
Company operated approximately 12,000 more phones on September 30, 2002 than on
September 30, 2001, net of the phones acquired in the PhoneTel Merger and the
program to remove unprofitable phones. The Company's had approximately 72,000
phones in service on September 30, 2002 and approximately 60,000 phones in
service on September 30, 2001. The average number of phones in service for the
nine months ended September 30, 2002 was approximately 56,000 and for the nine
months ended September 30, 2001 was approximately 64,000.
For the nine months ended September 30, 2002, total revenues decreased
approximately $12.5 million, or 17.9%, to approximately $57.6 million from
approximately $70.1 million in the same period of 2001. This decrease was
primarily attributable to the phone count and revenue changes noted above and
lower call volumes per phone due to increased competition from the wireless
communications industry, resulting in lower average revenue per payphone.
Coin call revenues decreased approximately $6.2 million, or 13.2%, to
approximately $41.2 million in the nine months ended September 30, 2002 from
approximately $47.4 million in the first nine months of 2001. The decrease in
coin call revenues was primarily attributable to the changes in phone counts and
revenues noted above and from lower call volumes on the Company's payphones
resulting from increased competition from wireless communication services and
changes in call traffic.
Non-coin call revenues, which is comprised primarily of dial-around
revenue and operator service revenue, decreased approximately $6.3 million, or
27.7%, to approximately $16.4 million in the nine months ended September 30,
2002 from approximately $22.7 million in the nine months ended September 30,
2001. The decrease was primarily attributable to the changes in phone counts and
revenues noted above offset by 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 $4.2 million, to
approximately $10.6 million in the nine months ended September 30, 2002 from
approximately $14.8 million in the first nine months of 2001. The dial-around
revenue decrease is primarily attributable to the changes note above, lower
calls per payphone due to increased competition from wireless services and a
$0.9 million revenue reduction relating to the WorldCom bankruptcy filing in
July 2002. Operator service revenues decreased approximately $2.8 million, to
approximately $5.1 million in the first nine months of 2002 from approximately
$7.9 million in the nine months ended September 30, 2001. The decrease is
attributable to the above noted changes, fewer long distance calls made per
payphone, and reduced call time per call. Non-carrier revenues increased $0.7
million during the period.
Telephone charges decreased approximately $7.6 million, or 32.9%, to
approximately $15.4 million for the nine months ended September 30, 2002 from
approximately $23.0 million in the nine months ended September 30, 2001. In
addition to the impact of phone count and expense changes noted above and to the
on-going favorable impact on monthly bills resulting from recent regulatory
changes, telephone charges in the first nine months of 2002 were affected by
favorable adjustments related to a litigation settlement which totaled $0.8
million, refunds from NST regulatory changes which totaled $3.3 million and
other carrier charges for years prior to 2002 which totaled $0.6 million.
Telephone charges were favorably affected in the first nine months of 2001 by
the receipt of $2.0 million of refunds from LECs relating to NST orders
regarding prior years' telephone charges. The Company continues to negotiate
contracts and pursue 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 $6.3 million, or 35.7%, to
approximately $11.3 million in the nine months ended September 30, 2002 from
approximately $17.6 million in the nine months ended September 30, 2001. The
decrease was primarily due to lower commissionable revenues resulting from the
reduced number of payphones noted above and lower commission rates obtained by
the Company in negotiating contract renewals.
26
Commissions for the nine months ended September 30, 2001 also included favorable
adjustments of $0.6 million resulting from a contract termination. 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 $1.9
million, or 10.8%, to approximately $15.6 million in the nine months ended
September 30, 2002 from approximately $17.5 million in the nine months ended
September 30, 2001. The decrease was primarily attributable to reductions in
the number of personnel and wage related costs of approximately $0.4 million,
reductions in service and collection expenses of approximately $0.2 million,
field office expense reductions of approximately $0.4 million, property and
franchise tax reductions of approximately $0.1 million, and network billing
and line charge reductions of $0.8 million.
Depreciation and amortization expense of $14.6 million in the nine months
ended September 30, 2002 was $0.8 million higher than the $13.8 million expense
for the nine months ended September 30, 2001 partially due to the impact of
depreciation and amortization expense on the assets acquired in the PhoneTel
Merger and to adjustments related to the removal of unprofitable phones.
Selling, general and administrative expenses of $8.2 million for the
period ended September 30, 2002 were $1.5 million lower than the $9.7 million of
expense in the nine months ended September 30, 2001. This was attributable to a
reduction in salaries and salary-related expenses of approximately $0.5 million,
a reduction in professional fees of approximately $1.2 million, including a
rescission of management fees of approximately $0.4 million which are no longer
due, and several other expense items netting to an increase of approximately
$0.2 million compared to the same period last year.
Interest expense in the nine months ended September 30, 2002 decreased
approximately $10.6 million, or 48.3%, compared to the prior-year period, to
approximately $11.3 million in the first nine months of 2002 from approximately
$21.9 million in the first nine months of 2001. The decrease in recorded
interest is the result of lower interest rates, a reduction of $2.7 million for
the amortization of loan origination fees charged to interest expense and lower
balances due to the debt extinguishment associated with the PhoneTel Merger,
offset by interest on PhoneTel debt which was assumed.
The nine months ended September 30, 2002 included a $181.0 million gain
resulting from the debt restructuring related to the completion of the PhoneTel
merger. The Company also incurred $2.8 million of exit and disposal activity
costs which included a $0.6 million lease termination fee, $0.7 million of
employee severance costs, $0.2 million of other merger related costs, and a $1.3
million charge for assets written-off as a result of moving the corporate office
from Tampa, Florida to Cleveland, Ohio after the completion of the PhoneTel
Merger.
The Company has not accrued any provision for Federal and State income
taxes because it has tax loss carryforward balances which exceed the amount of
income for the current nine month period.
For the nine months ended September, 30 2002 net income of $159.4 million
was $192.4 million greater than the net loss of approximately $33.1 million for
the nine months ended September 30, 2001 primarily due to the gain on debt
extinguishment associated with the PhoneTel Merger. Excluding the gain on the
debt extinguishment and $2.8 million of exit and disposal activity costs, the
Company incurred a net loss of $18.8 million in the nine months ended September
30, 2002, a reduction of $14.3 million from the loss of $33.1 million in the
nine months ended September 30, 2001.
27
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 issuance of common stock and proceeds from the issuance of
preferred stock. There was no stock issued for cash in the most recent two
years.
The Company's payphone revenues by operating region are affected by
seasonal variations, geographic distribution of payphones, removal of
unprofitable phones and type of location. Because many of the payphones are
located outdoors, weather patterns have differing effects on the Company's
results depending on the region of the country where the payphones are located.
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.
In the nine months ended September 30, 2002, operating activities used
approximately $1.1 million of net cash which was funded from the $4.8 million
received from the New Senior Credit Facility, which amount is net of the $0.2
million cost of issuing that debt. Operating activities provided approximately
$2.5 million of net cash in the nine months ended September 30, 2001. Cash used
in operating activities in the first nine months of 2002 included the operating
loss of $10.4 million, increases in other assets of $2.0 million for prepaid
insurance and expenses associated with the PhoneTel Merger, reductions in
accounts payable and accrued liabilities of $8.2 million and a decrease in
deferred revenue of $0.1 million. Such cash uses exceeded total sources, which
included depreciation and amortization of $14.6 million and a reduction in
accounts receivable of $2.9 million.
Capital expenditures for the nine months ended September 30, 2002 were
$0.2 million, compared to the $0.5 million in the nine months ended September
30, 2001. The on-going strategy of removing underperforming phones, combined
with the existence of an extensive inventory of phone components, allows for
minimal capital equipment expenditures. Payments relating to new and existing
location contracts for the nine months ended September 30, 2002 were $0.3
million, compared with $0.5 million in the nine months ended September 30, 2001.
The Company made payments under capital lease obligations totaling
approximately $0.4 million. Cash balances increased approximately $3.6 million
during the nine month period.
The Company's principal source of liquidity in the nine months ended
September 30, 2002 came from cash received pursuant to the new Senior Credit
Facility. See "Senior Credit Facility" below for a description of this
indebtedness. The Company's primary uses of liquidity are to provide working
capital and to meet debt service requirements.
Senior Credit Facility
Effective as of February 19, 2002, Madeleine L.L.C. and ARK CLO 2000-1,
Limited (the "Senior Lenders") entered into a credit agreement (the "Senior
Credit Facility) with Davel Financing Company, L.L.C., PhoneTel and Cherokee
Communications, Inc., a wholly owned subsidiary of PhoneTel. On that date, the
existing junior lenders of the Company and PhoneTel also agreed to a substantial
debt-for-equity exchange with respect to their outstanding indebtedness (see
Note 3). The Senior Credit Facility provided for a combined $10 million line of
credit which the Company and PhoneTel shared $5 million each. The Company and
PhoneTel each drew their available amounts under the line on February 20, 2002,
which amounts were used to pay merger related expenses and accounts payable.
Davel and PhoneTel agreed to remain jointly and severally liable for all amounts
due under the Senior Credit Facility.
Interest on the funds loaned pursuant to the 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 due on
the last day of each month, beginning July 31, 2002 and ending on the maturity
date of
28
June 30, 2003. The Senior Credit Facility includes covenants that require the
Company and PhoneTel to maintain a minimum level of combined earnings (EBITDA
and Adjusted EBITDA, as defined in the Senior Credit Facility) and limits the
incurrance of cash and capital expenditures, the payment of dividends and
certain asset disposals.
Pursuant to an Intercreditor and Subordination Agreement, dated as of
February 19, 2002 and reaffirmed on July 24, 2002, the existing junior lenders
agreed to subordinate their security interest in Company collateral to the
security interest of the Senior Lenders in such collateral. Upon the repayment
in full of the amounts owing under the Senior Credit Facility, the senior
security interests of the Senior Lenders will terminate and the junior lenders
will, once again, hold first priority security interests in the Company
collateral.
On May 14 and July 23, 2002, the Company and PhoneTel executed amendments
to the Senior Credit Facility that reduced the minimum level of combined
earnings that the companies were required to maintain. As of August 31, 2002,
the Company was not in compliance with the minimum EBITDA financial covenant
under the Senior Credit Agreement. At September 30, 2002, the Company was not in
compliance with the minimum EBITDA and Adjusted EBITDA financial covenants and
obtained a waiver from its Senior Lenders which waives all defaults through
September 30, 2002.
Junior Credit Facility
On July 24, 2002, immediately prior to the PhoneTel Merger, Davel and
PhoneTel amended, restated and consolidated their respective junior credit
facilities. The combined restructured Junior Credit Facility of $100.0 million
due December 31, 2005 (the "maturity date") consists of: (i) a $50.0 million
cash-pay term loan ("Term Note A") with interest payable in kind monthly through
June 30, 2003, and thereafter to be paid monthly in cash from a required payment
of $1.25 million commencing on August 1, 2003, with such monthly payment
increasing to $1.5 million beginning January 1, 2005, and the unpaid balance to
be repaid in full on the maturity date; and (ii) a $50.0 million payment-in-kind
term loan (the "PIK term loan" or "Term Note B") to be repaid in full on the
maturity date. Amounts outstanding under the term loans will accrue interest
from and after the closing date at the rate of ten percent (10%) per annum.
Interest on the PIK term loan will accrue from the closing date and will be
payable in kind. All interest payable in kind will be added to the principal
amount of the respective term loan on a monthly basis and thereafter treated as
principal for all purposes (including the accrual of interest upon such
amounts). Upon the occurrence and during the continuation of an event of
default, interest accrues at the rate of 14% per annum.
As discussed in Note 3, the Company has accounted for the debt exchange as
a troubled debt restructuring and recorded a $181.0 million gain on debt
extinguishment relating to its old credit facility. For accounting and reporting
purposes, with respect to Davel's portion of the debt exchange, all future cash
payments under the modified terms will be accounted for as reductions of
indebtedness and no interest expense will be recognized for any period between
the closing date and the maturity date. In addition, the remaining amounts
payable with respect to the PhoneTel portion have been recorded at the net
present value of such payments in accordance with the purchase method of
accounting. Interest expense is recognized on the PhoneTel portion of the
restructured debt over the term of the debt using the interest method of
accounting at a fair market rate of 15%.
The Junior Credit Agreement is secured by substantially all assets of the
Company and is subordinate in right of payment to the Senior Credit Facility.
The Junior Credit Facility also provides for the payment of a 1% loan fee and
requires advanced payments of principal from excess cash flow and certain types
of cash receipts. The Junior Credit Facility includes covenants that require the
Company to maintain a minimum level of combined earnings (EBITDA and Adjusted
EBITDA, as defined in the Junior Credit Facility) and limits the incurrance of
cash and capital expenditures, the payment of dividends and certain asset
disposals. The Junior Credit Agreement also has a cross default provision
that results in a default if the Company is in default under its Senior Credit
Facility.
As discussed above, the Company was not in compliance with certain
financial covenants under its Senior Credit Facility and, as a result, was in
default under its Junior Credit Facility at August 31 and September 30, 2002.
The Company has obtained a waiver from its Junior Lenders that waives all
defaults through September 30, 2002.
29
Excluding the gain on debt extinguishment of $181.0 million related to the
PhoneTel Merger, the Company has incurred losses of approximately $43.4 million
and $20.6 million for the year ended December 31, 2001 and for the nine months
ended September 30, 2002, 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. As of
September 30, 2002, the Company had a working capital deficit of $13.8 million
and its liabilities exceed its assets by $47.8 million.
Notwithstanding the new Senior Credit Facility and the debt-for-equity
exchange described above, 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
dispositions, or the timing thereof, or the amount of proceeds that the Company
could realize from such sales. As a result of these matters, substantial doubt
exists about the Company's ability to continue as a going concern.
IMPACT OF INFLATION
Inflation is not considered a material factor affecting the Company's
business. General operating expenses such as salaries, employee benefits and
occupancy costs are, however, subject to normal inflationary pressures.
SEASONALITY
The Company's revenues from its payphone operation regions are affected by
seasonal variations, geographic distribution of payphones and type of location.
Because many of the Company's payphones are located outdoors, weather patterns
have differing effects on the Company's results depending on the region of the
country where they are located. Most of the Company's payphones in the
southeastern United States produce substantially higher call volume in the first
and second quarters than at other times during the year, while the Company's
payphones throughout the midwestern and eastern United States produce their
highest call volumes during the second and third quarters. While the aggregate
effect of the variations in different geographical regions tend to counteract
the effect of one another, the Company has historically experienced higher
revenue and income in the second and third quarters than in the first and fourth
quarters. Changes in the geographical distribution of its payphones may in the
future result in different seasonal variations in the Company's results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to certain market risks inherent in the Company's
financial instruments that arise from transactions entered into in the normal
course of business. Both the New Senior Credit Facility and the New Junior
Credit Facility bear interest at fixed rates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
ITEM 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934,
within the 90 days prior to the filing date of this report, the Company carried
out an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. This evaluation was carried out
under the supervision and with the participation of the Company's management,
including the Company's Chairman and Chief Executive Officer along with the
Company's Chief Financial Officer, who concluded that the Company's disclosure
controls and procedures are effective. There have been no significant changes in
the Company's internal controls or in
30
other factors, which could significantly affect internal controls subsequent to
the date the Company carried out its evaluation. Disclosure controls and
procedures are controls and other procedures that are designed to ensure that
information required to be disclosed in the Company reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed in
Company reports filed under the Exchange Act is accumulated and communicated to
management, including the Company's Chief Executive Officer and Chief Financial
Officer as appropriate, to allow timely decisions regarding required disclosure.
31
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 2000, the Company and its wholly owned subsidiary Telaleasing
Enterprises, Inc. were sued in Maricopa County, Arizona Superior Court by CSK
Auto, Inc. ("CSK"). The suit alleges that the Company breached a location
agreement between the parties. CSK's complaint alleges damages in excess of $5
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 a related
case in California, which was settled in the third quarter of 2001. 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 with the
United States Court of Appeals for the Ninth Circuit. On May 17, 2002, the Court
of Appeals affirmed the remand order, thus allowing the case to proceed in
Arizona state court. The underlying suit is now in the pretrial discovery phase,
and no trial date has been set. The Company intends to vigorously defend itself
in the case. While the Company believes it possesses certain meritorious
defenses to the claims, the matter remains in its initial stages. Accordingly,
the Company cannot at this time predict the likelihood of an unfavorable result
or the amount or range of potential loss.
In February 2001, Picus Communications, LLC ("Picus"), a debtor in Chapter
11 bankruptcy in the United States Bankruptcy Court for the Eastern District of
Virginia, brought suit against Davel 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. On March 13, 2001, the Company filed a
proof of claim in the bankruptcy court to recover damages based on Picus'
breach of contract and failure to secure and pay federally mandated dial-around
compensation. On May 10, 2001, the district court entered an order dismissing
Picus' complaint without prejudice. 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' actions. On May 9, 2002, Picus filed an objection to the
Company's administrative claim and a counterclaim seeking to recover
approximately $717,000 in damages.
The various pleadings and claims in this matter were consolidated in an
adversary proceeding and set for trial to begin on October 21, 2002. Prior to
the commencement of the trial, on October 9, 2002 Picus filed a motion in the
bankruptcy court to seek court approval of a settlement of all outstanding
claims between the parties. The settlement provides that (i) Picus will
cooperate with the Company to recover certain dial-around compensation
potentially owed to the Company for the calendar year of 2000 and the first
calendar quarter of 2001, (ii) within ten days after entry of an order approving
the settlement and December 15, 2002, the Company will pay Picus $79,500, (iii)
the Company will pay Picus an additional $150,000 no later than May 15, 2003,
but potentially earlier, depending upon the receipt of first quarter 2001
dial-around compensation attributable to the Picus lines; and (iv) the Company
will pay Picus forty percent (40%) of the dial-around compensation for the
calendar year of 2000 attributable to the Picus lines, if any. If any of the
aforementioned payments are not timely paid by the Company, Picus will be
entitled to obtain a judgment against Davel for the full amount of its claim
against the Company, plus interest, less any amounts actually paid to Picus
under the settlement agreement.
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 accuse the defendants of negligence in the death of the father of
Thomas Sanchez, a former Davel employee. The matter fell within the parameters
of its insurance coverage, therefore, Davel's
32
insurance carrier maintained responsibility for the defense and associated costs
related to this matter. On or about October 25, 2002 the matter was settled
within the limits of the Company's liability insurance coverage.
The Company, in the course of its normal operations is subject to
regulatory matters, disputes, claims and other litigation. In management's
opinion, all such other matters of which the Company has knowledge, have been
reflected in the financial statements or will not have a material adverse effect
on the Company's financial position, results of operations or cash flows.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index.
(b) A Current Report on Form 8-K was filed by the Company on August 1,
2002.
33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned thereunto duly authorized.
DAVEL COMMUNICATIONS, INC.
Date: November 14, 2002 /s/ RICHARD P. KEBERT
--------------------
Richard P. Kebert
Chief Financial Officer
CERTIFICATION
I, John D. Chichester, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarterly
period ended September 30, 2002 of Davel Communications, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
34
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ John D. Chichester
----------------------
John D. Chichester
Chairman and Chief Executive Officer
CERTIFICATION
I, Richard P. Kebert, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarterly
period ended September 30, 2002 of Davel Communications, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
35
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls.
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Richard P. Kebert
---------------------
Richard P. Kebert
Chief Financial Officer
36
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Amendment to the Certificate of Incorporation
of Davel Communications, Inc. *
10.1 Amended, Restated, and Consolidated Credit Agreement, dated as
of July 24, 2002, by and among Davel Financing Company,
L.L.C., PhoneTel Technologies, Inc., Cherokee Communications,
Inc., Davel Communications, Inc., the domestic subsidiaries of
each of the foregoing and Foothill Capital Corporation, as
Agent, and the lenders named therein. *
10.2 Amended, Restated, and Consolidated Security Agreement, dated
as of July 24, 2002, by Davel Financing Company, L.L.C.,
PhoneTel Technologies, Inc., Cherokee Communications, Inc.,
Davel Communications, Inc., and the domestic subsidiaries of
each of the foregoing, in favor of Foothill Capital
Corporation, as Agent, and the lenders as set forth in the
Credit Agreement above. *
10.3 Second Amendment, dated as of July 23, 2002, to the Credit
Agreement, dated as of February 19, 2002, by and among Davel
Financing Company, L.L.C., PhoneTel Technologies, Inc.,
Cherokee Communications, Inc., Davel Communications, Inc. and
each of the domestic subsidiaries of the foregoing, Madeleine
L.L.C. and ARK CLO 2000-1, Limited. *
99.1 Certification of CEO and CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Incorporated by reference from Form 8-K filed by the
Registrant on August 1, 2002.
37