DAVEL COMMUNICATIONS INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark one)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

OR

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO .

COMMISSION FILE NUMBER 0-22610

DAVEL COMMUNICATIONS, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 59-3538257
------------------------------- ----------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

10120 WINDHORST ROAD
TAMPA, FLORIDA 33619
---------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

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

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

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
NONE NONE

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

COMMON STOCK, $0.01 PAR VALUE PER SHARE
(TITLE OF CLASS)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

As of March 15, 2001 the aggregate market value of the voting and nonvoting
common equity held by non-affiliates of the registrant was approximately
$379,764 based upon the closing price on March 15, 2001 of $0.034. As of March
15, 2001, there were 11,169,540 shares of the registrant's Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
None

DAVEL COMMUNICATIONS, INC.

FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS
Part I
Item 1 Business
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Submission of Matters to a Vote of Security Holders

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

Part III
Item 10 Directors and Executive Officers
Item 11 Executive Compensation
Item 12 Security Ownership of Certain Beneficial Owners and Management
Item 13 Certain Transactions

Part IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K

2

PART I

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934:

Certain of the statements contained in the body of this Report are
forward-looking statements (rather than historical facts) that are subject to
risks and uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements. In the preparation of
this Report, where such forward-looking statements appear, the Company has
sought to accompany such statements with meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those described in the forward-looking statements. A description
of the principal risks and uncertainties inherent in the Company's business is
included herein under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Readers of this Report are
encouraged to read these cautionary statements carefully.

ITEM 1. BUSINESS

GENERAL OVERVIEW

Davel Communications, Inc. (the "Company" or "Davel") was incorporated
on June 9, 1998 under the laws of the State of Delaware to effect the merger
(the "Peoples Telephone Merger"), on December 23, 1998, of Davel Communications
Group, Inc. ("Old Davel"), with Peoples Telephone Company, Inc. ("Peoples
Telephone"). The merger was accounted for as a pooling-of-interests transaction,
and, accordingly, the results of both companies have been restated as if they
had been combined for all periods presented.

As a result of the Peoples Telephone Merger and the prior acquisition
of Communications Central Inc. in February 1998 (the "CCI Acquisition"), the
Company is the largest domestic independent payphone service provider ("IPP") in
the United States. The Company's principal executive offices are located at
10120 Windhorst Road, Tampa, Florida 33619, and its telephone number is (813)
628-8000.

As of December 31, 2000, the Company owned and operated a network of
approximately 67,000 payphones in 44 states and the District of Columbia,
providing it with one of the broadest geographic ranges of coverage of any
payphone service provider ("PSP") in the country. The Company's installed
payphone base generates revenue through coin calls (local and long-distance),
non-coin calls (calling card, credit card, collect, and third-party billed calls
using the Company's preselected operator services providers such as Sprint and
AT&T) and dial-around calls (utilizing a 1-800, 1010XXX or similar "toll free"
dialing method to select a carrier other than the Company's pre-selected
carrier). A significant portion of the Company's payphones are located in
high-traffic areas such as convenience stores, shopping centers, truck stops,
service stations, and grocery stores.

As part of the Telecommunications Act of 1996 ("1996 Telecom
Act"), Congress directed the Federal Communications Commission ("FCC") to ensure
widespread access to payphones for use by the general public. Industry estimates
suggest that there are approximately 2.20 million payphones currently operating
in the United States, of which approximately 1.35 million are operated by the
Regional Bell Operating Companies ("RBOCs") and approximately 0.30 million are
operated by the smaller independent local exchange carriers ("LECs") and the
major long distance carriers such as Sprint and AT&T. The remaining
approximately 0.55 million payphones are owned or managed by the more than 1,000
IPPs currently operating in the United States.

3

INDUSTRY OVERVIEW

Today's telecommunications marketplace was principally shaped by the
1984 court-approved divestiture by AT&T of its local telephone operations (the
"AT&T Divestiture") and the many regulatory changes adopted by the FCC and state
regulatory authorities in response to and subsequent to the AT&T Divestiture,
including the authorization of the connection of competitive or independently
owned payphones to the public switched network. The "public switched network" is
the traditional domestic landline public telecommunications network used to
carry, switch and connect telephone calls. The connection of independently owned
payphones to the public switched network has resulted in the creation of
additional business segments in the telecommunications industry. Prior to these
developments, only the consolidated Bell system or independent LECs were
permitted to own and operate payphones. Following the AT&T Divestiture and
subsequent FCC and state regulatory rulings, the independent payphone sector
developed as a competitive alternative to the consolidated Bell system and other
LECs by providing more responsive customer service, lower cost of operations and
higher commissions to the owners or operators of the premises at which a
payphone is located ("Location Owners").

Prior to the AT&T Divestiture, the LECs could refuse to provide
payphone service to a business operator or, if service was installed, would
typically pay no or relatively small commissions for the right to place a
payphone on the business premises. Following the AT&T Divestiture and the FCC's
authorization of payphone competition, IPPs began to offer Location Owners
higher commissions on coin calls made from the payphones in order to obtain the
contractual right to install the equipment on the Location Owners' premises.
Initially, coin revenue was the only source of revenue for the payphone
operators because they were unable to participate in revenues from non-coin
calls. However, the operator service provider ("OSP") industry emerged and
enabled the competitive payphone operators to compete more effectively with the
regulated telephone companies by paying commissions to payphone owners for
non-coin calls. For the first time, IPPs were able to receive non-coin call
revenue from their payphones. With this incremental source of revenue from
non-coin calls, IPPs were able to compete more vigorously on a financial basis
with RBOCs and other LECs for site location agreements, as a complement to the
improved customer service and more efficient operations provided by the IPPs. As
part of the AT&T Divestiture, the United States was divided into Local Access
Transport Areas ("LATAs"). RBOCs were authorized to provide telephone service
that both originates and terminates within the same LATA ("intraLATA") pursuant
to tariffs filed with and approved by state regulatory authorities. RBOCs
typically provide payphone service primarily in their own respective
territories, and are now authorized to share in the payphone revenues generated
from telecommunications services between LATAs ("interLATA"). Long-distance
companies, such as Sprint, AT&T, MCI and Worldcom, provide interLATA services,
and in some circumstances, also provide local or long-distance service within
LATAs. An interLATA long-distance telephone call generally begins with an
originating LEC transmitting the call from the originating payphone to a point
of connection with a long-distance carrier. The long-distance carrier, through
its owned or leased switching and transmission facilities, transmits the call
across its long-distance network to the RBOC or LEC servicing the local area in
which the recipient of the call is located. The terminating RBOC or LEC then
delivers the call to the recipient.

BUSINESS STRATEGY

PURSUE STRATEGIC ACQUISITIONS. The Company is currently restricted from
making acquisitions by the Credit Agreement, as amended (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations-
Liquidity and Capital Resources-Second Amendment"). However, the Company will
continue to seek key opportunities, as strategic combinations have enabled the
Company to expand its market presence and further its strategy of concentrating
its payphones more rapidly than with internal sales growth alone. Any
acquisition would require approval from the Company's lenders. Concentrating its
payphones in close proximity allows the Company to plot more efficient

4

collection and maintenance routes. The Company believes that route density
contributes to cost savings. Because smaller companies typically are not able to
achieve the economies of scale that may be realized by the Company, the
integration of acquired payphones into the Company's network of payphones often
results in lower operating costs than the seller of such payphones had been able
to realize. By clustering its payphones, the Company is able to leverage its
existing infrastructure through more efficient service and collection routes
which leads to a lower overall cost structure. Since integrating the Peoples
Telephone Merger, Davel has been able to increase the number of payphones per
technician as a result of greater payphone density, workforce rationalizations
and automation of its field route operations.

The Company's objectives are to continue to rationalize its overall
cost structure, improve route density and service quality, monitor and take
action on its underperforming telephones and place an emphasis on expanding in
economically favorable territories. The Company has implemented the following
strategy to meet its objectives.

UTILIZE ADVANCED PAYPHONE TECHNOLOGY. The Company's payphones utilize
"smart" technology which provides voice synthesized calling instructions,
detects and counts coins deposited during each call, informs the caller at
certain intervals of the time remaining on each call, identifies the need for
and the amount of an additional deposit in order to continue the call, and
provides other functions associated with the completion of calls. Through the
use of a non-volatile, electronically erasable, programmable memory chip, the
payphones can also be programmed and reprogrammed from the Company's central
computer facilities to update rate information or to direct different types of
calls to particular carriers. The Company's payphones can also distinguish coins
by size and weight, report to its central host computer the total amount of coin
in the coin box, perform self-diagnosis and automatically report problems to a
pre-programmed service number.

APPLY SOPHISTICATED MONITORING AND MANAGEMENT INFORMATION SYSTEMS. The
Company utilizes a blend of enterprise-class proprietary and non-proprietary
software that continuously tracks coin and non-coin revenues from each payphone,
as well as expenses relating to each payphone, including commissions payable to
the Location Owners. The Company's technology also allows it to efficiently
track and facilitate the activities of its field technicians via interactions
from the pay telephone with the Company's computer systems and technical support
personnel at the Company's headquarters.

PROVIDE OUTSTANDING CUSTOMER SERVICE. The technology used by the
Company enables it to (i) respond quickly to equipment malfunctions and (ii)
maintain accurate records of payphone activity which can be verified by
customers. The Company strives to minimize "downtime" on its payphones by
identifying service problems as quickly as possible. The Company employs both
advanced telecommunications technology and trained field technicians as part of
its commitment to provide superior customer service. The records generated
through the Company's technology also allow for the more timely and accurate
payment of commissions to Location Owners.

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

RATIONALIZATION OF LOW-REVENUE PHONES. In recent years, the Company has
experienced revenue declines as a result of increased competition from cellular
and other telecommunications products. As a result of declining revenues, the
Company's strategy is to remove low revenue phones that do not meet the
Company's minimum criteria of profitability and to promote improved density of
the Company's payphone routes. During the most recent two years ending December
31, 2000 and 1999, the Company removed 12,616 and 16,841 phones respectively.
The Company has an ongoing program to identify additional phones to be removed
in 2001 based upon low revenue performance and route density considerations.

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

OPERATIONS

As of December 31, 2000 and December 31, 1999, the Company owned and
operated approximately 67,000 and 75,000 payphones, respectively.

5

COIN CALLS

The Company's payphones generate coin revenues primarily from local
calls. Historically, the maximum rate that LECs and IPPs could charge for local
calls was generally set by state regulatory authorities and in most cases was
$0.25 through October 6, 1997. In ensuring "fair compensation" for all calls,
the FCC determined that local coin rates from payphones should be generally
deregulated by October 7, 1997, but provided for possible modifications or
exemptions from deregulation upon a detailed demonstration by an individual
state that there are market failures within the state that would not allow
market-based rates to develop. On July 1, 1997, a federal court issued an order
which upheld the FCC's authority to deregulate local coin call rates. In
accordance with the FCC's ruling and the court order, certain RBOCs, LECs and
IPPs, including the Company, began to increase rates for local coin calls from
$0.25 to $0.35 after October 7, 1997. See "---Regulation-Effect of Federal
Regulation of Local and Dial-Around Calls."

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

NON-COIN CALLS

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

The services needed to complete a non-coin call include providing an
automated or live operator to answer the call, verifying billing information,
validating calling cards and credit cards, routing and transmitting the call to
its destination, monitoring the call's duration and determining the charge for
the call, and billing and collecting the applicable charge. The Company has
contracted with operator service providers to handle these calls and perform all
associated functions, while paying the Company a commission on the revenues
generated thereby.

The Company realizes additional non-coin revenue from various carriers
pursuant to the 1996 Telecom Act and FCC regulations thereunder as compensation
for "dial-around" non-coin calls made from its payphones. A dial-around call is
made by dialing an access code for the purpose of reaching a long distance
carrier company other than the one designated by the payphone operator or using
a traditional "toll free" number, generally by dialing a 1-800/888/877/866
number, a 950-XXXX number or a seven-digit "1010XXXX" code. (See Note 19 to the
Financial Statements.)

PAYPHONE BASE

The following table sets forth, for the last three fiscal years, the
number of Company payphones acquired, installed and removed during the year as
well as the net increase (decrease) in Company payphones in operation.

2000 1999 1998
------- ------- -------
Acquired -- 1,341 23,691
Installed 3,041 5,985 7,233
Removed (10,844) (16,841) (5,549)
------- ------- -------

Net Increase/(Decrease) (7,803) (9,515) 25,375
======= ======= =======

Total payphones in service
(approximately) 67,000 75,000 25,375
======= ======= =======

Most of the Company's payphones are located in reasonable proximity to
one of the Company's division offices, from which Company employees operate,
service and collect coins from the payphones. The Company had approximately
67,000 payphones in operation in forty-four states and the District of Columbia
as of December 31, 2000, compared with approximately 75,000 in operation as of
December 31, 1999. The five states possessing the greatest numbers of installed
telephones as of December 31, 2000, were: Florida (11,141), New York (5,333),
Virginia (4,752), Texas (4,080) and Tennessee (3,974).

6

The Company selects locations for its payphones where there is
typically high demand for payphone service, such as convenience stores, truck
stops, service stations, grocery stores and shopping centers. For many
locations, historical information regarding an installed payphone is available
because payphone operators are often obligated pursuant to agreements to provide
this information to Location Owners for their payphones. In locations where
historical revenue information is not available, the Company relies on its site
survey to examine geographic factors, population density, traffic patterns and
other factors in determining whether to install a payphone. The Company's
marketing staff attempts to obtain agreements to install the Company's payphones
("Location Agreements") at locations with favorable historical data regarding
payphone revenues. The Company recognizes, however, that recent changes in
payphone traffic volumes and usage patterns being experienced on an
industry-wide basis warrant a continued assessment of the locational deployment
of its payphones.

Location Agreements generally provide for revenue sharing with the
applicable Location Owner. The Company's Location Agreements generally provide
commissions based on fixed percentages of revenues and have three-to-five year
terms. The Company can generally terminate a Location Agreement on 30 days'
notice to the Location Owner if the payphone does not generate sufficient
revenue.

In 2000, the Company continued its aggressive monitoring of the
payphone base, which began in 1999, and removed under-performing payphones,
which are available for relocation at sites with greater potential for
profitability.

SERVICE AND MAINTENANCE

The Company employs field service technicians, each of whom collects
coin boxes, cleans and maintains a route of payphones. The technicians also
respond to trouble calls made by Location Owners, by users of payphones or by
the telephone itself as part of its internal diagnostic procedures. Some
technicians are also responsible for the installation of new payphones. Due to
the proximity of most of the Company's payphones to the Company's division
offices, the Company's polling and electronic tracking and trouble reporting
systems, and the ability of the field service technicians to perform on-site
service and maintenance functions, the Company is able to limit the frequency of
trips to the payphones as well as the number of employees needed to service the
payphones.

CUSTOMERS, SALES AND MARKETING

The Location Owners with whom the Company contracts are a diverse group
of small, medium and large businesses which are frequented by individuals
needing payphone access. The majority of the Company's payphones are located at
convenience stores, truck stops, service stations, grocery stores and shopping
centers. As of December 31, 2000, corporate payphone accounts of 50 or more
payphones represented approximately two-thirds of the Company's installed
payphone base.

SERVICE AND EQUIPMENT SUPPLIERS

The Company's primary suppliers provide payphone components, local line
access, and long-distance transmission and operator services. In order to
promote acceptance by end users accustomed to using RBOC or LEC-owned payphone
equipment, the Company utilizes payphones designed to be similar in appearance
and operation to payphones owned by LECs.

The Company purchases circuit boards from various manufacturers for
repair and installation of payphones. The Company primarily obtains local line
access from various LECs, including BellSouth, Verizon, SBC Communications, US
West and various other incumbent and competitive suppliers of local line access.
New sources of local line access are expected to emerge as competition continues
to develop in local service markets. Long-distance services are provided to the
Company by various long-distance and operator service providers, including
Sprint, AT&T, Qwest and others.

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

7

ASSEMBLY AND REPAIR OF PAYPHONES

The Company assembles and repairs payphone equipment for its own use.
The assembly of payphone equipment provides the Company with technical expertise
used in the operation, service, maintenance and repair of its payphones. The
Company assembles, refurbishes or replaces payphones from standard payphone
components either obtained from the Company's sizable inventory or purchased
from component manufacturers. These components include a metal case, an
integrated circuit board incorporating a microprocessor, a handset and cord, and
a coin box and lock. On the occasion when components are not available from
inventory, the components can be purchased by the Company from several
suppliers. The Company does not believe that the loss of any single supplier
would have a material adverse effect on its assembly operations.

The Company's payphones comply with all material regulatory
requirements regarding the performance and quality of payphone equipment and
have all of the operating characteristics required by the applicable regulatory
authorities, including free access to local emergency ("911") telephone numbers,
dial-around access to all available carriers, and automatic coin return
capability for incomplete calls.

TECHNOLOGY

The payphone equipment installed by the Company makes use of
microprocessors to provide voice synthesized calling instructions, detect and
count coin deposits during each call, inform the caller at certain intervals of
the time remaining on each call, identify the need for and the amount of an
additional deposit and other functions associated with completion of calls.
Through the use of non-volatile, electronically erasable, programmable read-only
memory chips, the payphones can also be programmed and reprogrammed from the
Company's central computer facilities to update rate information or to direct
different kinds of calls to particular carriers.

The Company's payphones can distinguish coins by size and weight,
report to a remote location the total coin in the coin box, perform
self-diagnosis and automatically report problems to a pre-programmed service
number, and immediately report attempts at vandalism or theft. Many of the
payphones operate on power available from the telephone lines, thereby avoiding
the need for and reliance upon an additional power source at the installation
location.

The Company utilizes proprietary and non-proprietary software that
tracks the coin and non-coin revenues from each payphone as well as expenses
relating to that payphone, including commissions payable to the Location Owners.

The Company provides all technical support required to operate the
payphones, such as computers and software and hardware specialists, at its
headquarters in Tampa, Florida. The Company's assembly and repair support
operations provide materials, equipment, spare parts and accessories to the
field. Each of the Company's division offices and/or each of the technician's
vans maintains inventories for immediate deployment in the field.

REGULATION

The FCC and state regulatory authorities have traditionally regulated
payphone and long-distance services, with regulatory jurisdiction being
determined by the interstate or intrastate character of the service and the
degree of regulatory oversight varying among jurisdictions. On September 20 and
November 8, 1996, the FCC adopted initial rules and policies to implement
Section 276 of the 1996 Telecom Act. The 1996 Telecom Act substantially
restructured the telecommunications industry, included specific provisions
related to the payphone industry and required the FCC to develop rules necessary
to implement and administer the provisions of the 1996 Telecom Act on both an
interstate and intrastate basis. Among other provisions, the 1996 Telecom Act
granted the FCC the power to preempt state payphone regulations to the extent
that any state requirements are inconsistent with the FCC's implementation of
Section 276.

FEDERAL REGULATION OF LOCAL COIN AND DIAL-AROUND CALLS

The Telephone Operator Consumer Services Improvement Act of 1990
("TOCSIA") established various requirements for companies that provide operator
services and for call aggregators, including PSPs, who send calls to those OSPs.
The requirements of TOCSIA as implemented by the FCC included call branding,
information posting, rate quotations, the filing of informational tariffs and
the right of payphone users to access any OSP to make non-coin calls. TOCSIA
also required the FCC to take action to limit the exposure of payphone companies
to undue risk of fraud upon providing this "open access" to carriers.

8

TOCSIA further directed the FCC to consider the need to provide
compensation for IPPs for dial-around calls. Accordingly, the FCC ruled in May
1992 that IPPs were entitled to dial-around compensation. Because of the
complexity of establishing an accounting system for determining per call
compensation for these calls, and for other reasons, the FCC temporarily set
this compensation at $6.00 per payphone per month based on an assumed average of
15 interstate carrier access code dial-around calls per month and a rate of
$0.40 per call. The failure by the FCC to provide compensation for 800 "toll
free" dial-around calls was challenged by the IPPs, and a federal court
subsequently ruled that the FCC should have provided compensation for these toll
free calls.

In 1996, recognizing that IPPs had been at a severe competitive
disadvantage under the existing system of regulation and had experienced
substantial increases in dial-around calls without a corresponding adjustment in
compensation, Congress enacted Section 276 to promote both competition among
payphone service providers and the widespread deployment of payphones throughout
the nation. Section 276 directed the FCC to implement rules by November 1996
that would:

o create a standard regulatory scheme for all public payphone service
providers;
o establish a per call compensation plan to ensure that all payphone service
providers are fairly compensated for each and every completed intrastate
and interstate call, except for 911 emergency and telecommunications relay
service calls;
o terminate subsidies for LEC payphones from LEC regulated rate-base
operations;
o prescribe, at a minimum, nonstructural safeguards to eliminate
discrimination between LECs and IPPs and remove the LEC payphones from the
LEC's regulated asset base;
o provide for the RBOCs to have the same rights that IPPs have to negotiate
with Location Owners over the selection of interLATA carrier services,
subject to the FCC's determination that the selection right is in the
public interest and subject to existing contracts between the Location
Owners and interLATA carriers;
o provide for the right of all PSPs to choose the local, intraLATA and
interLATA carriers subject to the requirements of, and contractual rights
negotiated with, Location Owners and other valid state regulatory
requirements;
o evaluate the requirement for payphones which would not normally be
installed under competitive conditions but which might be desirable as a
matter of public policy, and establish how to provide for and maintain
such payphones if it is determined they are required; and
o preempt any state requirements which are inconsistent with the FCC's
regulations implementing Section 276.

In September and November 1996, the FCC issued its rulings implementing
Section 276 (the "1996 Payphone Order"). In the 1996 Payphone Order, the FCC
determined that the best way to ensure fair compensation to independent and LEC
PSPs for each and every call was to deregulate, to the maximum extent possible,
the price of all calls originating from payphones. For local coin calls, the FCC
mandated that deregulation of the local coin rate would not occur until October
1997 in order to provide a period of orderly transition from the previous system
of state regulation.

To achieve fair compensation for dial-around calls through deregulation
and competition, the FCC in the 1996 Payphone Order directed a two-phase
transition from a regulated market. In the first phase, November 1996 to October
1997, the FCC prescribed flat-rate compensation payable to the PSPs by the
interexchange carriers ("IXCs") in the amount of $45.85 per month per payphone.
This rate was arrived at by determining that the deregulated local coin rate was
a valid market-based surrogate for dial-around calls. The FCC applied a
market-based, deregulated coin rate of $0.35 per call to a finding from the
record that there was a monthly average of 131 compensable dial-around calls per
payphone. This total included both carrier access code calls dialed for the
purpose of reaching a long distance company other than the one designated by the
PSP as well as 800 "toll free" calls. The monthly, per phone flat-rate
compensation of $45.85 was to be assessed only against IXCs with annual
toll-call revenues in excess of $100 million and allocated among such IXCs in
proportion to their gross long-distance revenues. During the second phase of the
transition to deregulation and market-based compensation (initially from October
1997 to October 1998, but subsequently extended in a later order by one year to
October 1999), the FCC directed the IXCs to pay the PSPs on a per-call basis for
dial-around calls at the assumed deregulated coin rate of $0.35 per call. At the
conclusion of the second phase, the FCC set the market-based local coin rate,
determined on a payphone-by-payphone basis, as the default per-call compensation
rate in the absence of a negotiated agreement between the PSP and the IXC. To
facilitate per-call compensation, the FCC required the PSPs to transmit
payphone-specific coding digits which would identify each call as originating
from a payphone and required the LECs to make such coding available to the PSPs
as a tariffed item included in the local access line service.

In July 1997, a federal court (the "Court") responded to an appeal of
the 1996 Payphone Order, finding that the FCC erred in (1) setting the default
per-call rate at $0.35 without considering the differences in underlying costs
between dial-around calls and local coin calls, (2) assessing the flat-rate
compensation against only the carriers with annual toll-

9

call revenues in excess of $100 million, and (3) allocating the assessment of
the flat-rate compensation based on gross revenues rather than on a factor more
directly related to the number of dial-around calls processed by the carrier.
The Court also assigned error to other aspects of the 1996 Payphone Order
concerning inmate payphones and the accounting treatment of payphones
transferred by an RBOC to a separate affiliate.

In response to the Court's remand, the FCC issued its modified ruling
implementing Section 276 (the "1997 Payphone Order") in October of 1997. The FCC
determined that distinct and severable costs of $0.066 were attributable to coin
calls that did not apply to the costs incurred by the PSPs in providing access
for dial-around calls. Accordingly, the FCC adjusted the per call rate during
the second phase of interim compensation to $0.284 (which is $0.35 less $0.066).
While the FCC tentatively concluded that the $0.284 default rate should be
utilized in determining compensation during the first phase and reiterated that
PSPs were entitled to compensation for each and every call during the first
phase, it deferred a decision on the precise method of allocating the initial
interim period (November 1996 through October 1997) flat-rate payment obligation
among the IXCs and the number of calls to be used in determining the total
amount of the payment obligation.

On March 9, 1998, the FCC issued a Memorandum Opinion and Order, FCC
98-481, which extended and waived certain requirements concerning the provision
by the LECs of payphone-specific coding digits which identify a call as
originating from a payphone. Without the transmission of payphone-specific
coding digits, some of the IXCs have claimed they are unable to identify a call
as a payphone call eligible for dial-around compensation. With the stated
purpose of ensuring the continued payment of dial-around compensation, the FCCs
Memorandum and Order issued on April 3, 1998 left in place the requirement for
payment of per-call compensation for payphones on lines that do not transmit the
requisite payphone-specific coding digits but gave the IXCs a choice for
computing the amount of compensation for payphones on LEC lines not transmitting
the payphone-specific coding digits of either accurately computing per-call
compensation from their databases or paying per-phone, flat-rate compensation
computed by multiplying the $0.284 per call rate by the nationwide average
number of 800 subscriber and access code calls placed from RBOC payphones for
corresponding payment periods. Accurate payments made at the flat rate are not
subject to subsequent adjustment for actual call counts from the applicable
payphone.

On May 15, 1998, the Court again remanded the per-call compensation
rate to the FCC for further explanation without vacating the $0.284 per call
rate. The Court opined that the FCC had failed to explain adequately its
derivation of the $0.284 default rate. The Court stated that any resulting
overpayment would be subject to refund and directed the FCC to conclude its
proceedings within a six-month period from the effective date of the Court's
decision.

In response to the Court's second remand, the FCC conducted further
proceedings and sought additional comment from interested parties to address the
relevant issues posed by the Court. On February 4, 1999, the FCC released the
Third Report and Order and Order on Reconsideration of the Second Report and
Order (the "1999 Payphone Order"), in which the FCC abandoned its efforts to
derive a "market-based" default dial-around compensation rate and instead
adopted a "cost-based" rate of $0.24 per dial-around call. Both PSPs and IXCs
petitioned the Court for review of the 1999 Payphone Order's determination of
the dial-around compensation rate. On June 16, 2000, the Court affirmed the 1999
Payphone Order setting a 24-cent dial-around compensation rate. On all the
issues, including those raised by the IXCs and the payphone providers, the Court
applied the "arbitrary and capricious" standard of review, and found that the
FCC's rulings were lawful and sustainable under that standard. As a result of
the Court's June 16, 2000 decision, the 24-cent dial-around compensation rate is
likely to remain in place until at least the end of 2001, when the FCC has
stated its intention to complete a third-year review of the rate. With respect
to the Petition for Reconsideration of the 1999 Payphone Order filed with the
FCC by the IPPs, this Petition is still pending and has yet to be ruled on by
the FCC. In view of the Court's affirmation of the 1999 Payphone Order, it is
unlikely that the FCC will adopt material changes to the key components of the
Order pursuant to the pending Reconsideration Petition, although no assurances
can be given.

The new 24-cent rate became effective April 21, 1999, and will serve as
the default rate through January 31, 2002. The new rate will also be applied
retroactively to the period beginning on October 7, 1997, less a $0.002 amount
to account for FLEX ANI payphone tracking costs, for a net compensation of
$0.238. The 1999 Payphone Order deferred a final ruling on the interim period
(November 7, 1996 to October 6, 1997) treatment to a later, as yet unreleased,
order. Upon establishment of the interim period rate, the FCC has further ruled
that a true-up may be made for all payments or credits (with applicable
interest) due and owing between the IXCs and the PSPs, including Davel, for the
payment period commencing on November 7, 1996 through the effective date of the
new $0.24 per call rate. It is possible that the final implementation of the
1999 Payphone Order, including resolution of this retroactive adjustment and the
outcome of any related administrative or judicial review, could have a material
adverse effect on the Company. See "--EFFECT OF FEDERAL REGULATION OF LOCAL COIN
AND DIAL-AROUND CALLS."

10

EFFECT OF FEDERAL REGULATION OF LOCAL COIN AND DIAL-AROUND CALLS

DIAL-AROUND CALLS. Based on the FCC's tentative conclusion in the 1997
Payphone Order, the Company during 1997 adjusted the amounts of dial-around
compensation previously recorded for the period November 7, 1996 to June 30,
1997 from the initial $45.85 rate to $37.20 ($0.284 per call multiplied by 131
calls). As a result of this adjustment, the provision recorded for the year
ended December 31, 1997, related to reduced dial-around compensation, is
approximately $3.3 million. Based on the reduction in the per-call compensation
rate in the 1999 Payphone Order, the Company further reduced non-coin revenues
by $9.0 million during 1998. The adjustment included approximately $6.0 million
to adjust revenue recorded during the period November 7, 1996 to October 6, 1997
from $37.20 per-phone per-month to $31.18 per phone per month ($0.238 per call
multiplied by 131 calls). The remaining $3.0 million of the adjustment was to
adjust revenues recorded during the period October 7, 1997 through December 31,
1998 to actual dial-around call volumes for the period multiplied by $0.238 per
call.

The Company recorded dial-around compensation revenue, net of
adjustments, of approximately $22.9 million for the year ended December 31,
2000; approximately $35.9 million for the year ended December 31, 1999; and
approximately $27.2 million for the year ended December 31, 1998.

The Company believes that it is legally entitled to fair compensation
under the 1996 Telcom Act for dial-around call the Company delivered to any
carrier during the period November 7, 1996 to October 6, 1997. Based on the
information available, the Company believes that the minimum amount it is
entitled to as fair compensation under the 1996 Telcom Act for this period is
$31.18 per payphone per month and the Company, based on the information
available to it, does not believe that it is reasonably possible that the amount
will be materially less than $31.18 per payphone per month. While the amount of
$0.24 per call ($0.238 for retroactive periods) constitutes the current level of
"fair" compensation, as determined by the FCC, certain carriers have asserted in
the past, are asserting and are expected to assert in the future that the
appropriate level of fair compensation should be lower than $0.24 per call. If
the level of fair compensation is ultimately determined to be an amount less
than $0.24 per call, such determination could have a material adverse effect on
the Company's results of operations and financial position.

LOCAL COIN CALL RATES. To ensure "fair compensation" for local coin
calls, the FCC previously determined that local coin rates from payphones should
be generally deregulated by October 7, 1997, but provided for possible
modifications or exemptions from deregulation upon a detailed showing by an
individual state that there are market failures within the state that would not
allow market-based rates to develop. On July 1, 1997, a federal court issued an
order that upheld the FCC's authority to deregulate local coin call rates. In
accordance with the FCC's ruling and the court order, certain LECs and IPPs,
including the Company, increased rates for local coin calls from $0.25 to $0.35.
Given the lack of direction on the part of the FCC on specific requirements for
obtaining a state exemption, the Company's inability to predict the responses of
individual states or the market, and the Company's inability to provide
assurance that deregulation, if and where implemented, will lead to higher local
coin call rates, the Company is unable to predict the ultimate impact on its
operations of local coin rate deregulation. The Company has, however,
experienced, and continues to experience, lower coin call volumes on its
payphones resulting from increased local coin calling rates, as well as from the
growth in wireless communication services, changes in call traffic and the
geographic mix of the Company's payphones.

OTHER PROVISIONS OF THE 1996 TELECOM ACT AND FCC RULES

As a whole, the 1996 Telecom Act and FCC Rules significantly altered
the competitive framework of the payphone industry. The Company believes that
implementation of the 1996 Telecom Act has addressed certain historical
inequities in the payphone marketplace and has, in part, led to a more equitable
and competitive environment for all payphone providers. However, there are
numerous uncertainties in the implementation and interpretation of the 1996
Telecom Act that may moderate any long-term positive impact. The Company has
identified the following such uncertainties:

o Various matters pending in several federal courts and raised before the
Congress which, while not directly challenging Section 276, relate to the
validity and constitutionality of the 1996 Telecom Act, as well as other
uncertainties related to the impact, timing and implementation of the 1996
Telecom Act.

o The 1996 Payphone Order required that LEC payphone operations be removed
from the regulated rate base on April 15, 1997. The LECs were also
required to make the access lines that are provided for their own
payphones

11

equally available to IPPs and to ensure that the cost to payphone
providers for obtaining local lines and services met the FCC's new
services test guidelines, which require that LECs price payphone access
lines at the direct cost to the LEC plus a reasonable allocation of
overhead. Proceedings are now pending in various stages and formats before
the FCC and numerous state regulatory bodies across the nation to resolve
these issues.

o In the past, RBOCs were allegedly impaired in their ability to compete
with the IPPs because they were not permitted to select the interLATA
carrier to serve their payphones. Recent changes to the FCC Rules remove
this restriction. Under the existing rules, the RBOCs are now permitted to
participate with the Location Owner in selecting the carrier of interLATA
services to their payphones, effective upon FCC approval of each RBOC's
Comparably Efficient Interconnection plans. Existing contracts between
Location Owners and payphone or long-distance providers that were in
effect as of February 8, 1996 are grand-fathered and will remain in effect
pursuant to their terms.

o The 1996 Payphone Order preempts state regulations that may require IPPs
to route intraLATA calls to the LEC by containing provisions that allow
all payphone providers to select the intraLATA carrier of their choice.
Outstanding questions exist with respect to 0+ local and 0- call routing,
whose classification will await the outcome of various state regulatory
proceedings or initiatives and potential FCC action.

o The 1996 Payphone Order determined that the administration of programs for
maintaining public interest payphones should be left to the states within
certain guidelines. Various state proceedings have been undertaken in
reviewing this issue, and the matter may be readdressed as circumstances
change.

BILLED PARTY PREFERENCE AND RATE DISCLOSURE

On January 29, 1998, the FCC released its Second Report and Order on
Reconsideration entitled In the Matter of Billed Party Preference for InterLATA
0+ Calls, Docket No. 92-77. Effective July 1, 1998, all carriers providing
operator services were required to give consumers using payphones the option of
receiving a rate quote before a call is connected when making a 0+ interstate
call.

STATE AND LOCAL REGULATION

State regulatory authorities have been primarily responsible for
regulating the rates, terms and conditions for intrastate payphone services.
Regulatory approval to operate payphones in a state typically involves
submission of a certification application and an agreement by the Company to
comply with applicable rules, regulations and reporting requirements. The states
and the District of Columbia have adopted a variety of state-specific
regulations that govern rates charged for coin and non-coin calls, as well as a
broad range of technical and operational requirements. The 1996 Telecom Act
contains provisions that require all states to allow payphone competition on
fair terms for both LECs and IPPs. State authorities also in most cases regulate
LEC tariffs for interconnection of independent payphones, as well as the LECs'
own payphone operations and practices.

The Company is also affected by state regulation of operator services.
Most states have capped the rates that consumers can be charged for coin toll
calls and non-coin local and intrastate toll calls made from payphones. In
addition, the Company must comply with regulations designed to afford consumers
notice at the payphone location of the long-distance company or companies
servicing the payphone and the ability to access alternate carriers. The Company
believes that it is currently in material compliance with all such regulatory
requirements.

In accordance with requirements under the 1996 Telecom Act, state
regulatory authorities are currently reviewing the rates that LECs charge IPPs
for local line access and associated services. Local line access charges have
been reduced in certain states, and the Company believes that selected states'
continuing review of local line access charges, coupled with competition for
local line access service resulting from implementation of the 1996 Telecom Act,
may lead to more options available to the Company for local line access at
competitive rates. The Company cannot provide assurance, however, that such
options or local line access rates will become available.

The Company believes that an increasing number of municipalities and
other units of local government have begun to impose taxes, license fees and
operating rules on the operations and revenues of payphones. The Company
believes that some of these fees and restrictions may be in violation of
provisions of the 1996 Telecom Act prohibiting barriers to entry into the
business of operating payphones and the policy of the Act to encourage wide
deployment of payphones. However, in at least one instance, involving a
challenge to a payphone ordinance adopted by the Village of

12

Huntington Park, California, the FCC declined to overturn a total ban on
payphones in a downtown area. The proliferation of local government licensing,
restriction, taxation and regulation of payphone services could have an adverse
affect on the Company and other PSPs unless the industry is successful in
resisting or moderating this trend.

MAJOR CUSTOMERS

No individual customer accounted for more than 10% of the Company's consolidated
revenues in 2000, 1999 or 1998.

COMPETITION

The Company competes for payphone locations directly with RBOCs, LECs
and other IPPs. The Company also competes, indirectly, with long-distance
companies, which can offer Location Owners commissions on long-distance calls
made from LEC-owned payphones. Most LECs and long-distance companies against
which the Company competes and some IPPs may have substantially greater
financial, marketing and other resources than the Company. In addition, many
LECs, faced with competition from the Company and other IPPs, have increased
their compensation arrangements with Location Owners to offer more favorable
commission schedules.

The Company believes that its principal competition is from providers
of wireless communications services for both local and long distance traffic.
Certain providers of wireless communication services have introduced rate plans
that are competitively priced with certain of the products offered by the
Company and have negatively impacted the usage of payphones throughout the
nation.

The Company believes that the competitive factors among payphone
providers are (1) the commission payments to a Location Owner, (2) the ability
to serve accounts with locations in several LATAs or states, (3) the quality of
service and the availability of specialized services provided to a Location
Owner and payphone users, and (4) responsiveness to customer service needs. The
Company believes it is currently competitive in each of these areas.

In February 2001, BellSouth, an RBOC operating (via its wholly owned
subsidiary BellSouth Public Communications, Inc.) the largest pay telephone
route in the nine state region comprising the southeastern United States,
announced plans to exit the pay telephone business over the next two years.
Additionally, a number of domestic IPPs continue to experience financial
difficulties from various competitive and regulatory factors impacting the pay
telephone industry generally, which may impair their ability to compete
prospectively. While no assurances can be given, the Company believes that these
circumstances create an opportunity for the Company to obtain new location
agreements and reduced site commissions going forward.

The Company competes with long-distance carriers that provide
dial-around services which can be accessed through the Company's payphones.
Certain national long-distance operator service providers and prepaid calling
card providers have implemented extensive advertising promotions and
distribution schemes which have increased dial-around activity on payphones
owned by LECs and IPPs, including the Company, thereby reducing traffic to the
Company's primary providers of long-distance service. While the Company does
receive compensation for dial-around calls placed from its payphones, regulatory
efforts are underway to improve the collection system and provide the Company
with the ability to collect that portion of dial-around calls that are presently
owing. See "-Regulation."

EMPLOYEES

As of December 31, 2000, the Company had 465 full-time employees, none
of whom is the subject of a collective bargaining agreement. The Company
believes that its relationship with its employees is good.

ITEM 2. PROPERTIES

The Company leases approximately 56,000 square feet of space in Tampa,
Florida that includes two locations for executive office space and facilities
for the assembly and repair of payphones. The Company also leases space for it's
approximately 27 division offices for payphone operations in various geographic
locations across the country. In addition, the Company had operated a regional
distribution and assembly center in approximately 20,500 square feet of combined
manufacturing and office space in Jacksonville, Illinois, which the Company
continues to lease pursuant to an agreement with David Hill, who is a Davel
director and major shareholder. The Company is searching for a tenant to
sub-lease this space. The Company also leases from Mr. Hill 12,000 square feet
of warehouse space used for storage in Jacksonville, Illinois.

13

ITEM 3. LEGAL PROCEEDINGS

In December 1995, Cellular World, Inc. filed suit in Dade County
Circuit Court against the Company's affiliates, Peoples Telephone and PTC
Cellular, Inc., alleging tortious interference with Cellular World's trade
secrets. The trial court previously entered partial summary judgment in favor of
the Company as to the plaintiff's trade secrets claim, leaving the tortious
interference claim for trial.

Trial on the tortious interference claim commenced on February 29,
2000. The Company had several meritorious legal and factual defenses to
plaintiff's claims. Although the Company believes that it had a reasonable
possibility of prevailing at trial or through an appeal, if necessary, the case
presented significant risks to the Company because the plaintiff intended to ask
the jury to award damages of up to $18 million. Following three days of trial,
the Company and Cellular World agreed to settle and resolve the dispute in its
entirety. Pursuant to the settlement, the Company agreed to pay Cellular World a
total of $1.5 million on extended payment terms: $500,000 by March 8, 2000;
$250,000 by January 5, 2001; and the remaining $750,000 in 15 equal monthly
installments of $50,000 each, beginning in January 2001. As a result of not
making certain of the payments under the original terms of the settlement, the
parties have initiated discussions for the purpose of negotiating a revised
settlement amount and payment schedule. Davel cannot predict at this time
whether a modified settlement agreement will be forthcoming.

On September 29, 1998, the Company announced that it was exercising its
contractual rights to terminate a merger agreement (the "Davel/PhoneTel Merger
Agreement") with PhoneTel Technologies, Inc. ("PhoneTel"), based on breaches of
representations, warranties and covenants by PhoneTel. On October 1, 1998, the
Company filed a lawsuit in Delaware Chancery Court seeking damages, rescission
of the Davel/PhoneTel Merger Agreement and a declaratory judgment that such
breaches occurred. On October 27, 1998, PhoneTel answered the complaint and
filed a counterclaim against the Company alleging that the Davel/PhoneTel Merger
Agreement had been wrongfully terminated. At the same time, PhoneTel also filed
a third party claim against Peoples Telephone (acquired by the Company on
December 23, 1998) alleging that Peoples Telephone wrongfully caused the
termination of the Davel/PhoneTel Merger Agreement. The counterclaim and third
party claim seek specific performance by the Company of the transactions
contemplated by the Davel/PhoneTel Merger Agreement and damages and other
equitable relief from the Company and Peoples Telephone. The Company believes
that it has meritorious claims against PhoneTel and intends to defend vigorously
against the counterclaim against Davel and the third party claim against Peoples
Telephone initiated by PhoneTel. The Company, at this time, cannot predict the
outcome of this litigation, but the parties have both indicated a willingness to
discuss settlement of the case.

In December 1999, the Company and its affiliate Telaleasing
Enterprises, Inc. were sued in the United States District Court, Central
District of California, by Telecommunications Consultant Group, Inc. ("TCG") and
U.S. Telebrokers, Inc. ("UST"), two payphone consulting companies which allege
to have assisted the Company in obtaining a telephone placement agreement with
CSK Auto, Inc. The suit alleges that the Company breached its commission
agreement with the plaintiffs based on the Company's alleged wrongful rescission
of its agreement with CSK Auto, Inc. Plaintiffs' amended complaint alleges
damages in excess of $700,000. The Company moved to dismiss the complaint, and,
on August 24, 2000, the Court denied the Company's motion. The Company
subsequently answered the complaint and asserted a counterclaim, seeking
declaratory relief. On October 13, 2000, plaintiffs answered the counterclaim,
denying its material allegations. Discovery has commenced in the matter;
however, the matter remains in its early stages, and the Company intends to
vigorously defend itself in the case.

In March 2000, the Company and its affiliate Telaleasing Enterprises,
Inc. were sued in a related action in Maricopa County, Arizona Superior Court by
CSK Auto, Inc. ("CSK"). The suit alleges that the Company breached a location
agreement between the parties. CSK's complaint alleges damages in excess of $5
million. The Company removed the case to the U.S. District Court for Arizona and
moved to have the matter transferred to facilitate consolidation with the
related case in California brought by TCG and UST. On October 16, 2000, the U.S.
District Court for Arizona denied the Company's transfer motion and ordered the
case remanded back to Arizona state court. On November 13, 2000, the Company
filed its Notice of Appeal of the remand order to the United States Court of
Appeals for the Ninth Circuit. The appeal and underlying suit are in their
initial stages, and no discovery has commenced. The Company intends to
vigorously defend itself in the case.

On or about December 15, 2000, the Company filed and served its Amended
Complaint against LDDS WorldCom, Inc., MCI WorldCom Network Services, Inc., MCI
WorldCom Communications, Inc., and MCI WorldCom Management Company, Inc.
(collectively "Defendants"), claiming a violation of the 1996 Telecom Act and
breach of contract and seeking damages and equitable and injunctive relief
associated with Defendants' wrongful withholding of

14

approximately $3.1 million in dial-around compensation due to the Company, based
upon an alleged, unrelated indebtedness. The Company believes that the majority
of Defendants' claims consist of charges for fraudulent calls, improperly
assessed payphone surcharges or other erroneous billings, and the Company
contends that it is not liable for the alleged indebtedness. The Company moved
the Court for a preliminary injunction, and oral arguments were heard on
February 12, 2001. Additionally, Defendants have moved the Court to dismiss the
Amended Complaint, and oral argument is scheduled to be heard on April 16, 2001.
Both the injunction and the motion to dismiss are currently pending before the
Court. Although the Company believes it has meritorious claims in the case and
intends to vigorously prosecute the suit, the matter is in its initial stages.
Accordingly, the Company cannot at this time predict its likelihood of success
on the merits.

In February 2001, Picus Communications, LLC, a debtor in Chapter 11
bankruptcy in the United States Bankruptcy Court for the Eastern District of
Virginia, brought suit against the Company and its wholly owned subsidiary,
Telaleasing Enterprises, Inc., in the United States District Court for the
Eastern District of Virginia, claiming unpaid invoices of over $600,000 for
local telephone services in Virginia, Maryland, and the District of Columbia.
The Company has sought relief from the Bankruptcy Court to assert claims against
Picus and has answered Picus's complaint in the District Court, denying its
material allegations. The Company believes it has meritorious defenses and
counterclaims against Picus and intends to vigorously defend itself and pursue
recovery from Picus on its counterclaims in the District Court and the
Bankruptcy Court.

The Company is involved in other litigation arising in the normal
course of its business which it believes will not materially affect its
financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On November 2, 2000, the Company held its 2000 Annual Meeting of
Stockholders at the Company's headquarters in Tampa, Florida. At the Annual
Meeting, stockholders were asked to vote on two proposals, the election of
directors and the approval of a new long-term equity incentive plan. The
proposal for election of directors included a reduction in the number of
directors from eight to six. It was the intention of the persons named in the
form of proxy accompanying the Company's 2000 Proxy Statement to vote the shares
represented by any completed proxies in favor of the six nominees named below.

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

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

The Davel Communications, Inc. 2000 Long-Term Equity Incentive Plan was
approved by the Company's Board of Directors on October 4, 2000 and recommended
to the stockholders for approval at the 2000 Annual Meeting. The purpose of the
Plan is to provide for grants of stock options, stock appreciation rights,
restricted stock, performance awards or any combination of the foregoing to
employees, officers and directors of, and certain other individuals who perform
significant services for, the Company and its subsidiaries so as to incentivize
such persons to maximize stockholder value and enable the Company to attract,
retain and reward the best available persons for positions of substantial
responsibility.

The following votes were tabulated at the 2000 Annual Meeting with
respect to each stockholder proposal:

15

VOTES AGAINST ABSTENTIONS/
PROPOSAL VOTES FOR OR WITHHELD BROKER NON-VOTES
-------- --------- ----------- ----------------

1.ELECTION OF DIRECTORS

Raymond A. Gross 10,400,454 34,113

David R. Hill 10,400,860 33,707

Robert D. Hill 10,400,743 33,824

Donald J. Liebentritt 10,401,404 33,163

William C. Pate 10,401,391 33,176

Theodore C. Rammelkamp, Jr. 10,399,521 35,046

2. APPROVAL OF DAVEL COMMUNICATIONS, INC.
2000 LONG-TERM EQUITY INCENTIVE PLAN 6,275,183 58,501 4,100,883

PART II

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

MARKET INFORMATION. Davel Common Stock trades on the NASDAQ
over-the-counter bulletin board under the symbol `DAVL.OB'. The following table
sets forth, for the periods indicated, the high and low closing prices of Davel
Common Stock on the NASDAQ National Market System, or bulletin board system,
from January 1, 1998 through December 31, 2000.

1998 HIGH LOW
---- ---- ---

First Quarter $28.50 $24.38
Second Quarter 29.25 21.25
Third Quarter 25.25 10.88
Fourth Quarter 19.75 9.00

1999
----

First Quarter $18.13 $7.00
Second Quarter 8.50 5.25
Third Quarter 6.50 3.94
Fourth Quarter 5.38 3.00

2000
----

First Quarter $5.75 $2.00
Second Quarter (1) 2.38 .34
Third Quarter (1) 1.59 .19
Fourth Quarter (1) .19 .02

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

16

As of March 2, 2001, there were approximately 865 holders of record of
the Common Stock, not including stockholders whose shares were held in "nominee"
or "street" name. The closing sale price of the Company's Common Stock on March
15, 2001 was $0.034 per share.

DIVIDENDS. The Company did not pay any dividends on its Common Stock
during 2000 and does not intend to pay any Common Stock dividends in the
foreseeable future. It is the current policy of the Company's Board of Directors
to retain cash to repay indebtedness and to finance the growth and development
of the Company's business. The payment of dividends is effectively prohibited by
the Company's Senior Credit Facility. Payment of cash dividends, if made in the
future, will be determined by the Company's Board of Directors based on the
conditions then existing, including the Company's financial condition, capital
requirements, cash flow, profitability, business outlook and other factors.

RECENT SALES OF UNREGISTERED SECURITIES. In the year ended December 31,
2000, the Company did not sell any securities that were not registered under the
Securities Act of 1933.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected financial data presented below under the captions
"Operating Data" and "Balance Sheet Data" are derived from the consolidated
financial statements of the Company. The selected financial data should be read
in conjunction with the financial statements and notes thereto included
elsewhere in this Annual Report on Form 10-K and with "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

YEAR ENDED DECEMBER 31, (1)
---------------------------
(In thousands, except per share data)
2000 1999 1998 (2) 1997 1996
--------- --------- --------- --------- ---------

OPERATING DATA:
Revenue $ 126,271 $ 175,846 $ 194,818 $ 158,411 $ 143,979
Expenses 210,613 232,935 220,600 152,368 140,665
--------- --------- --------- --------- ---------

Operating income (loss) (84,342) (57,089) (25,782) 6,043 3,314

Other expense 27,138 23,412 23,881 13,084 12,519
Income taxes -- (1,755) -- 2,459 1,868
--------- --------- --------- --------- ---------

Loss from continuing operations before Extraordinary item (111,480) (78,746) (49,663) (9,500) (11,073)
Gain (loss) from discontinued operations -- -- 607 2,092 (1,114)
Extraordinary loss from extinguishment of debt -- -- (17,856) -- --
Net loss $(111,480) $ (78,746) $ (66,912) $ (7,408) $ (12,187)
--------- --------- --------- --------- ---------
Basic and diluted loss per share:
Continuing operations before extraordinary item $ (10.02) $ (7.40) $ (5.68) $ (1.27) $ (1.47)
Gain (loss) from discontinued operations -- -- 0.07 0.25 (0.13)
Extraordinary loss from extinguishment of debt -- -- (1.98) -- --
Net loss $ (10.02) $ (7.40) $ (7.59) $ (1.02) $ (1.60)
Weighted average common shares outstanding 11,126 10,660 9,029 8,407 8,317

BALANCE SHEET DATA:
Total assets $ 93,187 $ 180,761 $ 273,018 $ 180,786 $ 184,732

Current maturities of long-term debt and obligations
under capital leases 239,083 21,535 11,525 2,671 617
Long-term debt and obligations under capital leases,
Less current maturities 839 206,509 225,451 107,076 106,383
Manditorily redeemable preferred stock -- -- -- 16,284 15,079
Shareholders' equity (deficit) (186,392) (75,079) 1,649 20,290 28,641

(1) On December 23, 1998, the Company consummated its merger with Peoples
Telephone, which was accounted for as a pooling-of-interests. Accordingly,
all financial data has been restated to reflect the combined operations of
Old Davel and Peoples for all periods presented.

(2) The year ended December 31, 1998 includes the results of CCI from the date
of the CCI Acquisition, February 3, 1998.

17

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The following discussion and analysis should be read in conjunction
with the Company's consolidated financial statements and notes thereto appearing
elsewhere herein.

Certain of the statements contained below are forward-looking
statements (rather than historical facts) that are subject to risks and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements.

GENERAL

On December 23, 1998, Old Davel and Peoples Telephone merged together
in a transaction accounted for as a pooling-of-interests. As such, the results
of both companies have been restated as if they had been combined for all
periods presented.

During 2000, the Company derived its revenues from two principal
sources: coin calls and non-coin calls. Coin calls represent calls paid for by
callers with coins deposited in the payphone. Coin call revenues are recorded in
the amount of coins deposited in the payphones.

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

The Company also recognizes non-coin revenues from calls that are
dialed from its payphones to gain access to a long distance company other than
the one pre-programmed into the telephone or to make a traditional "toll free"
call (dial-around calls). Revenues from dial-around calls are recognized based
on estimates of calls made using most recent actual historical data and the
Federal Communications Commission mandated dial-around compensation rate in
effect. This is commonly referred to as "dial-around" access. See
"Business-Regulation."

The principal costs related to the ongoing operation of the Company's
payphones include telephone charges, commissions, service, maintenance and
network costs. Telephone charges consist of payments made by the Company to LECs
and long distance carriers for line charges and use of their networks.
Commission expense represents payments to Location Owners. Service, maintenance
and network costs represent the cost of servicing and maintaining the payphones
on an ongoing basis.

REGULATORY IMPACT ON REVENUE

LOCAL COIN RATES

In ensuring "fair compensation" for all calls, the FCC previously
determined that local coin rates from payphones should be generally deregulated
by October 7, 1997, but provided for possible modifications or exemptions from
deregulation upon a detailed showing by an individual state that there are
market failures within the state that would not allow market-based rates to
develop. On July 1, 1997, a federal court issued an order which upheld the FCC's
authority to deregulate local coin call rates. In accordance with the FCC's
ruling and the court order, certain LECs and IPPs, including the Company,
increased rates for local coin calls from $0.25 to $0.35. In 2000, the Company
experienced lower coin call volumes on its payphones resulting from the
increased rates, growth in wireless communication services and changes in call
traffic and the geographic mix of the Company's payphones.

DIAL-AROUND COMPENSATION

In September and November 1996, the FCC issued its rulings implementing
Section 276 (the "1996 Payphone Order"). In the 1996 Payphone Order, the FCC
determined that the best way to ensure fair compensation to independent and LEC
PSPs for each and every call was to deregulate, to the maximum extent possible,
the price of all calls originating from payphones. For local coin calls, the FCC
mandated that deregulation of the local coin rate would not occur until October
1997 in order to provide a period of orderly transition from the previous system
of state regulation.

To achieve fair compensation for dial-around calls through deregulation
and competition, the FCC in the 1996

18

Payphone Order directed a two-phase transition from a regulated market. In the
first phase, November 1996 to October 1997, the FCC prescribed flat-rate
compensation payable to the PSPs by the IXCs in the amount of $45.85 per month
per payphone. This rate was arrived at by determining that the deregulated local
coin rate was a valid market-based surrogate for dial-around calls. The FCC
applied a market-based, deregulated coin rate of $0.35 per call to a finding
from the record that there was a monthly average of 131 compensable dial-around
calls per payphone. This total included both carrier access code calls dialed
for the purpose of reaching a long distance company other than the one
designated by the PSP as well as 800 "toll free" calls. The monthly, per phone
flat-rate compensation of $45.85 was to be assessed only against IXCs with
annual toll-call revenues in excess of $100 million and allocated among such
IXCs in proportion to their gross long-distance revenues. During the second
phase of the transition to deregulation and market-based compensation (initially
from October 1997 to October 1998, but subsequently extended in a later order by
one year to October 1999), the FCC directed the IXCs to pay the PSPs on a
per-call basis for dial-around calls at the assumed deregulated coin rate of
$0.35 per call. At the conclusion of the second phase, the FCC set the
market-based local coin rate, determined on a payphone-by-payphone basis, as the
default per-call compensation rate in the absence of a negotiated agreement
between the PSP and the IXC. To facilitate per-call compensation, the FCC
required the PSPs to transmit payphone-specific coding digits which would
identify each call as originating from a payphone and required the LECs to make
such coding available to the PSPs as a tariffed item included in the local
access line service.

In July 1997, a federal court (the "Court") responded to an appeal of
the 1996 Payphone Order, finding that the FCC erred in (1) setting the default
per-call rate at $0.35 without considering the differences in underlying costs
between dial-around calls and local coin calls, (2) assessing the flat-rate
compensation against only the carriers with annual toll-call revenues in excess
of $100 million, and (3) allocating the assessment of the flat-rate compensation
based on gross revenues rather than on a factor more directly related to the
number of dial-around calls processed by the carrier. The Court also assigned
error to other aspects of the 1996 Payphone Order concerning inmate payphones
and the accounting treatment of payphones transferred by an RBOC to a separate
affiliate.

In response to the Court's remand, the FCC issued its modified ruling
implementing Section 276 (the "1997 Payphone Order") in October of 1997. The FCC
determined that distinct and severable costs of $0.066 were attributable to coin
calls that did not apply to the costs incurred by the PSPs in providing access
for dial-around calls. Accordingly, the FCC adjusted the per call rate during
the second phase of interim compensation to $0.284 (which is $0.35 less $0.066).
While the FCC tentatively concluded that the $0.284 default rate should be
utilized in determining compensation during the first phase and reiterated that
PSPs were entitled to compensation for each and every call during the first
phase, it deferred a decision on the precise method of allocating the initial
interim period (November 1996 through October 1997) flat-rate payment obligation
among the IXCs and the number of calls to be used in determining the total
amount of the payment obligation.

On March 9, 1998, the FCC issued a Memorandum Opinion and Order, FCC
98-481, which extended and waived certain requirements concerning the provision
by the LECs of payphone-specific coding digits which identify a call as
originating from a payphone. Without the transmission of payphone-specific
coding digits, some of the IXCs have claimed they are unable to identify a call
as a payphone call eligible for dial-around compensation. With the stated
purpose of ensuring the continued payment of dial-around compensation, the FCCs
Memorandum and Order issued on April 3, 1998 left in place the requirement for
payment of per-call compensation for payphones on lines that do not transmit the
requisite payphone-specific coding digits but gave the IXCs a choice for
computing the amount of compensation for payphones on LEC lines not transmitting
the payphone-specific coding digits of either accurately computing per-call
compensation from their databases or paying per-phone, flat-rate compensation
computed by multiplying the $0.284 per call rate by the nationwide average
number of 800 subscriber and access code calls placed from RBOC payphones for
corresponding payment periods. Accurate payments made at the flat rate are not
subject to subsequent adjustment for actual call counts from the applicable
payphone.

On May 15, 1998, the Court again remanded the per-call compensation
rate to the FCC for further explanation without vacating the $0.284 per call
rate. The Court opined that the FCC had failed to explain adequately its
derivation of the $0.284 default rate. The Court stated that any resulting
overpayment would be subject to refund and directed the FCC to conclude its
proceedings within a six-month period from the effective date of the Court's
decision.

In response to the Court's second remand, the FCC conducted further
proceedings and sought additional comment from interested parties to address the
relevant issues posed by the Court. On February 4, 1999, the FCC released the
Third Report and Order and Order on Reconsideration of the Second Report and
Order (the "1999 Payphone Order"), in which the FCC abandoned its efforts to
derive a "market-based" default dial-around compensation rate and instead
adopted a "cost-based" rate of $0.24 per dial-around call. Both PSPs and IXCs
petitioned the Court for review of the 1999

19

Payphone Order's determination of the dial-around compensation rate. On June 16,
2000, the Court affirmed the 1999 Payphone Order setting a 24-cent dial around
compensation rate. On all the issues, including those raised by the IXCs and the
payphone providers, the Court applied the "arbitrary and capricious" standard of
review, and found that the FCC's rulings were lawful and sustainable under that
standard. As a result of the Court's June 16, 2000 decision, the 24-cent dial
around compensation rate is likely to remain in place until at least the end of
2001, when the FCC has promised to complete a third-year review of the rate.
With respect to the Petition for Reconsideration of the 1999 Payphone Order
filed with the FCC by the payphone providers, this Petition is still pending and
has yet to be ruled on by the FCC. In view of the Court's affirmation of the
1999 Payphone Order, it is unlikely that the FCC will adopt material changes to
the key components of the Order pursuant to the pending Reconsideration
Petition, although no assurances can be given.

The new 24-cent rate became effective April 21, 1999, and will serve as
the default rate through January 31, 2002. The new rate will also be applied
retroactively to the period beginning on October 7, 1997, less a $0.002 amount
to account for FLEX ANI payphone tracking costs, for a net compensation of
$0.238. The 1999 Payphone Order deferred a final ruling on the interim period
(November 7, 1996 to October 6, 1997) treatment to a later, as yet unreleased ,
order, however, it appears that the $0.238 rate will be applied to the period
from November 7, 1996 to October 6, 1997. Upon establishment of the interim
period rate, the FCC has further ruled that a true-up may be made for all
payments or credits (with applicable interest) due and owing between the IXCs
and the PSPs, including Davel, for the payment period commencing on November 7,
1996 through the effective date of the new $0.24 per call rate. It is possible
that the final implementation of the 1999 Payphone Order, including resolution
of this retroactive adjustment and the outcome of any related administrative or
judicial review, could have a material adverse effect on the Company.

The payment levels for dial-around calls prescribed in the 1996 and
1997 Payphone Orders significantly increase per-call dial-around compensation
revenues to the Company over the levels received prior to implementation of the
1996 Telecom Act (although the 1999 Payphone Order has now moderated those
increases). However, market forces and factors outside the Company's control
could significantly affect these per-call revenue increases. These factors
include the following: (i) the resolution by the FCC of the "true up" of the
initial interim period flat-rate and "per call" assessment periods, (ii) the
possibility of other administrative proceedings or litigation seeking to modify
or overturn the 1999 Payphone Order or portions thereof, (iii) the IXC's
reaction to the FCC's recognition that existing regulations do not prohibit an
IXC from blocking 800 subscriber numbers from payphones in order to avoid paying
per-call compensation on such calls, and (iv) ongoing technical or other
difficulties in the responsible carriers' ability and willingness to properly
track or pay for dial-around calls actually delivered to them.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain
information from the Company's Consolidated Statements of Operations, included
elsewhere in this Annual Report on Form 10-K, expressed as a percentage of total
revenues.

YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
------ ------ ------

REVENUES:
Coin calls 65.1% 63.0% 68.0%
Non-coin calls, net of dial-around compensation adjustments 34.9 37.0 32.0
------ ------ ------

Total revenues 100.0 100.0 100.0
------ ------ ------
COSTS AND EXPENSES:
Telephone charges 30.3 20.9 23.4
Commissions 27.4 23.3 24.1
Service, maintenance and network costs 27.2 23.9 27.1
Depreciation and amortization 25.3 22.3 19.8
Selling, general and administrative 17.7 12.0 11.0
Impairment charge and non-recurring items 38.8 29.1 5.6
Restructuring charge and merger related expenses -- 0.9 2.2
------ ------ ------

Total operating costs and expenses 166.7 132.4 113.2
------ ------ ------

Operating income (loss) (66.7)% (32.4)% (13.2)%
====== ====== ======

20

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

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

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

Non-coin call revenues, which is comprised primarily of dial-around
revenue and operator service revenue, decreased approximately $21.0 million, or
32.3%, from approximately $65.1 million in the year ended December 31, 1999 to
approximately $44.1 million in the year ended December 31, 2000. This decrease
was primarily attributable to the removal of unprofitable phone locations, lower
call volumes on the Company's payphones resulting from the growth in wireless
communication services and changes in call traffic. Dial-around revenue
decreased approximately $13.0 million, from approximately $35.9 million in the
year ended December 31, 1999 to approximately $22.9 million in the year ended
December 31, 2000. The dial-around decrease is primarily attributable to the
removal of approximately 10,800 unprofitable phones for the calendar year 2000
and continuing underpayments of dial-around revenues caused by deficiencies in
the established payment and tracking process now under regulatory review by the
FCC. Long-distance revenues decreased approximately $5.5 million, from
approximately $25.4 million in the year ended December 31, 1999 to approximately
$19.9 million in the year ended December 31, 2000. During 1999, operator
services were managed through the Company's switch. Revenue was recorded for the
gross billings and service, while maintenance and network costs were recorded
for the cost of the carrier services. The switch was phased out during 1999 and
shut down in November 1999. Operator services are now provided by third parties
that pay Davel a commission on their gross billings. These third parties incur
the expense related to their carrier services. The commission is recorded in
non-coin calls revenue.

Other revenue decreased approximately $1.8 million, or 58.0%, from
approximately $3.1 million in the year ended December 31, 1999 to approximately
$1.3 million in the year ended December 31, 2000. Non-carrier service revenues
from Sprint declined $1.4 million due to the conclusion of a designated one-time
program in the second quarter of 2000. An additional $0.6 million of debit card
sales were realized in the year ended December 31, 1999 that did not take place
in year ended December 31, 2000 as the Company exited the debit card business.

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

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

Service, maintenance and network costs decreased approximately $7.7
million, or 18.4%, from approximately $42.1 million in the year ended December
31, 1999 to approximately $34.3 million in the year ended December 31, 2000.
Service, maintenance and network costs increased from 23.9% of total revenues in
the year ended December 31, 1999 to 27.2% of total revenues in the year ended
December 31, 2000. Despite cost savings gained from consolidating offices
following the

21

Peoples Telephone Merger, increased geographic concentration of the phones and
improved efficiency in servicing Company payphones, the decline in revenues more
than offset the decline in expenses associated with the Company's cost saving
measures. Components of cost having the greatest impact on year over year cost
savings were salaries and wages ($3.1 million), network billing costs ($1.7
million), regulatory compliance ($0.6 million) and service and collection costs
($0.9 million). Certain staff reductions and office closings initiated in the
fourth quarter of 2000 served to increase short-term expenses while realization
of net expense savings will occur in 2001 and beyond.

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

Selling, general and administrative expenses increased approximately
$1.3 million, or 6.2%, from approximately $21.1 million in the year ended
December 31, 1999 to approximately $22.4 million in the year ended December 31,
2000. The increase was primarily attributable to fees for professional advisors
and legal services ($3.0 million), an adjustment for allowance for doubtful
accounts on trade receivables ($1.5 million) and operating software costs ($0.9
million) placed in service in the year ended December 31, 2000. These cost
increases were partially offset by a reduction in salaries and related costs
($2.7 million) as well as reductions in most other expense categories (net $1.6
million) related to the consolidation of administrative functions in Tampa,
Florida, subsequent to the Peoples Telephone Merger.

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

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

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

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

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

For the year ended December 31, 1999, total revenues from continuing
operations decreased approximately $19.0 million, or 9.7%, compared to the year
ended December 31, 1998, from $194.8 million in the year ended December 31, 1998
to $175.8 million in the year ended December 31, 1999. This decline was
primarily attributable to an 11.3% decrease in installed payphones (84,384
payphones on December 31, 1998 to 74,869 payphones on December 31, 1999),
erosion of coin revenue due to increased competition from wireless communication
services and a reduction in the federally established dial-around rate.

Coin call revenues decreased approximately $21.7 million, or 16.4%,
from $132.5 million in 1998 to $110.8 million in 1999, primarily attributable to
lower call volumes on the Company's payphones resulting from higher coin call

22

rates, increased competition from wireless communication services, changes in
call traffic and a significant reduction in the number of payphones operated by
the Company.

Non-coin call revenues increased approximately $2.7 million, or 4.4%,
from $62.3 million in the year ended December 31, 1998 to $65.1 million in the
year ended December 31, 1999. The increase was primarily attributable to an
increase in payments for dial-around call traffic from the Company's payphones.
Dial-around call revenue increased approximately $9.5 million, or 35.9%, from
$26.4 million in 1998 to $35.9 million in 1999. Other non-coin call revenues,
consisting primarily of operator service calls, decreased approximately $9.5
million, or 26.8%, from approximately $35.5 million in 1998 to approximately
$26.0 million 1999. This decrease was primarily due to the fact that when the
Company operated its long-distance switching equipment, revenues associated with
the calls were recorded based on the price charged for the call. The Company
then remitted the access cost associated with the call to other parties. With
the decommissioning of the switch, the Company now collects a commission based
on the gross revenues billed by third party operator service providers who
handle the routing of the call.

Telephone charges decreased $8.8 million, or 19.3%, from $45.6 million
in the year ended December 31, 1998 to $36.8 million in 1999. The decrease in
telephone charges was primarily attributable to the decrease in the number of
installed payphones, the effects of the FCC's "new services test" (pursuant to
the 1996 Telecom Act that reduced phone bills in a number of states), more
favorable contracts with LECs and utilization of competitive local exchange
carriers for local line access services.

Commissions decreased $6.0 million, or 12.7%, from $47.0 million in the
year ended December 31, 1998 to $41.0 million in the year ended December 31,
1999. The decrease was primarily attributable to lower revenues from the
Company's payphones. Commissions decreased to 23.3% of total revenues compared
to 24.1% in the prior year. The decrease in commissions as a percentage of total
revenues was primarily attributable to increases in certain types of revenues
that are excluded from commission calculations on a portion of the Company's
location agreements.

Service, maintenance and network costs decreased $10.7 million, or
20.2%, from $52.8 million in the year ended December 31, 1998 to $42.1 million
in the year ended December 31, 1999. The decrease was primarily attributable to
the closing of duplicate offices after the Peoples Telephone Merger and CCI
Acquisition. Service, maintenance and network costs decreased to 23.9% of total
revenues in 1999 compared to 27.1% in 1998. The decrease in service, maintenance
and network as a percentage of total revenues was primarily attributable to cost
saving generated from increased geographic density of the phones and the
Company's ability to improve efficiency in servicing the Company's payphones.

Depreciation and amortization expense in 1999 increased $0.6 million,
or 1.5%, from $38.6 million in 1998 to $39.2 million in 1999. The increase was
primarily due to an increase in amortization expense. The increased amortization
expense resulted from an acceleration of the amortization of location contracts
on removed payphones. An acceleration of amortization expense should continue as
the Company continues to remove unprofitable phones.

Selling, general and administrative expenses decreased approximately
$0.5 million, or 2.1%, from $21.5 million in the year ended December 31, 1998 to
$21.1 million in the year ended December 31, 1999. The decrease was primarily
attributable to the fact that selling, general and administrative expenses
related to the separate operation of payphones and administrative facilities
acquired in the CCI Acquisition and the Peoples Telephone Merger are included in
the prior year. The integration of CCI and Peoples Telephone was completed
during 1999, and included closing the separate corporate offices and duplicate
field offices, thereby eliminating duplicative costs.

The Company recognized a non-recurring charge of approximately $51.2
million in 1999 primarily related to a $37.9 million write-down of goodwill and
$7.8 million write-down of location contracts related to de-installation of
phones acquired in the CCI Acquisition and $3.1 million related to the removal
of other non-profitable phones. In addition, the Company incurred and paid
restructuring and other merger-related charges during the year ended December
31, 1999 of approximately $1.6 million related to integration and restructuring
of the Peoples acquisition. The restructuring and other merger-related charges
were primarily related to severance pay for terminated employees, relocation
costs and costs related to the closing of redundant facilities.

Other expense decreased approximately $0.5 million, or 2.0%, from $23.9
million in the year ended December 31, 1998 to $23.4 million in the year ended
December 31, 1999. This decrease resulted primarily from the recognition in 1998
of a $2.8 million impairment loss on an investment held by Peoples Telephone for
which there was no corresponding loss during 1999. This decrease was partially
offset by a $2.2 million increase in interest expense during 1999. The increase
in interest expense is related to higher borrowings under the credit facilities.

23

Loss from continuing operations before extraordinary items increased
approximately $29.1 million, or 58.6%, from approximately $49.7 million in 1998
to approximately $78.7 million in 1999. Loss before extraordinary item increased
approximately $29.7 million from approximately $49.1 million in 1998 to
approximately $78.7 million in 1999.

Net loss increased approximately $11.8 million, or 17.7%, from the
prior year, from a net loss of approximately $66.9 million in 1998 to a net loss
of approximately $78.7 million in 1999.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS

Historically, the Company's primary sources of liquidity have been cash
from operations, borrowings under various credit facilities and, periodically,
proceeds from the issuances of common stock and proceeds from the issuance of
preferred stock. There was no stock issued in the most recent two years. For
2000, quarterly revenue as a percentage of total revenue was approximately 29%,
28%, 25%, and 18%, respectively, for the first through fourth quarters of the
year. In addition, for fiscal 2000, quarterly income (loss) from operations as a
percentage of total (loss) from operations was approximately (7.8%), (15.2%),
(29.2)%, and (47.9)%, respectively, excluding the effect of an impairment
charge, for the first through fourth quarters of the year. The Company's
revenues and net income from its payphone operating regions are affected by
seasonal variations, geographic distribution of payphones, removal of
unprofitable phones and type of location. Because many of the payphones are
located outdoors, weather patterns have differing effects on the Company's
results depending on the region of the country where the payphones are located.
Phones located in the southern United States produce substantially higher call
volume in the first and second quarters 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 2000, operating activities used $10.8 million of net cash, compared
to the generation of $9.0 million in 1999. Greater cash operating losses were
partially offset by a reduction in trade receivables of $7.3 million during the
year ended December 31, 2000 and an increase in payables and accruals of $13.6
million during the year ended December 31, 2000. The latter increase was due in
part to extension of payment terms with vendors, and an effort to shift a
greater number of customers from monthly to quarterly commission payments.

Capital expenditures for 2000 were $2.1 million compared to $4.9
million for 1999. These capital expenditures were primarily used to purchase
payphone, computer and software equipment. Additionally, no capital was expended
in the year ended December 31, 2000 for business acquisitions following $5.1
million for such activities in 1999.

The Company's principal sources of liquidity in 2000 came from cash
flow generated from operating activities and borrowings under the Company's
Senior Credit Facility. The Company's principal uses of liquidity will be to
provide working capital and to meet debt service requirements. At December 31,
2000, the Company had utilized all available borrowing capacity under the
revolving credit facility. See "Credit Agreement" section below for discussion
of the Company's current indebtedness.

Financing activities used approximately $6.0 million in cash to repay
long-term debt and capital lease obligations. All outstanding debt in connection
with the senior credit facility was reclassified to current liabilities. The
Company borrowed approximately $17.0 million against the revolving credit
facility prior to that portion of the Senior Credit Facility being restructured.
See "--Credit Agreement."

CREDIT AGREEMENT

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

Indebtedness of the Company under the Senior Credit Facility is secured
by substantially all of its and its subsidiaries' assets, including but not
limited to their equipment, inventory, receivables and related contracts,
investment property, computer hardware and software, bank accounts and all other
goods and rights of every kind and description and is guaranteed by Davel and
all its subsidiaries.

The Company's borrowings under the original Senior Credit Facility bore
interest at a floating rate and may be

24

maintained as Base Rate Loans (as defined in the Senior Credit Facility) or, at
the Company's option, as Eurodollar Loans (as defined in the Senior Credit
Facility). Base Rate Loans bear interest at the Base Rate (defined as the higher
of (i) the applicable prime lending rate of Bank of America or (ii) the Federal
Reserve reported certificate of deposit rate plus 1%). Eurodollar Loans bear
interest at the Eurodollar Rate (as defined in the Senior Credit Facility).

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

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

FIRST AMENDMENT

In the first quarter of 1999, the Company gave notice to the
Administrative Agent that lower than expected performance in the first quarter
of 1999 would result in the Company's inability to meet certain financial
covenants contained in the Senior Credit Facility. On April 8, 1999, the Company
and the Lenders agreed to the First Amendment to Credit Agreement and Consent
and Waiver (the "First Amendment") which waived compliance, for the fiscal
quarter ended March 31, 1999, with the financial covenants set forth in the
Senior Credit Facility. In addition, the First Amendment waived any event of
default related to two acquisitions made by the Company in the first quarter of
1999, and waived the requirement that the Company deliver annual financial
statements to the Lenders within 90 days of December 31, 1998, provided that
such financial statements be delivered no later than April 15, 1999. The First
Amendment contained amendments that provided for the following:

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

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

o Further limitations on permitted acquisitions as defined in the Credit
Agreement through June 30, 2000

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

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

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

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

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

The First Amendment also places limits on capital expenditures and
required the payment of an amendment fee equal to the product of the Lender's
commitment multiplied by 0.35%.

SECOND AMENDMENT

In the first quarter of 2000, the Company gave notice to the
Administrative Agent that lower than expected performance in the first quarter
of 2000 would result in the Company's inability to meet certain financial
covenants contained in the Senior Credit Facility. Effective March 9, 2000, the
Company and the Lenders agreed to the Second Amendment to Credit Agreement and
Consent and Waiver (the "Second Amendment"), which waived certain covenants
through January 15, 2001. In exchange for the covenant relief, the Company
agreed to a lowering of the available credit

25

facility to $245 million (through a permanent reduction of the revolving line of
credit to $45 million), placement of a block on the final $10 million of
borrowing under the revolving credit facility (which requires that all of the
Lenders be notified in order to access the final $10.0 million of availability
on that facility), a fee of 35 basis points of the Lenders commitment and a
moratorium on acquisitions. The Second Amendment contained amendments that
provided for the following:

o Amendment of the applicable percentages for Eurodollar Loans to:
(a) 3.50% for all Revolving Loans which are Eurodollar Loans, all
Tranche A Term Loans which are Eurodollar Loans, and all Letter
of Credit Fees;
(b) 4.25% for all Tranche B Term Loans which are Eurodollar Loans;
(c) 2.00% for all Revolving Loans which are Base Rate Loans and all
Tranche A Term Loans which are Base Rate Loans;
(d) 2.75% for all Tranche B Term Loans which are Base Rate Loans; and
(e) 0.75% for all Commitment Fees;

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

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

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

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

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

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

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

THIRD AMENDMENT

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

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

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

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

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

26

FOURTH AMENDMENT

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

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

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

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

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

o The Revolving Loan commitment was terminated;

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

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

FIFTH AMENDMENT

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

SIXTH AMENDMENT

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

o Principal amortization payments would be made of $1.1 million on April
15, 2001, $2.2 million on July 15, 2001 and $3.3 million on October
15, 2001;

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

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

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

27

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

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

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

The Company has incurred losses of approximately $111.5 million, $78.7
million, and $66.9 million for the years ended December 31, 2000, 1999, and
1998, 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 December 31, 2000,
the Company had a working capital deficit of $257.6 million and its liabilities
exceed its assets by $186.4 million. In addition, the Company was unable to meet
its debt principal payments of $15.7 million and interest payments of $12.5
million, which would have been due and payable on January 12,2001 but for the
Company's execution of the Sixth Amendment to its loan agreement, which calls
for interim principal payments of $1.1 million due on April 15, 2001, $2.2
million due on July 15, 2001, $3.3 million due on October 15, 2001 and the
remainder due on January 11, 2002. In the absence of improved operating results
or cash flows, modifications to the Senior Credit Facility, or the completion of
possible strategic combinations, the Company will face liquidity problems and
might be required to dispose of material assets or operations to fund its
operations and to meet its debt service and other obligations. There can be no
assurances as to the ability of the Company to execute such sales, or the timing
thereof or the 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.

The Company's plans to increase liquidity include efforts to
substantially reduce costs, including through possible strategic combinations.
Management believes this will result in expansion of its market presence and
further leveraging of its infrastructure. In order to pursue this strategy, the
Company will need to obtain additional modifications to the Senior Credit
Facility, and may require forgiveness of a portion of its debt. The Company may
also need to obtain additional debt or equity financing. There can be no
assurance that such debt modifications or financings will be available to the
Company, or that they will be available on terms acceptable to the Company.
Further, any additional equity financing may be dilutive to existing
shareholders.

IMPACT OF INFLATION

Inflation is not a material factor affecting the Company's business.
General operating expenses such as salaries, employee benefits and occupancy
costs are, however, subject to normal inflationary pressures.

SEASONALITY

The Company's revenues from its payphone operating regions are affected
by seasonal variations, geographic distribution of payphones and type of
location. Because many of the Company's payphones are located outdoors, weather
patterns have differing effects on the Company's results depending on the region
of the country where the payphones are located. Most of the Company's payphones
in Florida produce substantially higher call volume in the first and second
quarters than at other times during the year, while the Company's payphones
throughout the Midwestern and eastern United States produce their highest call
volumes during the second and third quarters. While the aggregate effect of the
variations in different geographical regions tend to counteract the effect of
one another, the Company has historically experienced higher revenue and income
in the second and third quarters than in the first and fourth quarters. Changes
in the geographical distribution of its payphones may in the future result in
different seasonal variations in the Company's results.

NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended by
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133" and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,
an amendment of FASB Statement No. 133". See "Notes to Financial Statements No.
3". Statement 133 requires the Company to record all derivatives on the balance
sheet at fair value. Changes in derivative fair values will either be recognized
in earnings as offsets to the change in fair value of

28

related hedged assets, liabilities and firm commitments or, for forecasted
transactions, deferred and recorded as a component of other stockholders' equity
until the hedged transactions occur and are recognized in earnings. The
ineffective portion of a hedged derivative's change in fair value will be
immediately recognized in earnings. Adoption of these new accounting standards
on January 1, 2001 will result in cumulative after-tax increases in net loss of
approximately $41,000 in the first quarter of 2001.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to certain market risks inherent in the
Company's financial instruments that arise from transactions entered into in the
normal course of business. The Company is subject to variable interest rate risk
on its existing Senior Credit Facility and any future financing requirements.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."

In connection with the provisions of its Senior Credit Facility and the
Company's overall interest rate management objectives, the Company utilizes
derivative financial instruments to reduce its exposure to market risks from
significant increases in interest rates. The Company's strategy is to purchase
interest rate swaps, collars and caps from large financial institutions to limit
the impact of increases in interest rates on the Company's variable rate
long-term debt.

As of December 31, 2000, the Company has an interest rate cap agreement
with a notional amount of $15 million that terminates in September 2001. The
interest rate cap agreement requires premium payments to the counterparty based
on the notional amount of the contracts that are capitalized and amortized to
interest expense over the life of the contract. This agreement entitles the
Company to receive quarterly payments from the counterparties for amounts, if
any, by which the U.S. three month LIBOR rate exceeds 7%. In addition, the
Company entered into an interest rate collar agreement with a large financial
institution that terminates in February 2002. The notional amount of the
interest rate collar is $25 million and the agreement has a cap rate of 6.5% and
a floor rate of 4.8% based on the U.S. one month LIBOR rate.

As of December 31, 2000, the Company has an interest rate swap
agreement with an aggregate notional amount of $7.5 million with a termination
date of June 2001. The interest rate swap requires the Company to pay fixed
rates of 6.4% in exchange for variable rate payments based on the U.S. three
month LIBOR (5.1% as of December 31, 2000). Interest rate differentials are paid
or received every three months and are recognized as adjustments to interest
expense.

Based upon the Company's variable rate indebtedness and weighted
average interest rates at December 31, 2000, a ten percent (or one thousand
basis points) increase in market interest rates would decrease future earnings
and cash flows by approximately $24.7 million. A ten percent (or one thousand
basis points) decrease in market interest rates would increase future earnings
and cash flows by approximately $23.4 million.

These amounts were determined by considering the impact of hypothetical
interest rates and equity prices on the Company's financial instruments. These
analyses do not consider the effects of the reduced level of overall economic
activity that could exist in such an environment. Further, in the event of a
change of such magnitude, management would likely take actions to further
mitigate its exposure to the change. However, due to the uncertainty of specific
actions that would be taken and their possible effects, this analysis assumes no
changes in the Company's financial arrangements or capital structure.

29

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements and Supplementary Data
PAGE
----
Independent Public Accountants Report of Arthur Andersen LLP 31
for the years ended December 31, 2000, 1999 and 1998

Consolidated Balance Sheets for December 31, 2000 and 1999 32

Consolidated Statements of Operations for the years ended 33
December 31, 2000, 1999 and 1998

Consolidated Statements of Shareholders' Equity (Deficit)
for the years ended December 31, 2000, 1999 and 1998 34

Consolidated Statements of Cash Flows for the years ended 35
December 31, 2000, 1999 and 1998

Notes to Consolidated Financial Statements 36

30

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To Davel Communications, Inc.:

We have audited the accompanying consolidated balance sheets of Davel
Communications, Inc. (a Delaware corporation) and subsidiaries as of December
31, 2000, and 1999, and the related consolidated statements of operations,
shareholders' equity (deficit), comprehensive loss and cash flows for each of
the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Davel Communications, Inc. and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.

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

ARTHUR ANDERSEN LLP

Tampa, Florida
March 30, 2001

DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(In thousands, except share data)

ASSETS 2000 1999
- ------- --------- ---------

CURRENT ASSETS:
Cash and cash equivalents $ 6,104 $ 7,950
Trade accounts receivable, net of allowance for doubtful accounts of 14,307 22,983
$1,515 and $10,880, respectively
Other current assets 626 1,048
--------- ---------

Total current assets 21,037 31,981

PROPERTY AND EQUIPMENT, NET 64,702 115,558

LOCATION CONTRACTS, NET 2,571 20,852

GOODWILL -- 6,290

OTHER ASSETS, NET 4,877 6,080
--------- ---------

Total assets $ 93,187 $ 180,761
========= =========

LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt and obligations under capital leases $ 239,083 $ 21,535
Accounts payable and accrued expenses 39,532 27,484
--------- ---------
Total current liabilities 278,615 49,019

LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES 839 206,509

DEFERRED REVENUE 125 312
--------- ---------
Total liabilities 279,579 255,840

SHAREHOLDERS' DEFICIT:
Preferred stock - $.01 par value, 1,000,000 shares authorized, none issued
and outstanding -- --
Common stock - $.01 par value, 50,000,000 shares authorized, 11,169,540 and
11,033,628 shares issued and outstanding as of December 31, 2000
and 1999, respectively 112 110
Additional paid-in capital 128,503 128,338
Accumulated deficit (315,007) (203,527)
--------- ---------
Total shareholders' deficit (186,392) (75,079)
--------- ---------

Total liabilities and shareholders' deficit $ 93,187 $ 180,761
========= =========

THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE CONSOLIDATED BALANCE SHEETS

32

DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FORTHE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(In thousands, except per share and share data)

2000 1999 1998
------------ ------------ ------------

REVENUES:
Coin calls $ 82,205 $ 110,790 $ 132,483
Non-coin calls, net of dial-around compensation adjustments 44,066 65,056 62,335
------------ ------------ ------------

Total revenues 126,271 175,846 194,818

COSTS AND EXPENSES:
Telephone charges 38,290 36,783 45,582
Commissions 34,619 41,014 46,986
Service, maintenance and network costs 34,333 42,077 52,751
Depreciation and amortization 32,004 39,204 38,617
Selling, general and administrative 22,365 21,063 21,525
Impairment charge and non-recurring items 49,002 51,224 10,814
Restructuring charge and merger-related expenses -- 1,570 4,325
------------ ------------ ------------

Total costs and expenses 210,613 232,935 220,600
------------ ------------ ------------

Operating loss (84,342) (57,089) (25,782)

OTHER INCOME (EXPENSE):
Interest expense, net of interest income (27,420) (23,183) (20,955)
Loss on investment -- (350) (2,772)
Other 282 121 (154)
------------ ------------ ------------
Total other expense (27,138) (23,412) (23,881)
------------ ------------ ------------

Loss from continuing operations before income taxes and (111,480) (80,501) (49,663)
extraordinary item

INCOME TAX BENEFIT: -- (1,755) --

------------ ------------ ------------
Loss from continuing operations before extraordinary item (111,480) (78,746) (49,663)

DISCONTINUED OPERATIONS:

Gain on discontinued operations -- -- 607
------------ ------------ ------------
Loss before extraordinary item (111,480) (78,746) (49,056)

EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT -- -- (17,856)
------------ ------------ ------------

Net loss $ (111,480) $ (78,746) $ (66,912)
============ ============ ============

BASIC AND DILUTED LOSS PER SHARE:
Loss from continuing operations before extraordinary item $ (10.02) $ (7.40) $ (5.68)
Gain from discontinued operations -- -- .07
Extraordinary loss -- -- (1.98)
Net loss per share $ (10.02) $ (7.40) $ (7.59)
============ ============ ============

BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 11,125,582 10,659,594 9,029,285

THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

33

DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE LOSS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(In thousands, except share data)

TOTAL
ADDITIONAL UNREALIZED SHAREHOLDERS'
COMMON STOCK PAID-IN ACCUMULATED LOSS ON EQUITY COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INVESTMENT (DEFICIT) LOSS
--------- ------ --------- ---------- ---------- ------------- -------------

BALANCE, December 31, 1997 8,438,532 $ 84 $ 80,100 $ (57,869) $(2,025) $ 20,290 $ (7,962)

Stock options exercised and
grants of common stock 160,146 2 2,225 -- -- 2,227 --

Series C preferred stock
dividends accrued -- -- (1,464) -- -- (1,464) --

Preferred stock issuance cost
Accretion -- (158) -- -- (158) --

Issuance of stock 1,000,000 10 26,529 -- -- 26,539 --

Stock issued as payment for
services provided 44,659 -- 751 -- -- 751 --

Stock issued for retirement of
preferred stock 892,977 9 17,897 -- -- 17,906 --

Option repricing -- -- 445 -- -- 445 --

Unrealized loss on investment -- -- -- -- (747) (747) (747)

Reclassification of investment
to a trading security -- -- -- -- 2,772 2,772 2,772

Fractional shares retired upon
completion of merger (159) -- -- -- -- -- --

Net loss for the year ended
December 31, 1998 -- -- -- (66,912) -- (66,912) (66,912)

---------- ----- --------- --------- ------- --------- ---------
BALANCE, December 31, 1998 10,536,155 105 126,325 (124,781) -- 1,649 $ (64,887)

Grants of common stock 497,473 5 2,108 -- -- 2,113 --

Preferred stock dividend -- (95) -- -- (95) --

Net loss for the year ended
December 31, 1999 -- -- -- (78,746) -- (78,746) $ (78,746)

---------- ----- --------- --------- ------- --------- ---------
BALANCE, December 31, 1999 11,033,628 110 128,338 (203,527) -- (75,079) (78,746)

Grants of common stock, net of
rescission of common stock
grants 135,912 2 165 -- -- 167 --

Net loss for the year ended
December 31, 2000 -- -- -- (111,480) -- (111,480) (111,480)
---------- ----- --------- --------- ------- --------- ---------

BALANCE, December 31, 2000 11,169,540 $ 112 $ 128,503 $(315,007) -- $(186,392) $(111,480)
=========== ===== ========= ========= ======= =========

THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

34

DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(In thousands)

2000 1999 1998
--------- -------- ---------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(111,480) $(78,746) $ (66,912)
Adjustments to reconcile net loss to cash flows from operating activities:
Gain on sale of discontinued operations -- -- (607)
Depreciation and amortization 32,004 39,204 38,617
Increase in allowance for doubtful accounts 1,416 5,497 262
Write off of property and equipment -- -- (36)
Amortization of deferred financing charges 2,170 992 --
Impairment charge and non-recurring items 49,002 51,224 3,769
Restructuring charge and merger-related expenses -- -- 2,969
Option repricing -- -- 445
Recognition of unrealized loss on investment -- -- 2,772
Stock based compensation 167 2,113 751
Extraordinary loss from the early extinguishment of debt -- -- 17,856
Payment for location contracts (2,245) (7,859) (6,248)
Changes in assets and liabilities, net of effects from acquisition:
Accounts receivable 7,260 2,358 3,374
Other assets (21) 1,970 3,984
Accounts payable and accrued expenses 13,628 (8,019) (15,246)
Deferred revenue (1,767) 312 --
--------- -------- ---------

Net cash (used in) provided by operating activities (9,866) 9,046 (14,250)

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,074) (4,898) (11,920)
Purchase of payphone assets, net of cash acquired -- (5,123) (3,216)
Purchase of Communications Central, Inc., net of cash acquired -- -- (101,644)
Purchase of Indiana Telecom, net of cash acquired -- -- (11,317)
Other -- -- 181
--------- -------- ---------
Net cash (used in) investing activities (2,074) (10,021) (127,916)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt -- -- 366,500
Payments on long-term debt (5,237) (10,950) (231,408)
Net proceeds (payments) on revolving line of credit 17,043 2,500 (9,028)
Bond tender premium paid on early extinguishment of debt -- -- (12,929)
Principal payments under capital leases (754) (482) (769)
Debt issuance costs (958) -- (7,335)
Payment of preferred stock dividend -- (95) --
Proceeds from issuance of common stock -- -- 26,539
Stock options exercised and grants of common stock -- -- 2,227
--------- -------- ---------

Net cash provided by (used in) financing activities 10,094 (9,027) 133,797
Net decrease in cash and cash equivalents (1,846) (10,002) (8,369)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,950 17,952 26,321
--------- -------- ---------

CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,104 $ 7,950 $ 17,952
========= ======== =========

THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN
INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

35

DAVEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS

Davel Communications, Inc., and subsidiaries, (the "Company" or
"Davel") was incorporated on June 9, 1998 under the laws of the State of
Delaware to effect the merger, on December 23, 1998 of Davel Communications
Group, Inc. with Peoples Telephone Company, Inc. (the "Peoples Telephone
Merger"). As a result of the Peoples Telephone Merger, the Company is the
largest domestic 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 67,000
payphones in 44 states and the District of Columbia. The Company's headquarters
is located in Tampa, Florida, with divisional operational facilities in 27
dispersed geographic locations.

Pursuant to an Agreement and Plan of Merger dated July 5, 1998 as
amended and restated on October 22, 1998, the Peoples Telephone Merger was
consummated between the Old Davel and Peoples Telephone Company, Inc ("Peoples
Telephone") on December 23, 1998. The stock-for-stock transaction was approved
by the shareholders of the two companies, with the Company continuing as the
surviving corporation in the merger. Under the merger agreement, each
outstanding share of Peoples Telephone common stock was converted into the right
to receive 0.235 of a common share of the Company and resulted in the issuance
of 3,812,810 shares of common stock to the common shareholders of Peoples
Telephone. In addition, the outstanding shares of Peoples Telephone Series C
Preferred Stock and accrued Preferred Stock dividends were converted into
892,977 shares of common stock. This transaction was accounted for as a pooling
of interests, and, accordingly, the financial statements of the Company was
restated to reflect the combined financial position and operating results as if
the companies had operated as one entity since inception. For periods preceding
the merger, there were no intercompany transactions which required elimination
from the combined consolidated results of operations.

Selected financial information for the combining entities included in
the consolidated statements of operations for the year ended December 31, 1998
is as follows (in thousands):

1998
---------

TOTAL REVENUES

Davel $ 84,663
Peoples Telephone 110,155
---------

Combined $ 194,818
=========

NET INCOME (LOSS)

Davel $ (13,952)
Peoples Telephone (19,965)
Non-recurring items (10,814)
Restructuring charges (4,325)
Extraordinary item (17,856)
---------

Combined $ (66,912)
=========

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. The Company has
incurred losses of approximately $111.5 million, $78.7 million, and $66.9
million for the years ended December 31, 2000, 1999, and 1998, 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 (see Note 19). As of December 31, 2000, the Company
had a working capital deficit of $257.6 million and its liabilities exceeded it
assets by $186.4 million. In addition, the Company was unable to meet its debt
principal payments of $15.7 million and interest payments of $12.5 million,
which would have been due and payable on January 12, 2001 but for the Company's
execution of the Sixth Amendment to its loan agreement, which calls for interim
principal payments of $1.1 million due on April 15, 2001, $2.2 million due on
July 15, 2001, $3.3 million due on October 15, 2001 and the remainder due on
January 11, 2002. (see Note 12). In the absence of improved operating results or
cash flows, modifications to the Senior Credit Facility, or the completion of
possible strategic combinations, the Company will face liquidity problems and
might be required to dispose of material assets or operations to fund its
operations and to meet its debt service and other obligations. There can be no
assurances as to the ability of the Company to execute such sales, or the timing
thereof or the 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. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

36

The Company's plans to increase liquidity include efforts to
substantially reduce costs, including through possible strategic combinations.
Management believes this will result in expansion of its market presence and
further leveraging of its infrastructure. In order to pursue this strategy, the
Company will need to obtain additional modifications to the Senior Credit
Facility, and may require forgiveness of a portion of its debt. The Company may
also need to obtain additional debt or equity financing. There can be no
assurance that such debt modifications or financings will be available to the
Company, or that they will be available on terms acceptable to the Company.
Further, any additional equity financing may be dilutive to existing
shareholders.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. Financial data for all periods
presented reflect the retroactive effect of the merger, accounted for as a
pooling of interest, with Peoples Telephone consummated in December 1998. All
significant intercompany accounts and transactions are eliminated in
consolidation.

The divestitures of the Company's cellular and inmate telephone
operations have been classified as discontinued operations. Accordingly,
operating results and cash flows for these businesses have been segregated and
reported as discontinued operations in the accompanying consolidated financial
statements.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

CONCENTRATIONS OF CREDIT RISK

Receivables have a significant concentration of credit risk in the
telecommunications industry. In addition, a significant amount of receivables
are generated by approximately 18% of the Company's payphones located in the
state of Florida.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of the Company's financial instruments approximates
their carrying amounts at the balance sheet date. Fair value for all financial
instruments other than debt, for which no quoted market prices exist, were based
on appropriate estimates. The carrying value of the debt approximates its fair
value due to the variable rate associated with this instrument.

DERIVATIVES

The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133" and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133". SFAS No. 133, as amended, requires the Company to record all derivatives
on the balance sheet at fair value. Changes in derivative fair values will
either be recognized in earnings as offsets to the change in fair value of
related hedged assets, liabilities and firm commitments or, for forecasted
transactions, deferred and recorded as a component of other stockholders' equity
until the hedged transactions occur and are recognized in earnings. The
ineffective portion of a hedged derivative's change in fair value will be
immediately recognized in earnings. Adoption of these new accounting

37

standards, on January 1, 2001, will be accounted for as a change in accounting
principle and will not have a material impact on the consolidated financial
statements.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost less impairments as discussed
below (See "Long-Lived Assets"). Depreciation is provided over the estimated
useful lives using the straight-line method. Installed payphones and related
equipment includes installation costs, which are capitalized and amortized over
the estimated useful lives of the equipment. The costs associated with normal
maintenance, repair and refurbishment of telephone equipment are charged to
expense as incurred.

The capitalized cost of equipment and vehicles under capital leases is
amortized over the lesser of the lease term or the asset's estimated useful
life, and is included in depreciation and amortization expense in the
consolidated statements of operations.

Upon sale or retirement, the cost and related accumulated amortization
are eliminated and any resulting gain or loss is included in the consolidated
statements of operations.

LOCATION CONTRACTS

Location contracts include payments associated with obtaining written
and signed location contracts. The capitalized costs of these assets are
amortized on a straight-line basis over their contract terms (3 to 5 years) and
is included in depreciation and amortization expense in the consolidated
statements of operations. Accumulated amortization as of December 31, 2000 and
1999 was approximately $43.4 million and $28.7 million, respectively.

GOODWILL

Costs in excess of fair market value of the net assets recorded in
connection with acquisitions is recorded as goodwill in the accompanying
consolidated balance sheets. Goodwill is amortized on a straight-line basis over
periods estimated to be benefited, generally 15 years. Accumulated amortization
as of December 31, 1999 was approximately $6.8 million. During the fourth
quarter of 2000, the Company determined its goodwill was impaired and the
unamortized balance was written-off.

LONG-LIVED ASSETS

The Company accounts for long-lived assets pursuant to SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", which requires impairment losses to be recorded on long-lived
assets used in operations when events or changes in circumstances indicate that
the carrying amount on an asset may not be recoverable. Management reviews
long-lived assets and the related intangible assets for impairment whenever
events or changes in circumstances indicate the asset may be impaired. After
accounting for the impairments described below, the Company does not believe
that any long-lived assets are impaired at December 31, 2000 based on the
estimated future cash flows of the Company and assuming the Company can continue
to operate as a going concern.

In 2000 and 1999, the Company reviewed its long-lived assets and
certain other identifiable intangibles under the provisions of SFAS No. 121. The
Company considered continued declines in operating margin and lower than
expected cash flow related to its payphones to be the primary indicators of
potential impairment. The Company estimated fair value as the discounted future
cash flows generated by the payphones on a location basis and recorded
approximately $42.0 million and approximately $48.9 million in 2000 and 1999,
respectively, of non-recurring charges to state the assets at fair value, which
is included in impairment charge and non-recurring items on the accompanying
consolidated statements of operations.

These impairment charges were recorded as follows for the years ended
December 31 (in thousands):

2000 1999
------- -------
Installed payphones $13,900 --
Uninstalled payphone equipment 13,500 $ 1,100
Location contracts 10,200 9,800
Goodwill 4,400 37,900
Other assets -- 100
------- -------
$42,000 $48,900
======= =======

38

Management exercised considerable judgment to estimate discounted
future cash flows. The amount of future cash flows the Company will ultimately
realize could differ materially from the amounts assumed in arriving at the
impairment loss and as a result additional writedowns may be required.

In addition, the Company recorded approximately $7.0 million and $2.3
million of other non-recurring charges, the majority of which related to a loss
from a physical inventory count of its uninstalled equipment during the years
ended December 31, 2000 and 1999, respectively.

RECOGNITION OF REVENUE

The Company derives its revenues from two principal sources: coin calls
and non-coin calls. Coin calls represent calls paid for by callers with coins
deposited in the payphone. Coin call revenues are recorded at the time coins are
deposited into the payphones and the service is provided.

Prior to November 1999, the Company serviced "operator service" calls
through its switch. These non-coin calls were handled through an "unbundled"
service arrangement, whereby the Company recognized non-coin revenue equal to
the total amount charged the end user for the placement of the call. Utilizing
an unbundled services arrangement, the Company performed certain functions
necessary to service non-coin calls, incurring specific expenses using the long
distance company's switching equipment, operator services, billing arrangements
and other services on an as-needed basis to complete and bill for these calls.
Non-coin calls are now handled by independent operator service providers and
Sprint and AT&T. The carriers assume billing and collection responsibilities for
these calls and pay "commissions" to the Company. The Company generally
recognizes non-coin calls revenues in an amount equal to the commission.

The Company also recognizes non-coin calls revenues from calls that are
dialed from its payphones to gain access to a long distance company other than
the one pre-programmed into the telephone or to make a traditional "toll free"
call (dial-around calls). Revenues from dial-around calls are recognized based
on estimates of calls made using most recent historical payment data and the FCC
mandated dial-around compensation rate in effect at the time of the call. (see
Note 19).

INCOME TAXES

The Company has accounted for income taxes under SFAS No. 109
"Accounting for Income Taxes", an asset and liability approach to accounting and
reporting for income taxes. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.

USE OF ESTIMATES

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect, the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Significant estimates include
the allowance for doubtful accounts and the fair value of long-lived assets. A
significant assumption that impacts the carrying value of assets and liabilities
is that the Company will continue as a going concern.

RECLASSIFICATION

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

4. DISCONTINUED OPERATIONS

During the year ended December 31, 1998, the Company sold its
investment in Shared Technologies Cellular, Inc. (STC) common stock, resulting
in a gain of $607,000. The STC common stock was received in 1995 as part of the
proceeds from the sale of the Company's Cellular Telephone Operations to STC,
which was treated as discontinued

39

operations. Accordingly, the gain from the sale of the investment is recorded in
discontinued operations in the 1998 consolidated statement of operations.

5. ACQUISITIONS

On February 3, 1998, the Company completed its acquisition of
Communications Central Inc. (the "CCI Acquisition") at a price of $10.50 per
share in cash, or approximately $70.2 million in the aggregate, assumed CCI's
outstanding debt of $36.7 million and incurred $2.2 million in transaction
costs. The CCI Acquisition has been accounted for by the purchase method, and,
accordingly the results of operations are included in the Company's consolidated
statements of operations from the date of acquisition. Goodwill associated with
the acquisition was to be amortized over fifteen years using straight-line
amortization (See Note 3).

During 1999, the Company wrote off $37.9 million of goodwill and $7.8
million of location contracts related to prior purchases of assets, including
those associated with the CCI Acquisition (See Note 3).

During the years ended December 31, 1999 and 1998, the Company made
certain acquisitions, which have been accounted for as purchase business
combinations. The consolidated financial statements include the operating
results of each business from the date of acquisition. Pro forma results of
operations have not been presented because the effects of each of these
acquisitions were not significant. For all transactions, the purchase price was
allocated to payphones and associated assets and, in some instances, non-compete
agreements and goodwill.

6. RESTRUCTURING CHARGE AND MERGER - RELATED EXPENSES

In connection with the Peoples Telephone Merger, the Company recognized
non-recurring costs of $10.8 million in 1998. These costs include legal fees,
investment banking fees, accounting fees and change of control payments. Also,
in 1998 the Company recognized restructuring costs of $4.3 million related to
the Peoples Telephone Merger and other restructurings. These costs were composed
of payments incurred in connection with early lease terminations, facility
closing costs, a write-down of the value of the former Peoples Telephone
headquarters and employee termination benefits for 143 excess field operations
and administrative personnel. The following table summarizes the restructuring
charge and the amounts incurred during the years ended December 31, 2000, 1999,
and 1998 (in thousands):

EMPLOYEE MERGER
FACILITY TERMINATION WRITE-DOWN CLOSING
CLOSING COSTS COSTS OF ASSETS OTHER COSTS TOTAL
------------- ----------- --------- ----- -------- ---------

Non-recurring and
restructuring charge $ 1,140 $ 1,424 $ 790 $ 971 $ 10,814 $ 15,139
Utilized in 1998 (251) (131) (790) (184) (7,045) (8,401)
------- ------- ----- ----- -------- --------
Remaining reserve at
December 31, 1998 889 1,293 -- 787 3,769 6,738

Adjustments to certain
reserves (647) 1,311 -- -- (664) --
Utilized in 1999 (170) (2,604) -- (787) (3,105) (6,666)
------- ------- ----- ----- -------- --------
Remaining reserve at
December 31, 1999 72 0 0 0 0 72
======= ======= ===== ===== ======== ========

Utilized in 2000 (49) (49)

Remaining reserve at
December 31, 2000 $ 23 $ 0 $ 0 $ 0 $ 0 $ 23
======= ======= ===== ===== ======== ========

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

Additionally, during 1999, the Company incurred and paid restructuring
charges and other merger-related expenses with respect to the Peoples Telephone
Merger of approximately $1,570,000 related to integration and restructuring
activities. The restructuring charges and other merger-related expense were
primarily related to severance pay for terminated

40

employees, relocation costs and costs related to the closing of redundant
facilities.

7. INVESTMENTS

Investments in debt and equity securities are accounted for in
accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". During 1999, the Company wrote off its investment in Global
Telecommunications Solutions, Inc. ("GTS"). Accordingly, the Company recognized
a realized loss of $350,000 during 1999 and an unrealized loss on the investment
of $2,772,000 during 1998 in the accompanying consolidated statements of
operations.

8. ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

2000 1999 1998
-------- ------- -------

Balance, at beginning of period 10,880 $ 5,383 $ 5,121
Charged to expense 1,416 5,497 1,299
Uncollected balances written off, net of recoveries (10,781) -- (1,037)
-------- ------- -------
Balance, at end of period $ 1,515 $10,880 $ 5,383
======== ======= =======

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

9. PROPERTY AND EQUIPMENT

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

ESTIMATED
USEFUL LIFE
IN YEARS 2000 1999
----------- --------- ---------

Installed payphones and related equipment 10 $ 143,463 $ 211,394
Furniture, fixtures and office equipment 5-7 9,578 9,224
Vehicles, equipment under capital leases and other equipment 4-10 3,083 4,521
Building and improvements 25 3,525 1,190
--------- ---------

159,649 226,329
Less - Accumulated depreciation (102,228) (132,606)
--------- ---------

57,421 93,723
Uninstalled payphone equipment 7,281 21,835
--------- ---------
$ 64,702 $ 115,558
========= =========

10. OTHER ASSETS

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

2000 1999

Non-compete agreements $1,063 $ 925
Loan origination fees 3,699 4,957
Other 115 198
------ ------

$4,877 $6,080
====== ======

41

11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

2000 1999
------- -------

Accounts payable $ 1,792 $ 4,375
Location contracts payable 851 7,917
Taxes payable 2,883 2,361
Accrued commissions 10,212 4,972
Deferred revenue 188 1,767
Interest payable 13,039 170
Accrued telephone bills 4,513 1,111
Accrued compensation 1,433 929
Other 4,621 3,882
------- -------

$39,532 $27,484
======= =======

12. LONG-TERM DEBT AND OBLIGATIONS UNDER CAPITAL LEASES

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

2000 1999
--------- ---------

SENIOR CREDIT FACILITY

TERM A note payable to banks at an adjusted LIBOR rate (11.5% at $ 110,000 $ 115,000
December 31, 2000) (See below for principal and interest payment terms.)

TERM B note payable to the banks at an adjusted LIBOR rate (12.25% at 93,813 94,050
December 31, 2000) (See below for principal and interest payment terms.)

REVOLVING ADVANCE on bank's line of credit at the bank's adjusted LIBOR 34,543 17,500
rate (11.5% at December 31, 2000) (See below for principal and interest
payment terms.)

CAPITAL LEASE obligations and other notes with various interest rates and
various maturity dates through 2004 1,566 1,494
--------- ---------
239,922 228,044

Less - Current maturities (239,083) (21,535)
--------- ---------

$ 839 $ 206,509
========= =========

In connection with the Peoples Telephone Merger on December 23, 1998,
the Company entered into a senior credit facility ("Senior Credit Facility")
with Bank of America, formerly NationsBank, N.A., (the "Administrative Agent")
and the other lenders named therein ("Lenders"). The Senior Credit Facility
provided for borrowings by the Company from time to time of up to $280 million
for working capital and other corporate purposes. Upon consummation of the
Peoples Telephone Merger, the Company redeemed approximately $100.0 million in
Senior Notes that were scheduled to mature in 2002 and retired approximately
$96.7 million in notes payable prior to maturity. In connection with this early
extinguishment of debt, the Company recognized an extraordinary loss of
approximately $17.9 million.

The Senior Credit Facility was amended on April 8, 1999 (the "First
Amendment"). This amendment waived compliance, for the first quarter of 1999,
with the financial covenants set forth in the Senior Credit Facility. In
addition, the First Amendment waived any event of default related to two
acquisitions made by the Company in the first quarter of 1999, and waived the
requirement that the Company deliver annual financial statements to the Lenders
within 90 days of December 31, 1998, provided that such financial statements be
delivered no later than April 15, 1999.

42

On March 28, 2000, the Company and the Lenders agreed to the Second
Amendment to Credit Agreement and Consent and Waiver (the "Second Amendment")
which amended certain covenants through January 15, 2001. In exchange for the
covenant relief, the Company agreed to a lowering of the available credit
facility to approximately $245.0 million (through a permanent reduction of the
revolving line of credit) and placement of a block on the final $10.0 million of
revolver borrowing. The Second Amendment also placed a moratorium on
acquisitions and changed the calculation of interest rates for the Senior Credit
Facility.

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

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

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

The Company was unable to meet its debt principal payments of $15.7
million and interest payments of $12.5 million, which would have been due and
payable on January 12, 2001 but for the Company's signing the Sixth Amendment
effective as of January 12, 2001 (see below). Because of uncertainties regarding
compliance with terms of the sixth amendment during 2001, all debt under the
Senior Credit Facility is classified as a current liability as of December 31,
2000 in the consolidated balance sheet.

On March 23, 2001, the Company and the Lenders entered into the Sixth
Amendment to Credit Agreement and Waiver, effective as of January 12, 2001 (the
"Sixth Amendment"). The Sixth Amendment extended the maturity date of the
principal and interest payments under the Senior Credit Facility to January 11,
2002, with required interim amortization payments of $1.1 million on April 15,
2001, $2.2 million on July 15, 2001 and $3.3 million on October 15, 2001. The
remaining balance outstanding on their Senior Credit Facility will be due and
payable on January 11, 2002. As of December 31, 2000, the Company had utilized
all available borrowing capacity under the revolving credit facility. In
addition, the Sixth Amendment added certain new covenants, including a minimum
cumulative EBITDA covenant, a maximum limit on location signing bonuses, a
maximum limit on capital expenditures and a budget compliance covenant. Pursuant
to the Sixth Amendment, the parties agreed that PNC Bank, National Association,
would become the new administrative agent for the Lenders and that the Company
would pay certain earned fees of the Lenders' professional advisors.

Indebtedness of the Company under the amended Senior Credit Facility is
secured by substantially all of its and its subsidiaries' assets, including but
not limited to their equipment, inventory, receivables and related contracts,
investment property, computer hardware and software, bank accounts and all other
goods and rights of every kind and description and is guaranteed by the Company.

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

The Company is required to pay the Lenders under the amended Senior
Credit Facility a commitment fee of 0.5%, payable in arrears on a quarterly
basis, on the average unused portion of the Senior Credit Facility during the
term

43

of the facility. The Company is also required to pay an annual agency fee to the
Administrative Agent. In addition, the Company was also required to pay an
arrangement fee for the account of each bank in accordance with the banks'
respective pro rata share of the amended Senior Credit Facility. The
Administrative Agent and the Lenders will receive such other fees as have been
separately agreed upon with the Administrative Agent. These fees were
capitalized within other assets in the consolidated financial statements and
will be amortized over the remaining life of the Senior Credit Facility.

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

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

In connection with the provisions of its amended Senior Credit Facility
and the Company's overall interest rate management objectives, the Company
utilizes derivative financial instruments to reduce its exposure to market risks
from significant increases in interest rates. The Company's strategy is to
purchase interest rate swaps, collars and caps from large financial institutions
to limit the impact of increases in interest rates on the Company's variable
rate long-term debt. As of December 31, 2000, the Company had an interest rate
swap agreement with an aggregate notional amount of $7.5 million with a
termination date of June 2001. The interest rate swap requires the Company to
pay fixed rates of 5.9% in exchange for variable rate payments based on the U.S.
three month LIBOR (6.4% as of December 31, 2000). Interest rate differentials
are paid or received every three months and are recognized as adjustments to
interest expense.

As of December 31, 2000, the Company had an interest rate cap agreement
with a notional amount of $15 million that terminates in September 2001. The
interest rate cap agreement requires premium payments to the counterparty based
on the notional amount of the contracts that are capitalized and amortized to
interest expense over the life of the contract. These agreements entitle the
Company to receive quarterly payments from the counterparties for amounts, if
any, by which the U.S. three month LIBOR rate exceeds 6.5%. In addition, the
Company entered into an interest rate collar agreement with a large financial
institution that terminates in February 2002. The notional amount of the
interest rate collar is $25 million and the agreement has a cap rate of 7.0% and
a floor rate of 4.8% based on the U.S. one month LIBOR rate (6.6% as of December
31,2000).

The Company does not hold or issue derivative financial instruments for
trading purposes. The Company is exposed to credit risk in the event of
nonperformance by the counterparties; however, the Company does not anticipate
nonperformance by any of its counterparties. The carrying amount and fair value
of these contracts are not significant.

13. LEASE COMMITMENTS

The Company conducts a portion of its operations in leased facilities
under noncancellable operating leases expiring at various dates through 2004.
Some of the operating leases provide that the Company pay taxes, maintenance,
insurance and other occupancy expenses applicable to leased premises. The
Company also maintains certain equipment under noncancellable capital leases
expiring at various dates through 2004.

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

OPERATING CAPITAL TOTAL
--------- ------- -----
Year ended December 31:

2001 $2,410 $ 727 $3,137
2002 1,768 544 2,312
2003 1,692 207 1,899
2004 1,710 88 1,798
------ ------ ------
$7,580 $1,566 $9,146
====== ------ ======
Less current capital lease
obligations (727)
------
Long-term capital lease obligations 839
======

Rent expense for operating leases from continuing operations for the years ended
December 31, 2000, 1999, and 1998 was $2,603,000, $2,566,000, and $1,060,000
respectively.

44

14. INCOME TAXES

Deferred income taxes arise from temporary differences between the tax
bases of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered. Income tax provisions will increase or decrease in the same
period in which a change in tax rates is enacted.

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

2000 1999 1998
------- ------- -------

Current provision (benefit):
Federal $ -- $(1,755) $ --
State -- -- 108
Deferred provision -- -- (108)
------- ------- -------
Total income tax expense (benefit) $ -- $(1,755) $ --
======= ======= =======

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

2000 1999 1998
-------- -------- --------

Provision for federal income tax at the statutory rate (34%) $(37,903) $(26,604) $(16,885)
State income taxes net of federal benefit (4,236) (1,770) (1,902)
Change in valuation allowance 43,913 16,595 17,808
Goodwill amortization -- 10,380 927
Other, net (1,774) (356) 52
-------- -------- --------

Income taxes from continuing operations -- (1,755) --

Expected income tax benefit from discontinued operations and -- -- (6,525)
extraordinary items

Change in valuation allowance -- -- 6,525
-------- -------- --------

Total income tax benefit $ -- $ (1,755) $ --
======== ======== ========

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

2000 1999
--------- ---------

DEFERRED TAX ASSETS:
Net operating loss carryforward $ 109,711 $ 69,412
Capital loss carryforward 687 687
Amortization of location contracts and
goodwill 15,763 14,618
Alternative minimum tax credit carryforward 862 862
Impairment charge 17,852 2,036
Investment write-off 1,043 1,043
Allowance for doubtful accounts 570 4,094
Accrued expenses -- 2,594
Other reserves -- 3,011
Accrued income -- 1,847
Other 888 3,259
--------- ---------
Total deferred tax assets 147,376 103,463
Valuation allowance (115,305) (71,392)
--------- ---------

Net deferred tax assets 32,071 32,071
--------- ---------

DEFERRED TAX LIABILITIES:
Depreciation (32,071) (32,071)
--------- ---------
Net deferred tax liability $ 0 $ 0
========= =========

45

As of December 31, 2000, the deferred tax asset valuation allowance
increased to approximately $115,305,000 from $71,392,000 as of December 31,
1999. The increase is recorded as a component of the Company's 2000 tax
provision. Realization of deferred tax assets is dependent upon sufficient
future taxable income during the periods that temporary differences and
carryforwards are expected to be available to reduce taxable income. As such,
the Company has recorded a valuation allowance to reflect the estimated amount
of deferred tax assets, for which it is more likely than not that they will not
be realized.

At December 31, 2000, the Company had tax net operating loss
carryforwards of approximately $291,552,000 and capital loss carryforwards of
$1,827,000, which expire in various amounts in the years 2001 to 2020. Following
the Peoples Telephone Merger and the CCI Acquisition in 1998, recognition of net
operating loss carryforwards incurred prior to 1998, are limited to
approximately $5.8 million and $3.5 million, respectively, each year under the
rules of Internal Revenue Code Section 382. Approximately $134,353,000 of the
net operating loss carryforwards will be limited under these rules.
Additionally, the net operating loss and capital loss carryforwards will be
subject to limitations if future ownership changes occur. In addition, these
loss carryforwards can only be utilized against future taxable income, if any,
generated by these acquired companies as if these companies continued to file
separate income tax returns.

15. CAPITAL STOCK TRANSACTIONS

PREFERRED STOCK

The Company's certificate of incorporation authorizes 1,000,000 shares
of preferred stock, par value $.01 per share.

Peoples Telephone's articles of incorporation authorized 5,000,000
share of preferred stock, of which 600,000 shares were designated as Series B
Preferred Stock and 160,000 shares were designated as Series C Preferred Stock.
During 1995, Peoples issued 150,000 shares of Series C Cumulative Convertible
Preferred Stock to UBS Capital II LLC, a wholly-owned subsidiary of Union Bank
of Switzerland, for proceeds of $15.0 million. The Preferred Stock accumulated
dividends at an annual rate of 7%. The dividends were payable in cash or may
accumulate. In connection with the Peoples Telephone Merger, the Company issued
892,977 shares of common stock for the outstanding Series C Preferred Stock and
cumulative dividends and cancelled the 5,000,000 authorized shares of Peoples
Preferred Stock.

COMMON STOCK

On June 30, 1998, the Company announced the closing of an investment by
an affiliate of Equity Group Capital Investments ("EGCI"), a privately-held
investment company controlled by Sam Zell, a shareholder. In the transaction,
the EGCI affiliate invested $28,000,000 in the Company as payment for 1,000,000
shares of newly issued common stock and warrants to purchase an additional
299,513 shares, which are exercisable at a price of $32.00 per share and expire
on June 29, 2002. Proceeds of the sale were used for working capital and payment
of the merger consideration for the Peoples Telephone Merger.

In December 1998, the shareholders of the Company approved an increase
in the number of shares of authorized common stock from 10,000,000 to 50,000,000
in order to accommodate issuance of stock in connection with the Peoples
Telephone Merger.

STOCK OPTIONS

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

The Company also has several pre-existing stock option plans under
which options to acquire up to 2,234,525

46

shares were originally available to be granted to directors, officers and
certain employees of the Company, including the stock option plans acquired in
the Peoples Telephone Merger, and options to acquire 302,266 shares were
available as of December 31, 2000 to be so granted. Vesting periods for options
issued under these plans range from immediate vesting up to 10 years and
generally expire after 5 to 10 years. The plans also provide for the issuance of
restricted common stock.

For the years ended December 31, 2000 and 1999, respectively, 171,592
and 28,222 share of restricted stock were issued. The Company records
compensation based on the fair market value of the Company's common stock on the
day the restricted shares are granted. This compensation expense is recorded
ratably over the vesting period of the restricted stock. During the
year ended December 31, 2000, approximately 36,000 shares of restricted stock
were rescinded and the compensation recorded upon the initial grant was
reversed.

The exercise price of options generally equals the market price of the
Company's stock on the date of grant. Accordingly, no compensation cost has been
recognized for options granted under the plans. Had compensation cost for the
plans been determined based on the fair value of the options at the grant dates
consistent with the method of SFAS No. 123, "Accounting for Stock-Based
Compensation", the Company's net loss and loss per share would have been
increased to the pro forma amounts indicated below (in thousands):

2000 1999 1998
--------- -------- --------

Net loss As reported $(111,480) $(78,746) $(66,912)
Pro forma $(114,378) $(81,208) $(71,766)
Basic and diluted loss per common share As reported $(10.02) $(7.40) $(7.59)
Pro forma $(10.28) $(7.62) $(8.13)

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes options-pricing method with the following
weighted-average assumptions used for grants in 2000, 1999 and 1998: dividend
yield of 0% for all years; expected volatility of 264.1%, 84.7%, and 48.8%,
respectively, risk-free interest rates of 6.16%, 5.0%, and 5.4%, respectively,
and expected life of approximately five years.

A summary of the status of the Company's stock option plans as of
December 31 and changes during the years ended on those dates is presented below
(shares in thousands):

2000 1999 1998
-------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----

Outstanding at beginning of year 1,365 $14.77 1,291 $20.88 1,136 $20.34
Granted 637 4.59 524 5.85 407 23.98
Exercised -- --- -- -- (153) 13.35
Expired (17) 16.18 (50) 10.33 (99) 15.60
Cancelled (580) 11.38 (400) 21.90 -- --
----- -----

Outstanding at end of year 1,405 $11.55 1,365 $14.77 1,291 $20.88
----- ----- -----

Options exercisable at end of year 996 1,051 $13.68 1,065 $20.03
=== ===== =====

Weighted-average fair value of options granted during
the year $4.43 $5.79 $11.92

The following information applies to options outstanding at December 31, 2000:
(shares in thousands)

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER
RANGE OF OUTSTANDING AT REMAINING CONTRACTUAL AVERAGE EXERCISABLE AT WEIGHTED AVERAGE
EXERCISE PRICE DECEMBER 31, 2000 LIFE (YEARS) EXERCISE PRICE DECEMBER 31, 2000 EXERCISE PRICE
-------------- ----------------- ------------ -------------- ----------------- --------------

$0.07 to $4.94 350 8.2 $ 3.99 67 $ 0.52
$5.38 to $6.50 425 4.3 $ 5.89 299 $ 5.78
$9.25 to $13.83 76 6.1 $ 11.92 76 $11.92
$14.13 to $19.13 317 1.9 $ 16.12 317 $ 16.12
$21.53 to $30.85 237 5.3 $ 26.65 237 $ 26.65
----- ---
1,405 $ 11.55 996 $ 14.15
----- ---

47

At December 31, 2000, approximately 1,302,000 shares of Common Stock
were reserved pursuant to its stock option plans.

16. EARNINGS PER SHARE

The treasury stock method was used to determine the dilutive effect of
the options and warrants on earnings per share data. The following table
summarizes the net loss from continuing operations per share and the weighted
average number of shares outstanding used in the computations in accordance with
SFAS No. 128 "Earnings Per Share". In accordance with SFAS No. 128, the
following table reconciles net income and weighted average shares outstanding to
the amounts used to calculate the basic and diluted loss per share (in
thousands, except share and per share data):

2000 1999 1998
------------ ------------ -----------

Loss from continuing operations before extraordinary items $ (111,480) $ (78,746) $ (49,663)

DEDUCT:

Cumulative preferred stock dividend requirement -- 95 1,464
Preferred stock issuance cost accretion -- -- 158
------------ ------------ -----------
Loss from continuing operations applicable to
common shareholders $ (111,480) $ (78,841) $ (51,285)
============ ============ ===========
Weighted average common shares outstanding 11,125,582 10,659,594 9,029,285
============ ============ ===========
Basic and diluted loss from continuing operations
per share $ (10.02) $ (7.40) $ (5.68)
============ ============ ===========

Diluted loss per share is equal to basic loss per share since the
exercise of 1,405,000 outstanding options and 299,513 warrants outstanding would
be anti-dilutive for all periods presented.

17. 401(k) PROFIT SHARING PLAN

The Company maintains a 401(k) plan which is available to all employees
of the Company, including its executive officers. The Company provides a
matching contribution to the plan up to a maximum of 1.5% of the salary of the
contributing employee. The Company's contribution to an employee's account vests
over a period of five years. In 1999, the Davel Communications Group, Inc.
Profit Sharing Plan was merged with the plans of Peoples Telephone and
Communications Central Inc., subsidiaries of the Company. The subsidiaries
contributed approximately $186,000, $456,000 and $397,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.

18. STATEMENT OF CASH FLOWS

Cash paid for interest and income taxes and non-cash activities during the years
ended December 31 was as follows (in thousands):

2000 1999 1998
------- ------- -------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash paid for :
Interest $12,137 $22,619 $26,445
======= ======= =======
Income taxes -- 1,755 $ 143
------- ------- -------

NON-CASH ACTIVITIES:

Fixed assets acquired under capital lease obligations 826 -- $ 1,934
------- ------- -------

Common stock issued for retirement of preferred stock -- -- $17,906
------- ------- -------

Series C preferred stock dividends accrued -- -- $ 1,464
------- ------- -------

Preferred stock issuance accretion -- -- $ 158
------- ------- -------

48

19. PROVISION FOR DIAL-AROUND COMPENSATION

On September 20, 1996, the Federal Communications Commission (FCC)
adopted rules in a docket entitled IN THE MATTER OF IMPLEMENTATION OF THE
PAYPHONE RECLASSIFICATION AND COMPENSATION PROVISIONS OF THE TELECOMMUNICATIONS
ACT OF 1996, FCC 96-388 (the "1996 Payphone Order"), implementing the payphone
provisions of Section 276 of the Telecommunications Act of 1996 (the "Telcom
Act"). The 1996 Payphone Order, which became effective November 7, 1996,
initially mandated dial-around compensation for both access code calls and 800
subscriber calls at a flat rate of $45.85 per payphone per month (131 calls
multiplied by $0.35 per call). Commencing October 7, 1997, and ending October 6,
1998, the $45.85 per payphone per month rate was to transition to a per-call
system at the rate of $0.35 per call. Several parties filed petitions for
judicial review of certain of the FCC regulations including the dial-around
compensation rate. On July 1, 1997, the U.S. Court of Appeals for the District
of Columbia Circuit (the "Court") responded to appeals related to the 1996
Payphone Order by remanding certain issues to the FCC for reconsideration. These
issues included, among other things, the manner in which the FCC established the
dial-around compensation for 800 subscriber and access code calls, the manner in
which the FCC established the interim dial-around compensation plan and the
basis upon which interexchange carriers (IXCs) would be required to compensate
payphone service providers ("PSP"s). The Court remanded the issue to the FCC for
further consideration, and clarified on September 16, 1997, that it had vacated
certain portions of the FCC's 1996 Payphone Order, including the dial-around
compensation rate. Specifically, the Court determined that the FCC did not
adequately justify (i) the per-call compensation rate for 800 subscriber and
access code calls at the deregulated local coin rate of $0.35, because it did
not sufficiently justify its conclusion that the costs of local coin calls are
similar to those of 800 subscriber and access code calls; and (ii) the
allocation of the payment obligation among the IXCs for the period from November
7, 1996, through October 6, 1997.

In accordance with the Court's mandate, on October 9, 1997, the FCC
adopted and released its SECOND REPORT AND ORDER in the same docket, FCC 97-371
(the "1997 Payphone Order"). This order addressed the per-call compensation rate
for 800 subscriber and access code calls that originate from payphones in light
of the decision of the Court which vacated and remanded certain portions of the
FCC's 1996 Payphone Order. The FCC concluded that the rate for per-call
compensation for 800 subscriber and access code calls from payphones is the
deregulation local coin rate adjusted for certain cost differences. Accordingly,
the FCC established a rate of $0.284 ($0.35 - $0.066) per call for the first two
years of per-call compensation (October 7, 1997, through October 6, 1999). The
IXCs were required to pay this per-call amount to PSPs, including the Company,
beginning October 7, 1997.

On March 9, 1998, the FCC issued a Memorandum Opinion and Order, FCC
98-481, which extended and waived certain requirements concerning the provision
by the LECs of payphone-specific coding digits which identify a call as
originating from a payphone. Without the transmission of payphone-specific
coding digits some of the IXCs have claimed they are unable to identify a call
as a payphone call eligible for dial-around compensation. With the stated
purpose of ensuring the continued payment of dial-around compensation, the FCC,
by Memorandum and Order issued on April 3, 1998, left in place the requirement
for payment of per-call compensation for payphones on lines that do not transmit
the requisite payphone-specific coding digits, but gave the IXCs a choice for
computing the amount of compensation for payphones on LEC lines not transmitting
the payphone-specific coding digits of either accurately computing per-call
compensation from their databases or paying per-phone, flat-rate compensation
computed by multiplying the $0.284 per call rate by the nationwide average
number of 800 subscriber and access code calls placed from RBOC payphones for
corresponding payment periods. Accurate payments made at the flat rate are not
subject to subsequent adjustment for actual call counts from the applicable
payphone.

On May 15, 1998, the Court again remanded the per-call compensation
rate to the FCC for further explanation without vacating the $0.284 per call
rate. The Court opined that the FCC had failed to explain adequately its
derivation of the $0.284 default rate. The Court stated that any resulting
overpayment would be subject to refund and directed the FCC to conclude its
proceedings within a six-month period from the effective date of the Court's
decision.

In response to the Court's second remand, the FCC conducted further
proceedings and sought additional comment from interested parties to address the
relevant issues posed by the Court. On February 4, 1999, the FCC released its
Third Report and Order, and Order on Reconsideration of the Second Report and
Order (the "1999 Payphone Order"), in which the FCC abandoned its efforts to
derive a "market-based" default dial-around compensation rate and instead
adopted a "cost-based" rate of $0.24 per dial-around call.

49

On June 16, 2000, the Court affirmed the 1999 Payphone Order setting a
24-cent dial around compensation rate. On all the issues, including those raised
by the IXCs and the payphone providers, the court applied the "arbitrary and
capricious" standard of review, and found that the FCC's rulings were lawful and
sustainable under that standard. As a result of the Court's June 16, 2000
decision, the 24-cent dial around compensation rate is likely to remain in place
until at least the end of 2001, when the FCC has promised to complete a
third-year review of the rate. With respect to the Petition for Reconsideration
of the 1999 Payphone Order filed with the FCC by the payphone providers, this
Petition is still pending and has yet to be ruled on by the FCC. In view of the
Court's affirmation of the 1999 Payphone Order, it is unlikely that the FCC will
adopt material changes to the key components of the Order pursuant to the
pending Reconsideration Petition, although no assurances can be given.

The new 24-cent rate became effective April 21, 1999, and will serve as
the default rate through January 31, 2002. The new rate will also be applied
retroactively to the period beginning on October 7, 1997, less a $0.002 amount
to account for FLEX ANI payphone tracking costs, for a net compensation of
$0.238. The 1999 Payphone Order deferred a final ruling on the interim period
(November 7, 1996 to October 6, 1997) treatment to a later, as yet unreleased,
order; however, it appears that the $0.238 rate will be applied to the period
from November 7, 1996 to October 6, 1997. Upon establishment of the interim
period rate, the FCC has further ruled that a true-up may be made for all
payments or credits (with applicable interest) due and owing between the IXCs
and the PSPs, including the Company, for the payment period commencing on
November 7, 1996 through the effective date of the new $0.24 per call rate. It
is possible that the final implementation of the 1999 Payphone Order, including
resolution of this retroactive adjustment and the outcome of any related
administrative or judicial review, could have a material adverse effect on the
Company. Based on the FCC's tentative conclusion in the 1997 Payphone Order, the
Company during 1997 adjusted the amounts of dial-around compensation previously
recorded related to the period from November 7, 1996, through June 30, 1997,
from the initial $45.85 rate to $37.20 ($0.284 per call multiplied by 131
calls). As a result of this adjustment, the provision recorded for the year
ended December 31,1997, related to reduced dial-around compensation is
approximately $3.3 million. Based on the reduction in the per-call compensation
rate in the 1999 Payphone Order, the Company further reduced non-coin revenues
by $9.0 million during 1998. The adjustment included approximately $6.0 million
to adjust revenue recorded during the period November 7, 1996 to October 6, 1997
from $37.20 per-phone per-month to $31.18 per phone per month ($0.238 per call
multiplied by 131 calls). The remaining $3.0 million of the adjustment was to
adjust revenues recorded during the period October 7, 1997 through December 31,
1998 to actual dial-around call volumes for the period multiplied by $0.238 per
call. The Company recorded dial-around compensation revenue, net of adjustments
of approximately $22.9 million, $35.9 million, and $27.2 million for 2000, 1999,
and 1998, respectively.

The Company's counsel, Dickstein, Shapiro, Morin & Oshensky, is of the
opinion that the Company is legally entitled to fair compensation under the
Telcom Act for dial-around calls the Company delivered to any carrier during the
period from November 7, 1996, through October 6, 1997. Based on the information
available, the Company believes that the minimum amount it is entitled to as
fair compensation under the Telcom Act for the period from November 7, 1996,
through October 6, 1997, is $31.18 per payphone per month and the Company, based
on the information available to it, does not believe that it is reasonably
possible that the amount will be materially less than $31.18 per payphone per
month. While the amount of $0.24 per call ($0.238 for retroactive periods)
constitutes the Company's position of the appropriate level of fair
compensation, certain IXCs have asserted in the past, are asserting and are
expected to assert in the future that the appropriate level of fair compensation
should be lower than $0.24 per call. If the level of fair compensation is
ultimately determined to be an amount less than $0.24 per call, such
determination could result in a material adverse impact on the Company's results
of operations and financial position. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

20. RELATED-PARTY NOTES AND TRANSACTIONS

TRANSACTIONS WITH MAJOR SHAREHOLDER AND DIRECTOR

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

2000 1999 1998
---- ---- ---

Payments made for rent of commercial real estate $129 $119 $68
==== ==== ===
Payments made for consulting services $116 0 0
==== ==== ===
Payments received for providing administrative services $ 84 $ 46 $85
==== ==== ===

The Company received management advisory services from Equity Group
Corporate Investments, Inc. ("EGCI"), an affiliate of the Company. In exchange
for these services, during 1998 the Company issued to affiliates of EGCI 44,659
shares of common stock with a fair value of $751,000 at the date of grant. In
1999, the Company agreed to pay a fee, payable in the Company's common stock,
equal to 0.35% of the enterprise value of the merger with PTC and any other
merger, payable upon consummation of such merger. Effective August 31, 2000, the
Company and EGI entered into an Amended and Restated Advisory Agreement,
pursuant to which EGI became a non-exclusive financial advisor to the Company.
At the same time, the Company entered into a Settlement Agreement with EGI
pursuant to which the Company agreed to pay EGI $375,000 in accrued advisory
fees that had been earned under a predecessor advisory agreement. The parties
agreed that Davel would pay such fees by December 31, 2000 or such later date on
which cash is available to pay such amount. As of December 31, 2000, the Company
had an accrued liability to EGCI of $375,000 for advisory services rendered to
date.

50

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

21. COMMITMENTS AND CONTINGENCIES

LITIGATION

In December 1995, Cellular World, Inc. filed suit in Dade County
Circuit Court against the Company's affiliates, Peoples Telephone and PTC
Cellular, Inc., alleging tortious interference with Cellular World's trade
secrets. The trial court previously entered partial summary judgment in favor of
the Company as to the plaintiff's trade secrets claim, leaving the tortious
interference claim for trial.

Trial on the tortious interference claim commenced on February 29,
2000. The Company had several meritorious legal and factual defenses to
plaintiff's claims. Although the Company believes that it had a reasonable
possibility of prevailing at trial or through an appeal, if necessary, the case
presented significant risks to the Company because the plaintiff intended to ask
the jury to award damages of up to $18 million. Following three days of trial,
the Company and Cellular World agreed to settle and resolve the dispute in its
entirety. Pursuant to the settlement, the Company agreed to pay Cellular World a
total of $1.5 million on extended payment terms: $500,000 by March 8, 2000;
$250,000 by January 5, 2001; and the remaining $750,000 in 15 equal monthly
installments of $50,000 each, beginning in January 2001. As a result of not
making certain of the payments under the original terms of the settlement, the
parties have initiated discussions for the purpose of negotiating a revised
settlement amount and payment schedule. The Company cannot predict at this time
whether a modified settlement agreement will be forthcoming.

On September 29, 1998, the Company announced that it was exercising its
contractual rights to terminate a merger agreement (the "Davel/PhoneTel Merger
Agreement") with PhoneTel Technologies, Inc. ("PhoneTel"), based on breaches of
representations, warranties and covenants by PhoneTel. On October 1, 1998, the
Company filed a lawsuit in Delaware Chancery Court seeking damages, rescission
of the Davel/PhoneTel Merger Agreement and a declaratory judgment that such
breaches occurred. On October 27, 1998, PhoneTel answered the complaint and
filed a counterclaim against the Company alleging that the Davel/PhoneTel Merger
Agreement had been wrongfully terminated. At the same time, PhoneTel also filed
a third party claim against Peoples Telephone (acquired by the Company on
December 23, 1998) alleging that Peoples Telephone wrongfully caused the
termination of the Davel/PhoneTel Merger Agreement. The counterclaim and third
party claim seek specific performance by the Company of the transactions
contemplated by the Davel/PhoneTel Merger Agreement and damages and other
equitable relief from the Company and Peoples Telephone. The Company believes
that it has meritorious claims against PhoneTel and intends to defend vigorously
against the counterclaim against Davel and the third party claim against Peoples
Telephone initiated by PhoneTel. The Company, at this time, cannot predict the
outcome of this litigation, but the parties have both indicated a willingness to
discuss settlement of the case.

In December 1999, the Company and its affiliate Telaleasing
Enterprises, Inc. were sued in the United States District Court, Central
District of California, by Telecommunications Consultant Group, Inc. ("TCG") and
U.S. Telebrokers, Inc. ("UST"), two payphone consulting companies which allege
to have assisted the Company in obtaining a telephone placement agreement with
CSK Auto, Inc. The suit alleges that the Company breached its commission
agreement with the plaintiffs based on the Company's alleged wrongful rescission
of its agreement with CSK Auto, Inc. Plaintiffs' amended complaint alleges
damages in excess of $700,000. The Company moved to dismiss the complaint, and,
on August 24, 2000, the Court denied the Company's motion. The Company
subsequently answered the complaint and asserted a counterclaim, seeking
declaratory relief. On October 13, 2000, plaintiffs answered the counterclaim,
denying its material allegations. Discovery has commenced in the matter;
however, the matter remains in its early stages, and the Company intends to
vigorously defend itself in the case. The Company cannot at this time predict
its likelihood of success on the merits.

In March 2000, the Company and its affiliate Telaleasing Enterprises,
Inc. were sued in a related action in Maricopa County, Arizona Superior Court by
CSK Auto, Inc. ("CSK"). The suit alleges that the Company breached a location
agreement between the parties. CSK's complaint alleges damages in excess of $5
million. The Company removed the case to the U.S. District Court for Arizona and
moved to have the matter transferred to facilitate consolidation with the
related case in California brought by TCG and UST. On October 16, 2000, the U.S.
District Court for Arizona denied the Company's transfer motion and ordered the
case remanded back to Arizona state court. On November 13, 2000, the Company
filed its Notice of Appeal of the remand order to the United States Court of
Appeals for the Ninth Circuit. The appeal and underlying suit are in their
initial stages, and no discovery has commenced. The Company intends to
vigorously defend itself in the case. The Company cannot at this time predict
its likelihood of success on the merits.

51

On or about December 15, 2000, the Company filed and served its Amended
Complaint against LDDS WorldCom, Inc., MCI WorldCom Network Services, Inc., MCI
WorldCom Communications, Inc., and MCI WorldCom Management Company, Inc.
(collectively "Defendants"), claiming a violation of the Telecom Act and breach
of contract and seeking damages and equitable and injunctive relief associated
with Defendants' wrongful withholding of approximately $3.1 million in dial
around compensation due to the Company, based upon an alleged, unrelated
indebtedness. The Company believes that the majority of Defendants' claims
consist of charges for fraudulent calls, improperly assessed payphone surcharges
or other erroneous billings, and the Company contends that it is not liable for
the alleged indebtedness. The Company filed a motion with the Court for a
preliminary injunction, and oral arguments were heard on February 12, 2001.
Additionally, Defendants have filed a motion with the Court to dismiss the
Amended Complaint, and oral argument is scheduled to be heard on April 16, 2001.
Both the injunction and the motion to dismiss are currently pending before the
Court. Although the Company believes it possesses meritorious claims in the case
and intends to vigorously prosecute the suit, the matter is in its initial
stages. Accordingly, the Company cannot at this time predict its likelihood of
success on the merits.

In February 2001, Picus Communications, LLC, a debtor in Chapter 11
bankruptcy in the United States Bankruptcy Court for the Eastern District of
Virginia, brought suit against the Company and its wholly owned subsidiary,
Telaleasing Enterprises, Inc., in the United States District Court for the
Eastern District of Virginia, claiming unpaid invoices of over $600,000 for
local telephone services in Virginia, Maryland, and the District of Columbia.
The Company has sought relief from the Bankruptcy Court to assert claims against
Picus and has answered Picus's complaint in the District Court, denying its
material allegations. The Company believes it has meritorious defenses and
counterclaims against Picus and intends to vigorously defend itself and pursue
recovery from Picus on its counterclaims in the District Court and the
Bankruptcy Court. The Company cannot at this time predict its likelihood of
success on the merits.

The Company is involved in other litigation arising in the usual course
of business which it believes will not materially affect its financial position,
results of operations, or liquidity.

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements as of December 31,
2000 with certain Company executives. The remaining minimum commitment under the
terms of these agreements as of December 31, 2000 is approximately $865,000, all
of which is payable by 2002. These employment agreements expire, subject to
possible renewal, on various dates through February 2002.

22. SUBSEQUENT EVENTS:

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

23. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

Certain unaudited quarterly financial information for the year ended
December 31, 2000 and 1999, is as follows (in thousands):

MARCH JUNE SEPTEMBER DECEMBER FULL YEAR
-------- -------- --------- -------- ---------

2000
----
Total revenues $ 36,401 $ 35,452 $ 32,079 $ 22,339 $ 126,271
Operating loss (2,741) (5,365) (10,303) (65,933) (84,342)
Net loss (9,344) (11,720) (16,867) (73,549) (111,480)
Net loss per share:
Basic and diluted $ (0.84) $ (1.05) $ (1.51) $ (6.62) $ (10.02)

1999
----
Total revenues $ 44,445 $ 46,805 $ 45,183 $ 39,413 $ 175,846
Operating (loss) income (5,110) 428 (48,289) (4,118) (57,089)
Net loss (10,400) (5,488) (54,467) (8,391) (78,746)
Net loss per share:
Basic and diluted $ (0.99) $ (0.53) $ (5.11) $ (0.77) $ (7.40)

The decrease in revenues in the fourth quarter of 2000 and 1999 is due
to seasonality, and the 2000 decrease is also due to a $4.4 million adjustment
to decrease dial-around revenue based on management's revised estimate of the
number of dial-around calls per phone per month.

52

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

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

There have been no reported disagreements on any matter of accounting
principles or practice or financial statement disclosure at any time during the
twenty-four months prior to December 31, 2000.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

DIRECTORS

The Company has six directors. Each member of the Board of Directors
will serve until the next annual meeting of the Company's stockholders or until
his successor has been elected and qualified.

The following table sets forth certain information for each director.

DIRECTOR
CONTINUOUSLY
NAME SINCE AGE
- ---- ----- ---
Raymond A. Gross November 2000 50
David R. Hill April 1979 68
Robert D. Hill August 1993 48
Donald J. Liebentritt November 2000 50
William C. Pate November 2000 36
Theodore C. Rammelkamp, Jr. November 2000 55

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

Raymond A. Gross, Chairman of the Board of Directors, joined the
Company as its Chief Executive Officer on February 28, 2000. Mr. Gross was
formerly Chief Operating Officer of BHI Holdings, now Carlisle Holdings LTD, and
President of Carlisle's U.S. subsidiary, One Source. Prior to 1998, Mr. Gross
was Senior Vice President of ADT Security Services, responsible for directing
the residential business unit, corporate marketing and negotiation of strategic
business alliances. From 1993 to 1996, Mr. Gross was President and Chief
Executive Officer of Alert Centre, Inc., a publicly traded alarm company. Prior
to 1993, Mr. Gross held various executive positions in the telecommunications
and computer services industries.

David R. Hill founded the Company's predecessor, Davel Communications
Group, Inc., and its subsidiaries. He served as the Chief Executive Officer of
the Company from October 1993 through December 1994 and as Chairman of the Board
until July 1999. Mr. Hill is a self-appointed Board designee pursuant to the
Investment Agreement, dated April 19, 1999, among the Company, EGI-DM
Investments, L.L.C., and Mr. Hill (the "Investment Agreement") which amends and
restates a prior agreement among Davel Communications Group, Inc., David Hill
and Samstock, L.L.C. Mr. Hill is the father of Robert D. Hill.

Robert D. Hill joined the Company in 1981 as the general manager of its
largest telephone remanufacturing facility. Between January 1990 and December
1994, he served as the Company's President. From January 1995 until November
1999, he served as the Company's President and Chief Executive Officer. Mr. Hill
is a Board designee of

53

David Hill pursuant to the Investment Agreement.

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

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

Theodore C. Rammelkamp, Jr. has practiced law in Jacksonville, Illinois
since September 1, 2000 in a general business and commercial practice known as
the Law Offices of Teddy Rammelkamp. He served as Senior Vice President and
General Counsel for the Company from 1994 through June 1999. Prior to joining
Davel he was a general partner in a prominent west central Illinois law firm.
Mr. Rammelkamp has also served as a director of the Company, Elliott State Bank
and the American Public Communications Council.

EXECUTIVE OFFICERS

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

NAME AGE POSITION
- ---- --- --------
Raymond A. Gross 50 Chief Executive Officer
Bruce W. Renard 47 Senior Vice President of Regulatory,
External Affairs, Human Resources and
General Counsel and Corporate Secretary
Lawrence T. Ellman 48 Senior Vice President of Sales and
Account Management
Marc S. Bendesky 57 Chief Financial Officer and Treasurer
Paul M. Lucking 54 Chief Operating Officer

Please see the biography of Mr. Gross under "Directors" above.

Bruce W. Renard joined the Company as Senior Vice President of
Regulatory and External Affairs and Associate General Counsel in December 1998,
subsequent to the Peoples Telephone Merger. He has served as General Counsel of
the Company since July 1999. At Peoples Telephone, Mr. Renard served in the
positions of General Counsel and Executive Vice President of Regulatory Affairs
from February 1996 to December 1998 and General Counsel and Vice President of
Regulatory Affairs from January 1992 to February 1996. Prior to private law
practice Mr. Renard was the Associate General Counsel for the Florida Public
Service Commission, overseeing key telecommunications policy initiatives for the
State. Mr. Renard also serves as a director and Chairman of the Legal Committee
for the American Public Communications Council, the national public
communication trade organization, and as a director of several state public
communication trade organizations.

Lawrence T. Ellman has been Senior Vice President of National Accounts
since December 1998 when he joined the Company following the Peoples Telephone
Merger. Mr. Ellman was at Peoples Telephone from 1994 to 1998 and held several
sales related positions, including Executive Vice President/President National
Accounts. Prior to joining Peoples Telephone, Mr. Ellman was President of
Atlantic Telco, Inc., an independent pay telephone provider operating in the
northeastern United States. Mr. Ellman has served as Treasurer and a member of
the board of directors for the American Public Communications Council as well as
President and Chairman of the Board for the Mid-Atlantic Payphone Association.

Marc S. Bendesky joined the Company in October 2000 as Chief Financial
Officer and Treasurer. Mr. Bendesky is also a Partner of Tatum CFO Partners,
L.L.P., a national partnership of career CFOs providing CFO services to
companies. His business career spans over 30 years and includes a diversified
financial background with extensive experience and expertise in capital markets,
finance, accounting, taxation, and operations. Mr. Bendesky's most recent

54

work experience includes 2 years as a Tatum partner, during which time he served
4 clients prior to joining the Company. He served 4 years with Tunstall
Consulting, Inc., a corporate financial consulting firm specializing in the
capital markets. Prior to Tunstall, he served for 16 years as Vice President at
General Media International, Inc., a diversified domestic and international
consumer publishing company, and 11 years with 2 international CPA firms,
PricewaterhouseCoopers and Laventhol & Horwath.

Paul Lucking assumed the Chief Operating Officer position in September
2000. For five months prior to that he provided information technology and
business strategy consulting services to the Company. Mr. Lucking also provides
management services to three enterprises that he owns. One of these, Interface
Solutions, Inc., of which Mr. Lucking is owner and President, has provided
information technology focused management consulting services to 15 Fortune 500
companies and numerous smaller enterprises. His business experience includes
executive positions over approximately 30 years with Federal Express as Managing
Director Customer Support, CitiBank (now CitiGroup) as Vice President Strategic
Planning, Managed Prescription Services (acquired by Humana, Inc.) as Chief
Operating Officer, InsuRx - America's Pharmacy (acquired by Merck-Medco) as
Chief Operating Officer, and most recently ADT Security Services, Inc. (merged
with Tyco International) as Vice President Customer Service and Chief Technology
Officer.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 and related
regulations require the Company's directors, certain officers, and any persons
holding more than 10% of the Company's common stock ("reporting persons") to
report their initial ownership of the Company's common stock and any subsequent
changes in that ownership to the Securities and Exchange Commission. Specific
due dates have been established, and the Company is required to disclose in this
Item 10 any failure to file by these dates during 2000. To its knowledge, all
reporting persons of the Company satisfied these filing requirements in 2000.

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

ITEM 11. EXECUTIVE COMPENSATION:

The following tables and notes set forth the compensation of the
Company's Chief Executive Officer and the four highest paid executive officers
whose salary and bonuses exceeded $100,000 in the fiscal year ended December 31,
2000.

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------------------------- ------------------------------------------
RESTRICTED
STOCK
AWARDS; SECURITIES
NAME AND OTHER ANNUAL LTIP UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION PAYOUTS OPTIONS/SARS COMPENSATION
------------------ ---- ------ ----- ------------ ------- ------------ ------------

RAYMOND A. GROSS 2000 $ 215,017 $ 181,000 -- -- 275,000 $ 20,483(3)
Chief Executive Officer

PAUL M. LUCKING 2000 $206,776(4) $ 86,196(4) -- -- -- --
Chief Operating Officer

MARC S. BENDESKY 2000 $ 44,615(2) $ 15,000 -- -- -- --
Chief Financial Officer

BRUCE W. RENARD 2000 $ 179,800 $ 66,667 -- -- -- $ 132,136(3)
Senior Vice President of 1999 158,000 -- -- -- 47,750 $ 192,500(1)(5)
Regulatory and External 1998 346,000 -- -- -- --
Affairs, Secretary and
General Counsel

LAWRENCE T. ELLMAN 2000 $ 175,127 $ 25,000 -- -- -- --
Senior Vice President 1999 158,000 -- -- -- 47,750 $ 223,600(1)(5)
of National Accounts 1998 284,000 -- -- -- -- --

55

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

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

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

(4) Mr. Lucking became Chief Operating Officer on September 29, 2000.

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

OPTION GRANTS IN LAST FISCAL YEAR

INDIVIDUAL GRANTS
-----------------
NUMBER OF
SECURITIES PERCENT OF TOTAL EXERCISE POTENTIAL REALIZABLE
UNDERLYING OPTIONS GRANTED OR BASE PRICE EXPIRATION VALUE(1)
NAME OPTIONS GRANTS TO EMPLOYEES ($/SHARE) DATE 0% 5% 10%
- ---- -------------- ------------ --------- ---- -- -- ---

Raymond A. Gross 275,000(2) 19% $4.81 2/28/10 $1,323,438/$2,155,740/$3,432,656

Bruce W. Renard 5,000(3) 0% $5.38 1/25/05 $26,875/$34,300/$43,282

Lawrence T. Ellman 5,000(3) 0% $5.38 1/25/05 $26,875/$34,300/$43,282

(1) The values shown are purely hypothetical and have been calculated on the
assumption that the value of the Common Stock underlying an option
appreciates at the specified rate (0%, 5% or 10% per annum) from the date
of the grant of the option until its expiration. In fact, the options
cannot be valued without prediction of the future movement of the price of
the Common Stock. The amount realized from the options disclosed in this
table will depend upon, among other things, the continued employment of the
recipient of the option and the actual performance of the Common Stock
during the applicable period.

(2) Granted on February 28, 2000. 55,000 options exercisable on February 28,
2001; 55,000 options exercisable on February 28, 2002; 55,000 options
exercisable on February 28, 2003; 55,000 options exercisable on February
28, 2004; and 55,000 options exercisable on February 28, 2005.

(3) Granted on January 25, 2000. 1,666 exercisable on date of Grant; 1,666
exercisable on January 23, 2001; and 1,668 exercisable on January 23, 2002.

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

VALUE OF
UNEXERCISED
IN-THE-MONEY
NUMBER OF SHARES UNDERLYING OPTIONS AT
NUMBER OF SHARES UNEXERCISED OPTIONS AT DECEMBER 31, 2000
ACQUIRED ON VALUE DECEMBER 31, 2000 EXERCISABLE/
NAME EXERCISE(1) REALIZED(1) EXERCISABLE/UNEXERCISABLE UNEXERCISABLE(2)
---- ----------- ----------- ------------------------- ----------------

Raymond A. Gross -- -- 0 / 275,000 $0 / $0
Lawrence T. Ellman -- -- 53,231 / 3,334 $0 / $0
Bruce W. Renard -- -- 69,681 / 3,334 $0 / $0

(1) There were no option exercises in the last fiscal year.

(2) Equals the difference between the aggregate exercise price of such options
and the aggregate fair market value of the shares of Common Stock that
would be received upon exercise, assuming such exercise occurred on
December 31, 2000, at which date the closing price of the Common Stock as
quoted on the Nasdaq over-the-counter bulletin board was $0.02 per share.
The above valuations may not reflect the actual value of unexercised
options as the value of unexercised options fluctuates with market
activity.

COMPENSATION OF DIRECTORS

Through December 31, 1995, the Company did not pay cash compensation
for service as directors. In 1996, the Company began paying cash compensation to
directors who are not employees of the Company in the amount of $2,500

56

per meeting of the Board of Directors or of any committee thereof. In April
1998, the Board approved a resolution to eliminate the per-meeting payment and
to begin paying (effective as of the date of the 1998 Annual Meeting) an annual
cash retainer to directors who are not employees in the amount of $20,000. In
July 1999, the Board approved a resolution to eliminate the cash retainer and to
begin granting, on the date of each annual meeting (effective as of the 1999
Annual Meeting), to each non-employee director 18,000 options to purchase Common
Stock of the Company at a strike price equal to the market price of the Common
Stock as of the close of business immediately preceding the date of grant. At
its November 2, 2000 regular meeting, the Board approved a resolution that the
directors of the Company who are not employees receive, as their sole and
exclusive compensation for their service to the Company, the following: (i)
options exercisable for 12,000 shares of Common Stock of the Corporation
pursuant to the Davel Communications, Inc. 2000 Long-Term Equity Incentive Plan,
to be granted at the beginning of each year of service on the date of the Annual
Meeting of Stockholders, and (ii) a cash payment equal to $1,000 for each
meeting of the Board of Directors or any committee thereof, plus reimbursement
of any reasonable travel expenses; and (iii) medical/health insurance for those
requesting same; and, that any previously existing director compensation policy
was thereby terminated and abandoned.

INCENTIVE COMPENSATION

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

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

401(k) PLAN

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

EMPLOYMENT AGREEMENTS

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

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

57

achievement of certain common stock trading prices. The Agreement also contains
certain confidentiality, non-competition and non-solicitation provisions.

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

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

The employment agreements provide for an initial employment period
through December 31, 2000, with automatic one-year renewals unless either party
notifies the other of intention to terminate at least 60 days prior to the end
of any term. The employment agreements provide for an annual base salary of at
least $170,000 for Mr. Ellman and $170,000 for Mr. Renard. The employment
agreements provide for employment of such persons in their current respective
positions, subject to change or reassignment of duties by the Company. The
employment agreements provide for certain fringe benefits and incentive
compensation as outlined below.

Under the employment agreements, the Company may terminate any Executive
for cause (as defined therein). An Executive can voluntarily terminate his
employment agreement by providing 60 days' written notice to the Company at any
time. In the event of termination with cause or voluntary termination, the
Executive will receive all accrued base pay and a credit for certain unused
vacation. If the Company breaches any provisions of, terminates without cause or
fails to renew an employment agreement with any Executive, the Executive will be
deemed to have been involuntarily terminated. In the event of involuntary
termination or termination for a disability, all of such Executive's options
fully vest and all accrued base pay and a credit for certain vacation benefits
become due. The Executive will also receive the greater of one year's base pay
or the remaining base pay due under the term of the employment agreement, the
greater of the target incentive bonus for such year or the highest annualized
bonus during the prior three years, and continuation of benefits for the
remainder of the term. The Executives will be deemed to have been terminated
upon a "Change in Control" if any party other than David Hill or his descendants
or Samstock, L.L.C. acquires control of 25% or more of the combined voting power
of the Company and within two years thereafter the Company terminates the
Executive or the Executive resigns for any reason. In the event of termination
upon such a Change in Control, an Executive will receive a severance payment
equal to the sum of the Executive's base salary and target incentive bonuses for
the year in which the Change in Control occurred multiplied by three, subject to
certain reductions if such amounts would constitute "parachute payments" under
the Internal Revenue Code.

In September 1996, the Company entered into an employment agreement with
Mr. David Hill, the former Chairman of the Board and Chairman of the Executive
Committee of the Board, for six years at an annual base salary of $400,000.
Under the agreement, Mr. David Hill was eligible to receive a cash bonus as well
as a grant of options based upon the percentage by which the annual before tax
profit exceeds the annual before tax profit for 1996. Mr. David Hill agreed not
to compete with the Company during his employment and for a period of one year
afterwards. The agreement also provides that, upon a change of control (as
defined therein), (1) all stock options previously awarded to Mr. David Hill
will vest and become immediately exercisable and (2) in the event of a
termination of Mr. David Hill, he will receive severance pay from the Company as
specified in his employment agreement. Effective July 6, 1999, Mr. Hill resigned
as Chairman of the Board, agreed to terminate the employment agreement and
entered into a consulting agreement with the Company for the 2000 and 2001
years. Under the consulting agreement, Mr. Hill will receive monthly payments
aggregating $100,000 annually. Under certain circumstances the payments may be
deferred or paid in the Company's common stock.

On October 4, 2000, the Company entered into an employment agreement with
Marc S. Bendesky. Pursuant to the Agreement, Mr. Bendesky is to serve as the
Chief Financial Officer of the Company until December 31, 2001. During the
employment period, the base salary under the Agreement is set at $200,000 per
year plus a 20% retainer to Tatum CFO Partners. In addition, the Board may award
an incentive cash bonus up to $50,000, to be paid directly to Tatum CFO
Partners, based upon achievement of mutually agreed goals. If the Company
terminates Mr. Bendesky other than for "cause" or "disability," the Company
shall pay severance in an amount equal to two months' base salary.

58

COMPENSATION COMMITTEE REPORT

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

COMPENSATION PHILOSOPHY

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

2000 COMPENSATION

The 2000 compensation of executive officers was generally established
in their employment agreements with the Company. The Committee has reviewed the
terms of the employment agreements and found them to be generally consistent
with the Committee's policies regarding executive compensation. The one
executive officer who did not have an employment agreement with the Company in
2000, Paul M. Lucking, was compensated pursuant to a consulting services
arrangement on customary and acceptable terms.

There were four potential elements of compensation of the executive
officers for 2000: base salary, an annual cash bonus, stock options granted
under the Stock Option Plan and annual stock grants.

Each executive officer's 2000 base salary was established at the
beginning of the term of his employment or consulting agreement. Base salaries
of all officers were intended to be relatively moderate and are believed to be
at or below the median of the base salaries paid in 2000 by public
telecommunications companies of a size comparable to the Company. The employment
agreements did not provide for automatic increases in the base salary of any of
the executive officers.

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

In an effort to provide a long-term incentive for future performance
that aligns the executive officers' interests with the interests of
stockholders, executive officers are eligible for participation in the Company's
Stock Option Plan and, effective as of the date of adoption by stockholders on
November 2, 2000, the Company's 2000 Long-Term Equity Incentive Plan. Stock
options are intended to provide an incentive for the creation of stockholder
value over the term of several years since the full benefit of options will be
realized only if the price of common stock appreciates over that term. In 2000,
no stock options were granted to the executive officers of the Company with
respect to the Company's performance in 1999. However Raymond A. Gross received
275,000 options upon his commencement of employment with the Company in February
2000. The Company also may award stock grants under the Stock Option Plan or
2000 Long-Term Equity Incentive Plan. Stock awarded under either plan would
contain certain restrictions on transfer. Awarding stock with restriction on its
transfer provides further long-term incentives that align the interests of the
executive officers with the interests of stockholders. All stock grants awarded
to executive officers in 2000 were rescinded.

DEDUCTIBILITY OF COMPENSATION

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

59

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

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

PERFORMANCE GRAPH

The comparative stock performance graph below compares the cumulative
stockholder return on the common stock of the Company for the period from
October 20, 1993, the date the common stock began trading on the Nasdaq Stock
Market, through December 31, 2000 with the cumulative total return on (i) the
Total Return Index for the Nasdaq Stock Market (U.S. Companies) (the "Nasdaq
Composite Index") and (ii) a peer group of companies that compete with the
Company in the operation of independently owned pay telephones (the "Peer
Group"), in each case assuming the reinvestment of dividends. None of the
companies in the Peer Group offers a range of products and services fully
comparable to those of the Company, although each competes with the Company with
respect to certain of the Company's significant business segments. The returns
of each company have been weighted according to their respective stock market
capitalization for purposes of arriving at a peer group average. The members of
the Peer Group are Peoples Telephone, PhoneTel Technologies, Inc. and Choicetel
Communications, Inc. Due to the Company's acquisition of Peoples Telephone in
the Peoples Telephone Merger, Peoples has not been separately reflected in the
Peer Group since 1998.

[GRAPH OMITTED]

-----------------------------------------------------------------------------------------------------
TOTAL RETURN ANALYSIS
12/29/95 12/27/96 12/26/97 12/25/98 12/31/99 12/29/00
-----------------------------------------------------------------------------------------------------

DAVEL COMMUNICATIONS $ 100.00 $ 129.64 $ 185.20 $ 145.38 $ 35.24 $ 0.16
-----------------------------------------------------------------------------------------------------
PEER GROUP $ 100.00 $ 130.91 $ 187.86 $ 146.14 $ 2,445.82 $ 780.96
-----------------------------------------------------------------------------------------------------
NASDAQ COMPOSITE $ 100.00 $ 122.74 $ 143.65 $ 205.59 $ 387.94 $ 235.52
-----------------------------------------------------------------------------------------------------
Source: Carl Thompson Associates www.ctaonline.com (800) 959-9677. Data from BRIDGE Information
Systems, Inc.

60

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

The following table sets forth information regarding shares of the
Company's common stock, par value $0.01 per share, beneficially owned, as of
March 20, 2001, by the Company's directors, named executive officers and 10%
stockholders.

NUMBER OF SHARES
NAME AND ADDRESS(1) BENEFICIALLY OWNED PERCENTAGE OF CLASS
------------------- ------------------ -------------------

Raymond A. Gross (2) (3) (14) 55,000 *
David R. Hill (3) (4) (14) 2,165,945 17.6%
Robert D. Hill (3) (5) (14) 197,086 1.6%
Lawrence T. Ellman (2) (6) (14) 54,897 *
Bruce W. Renard (2) (7) (14) 71,347 *
Marc S. Bendesky (2) (14) 0 *
Paul M. Lucking (2) (14) 0 *
Donald J. Liebentritt (3) (8) (14) 12,231 *
William C. Pate (3) (8) (14) 12,000 *
T. C. Rammelkamp, Jr. (3) (10) (14) 38,568 *
EGI-DM Investments, L.L.C. (11) 1,773,800 14.4%
UBS Capital II LLC (12) 918,977 7.5%
All current directors and executive officers as a group (10 persons) 2,607,074 21.2%
(13)

* Less than 1%
(1) For purposes of calculating the beneficial ownership of each stockholder,
it was assumed (in accordance with the Securities and Exchange Commission's
definition of "beneficial ownership") that such stockholder had exercised
all options, conversion rights or warrants by which such stockholder had
the right, within 60 days, to acquire shares of such class of stock.
(2) Such person is an employee of the Company.
(3) Such person is a director of the Company.
(4) Includes 314,412 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.
(5) Includes 121,250 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.
(6) Includes 54,897 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.
(7) Includes 71,347 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.
(8) Includes 12,000 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan and warrants
to purchase 231 shares with an exercise price of $32.00 per share from the
Company.
(9) Includes 12,000 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.
(10) Includes 37,000 shares that could be acquired within 60 days upon the
exercise of options granted pursuant to the Stock Option Plan.
(11) Includes 1,773,800 shares beneficially owned (including warrants to acquire
299,513 shares with an exercise price of $32.00 per share from the Company
and certain individual shareholders). The managing member of EGI-DM, with
the sole power to direct the vote and disposition of securities held by
EGI-DM, is Samstock/SIT, L.L.C. ("Samstock/SIT"). The sole member of
Samstock/SIT is a trust formed for the benefit of Mr. Samuel Zell and
members of his family. Mr. Zell is the President of both EGI-DM and
Samstock/SIT. The principal business address for each of EGI-DM,
Samstock/SIT and Samuel Zell is c/o Equity Group Investments, L.L.C., Two
North Riverside Plaza, Chicago, Illinois 60606.
(12) Based on a Schedule 13D/A filed on January 14, 1999. Includes 26,000 shares
that could be acquired within 60 days upon the exercise of options granted
pursuant to the Directors Stock Option Plan. The address of UBS Capital II
LLC, is 299 Park Avenue, New York, NY 10171.
(13) Includes 677,906 shares that could be acquired within 60 days upon the
exercise of options and 231 shares that could be acquired within 60 days
upon the exercise of warrants.
(14) The address of such officers, unless otherwise noted, is 10120 Windhorst
Road, Tampa, Florida 33619.

61

ITEM 13. CERTAIN TRANSACTIONS

The Company has entered into certain transactions with Mr. David R.
Hill, who is a director. The Company leased an aircraft and residential real
estate from Mr. David Hill, for which the Company paid him $82,300 and $13,000
in 1999 and 1998, respectively. Both leases were terminated in July 1999. The
Company also leased office space in Jacksonville, Illinois from Mr. Hill, which
it paid aggregate amounts of $129,420, $118,600 and $68,000 in 2000, 1999 and
1998, respectively.

During 1999 the Company sold to Mr. David Hill a building located in
Miami, Florida for $2,250,000. The Company believes that the terms of the sale
are at least as favorable to the Company as those that could have been obtained
from unrelated parties at the time it was entered into.

In addition, the Company received payments from Mr. David Hill for
administrative services provided to him by certain employees of the Company in
the aggregate amounts of $129,500 and $45,900 and $85,000 in 2000, 1999, 1998,
respectively.

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

Any future transactions between the Company and its officers,
directors, employees and affiliates that are outside the scope of the Company's
employment relationship with such persons will be subject to the approval of a
majority of the disinterested members of the Board of Directors.

62

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed with, and as part of, this Annual
Report on Form 10-K.

1. FINANCIAL STATEMENTS
See Part II.

2. FINANCIAL STATEMENT SCHEDULES
None

3. EXHIBITS
See Exhibit Index on the following page.

(b) Reports on Form 8-K.

No Current Reports on Form 8-K were filed during the three
months ended December 31, 2000.

63

EXHIBIT INDEX

3.1 Restated Certificate of Incorporation of Davel Communications, Inc.
(incorporated by reference to Exhibit 3.1 to Registration Statement on
Form S-4 (Registration No. 333- 67617) dated November 20, 1998).
3.2 Restated By-laws of Davel Communications, Inc. (incorporated by
reference to Exhibit 3.2 to Registration Statement on Form S-4
(Registration No. 333- 67617) dated November 20, 1998.
10.1 Credit Agreement, dated as of December 23, 1998, among Davel Financing
Company, L.L.C., as Borrower, Davel Communications, Inc., the Domestic
Subsidiaries of the Borrower and Davel Communications, Inc., as
Guarantors, the Lenders identified therein, NationsBank, N.A., as
Administrative Agent, BancBoston Robertson Stephens Inc., as
Syndication Agent, The Chase Manhattan Bank, as Documentation Agent,
and NationsBanc Montgomery Securities, LLC, as Lead Arranger
(incorporated by reference to Exhibit 10.1 to Current Report on Form
8-K filed with the Commission on January 6, 1999).
10.2 First Amendment to Credit Agreement and Consent and Waiver, dated as of
April 8, 1999, among Davel Financing Company, L.L.C., Davel
Communications, Inc., NationsBank, N.A., as Administrative Agent, and
the other Lenders party thereto (incorporated by reference to Exhibit
10.1 to Quarterly Report on Form 10-Q filed with the Commission on
August 16, 1999).
10.3 Second Amendment to Credit Agreement and Consent and Waiver, dated as
of March 9, 2000, among Davel Financing Company, L.L.C., Davel
Communications, Inc., NationsBank, N.A., as Administrative Agent, and
the other Lenders party thereto (incorporated by reference to Exhibit
10.20 to Amendment No. 1 to Annual Report on Form 10-K/A filed with the
Commission on March 29, 2000).
10.4 Third Amendment to Credit Agreement, dated as of June 22, 2000, among
Davel Financing Company, L.L.C., Davel Communications, Inc., Bank of
America, N..A., (formerly known as NationsBank, N.A.), as
administrative agent, and the other Lenders party thereto (incorporated
by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q filed
with the Commission on August 14, 2000).
10.5 Fourth Amendment to Credit Agreement, dated as of September 28, 2000,
among Davel Financing Company, L.L.C., Davel Communications, Inc., Bank
of America, N..A., (formerly known as NationsBank, N.A.), as
administrative agent, and the other Lenders party thereto (incorporated
by reference to Exhibit 10.1 to Quarterly Report on Form 10-Q filed
with the Commission on November 14, 2000).
10.6 Fifth Amendment to Credit Agreement, dated as of November 29, 2000,
among Davel Financing Company, L.L.C., Davel Communications, Inc., Bank
of America, N..A., (formerly known as NationsBank, N.A.), as
administrative agent, and the other Lenders party thereto.
10.7 Sixth Amendment to Credit Agreement and Waiver, dated as of March 23,
2001, among Davel Financing Company, L.L.C., Davel Communications,
Inc., Bank of America, N.A. (formerly known as NationsBank, N.A.), as
administrative agent, PNC Bank, National Association, as successor
administrative agent, and the other Lenders party thereto.
10.8 Employment and Non-Competition Agreement, dated as of December 23,
1998, by and between Davel Communications, Inc. and Bruce W. Renard
(incorporated by reference to Exhibit 10.10 to Current Report on Form
8-K filed with the Commission on January 6, 1999).
10.9 Employment and Non-Competition Agreement, dated as of December 23,
1998, by and between Davel Communications, Inc. and Lawrence T. Ellman
(incorporated by reference to Exhibit 10.11 to Current Report on Form
8-K filed with the Commission on January 6, 1999).
10.10 Investment Agreement, dated April 19, 1999, among Davel Communications,
Inc., Samstock L.L.C. and EGI-Davel Investors, L.L.C. (incorporated by
reference to Exhibit 10.31 to Amendment No. 1 to Annual Report on Form
10-K/A filed with the Commission on March 29, 2000).
21.1 Subsidiaries of Davel Communications, Inc.
23.1 Consent of Arthur Andersen LLP

64

SIGNATURES

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

DAVEL COMMUNICATIONS, INC.

/s/ MARC S. BENDESKY
----------------------------------
Marc S. Bendesky
Chief Financial Officer

Date: March 30, 2001

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
- --------- ----- ----

/s/ RAYMOND A. GROSS Chairman and Chief
- -------------------------------- Executive Officer March 30, 2001
Raymond A. Gross

/s/ MARC S. BENDESKY Chief Financial Officer March 30, 2001
- --------------------------------
Marc S. Bendesky

/s/ DAVID R. HILL Director March 30, 2001
- --------------------------------
David R. Hill

/s/ ROBERT D. HILL Director March 30, 2001
- --------------------------------
Robert D. Hill

/s/ DONALD J. LIEBENTRITT Director March 30, 2001
- --------------------------------
Donald J. Liebentritt

/s/ WILLIAM C. PATE Director March 30, 2001
- --------------------------------
William C. Pate

/s/ THEODORE C. RAMMELKAMP, JR. Director March 30, 2001
- --------------------------------
Theodore C. Rammelkamp, Jr.

65