DAVEL COMMUNICATIONS INC - 10-K Annual Report

Back to GetFilings.com

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 credi