<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: June 30, 1996 Commission File Number: 0-22610
DAVEL COMMUNICATIONS GROUP, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
ILLINOIS 37-1064777
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. No.)
1429 MASSARO BOULEVARD, TAMPA, FLORIDA 33619
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(Address of principal executive offices) (Zip Code)
Registrant`s telephone number: (813) 623-3545
________________________
Indicate by check mark whether the Registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
----- ------
As of August 13, 1996, the number of shares outstanding of the Registrant`s
Common Stock was 4,556,219.
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
Assets
---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,790,901 $ 2,433,143
Accounts receivable at net 8,015,577 7,287,498
Inventory 309,129 290,627
Other current assets 661,472 487,683
----------- -----------
Total current assets 11,777,079 10,498,951
Property and equipment at net 24,559,948 20,058,029
Other assets:
Goodwill at net 2,250,662 2,392,745
Other assets 548,139 378,203
----------- -----------
Total other assets 2,798,801 2,770,948
----------- -----------
Total assets $39,135,828 $33,327,928
=========== ===========
Liabilities
-------------
Current liabilities:
Current maturities of long term debt $ 2,677,463 $ 86,992
Accounts payable 1,882,933 1,672,428
Accrued expenses 1,344,742 1,210,988
Cash advances on factored receivables 978,916 697,109
Income taxes payable -- 18,429
----------- -----------
Total current liabilities 6,884,054 3,685,946
Long term debt, less current maturities 167,473 204,810
Deferred income taxes 1,548,025 1,447,300
Stockholders' equity:
Common stock: authorized 10,000,000
shares without par value-issued and
outstanding-4,547,952 shares 45,480 44,550
Additional paid-in capital 19,502,629 18,772,736
Retained earnings 10,988,167 9,172,586
----------- -----------
Total stockholders' equity 30,536,276 27,989,872
----------- -----------
Total liabilities and
stockholders' equity $39,135,828 $33,327,928
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements
2
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DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
June 30, 1996 June 30, 1995
-------------- --------------
<S> <C> <C>
Revenues:
Coin calls $ 4,424,523 $ 3,761,377
Non-coin calls payphones 3,858,934 3,933,091
Non-coin calls hospitality 2,677,320 3,572,796
Sales of equipment 106,563 322,273
----------- -----------
Total revenues 11,067,340 11,589,537
Operating costs and expenses:
Telephone charges-payphones 1,737,165 1,581,085
Location commissions-payphones 1,123,507 923,096
Service, maintenance & network payphones 1,995,290 1,889,475
Cost of sales-hospitality 1,985,848 2,564,332
Cost of equipment sold and repairs 83,285 249,177
Selling, general, and administrative 1,881,361 1,694,686
Depreciation and amortization 833,164 877,047
----------- -----------
Total operating costs and expenses 9,639,620 9,778,898
----------- -----------
Operating profit 1,427,720 1,810,639
Interest (expense) (14,529) (15,273)
----------- -----------
Earnings before income taxes 1,413,191 1,795,366
Income taxes 537,012 700,193
----------- -----------
Net earnings $ 876,179 $ 1,095,173
=========== ===========
Earnings per common share $ .20 $ .25
=========== ===========
Average shares outstanding 4,477,125 4,455,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements
3
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six For the Six
Months Ended Months Ended
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Revenues:
Coin calls $ 8,080,841 $ 6,754,323
Non-coin calls payphones 7,581,533 7,297,426
Non-coin calls hospitality 5,704,316 6,903,655
Sales of equipment 244,077 644,492
----------- -----------
Total revenues 21,610,767 21,599,896
Operating costs and expenses:
Telephone charges-payphones 3,334,839 2,934,684
Location commissions-payphones 2,072,169 1,727,577
Service, maintenance & network payphones 3,796,877 3,395,463
Cost of sales-hospitality 4,075,369 4,919,936
Cost of equipment sold and repairs 212,139 472,808
Selling, general, and administrative 3,587,497 3,309,125
Depreciation and amortization 1,605,696 1,656,103
----------- -----------
Total operating costs and expenses 18,684,586 18,415,696
----------- -----------
Operating profit 2,926,181 3,184,200
Interest (expense) 2,173 37,996
----------- -----------
Earnings before income taxes 2,928,354 3,222,196
Income taxes 1,112,773 1,256,656
----------- -----------
Net earnings $ 1,815,581 $ 1,965,540
=========== ===========
Earnings per common share $.41 $.44
=========== ===========
Average shares outstanding 4,466,063 4,455,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Six For the Six
Months Ended Months Ended
June 30, 1996 June 30, 1995
-------------- -------------
<S> <C> <C>
Net earnings $ 1,815,581 $ 1,965,540
Adjustments to reconcile net earnings to
net cash provided by (used in) operating activities:
Depreciation and amortization 1,605,696 1,656,103
(Gain) loss on sale of property and equipment 947 ---
Deferred income taxes 100,725 77,500
Change in assets and liabilities, net of
effects from acquisitions:
Increase in accounts receivable (728,080) (1,603,438)
Increase in inventory (18,502) (88,715)
Increase in prepaid income taxes (297,011) (110,340)
Increase in other assets (61,520) (481,423)
Increase (decrease) in accounts payable 210,505 (607,773)
Increase in accrued expenses 415,561 525,026
Decrease in income taxes payable (18,429) (179,939)
----------- -----------
Net cash provided by operating activities 3,025,473 1,152,541
Cash flows from investing activities:
Capital expenditures (3,355,195) (3,297,961)
Proceeds from sale of equipment 2,000 ---
Increase in cash value of life insurance (6,377) (4,663)
Purchase of pay telephones (2,592,100) (1,635,837)
----------- -----------
Net cash used in investing activities (5,951,672) (4,938,461)
Cash flows from financing activities:
Payments on long-term debt (296,866) (48,261)
Increase (decrease) in other financing assets 730,823 ---
Long-term debt financing 2,850,000 347,815
----------- -----------
Net cash provided by (used in) financing activities 3,283,957 299,554
----------- -----------
Net increase (decrease) in cash 357,758 (3,486,366)
Cash and cash equivalents at beginning of period 2,433,143 4,900,591
----------- -----------
Cash and cash equivalents at end of period $ 2,790,901 $ 1,414,225
=========== ===========
Supplemental disclosures of cash flow information:
- --------------------------------------------------
Cash paid during the period:
Interest on bank loans $ 72,116 $ 81,538
Income taxes $ 784,021 $ 1,471,225
</TABLE>
The accompanying notes are an integral part of these statements
5
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been prepared
by the Company and include the accounts of its subsidiaries. These statements
reflect all adjustments, consisting of only normal recurring adjustments which
are, in the opinion of management, necessary for a fair presentation of
financial results for the three month and six month periods ended June 30, 1996
and 1995, in accordance with generally accepted accounting principles for
interim financial reporting. Certain information and footnote disclosures
normally included in audited financial statements have been omitted pursuant to
such rules and regulations. These interim consolidated financial statements
should be read in conjunction with the Company's audited consolidated financial
statements for the years ended December 31, 1995 and 1994. The results of
operations for the three month and six month periods ended June 30, 1996 and
1995 are not necessarily indicative of the results for the full year.
1. The Company
Davel Communications Group, Inc. and its Subsidiaries taken as a whole (the
Company) operates, services and maintains a system of pay telephones in 22
states and provides operator services to these pay telephones as well as motel
and hotel telephones in 43 states (hospitality calls). The Company also
manufactures, remanufactures and repairs pay telephones and other
telecommunications equipment for its own use and for sale to others.
2. Principles of Consolidation
The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Intercompany transactions and balances have been
eliminated in consolidation.
3. Inventories
Inventories, which consists mainly of repair and manufacturing parts and
supplies, are carried at the lower of cost or market. Cost is determined by the
first-in, first-out method.
4. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives using
straight-line and accelerated methods.
6
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5. Intangible Assets
Intangible assets represent the unamortized excess of cost over fair market
value of net assets of businesses acquired by purchase in business combinations.
Goodwill is being amortized on a straight-line basis primarily over ten years.
Accumulated amortization of goodwill as of June 30, 1996 and 1995, was $549,718
and $327,347, respectively.
Hospitality contracts were contracts in place to provide operator and
telecommunication management services to the hospitality industry. These
contracts were being amortized on a straight-line basis over five years, which
was the expected average length of the contracts including renewals at the time
of acquisition. Accumulated amortization of hospitality contracts as of June 30,
1995 was $886,667. These contracts were written off in the fourth quarter of
1995 in accordance with SFAS 121 (See Note B).
The company periodically evaluates the carrying amount of intangible assets,
considering whether the undiscounted cash flows from related operations will be
sufficient to recover recorded asset amounts. As of June 30, 1996, management of
the Company believes no impairment exists, and therefore no write-downs of
intangibles have been made.
6. Recognition of Revenue
Revenues from coin calls, non coin calls and hospitality calls are recognized as
calls are made. When revenue on a telephone call is recorded, an expense is also
recorded for fees associated with the call. Revenues from sales of equipment and
repairs are recognized when sales are consummated and goods are shipped to the
customer.
7. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Such temporary
differences include accumulated depreciation and amortization of property and
equipment and intangibles and allowance for doubtful accounts.
8. Earnings Per Share
Earnings per common share is computed on the basis of the average number of
shares outstanding during each period.
9. Cash Equivalents
For purposes of determining cash flows, the Company defines cash and cash
equivalents as highly-liquid investments purchased with an original maturity of
three months or less.
7
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10. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Although these estimates are based on management's knowledge of current events
and actions it may undertake in the future, they may ultimately differ from
actual results.
NOTE B - NON-RECURRING CHARGE
In 1995, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). The
Company adopted the statement during the year ended December 31, 1995.
In the 1995 fourth quarter, the Company recorded a non-recurring charge of $3.1
million ($2.9 million after-tax or $0.65 per share) due to impairment of
intangible and long-lived assets after applying certain provisions of SFAS 121.
Of the non-recurring charge, $2.7 million related to intangible assets purchased
in the April 1994 acquisition of Comtel Computer Corp. Acquired contracts with
hotel and motel properties for operator services represented $2.5 million of the
charge, and acquired research and development costs represented the remaining
$0.2 million. The contracts written off had either disconnected from the
Company's long distance network or were expected to disconnect without providing
significant future benefits to the Company. The Company determined the future
cash flows from these impaired assets to be negligible and considered a complete
write-down of the remaining intangible balances to be appropriate.
The balance of the non-recurring charge of $0.4 million ($0.2 million net of
tax) represented a write off of uninstalled pay telephone and PBX switching
equipment which was made obsolete by 1995 changes to the North American
Numbering Plan, the telephone numbering plan used in the United States, Canada,
Bermuda, Puerto Rico and the Caribbean countries ("NANP"). This uninstalled
equipment was not upgradable to accommodate new area codes created by the
changes to the NANP and was determined by the Company to be impaired. All of the
Company's remaining equipment has been upgraded or is fully upgradable to comply
with the changes to the NANP.
NOTE C - FACTORED ACCOUNTS RECEIVABLE
The Company, through its Hospitality Division, has an agreement with one of its
billing agents which provides for the factoring of certain accounts receivable,
without recourse, through a third-party commercial finance company. The
Company's billing agent has a first lien on the Hospitality Division's accounts
receivable submitted as collateral for all of its obligations under the advanced
payment agreement. Advances under the agreement
8
<PAGE>
bear interest at 4% above the prime rate as published in the Money Rates column
of The Wall Street Journal which is in effect on the payment date.
NOTE D - FAIR VALUES OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities, and
notes payable, the carrying amounts approximate fair value due to their short
maturities. Due to floating interest rates and values determined using borrowing
rates currently available to the Company, long-term debt is also carried at
amounts that approximate fair value.
NOTE E - OFFICER'S LIFE INSURANCE
The Company maintains $ 300,000 face amount of insurance on the life of the
Chairman of its Board of Directors. In connection with this policy, the Company
is the sole beneficiary.
NOTE F - LINE-OF-CREDIT
The Company has a $15 million revolving line of credit with the Boatmen's
National Bank of St. Louis ("Boatmen's"), with the option to convert up to $10
million of the line of credit to term loans. The terms of the agreement call for
the Company to pay interest on a graduated scale based on Boatmen's Corporate
Base Rate ("CBR"), which was 8.25% on June 30, 1996. The interest rate is
indexed based on the Company's ratio of funded debt to EBITDA as defined in the
credit facility and is adjusted based on market interest rates for CBR and
LIBOR. The maturity date of the revolving portion of the credit facility is
September 30, 1996. Principal outstanding on each term loan under the credit
facility shall be payable in 36 to 60 monthly installments with the last
installment due no later than September 30, 1999. The Company is currently
involved in negotiations with Boatmen's to increase the line of credit to $25
million and renew the term for an additional two year period. As of August 13,
1996, the Company had $4.4 million borrowed under the revolving portion of the
credit facility.
NOTE G - CAPITAL STOCK TRANSACTIONS
1. Preferred Stock
The Company's articles of incorporation authorize 1,000,000 shares of preferred
stock, par value $.01 per share. The Company does not have any immediate plans
to issue any shares of preferred stock.
2. Stock Options and Warrants
The Company maintains a Stock Option Plan and a Directors' Stock Option Plan.
The plans provide for the grant of nonqualified options to purchase shares of
common stock.
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The exercise price of any option will be equal to the market price of the common
stock at the time of the grant. The maximum number of shares of common stock
reserved for issuance under the Stock Option Plan and the Directors' Stock
Option Plan are 500,000 and 150,000 shares, respectively.
The Compensation Committee of the Company's Board of Directors has recommended
and the Board of Directors approved a resolution which was included on the
Company's 1995 Proxy Statement to amend and restate the Stock Option Plan to
provide for (i) an additional 500,000 shares of Common Stock for issuance
thereunder, thereby increasing the total number of shares reserved for issuance
under the Stock Option Plan to 1,000,000 and (ii) outright grants of shares of
Common Stock in addition to awards of stock options. The Company's stockholders
will vote on the proposal to amend and restate the Stock Option Plan at its 1996
Annual Meeting of Stockholders to be held on August 21, 1996.
The Board of Directors also approved other amendments to the Stock Option Plan,
including to conform it to the newly enacted rules regarding the administration
of employee benefit plans as set forth under Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended, and to conform the Stock Option
Plan to the requirements of Section 162(m) of the Internal Revenue Code of 1986,
as amended, by placing an annual limit on the maximum aggregate number of shares
underlying options that may be granted to any Participant under the Stock Option
Plan. The Board of Directors has selected 200,000 shares of Common Stock as the
award limitation.
NOTE H - 401(K) PROFIT SHARING PLAN
The Company maintains a 401(K) profit sharing plan which covers all full-time
employees who meet the eligibility requirements as to age and length of service.
A participant may elect to have his or her compensation reduced by an amount not
to exceed 15% of compensation actually paid. The Company will match 50% of the
participants' elective deferrals not exceeding 3% of the participants'
compensation.
NOTE I - ACQUISITIONS
On June 4, 1996, the Company completed the acquisition of the assets of
Cottonwood Communications of Burlington, IA, including 933 installed pay
telephones in Arizona, Iowa and Utah. The purchase price for the assets, which
included equipment related to the installed telephones, inventory and location
agreements, was $2,592,100 in cash.
On July 12, 1996, the Company completed the acquisition of 664 installed pay
telephones and other related assets from Payphone Corporation of America for
$1,785,250 in cash. The acquired pay telephones are located primarily in the
Washington, D.C. metropolitan area.
10
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NOTE J - SALE OF HOSPITALITY DIVISION
On June 27, 1996, the Company signed a letter of intent to sell its Hospitality
Division for $5 million to Portland, Oregon-based Skylink Communications Corp.,
a privately-held multi-media and telecommunications company which provides movie
and television programming and telecommunications services to the hospitality
industry. The transaction is subject to satisfactory completion of due
diligence, receipt of appropriate regulatory approvals and other customary terms
and conditions.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements appearing elsewhere herein.
The Company derives its revenues from three principal sources: coin calls,
non-coin calls, including hospitality calls, and sales of equipment and repairs.
Coin calls represent calls paid for with coins deposited in the telephone, and
the Company recognizes coin revenue in the amount deposited.
Non-coin or cashless calls made from the Company's pay telephones and
hospitality and other telephones to which the Company provides operator services
generate revenues in an amount that depends upon whether the Company or a long
distance company handles the call. If the cashless call is handled by the
Company through its switch or an "unbundled" services arrangement, the Company
recognizes non-coin revenues equal to the total amount charged for the call. If
the cashless call is handled by a long distance company, the Company generally
recognizes revenues in an amount equal to the commission on that call paid to
the Company by the long distance company. Under an unbundled services
arrangement, the Company performs certain functions necessary to service
cashless calls, uses the long distance company's switching equipment and its
other services on an as-needed basis, and pays the long distance company on an
unbundled basis for the operator services actually used to complete these calls.
The Company also recognizes non-coin revenues from calls that are dialed
from its pay telephones to gain access to a long distance company other than the
one pre-programmed into the telephone; this is commonly referred to as "dial-
around" access. The Company also derives a small amount of non-coin revenues
from certain LECs for intraLATA cashless calls.
Although the Company manufactures pay telephones primarily for its own use,
the Company also sells its pay telephones to other owners and operators of pay
telephones and recognizes revenues from these sales. In addition, the Company
receives revenues from the remanufacture and repair of telecommunications
equipment such as PBXs, key systems and small business systems.
The principal costs related to the ongoing operation of the Company's pay
telephones include telephone charges, commissions, and service, maintenance and
network costs. Telephone charges consist of payments made by the Company to LECs
and long distance carriers for access charges and use of their networks.
Commission expense represents payments to property owners. Service, maintenance
and network costs represent the cost of servicing and maintaining the pay
telephones on an ongoing basis, costs related to operation of the Company's
switch and, in connection with
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unbundled services arrangements, the fees paid for those services, Costs of
equipment sold and repairs include the cost of purchasing new and used equipment
and repair parts and the labor and materials necessary to repair and
remanufacture the equipment.
The principal costs related to the Company`s hospitality calls include
commissions, network costs and billing and collection costs. Commissions
represents payments to property owners. Network costs represents costs related
to unbundled services arrangements utilized in providing service to the
Company's hospitality customers. The Company provides long distance services to
its hospitality customers through use of its switching equipment in Tampa,
Florida where it is economically feasible and regulatory approvals have been
received.
ACQUISITIONS
On June 4, 1996, the Company completed the acquisition of the assets of
Cottonwood Communications of Burlington, IA, including 933 installed pay
telephones in Arizona, Iowa and Utah. The purchase price for the assets, which
included equipment related to the installed telephones, inventory and location
agreements, was $2,592,100 in cash.
On July 12, 1996, the Company completed the acquisition of 664 installed
pay telephones and other related assets from Payphone Corporation of America for
$1,785,250 in cash. The acquired pay telephones are located primarily in the
Washington, D.C. metropolitan region.
SALE OF HOSPITALITY DIVISION
On June 27, 1996, the Company signed a letter of intent to sell its
Hospitality Division for $5 million to Portland, Oregon-based Skylink
Communications Corp., a privately-held multi-media and telecommunications
company which provides movie and television programming and telecommunications
services to the hospitality industry. The transaction is subject to
satisfactory completion of due diligence, receipt of appropriate regulatory
approvals and other customary terms and conditions.
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
For the three months ended June 30, 1996, total revenues decreased
approximately $522,000 or 5.3%, compared to the three months ended June 30,
1995. The decrease was primarily due to lower call volume from telephones in
hotel rooms served by the Company's Hospitality Division and the Company's pay
telephones resulting from an increase in dial around calls. Revenues from the
Company's Hospitality Division decreased approximately $895,000 or 25.1%
compared to the three months ended June 30, 1995, while non-coin revenues from
the Company's pay telephones decreased approximately $74,000 or 1.89% from the
prior year period.
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<PAGE>
Pay telephone revenues increased approximately $589,000 or 7.65% from the
three months ended June 30, 1996. This increase was primarily attributable to an
increase in coin call revenues from the Company's pay telephones. Coin call
revenues increased by approximately $663,000 or 17.6% from the prior year
period. The growth in pay telephone revenues was also attributable to an
increase from 10,229 pay telephones on June 30, 1995 to 13,263 pay telephones on
June 30, 1996.
Revenues from sales of equipment and repairs decreased by approximately
$216,000 or 66.9% due to the closing in August 1995 of the Company's repair and
remanufacturing facility in Jacksonville, IL and a shift in the utilization of
its technical personnel to the manufacture of pay telephones to accommodate its
increasing need for equipment to install additional pay telephone locations.
Telephone charges related to the Company's pay telephones increased to
21.0% of pay telephone revenues compared to 20.5% in the prior year period.
The increase in telephone charges as a percentage of pay telephone revenues was
primarily attributable to lower monthly long distance revenues as a result of an
increase in dial around calls placed from the Company's pay telephones. The
Company's average monthly telephone charge on a per phone basis did, however,
decrease from $53.62 per month in the three months ended June 30, 1995, to
$47.25 per month in the three months ended June 30, 1996. This decrease was
primarily attributable to implementation of legislation in the State of Florida
in July 1995, which allowed the Company to select a billing option which
eliminates measured, local service on certain of the Company's pay telephones in
the State. As of June 30, 1996, the Company had 4,373 installed pay telephones
in the State of Florida.
Commissions related to the Company's pay telephone operations increased to
13.6% of pay telephone revenues compared to 12.0% in the prior year period.
The increase in commissions as a percentage of pay telephone revenues was
primarily attributable to lower monthly long distance revenues as a result of an
increase in dial around calls placed from the Company's pay telephones.
Service, maintenance and network costs related to the operation of the Company's
pay telephones decreased to 24.2% of pay telephone revenues compared to 24.6% in
the prior-year period. The decrease was primarily attributable to increased
efficiencies in operating the Company's pay telephone routes achieved through
the installation of additional pay telephones.
Cost of equipment sold and repaired increased to 78.2% of sales of
equipment and repairs compared to 77.3% in the prior-year period. This increase
resulted primarily from a higher concentration of sales of equipment during the
quarter as opposed to a higher concentration in the prior period of sales of
repairs. The Company has historically experienced lower costs related to the
repair of equipment than the sale of equipment.
Depreciation and amortization decreased approximately $44,000, or 5.0%,
from the prior-year period, primarily attributable to the Company's adoption of
the Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards No.
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121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"). The Company adopted the statement during
the year ended December 31, 1995. The Company recorded a non-recurring charge of
$3.1 million ($2.9 million after-tax or $0.65 per share) due to impairment of
intangible and long-lived assets after applying certain provisions of SFAS 121.
Without the non-recurring charge, depreciation and amortization expense would
have been approximately $200,000 higher, the increase over the prior year due
primarily to the purchase of additional capital equipment to increase the number
of installed pay telephones. Selling, general and administrative ("SG&A")
expenses increased approximately $187,000, or 11.0%, from the prior-year period.
These increases were primarily attributable to increases in the cost of
professional services and salaries and wages.
Interest expense, net of interest income, remained stable over the prior
year period at approximately $15,000 in the three months ended June 30, 1996.
Net earnings decreased approximately $219,000 or 20.0% from the prior-year
period.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
For the six months ended June 30, 1996, total revenues increased
approximately $11,000 or 0.5%, compared to the six months ended June 30, 1995.
This increase was attributable to revenues generated by an increase in the
number of installed pay telephones. Pay telephone revenues increased
approximately $1.6 million or 11.5%. The growth in pay telephone revenues was
primarily attributable to an increase from 10,229 pay telephones on June 30,
1995 to 13,263 pay telephones on June 30, 1996. Total revenues contributed by
the Company's Hospitality Division decreased approximately $1.2 million or
17.4%, during the six months ended June 30, 1996 compared to the prior year
period. The lower call volume resulted from an increase in dial around calls
placed from motel and hotel rooms to which the Company provides long distance
services.
Pay telephone revenues increased approximately $1.6 million or 11.46% from
the six months ended June 30, 1996. This increase was primarily attributable to
an increase in coin call revenues from the Company's pay telephones. Coin call
revenues increased by approximately $1.3 million or 19.6% from the prior year
period. While non-coin call revenues on the Company's pay telephones increased
by $284,000 or 3.9% in the six months ended June 30, 1996, the Company
experienced lower call volumes on its pay telephones due to an increase in dial
around calls over the prior year period.
Revenues from sales of equipment and repairs decreased by approximately
$400,000 or 62.1% due to the closing in August 1995 of the Company's repair and
remanufacturing facility in Jacksonville, IL and a shift in the utilization of
its technical personnel to the manufacture of pay telephones to accommodate its
increasing need for equipment to install additional pay telephone locations.
15
<PAGE>
Telephone charges related to the Company's pay telephones increased to
21.2% of pay telephone revenues compared to 20.9% in the prior year period.
The increase in telephone charges as a percentage of pay telephone revenues was
primarily attributable to lower monthly long distance revenues as a result of an
increase in dial around calls placed from the Company's pay telephones. The
Company's average monthly telephone charge on a per phone basis did, however,
decrease from $53.14 per month in the six months ended June 30, 1995, to $46.73
per month in the six months ended June 30, 1996. This decrease was primarily
attributable to implementation of legislation in the State of Florida in July
1995, which allowed the Company to select a billing option which eliminates
measured, local service on certain of the Company's pay telephones in the State.
As of June 30, 1996, the Company had 4,373 installed pay telephones in the State
of Florida.
Commissions related to the Company's pay telephone operations increased to
13.2% of pay telephone revenues compared to 12.3% in the prior year period.
The increase in commissions as a percentage of pay telephone revenues was
primarily attributable to lower monthly long distance revenues as a result of an
increase in dial around calls placed from the Company's pay telephones.
Service, maintenance and network costs related to the operation of the Company's
pay telephones remained stable in the six months ended June 30, 1996 at 24.2% of
pay telephone revenues
Cost of equipment sold and repaired increased to 86.9% of sales of
equipment and repairs compared to 73.4% in the prior-year period. This increase
resulted primarily from a higher concentration of sales of equipment during the
period as opposed to a higher concentration in the prior period of sales of
repairs. The increase also resulted from a decrease in revenues from sales of
equipment and repairs of approximately $261,000 or 55.1% from the six months
ended June 30, 1995. A portion of the Company's cost of equipment sold and
repaired is fixed, contributing to the increased cost as a percentage of sales.
The Company has also historically experienced lower costs related to the repair
of equipment than the sale of equipment.
Depreciation and amortization decreased approximately $50,000, or 3.0%,
from the prior-year period, primarily attributable to the Company's adoption of
the Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). The Company
adopted the statement during the year ended December 31, 1995. The Company
recorded a non-recurring charge of $3.1 million ($2.9 million after-tax or $0.65
per share) due to impairment of intangible and long-lived assets after applying
certain provisions of SFAS 121. Without the non-recurring charge, depreciation
and amortization expense would have been approximately $400,000 higher, the
increase over the prior year due primarily to the purchase of additional capital
equipment to increase the number of installed pay telephones. Selling, general
and administrative ("SG&A") expenses increased approximately $278,000, or 8.4%,
from the prior-year period. This increase was primarily attributable to
increases in the cost of professional services and salaries and wages.
16
<PAGE>
Interest income, net of interest expense, decreased approximately $36,000,
or 94.3%, compared to the prior-year period. This decrease resulted primarily
from lower cash balances available for investment due to the application of cash
for the acquisition of 700 pay telephones in April 1995, and the installation of
pay telephones obtained through the Company's internal sales efforts.
Net earnings decreased approximately $150,000 or 7.6% from the prior-year
period.
The Omnibus Budget Reconciliation Act of 1993 increased the top corporate
income tax rate one percentage point to 35% on taxable income in excess of $10
million, effective for tax years beginning on or after January 1, 1993. The
Company does not expect to achieve this level of taxable income in the current
year.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30,1996, the Company had a current ratio of 1.71 to 1, as
compared to a current ratio of 2.85 to 1 on December 31, 1995. The decrease was
primarily attributable to a decrease in working capital from approximately $6.8
million as of December 31, 1995, to approximately $4.9 million as of June 30,
1996. This decrease in working capital resulted primarily from an increase in
current maturities of long-term debt from approximately $87,000 on December 31,
1995 to approximately $2.7 million on June 30, 1996. The increase in current
maturities of long-term debt related to borrowings on the Company's credit line
for the acquisition of 933 pay telephones in June 1996. The Company is
currently involved in negotiations to renew its line of credit. The Company`s
capital expenditures for the six month periods ended June 30, 1996 and 1995 were
$3.4 million and $3.3 million, respectively. The Company`s capital expenditures
primarily consisted of the installation of additional pay telephones and were
financed with funds generated from continuing operations.
The Company has a $15 million revolving line of credit with the Boatmen's
National Bank of St. Louis ("Boatmen's"), with the option to convert up to $10
million of the line of credit to term loans. The terms of the agreement call
for the Company to pay interest on a graduated scale based on Boatmen's
Corporate Base Rate ("CBR"), which was 8.25% on June 30, 1996. The interest
rate is indexed based on the Company's ratio of funded debt to EBITDA as defined
in the credit facility and is adjusted based on market interest rates for CBR
and LIBOR. The maturity date of the revolving portion of the credit facility is
September 30, 1996. Principal outstanding on each term loan under the credit
facility shall be payable in 36 to 60 monthly installments with the last
installment due no later than September 30, 1999. The Company is currently
involved in negotiations with Boatmen's to increase the line of credit to $25
million and renew the term for an additional two year period. As of August 13,
1996, the Company had $4.4 million borrowed under the credit facility.
17
<PAGE>
The Company believes that cash generated from operations and available
borrowings under the revolving credit facility will be sufficient to fund the
Company`s cash requirements, including capital expenditures, for the next three
years. The Company also believes that it will be able to fund any acquisitions
through a combination of cash generated from operations, additional borrowing
and the issuance of shares of its Common Stock. There can be no assurance,
however, that the Company will continue to expand at its current rate or that
additional financing will be available when needed or, if available, will be
available on terms acceptable to the Company.
IMPACT OF INFLATION
Inflation is not a material factor affecting the Company`s business.
Switching equipment, telephone charges and transmission costs have not increased
and in some cases, have decreased over the last several years. General
operating expenses such as salaries, employee benefits and occupancy costs are,
however, subject to normal inflationary pressures.
SEASONALITY
The Company`s revenues from its pay telephone operating regions are
affected by seasonal variations to different degrees. For example, many of the
Company`s pay telephones in Florida produce substantially higher call volume in
the first and second quarters than at other times during the year, while the
Company`s pay telephones throughout the midwestern and eastern United States
produce their highest call volumes during the second and third quarters. While
the aggregate effect of the variations in different geographical regions tend to
counteract the effect of one another, the Company has historically experienced
higher revenue and income in the second and third quarters than in the first and
fourth quarters. Changes in the geographical distribution of its pay telephones
may in the future result in different seasonal variations in the Company`s
results.
Hotel and motel room telephones to which the Company provides operator
services are located in 43 states and, as such, are also subject to seasonal
variations and may be affected by lower hotel and motel occupancy during certain
seasons throughout the year.
18
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the quarter ended June 30, 1996.
19
<PAGE>
SIGNATURE
- ---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAVEL COMMUNICATIONS GROUP, INC.
Date: August 13, 1996 /s/ Michael E. Hayes
------------------------------
Michael E. Hayes
Vice President and Chief
Financial Officer
(PRINCIPAL ACCOUNTING OFFICER)
20
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<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 2,790,901 2,790,901
<SECURITIES> 0 0
<RECEIVABLES> 8,015,577 8,015,577
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<INVENTORY> 309,129 309,129
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<DEPRECIATION> 8,798,872 8,798,872
<TOTAL-ASSETS> 39,135,828 39,135,828
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<INCOME-TAX> 537,012 1,112,773
<INCOME-CONTINUING> 876,179 1,815,581
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