<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, 1997 Commission File Number: 0-22610
DAVEL COMMUNICATIONS GROUP, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
ILLINOIS 37-1064777
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. No.)
1429 MASSARO BOULEVARD, TAMPA, FLORIDA 33619
--------------------------------------------
(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 14, 1997, the number of shares outstanding of the Registrant's
Common Stock was 4,606,273.
<PAGE>
Davel Communications Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
December 31,
June 30, 1997 1996
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,902,247 $ 4,629,936
Accounts receivable, at net 9,248,500 6,079,421
Accounts receivable - officers and employees 87,744 59,418
Note receivable 2,301,000 2,301,000
Inventories 121,812 50,856
Prepaid income taxes - 804,945
Other current assets 488,773 230,269
Net assets of discontinued operations - 599,237
------------- ------------
Total current assets 14,150,076 14,755,082
PROPERTY AND EQUIPMENT - AT COST
less accumulated depreciation 35,460,565 28,417,615
OTHER ASSETS
Goodwill, less accumulated amortization 303,231 274,586
Other assets 577,772 414,844
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Total other assets 881,003 689,430
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Total assets $50,491,644 $43,862,127
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,170,215 $ 69,207
Accounts payable 1,218,920 1,044,179
Accrued expenses 1,771,680 1,511,803
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Total current liabilities 4,160,815 2,625,189
LONG-TERM DEBT, less current maturities 7,670,359 5,726,019
DEFERRED INCOME TAXES 2,989,287 2,575,626
SHAREHOLDERS' EQUITY
Preferred stock - authorized but unissued,
1,000,000 shares $.01 par value - -
Common Stock - authorized 10,000,000 shares without par
value - 4,581,269 shares issued and outstanding 45,813 45,813
Additional paid-in capital 19,912,080 19,912,080
Retained earnings 15,713,290 12,977,400
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Total shareholders' equity 35,671,183 32,935,293
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Total liabilities and shareholders' equity $50,491,644 $43,862,127
============= ============
</TABLE>
The accompanying notes are an integral part of these statements
2
<PAGE>
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, 1997 June 30, 1996
--------------- ---------------
<S> <C> <C>
Revenues
Coin calls $ 6,085,894 $ 4,424,523
Non-coin calls 5,673,051 3,858,934
Long distance income 122,247 578,589
--------------- ---------------
Total revenues 11,881,192 8,862,046
Costs and expenses
Telephone charges - payphones 2,317,722 1,737,165
Commissions - payphones 1,443,646 1,123,507
Cost of long distance income 106,355 447,560
Service, maintenance and network costs 2,368,011 1,995,290
Selling, general and administrative 2,072,938 1,371,884
Depreciation and amortization 983,133 683,239
--------------- ---------------
Total operating costs and expenses 9,291,805 7,358,645
--------------- ---------------
Operating profit 2,589,387 1,503,401
Other income (expense)
Interest and other income 95,719 25,144
Interest expense (82,841) (23,039)
--------------- ---------------
Total other income (expense) 12,878 2,105
--------------- ---------------
Earnings from continuing operations
before income taxes 2,602,265 1,505,506
Income taxes 988,867 572,092
--------------- ---------------
Earnings from continuing operations 1,613,398 933,414
Discontinued operations
Loss from operations of discontinued operations, net of
income taxes - (57,235)
--------------- ---------------
Net earnings $ 1,613,398 $ 876,179
=============== ===============
Earnings per common share
Continuing operations $ 0.35 $ 0.21
Discontinued operations - (0.01)
--------------- ---------------
Total $ 0.35 $ 0.20
=============== ===============
Average shares outstanding 4,581,269 4,476,002
================ ===============
</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, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Revenues
Coin calls $11,457,139 $ 8,080,841
Non-coin calls 10,805,721 7,581,533
Long distance income 297,880 1,133,134
----------- -----------
Total revenues 22,560,740 16,795,508
Costs and expenses
Telephone charges - payphones 4,569,093 3,334,839
Commissions - payphones 2,754,698 2,072,169
Cost of long distance income 173,246 839,794
Service, maintenance and network costs 4,597,920 3,796,877
Selling, general and administrative 4,167,962 2,583,926
Depreciation and amortization 1,895,864 1,381,892
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Total operating costs and expenses 18,158,783 14,009,497
----------- -----------
Operating profit 4,401,957 2,786,011
Other income (expense)
Interest and other income 168,573 49,577
Interest expense (160,694) (30,417)
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Total other income (expense) 7,879 19,160
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Earnings from continuing operations before
income taxes 4,409,836 2,805,171
Income taxes 1,673,946 1,065,965
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Earnings from continuing operations 2,735,890 1,739,206
Discontinued operations
Gain from operations of discontinued operations,
net of income taxes -- 76,375
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Net earnings $ 2,735,890 $ 1,815,581
=========== ===========
Earnings per common share
Continuing operations $ 0.60 $ 0.39
----------- -----------
Discontinued operations -- 0.02
Total $ 0.60 $ 0.41
=========== ===========
Average shares outstanding 4,581,269 4,466,063
=========== ===========
</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, 1997 June 30, 1996
------------- -------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings $ 2,735,890 $ 1,815,581
Adjustments to reconcile net earnings to net cash
provided by continuing operations
Discontinued operations - (120,758)
(Gain) loss on sale of property and equipment (6,373) 947
Depreciation and amortization 1,895,864 1,431,467
Deferred income taxes 413,661 92,675
Changes in assets and liabilities
Increase in accounts receivable (3,197,405) (833,963)
Increase in inventories (70,956) (49,938)
Increase in other assets (258,504) (63,726)
(Increase) decrease in prepaid income taxes 804,945 (345,581)
Increase in accounts payable 174,741 241,211
Increase in accrued expenses 259,877 158,539
----------- -----------
Net cash provided by operating activities 2,751,740 2,326,454
Cash flows from investing activities
Capital expenditures (2,743,806) (3,226,067)
Proceeds from sale of equipment 18,800 2,000
Decrease in net assets of discontinued operations 599,237 564,065
Increase in cash value of life insurance (1,784) (6,377)
Purchase of pay telephones (6,160,296) (2,592,100)
Increase in other investing assets (236,928) -
----------- -----------
Net cash used in investing activities (8,524,777) (5,258,479)
Cash flows from financing activities
Payments on long-term debt (3,114,948) (291,040)
Increase in other financing assets - 730,823
Long-term debt financing 6,160,296 2,850,000
----------- -----------
Net cash used in financing activities 3,045,348 3,289,783
----------- -----------
Net increase (decrease) in cash
and cash equivalents (2,727,689) 357,758
Cash and cash equivalents at beginning of year 4,629,936 2,433,143
----------- -----------
Cash and cash equivalents at end of year $ 1,902,247 $ 2,790,901
=========== ===========
</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, 1997
(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 six month periods ended June 30, 1997 and 1996, 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 and the
notes thereto for the years ended December 31, 1996 and 1995 and Management's
Discussion and Analysis of Financial Condition and Results of Operations
appearing elsewhere in this Form 10-Q and in the Company's Form 10-K for the
year ended December 31, 1996. The results of operations for the six month
periods ended June 30, 1997 and 1996 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 over 18,000 pay
telephones in 27 states and the District of Columbia, and provides operator
services to these pay telephones. Until December 31, 1996, the Company also
provided operator services to approximately 74,000 motel and hotel telephones in
47 states ("the Hospitality Division"). The Company also manufactured,
remanufactured and repaired pay telephones and other telecommunications
equipment for its own use and for sale to others through the fourth quarter of
1996 ("the Remanufacturing Division"). The Hospitality Division was sold and
the Remanufacturing Division was discontinued late in 1996 (See Note B).
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 consist 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.
6
<PAGE>
4. Concentrations of Credit Risk
Receivables have a significant concentration of credit risk in the
telecommunications industry. In addition, a significant amount of receivables
are generated by approximately 23% of the Company's pay telephones located in
the State of Florida.
The Company and its Subsidiaries maintain cash balances at several financial
institutions located throughout the United States. Accounts at each institution
are insured by the Federal Deposit Insurance Corporation up to $100,000. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on cash and cash equivalents.
5. 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. 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, 1997 and 1996, was $95,842
and $62,212, respectively.
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, 1997, management of
the Company believes no impairment exists, and therefore no write-downs of
intangibles have been made.
7. Recognition of Revenue
Revenues from coin calls and non coin calls are recognized as calls are made.
When revenue on a telephone call is recorded, an expense is also recorded for
costs associated with the call.
8. 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 a deferred gain on an involuntary conversion, accumulated
depreciation and amortization of property and equipment and intangibles,
allowance for doubtful accounts and accrued liabilities.
7
<PAGE>
9. Earnings Per Share
Earnings per common share is computed on the basis of the average number of
shares outstanding during each period.
10. 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.
11. 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.
12. Reclassification
Certain reclassifications have been made to conform 1996 amounts to the 1997
presentation.
NOTE B - DISCONTINUED OPERATIONS
On December 31, 1996, the Company sold the Hospitality Division (Comtel Computer
Corp.) in a stock sale agreement for approximately $5 million (cash proceeds of
$2.7 million and a note receivable of $2.3 million). The note receivable has a
maturity date of December 31, 1997, with a stated interest rate of 9.75% per
annum, compounded daily. The Company holds a first security interest in the
assets and common stock of Comtel. This division is being accounted for as a
discontinued operation and its operating results are segregated and reported as
discontinued operations in the accompanying consolidated statements of earnings
and cash flows for the periods ended June 30, 1996.
During the fourth quarter of 1996, the Company also discontinued its
Remanufacturing Division. This division is being accounted for as a discontinued
operation and its operating results are segregated and reported as discontinued
operations in the accompanying consolidated statements of earnings and cash
flows for the periods ended June 30, 1996. The net assets of the Remanufacturing
Division to be disposed of have been separately classified in the accompanying
balance sheet at December 31, 1996. The Company disposed of the assets of the
Remanufacturing Division in the first quarter of 1997 through the sale of the
remaining inventory and equipment at its book value, resulting in no gain or
loss on the sale.
8
<PAGE>
Information relating to discontinued operations for the six months ended June
30, 1996, is as follows:
<TABLE>
<CAPTION>
<S> <C>
Revenues $5,626,133
Costs and expenses 5,527,670
----------
Operating profit 98,463
Other income 24,721
----------
Earnings before income taxes 123,184
Income taxes 46,809
----------
Net earnings $ 76,375
==========
</TABLE>
NOTE C - 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 D - LINE-OF-CREDIT
The Company has a $25 million revolving line of credit with NationsBank, with
provisions to convert up to $17.5 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 NationsBank's Corporate Base Rate ("CBR"), which was 8.50% on
June 30, 1997. 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, 2001. Principal outstanding on
each term loan under the convertible portion of the credit facility shall be
payable in 12 to 20 quarterly installments with the last installment due no
later than September 30, 2003. As of August 14, 1997, the Company had
approximately $1.2 million borrowed under the revolving portion and $7.5 million
borrowed under the term portion of the credit facility.
9
<PAGE>
NOTE E - 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 current plans to
issue any shares of preferred stock.
2. Stock Options and Warrants
The Company maintains an Employee Stock Option Plan and a Directors' Stock
Option Plan, accounted for under APB Opinion 25 and related Interpretations.
The plans provide for the grant of nonqualified options to purchase shares of
common stock and outright grants of common stock. Generally, key employee
options vest in three equal installments and outright stock grants vest in two
installments. Nonemployee Director options become fully vested upon receipt.
The exercise price of each option generally equals the market price of the
common stock on the date of the grant. The maximum number of shares of common
stock reserved for issuance under the Employee Stock Option Plan and the
Directors' Stock Option Plan are 1,000,000 and 150,000 shares, respectively.
NOTE F - 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 G - TELECOMMUNICATIONS ACT OF 1996
On September 20, 1996, the FCC adopted rules and policies to implement Section
276 of the Communications Act of 1934 (the "Payphone Order"), as amended by the
Telecommunications Act of 1996 ("the Telecommunications Act"). The Payphone
Order included provisions related to the pay telephone industry including a new
interim dial-around compensation system for independent pay telephone providers.
The new interim dial-around compensation system provides for compensation to pay
telephone providers for both dial-around "access code" calls dialed for the
purpose of reaching a long distance company other than the one designated by the
pay telephone operator, and "800 subscriber" calls placed from pay telephones
for the purpose of reaching a party subscribing to "800" toll-free service. The
new interim dial-around compensation rate became effective on November 6, 1996
and is set at a rate of $45.85 per pay telephone per month to the pay telephone
provider to be paid by certain long distance providers.
Petitions for review of the Payphone Order were filed by numerous parties and
consolidated before the U.S. Court of Appeals for the District of Columbia
Circuit. On
10
<PAGE>
July 1, 1997, the Court of Appeals upheld significant portions of the Payphone
Order, vacated a narrow aspect and remanded several provisions to the FCC for
reconsideration. Among the issues remanded, the Appeals Court found that the FCC
had been potentially arbitrary in the method it had used in setting the amount
of interim and permanent dial-around compensation and directed the FCC to
reconsider the issue. On August 5, 1997, the FCC in Docket No. 96-128 issued a
pleading cycle for comment on the remanded issues and advised the industry that
the remanded portions of the Payphone Order, including the obligation to pay
interim dial-around compensation, were not vacated by the Court of Appeals and
remain in effect during the reconsideration on remand. The FCC further advised
that "should the equities so dictate, payphone compensation payment
obligations... may be subject to retroactive adjustment in order to undo the
effects of applying aspects of the current rules that were identified by the
court as potentially arbitrary."
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 and notes thereto appearing elsewhere in
this Form 10-Q and in conjunction with the consolidated financial statements and
notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations appearing in the Company's Form 10-K for the year
ended December 31, 1996.
Statements in Management's Discussion and Analysis relating to matters that
are not historical facts are forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors,
which may cause the actual results, performance or achievements of Davel
Communications Group, Inc. to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such known and unknown risks, uncertainties and other factors
include, but are not limited to, the following: the impact of competition and
the possibility of increasing competitive pressures in a deregulated
environment, continuing increases in "dial-around" call traffic originating from
the Company's pay telephones, uncertainties with respect to the implementation
and effects of the Telecommunications Act of 1996, including potential effects
of an order issued by the U.S. Court of Appeals for the District of Columbia
Circuit remanding portions of the Act to the FCC for reconsideration and the
ongoing ability of the Company to deploy its pay telephones in favorable
locations. Such factors and others are set forth more fully in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996, Quarterly
Reports on Form 10-Q and the consolidated financial statements and notes thereto
appearing elsewhere in this Form 10-Q.
The financial results discussed below relate to continuing operations which
primarily consist of the Company's pay telephone operations.
General
Davel Communications Group, Inc. (the "Company") is one of the largest
independent providers of pay telephone services in the United States. The
Company owns and operates a network of over 18,000 pay telephones in 27 states
and the District of Columbia, and provides operator services to these pay
telephones through its long distance switching equipment and through contractual
relationships with various long distance companies. The Company's pay telephones
accept coins as payment for local and long distance calls and can also be used
to make "non-coin" or "cashless" calls, including calling card calls, credit
card calls, collect calls and third-party billed calls. The Company's pay
telephones are located at convenience stores, truck stops, service stations,
grocery stores and other locations with a high demand for pay telephone service.
On December 31, 1996, the Company sold its Hospitality Division ("Comtel")
in a stock sale agreement for approximately $ 5 million (cash proceeds of $ 2.7
million and a note
12
<PAGE>
receivable of $ 2.3 million). The note receivable has a maturity date of
December 31, 1997, with a stated interest rate of 9.75% per annum, compounded
daily. The Company holds a first security interest in the assets and common
stock of Comtel. This division is being accounted for as a discontinued
operation and its operating results are segregated and reported as discontinued
operations in the accompanying consolidated statements of earnings and cash
flows for the periods ended June 30, 1996.
During the fourth quarter of 1996, the Company also discontinued its
Remanufacturing Division. This division is being accounted for as a discontinued
operation and its operating results are segregated and reported as discontinued
operations in the accompanying consolidated statements of earnings and cash
flows for the periods ended June 30, 1996.
The Company derives virtually all its revenues from calls placed from its
pay telephones which include coin calls, non-coin calls and "dial-around" calls.
The Company's pay telephones generate coin revenues primarily from local
calls. In all of the territories in which the Company's pay telephones are
located, the Company charges the same rates for local coin calls as does the
Local Exchange Carrier ("LEC"). The maximum rate LECs and independent pay
telephone companies may charge for local calls is currently generally set by
state regulatory authorities and in most cases is $0.25 or $0.35. On September
20, 1996, the FCC adopted rules and policies to implement Section 276 of the
Communications Act of 1934, as amended by the Telecommunications Act of 1996,
governing the pay telephone industry. Among other provisions, the new rules
require that local coin call rates must generally be deregulated no later than
October 7, 1997. On July 1, 1997, the U.S. Court of Appeals for the District of
Columbia Circuit issued an order which upheld the FCC's authority to deregulate
local coin call rates.
The Company also receives revenues from cashless calls made from its pay
telephones. Cashless calls include credit card calls, calling card calls,
collect calls and third-party billed calls. Cashless calls from the Company's
pay telephones are generally handled by the Company's switching equipment which
is located in Tampa, Florida. Through the use of its switching equipment, the
Company performs certain of the operator services necessary to complete cashless
calls.
Non-coin or cashless calls made from the Company's pay telephones 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-
13
<PAGE>
needed basis, and pays the long distance company on an unbundled basis for the
operator services actually used to complete these calls.
The Company realizes additional revenues from certain long distance
companies pursuant to FCC regulation as compensation for "dial-around" cashless
calls made from its pay telephones. A dial-around call is made by dialing an
access code for the purpose of reaching a long distance company other than the
one designated by the pay telephone provider, generally by dialing a 1-800
number or a five-digit "10XXX" code. Rules adopted by the FCC pursuant to the
Telecommunications Act of 1996 may increase the amount of dial-around call
compensation received by the Company and other independent pay telephone
providers. Effective November 6, 1996, the FCC Rules mandated that pay telephone
providers be paid at a rate of $45.85 per pay telephone per month by certain
long distance providers. The interim compensation rate is based on an estimated
industry-wide average of 131 access code and 800 subscriber calls per pay
telephone per month at a rate of $.35 per call. The new interim dial-around
compensation system is scheduled to be effective until October 7, 1997, and be
replaced at that time with a per-call compensation system, with the initial per-
call rate set at $.35. After October 7, 1998, the per-call rate for dial-around
compensation is set to be equal to the local coin call rate charged at the pay
telephone or a rate negotiated between the pay telephone provider and the inter-
exchange carrier ("IXC"). The FCC Rules also allow IXCs the option to block 800
subscriber calls from pay telephones in the event they wish to avoid payment of
per call compensation for 800 subscriber calls.
The initial flat-rate payment level significantly increases dial-around
compensation revenues to the Company. However, market forces and factors outside
the Company's control could significantly effect the resulting revenue impact.
These factors include potential effects of an order issued by the U.S. Court of
Appeals for the District of Columbia Circuit remanding portions of the Act to
the FCC for reconsideration (See "Safe Harbor Statement-Dial-around
Compensation"), as well as the FCC's recognition that existing regulations do
not prohibit an IXC from blocking 800 subscriber numbers from pay telephones if
the IXC wants to avoid paying per-call compensation on these calls.
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
for access charges and use of their networks. Commission expense represents
payments to property owners for allowing the Company to place its pay telephones
on the owner's property. 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 unbundled
services arrangements, the fees paid for those services.
14
<PAGE>
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
For the three months ended June 30, 1997, total revenues from continuing
operations increased approximately $3.0 million or 34.1%, compared to the three
months ended June 30, 1996. This growth was primarily attributable to an
increase from 13,263 pay telephones on June 30, 1996 to 18,173 pay telephones on
June 30, 1997. Coin call revenues increased approximately $1.7 million or 37.6%
driven primarily by the growth in the number of installed pay telephones, the
acquisition and installation of pay telephones at locations with favorable coin
call traffic, and the impact of the removal during the third and fourth quarter
of 1996 of approximately 600 under-performing pay telephones and their
replacement at better locations. Non-coin call revenues increased approximately
$1.8 million or 47.0%. In addition to growth in the number of installed pay
telephones, the increase in non-coin call revenues was attributable to
additional dial-around compensation resulting from implementation of the
Telecommunications Act of 1996 which became effective in November 1996. While
non-coin call revenues increased in the period over the prior year, the Company
continued to experience lower volumes of calls per phone routed through its long
distance network due to increases in the number of dial-around calls. On July 1,
1997, the U.S. Court of Appeals for the District of Columbia Circuit issued a
decision remanding certain provisions of the Payphone Order to the FCC for
reconsideration and explanation. Among the provisions remanded to the FCC was
the methodology for calculating the amounts of interim and permanent dial-around
compensation to be paid to pay telephone providers. See "Safe Harbor Statement-
Dial-around Compensation".
Long distance income consists primarily of operator services provided
through the Company's long distance switching equipment under a contractual
relationship with Comtel. Long distance income decreased approximately $456,000
or 78.9% in the three months ended June 30, 1997 over the three months ended
June 30, 1996. The decrease was primarily the result of the terms of a
Telecommunication Services Agreement connected with the sale of Comtel which
calls for the provision of certain long distance services to Comtel for a period
of one year after the effective date of the sale. The Agreement provides that,
effective January 1, 1997, gross revenues on calls carried over the Company's
long distance network will be recorded by Comtel rather than by the Company as
was the case in previous periods. Amounts recorded by the Company as long
distance income in the period ended June 30, 1997 consist of payments to the
Company for use of its long distance network rather than the gross call revenue.
Telephone charge expenses decreased to 19.7% of pay telephone revenues
compared to 21.0% in the prior year. The decrease in telephone charges as a
percentage of pay telephone revenues was primarily attributable to higher pay
telephone revenues.
Commission expenses decreased to 12.3% of pay telephone revenues compared
to 13.6% in the prior year. The decrease in commissions as a percentage of pay
telephone revenues was primarily attributable to higher pay telephone revenues.
15
<PAGE>
Service, maintenance and network costs decreased to 20.1% of pay telephone
revenues compared to 24.1% in the prior-year period. The decrease in service,
maintenance and network costs as a percentage of pay telephone revenues was
primarily attributable to higher pay telephone revenues and increasing operating
efficiencies achieved through increasing density in the Company's pay telephone
routes resulting from expansion of its installed base of phones. The Company
also recorded a credit from its provider of billing and collection services of
approximately $139,000 pursuant to an agreement to retroactively adjust the
amount of bad debt expense charged to the Company for calls placed from its pay
telephones during the first quarter of 1997.
Cost of long distance income consists primarily of costs associated with
the provision of operator services to Comtel. Cost of long distance income
decreased approximately $341,000 or 76.2% in the three months ended June 30,
1997 over the three months ended June 30, 1996. Cost of long distance income in
the period ended June 30, 1996 included not only costs associated with providing
network services to Comtel, but also costs associated with billing and
collection of calls and bad debt, for which the Company is no longer
responsible. Cost of long distance income in the three months ended June 30,
1997 includes only costs associated with providing network services to Comtel.
Depreciation and amortization expense on continuing operations increased
approximately $300,000 or 43.9%, from the prior year, reflecting a 37.0%
increase in the number of installed pay telephones. Selling, general and
administrative expenses on continuing operations increased approximately
$701,000, or 51.1%, from the prior year. The increase was primarily attributable
to costs associated with the opening and operation of four new divisional sales
and service offices and the hiring of additional support personnel needed to
service the Company's increasing pay telephone base.
Interest and other income in the three months ended June 30, 1997 increased
approximately $71,000, or 280.7%, compared to the prior year period. This
increase resulted primarily from accrued interest income of approximately
$57,000 on the note receivable related to the sale of Comtel on December 31,
1996. (See Note B of Notes to Consolidated Financial Statements).
Interest expense in the three months ended June 30, 1997 increased
approximately $60,000, or 259.6%, compared to the prior year period. This
increase resulted from an increase in long-term debt, including current
maturities, from approximately $2.8 million on June 30, 1996, to approximately
$8.8 million on June 30, 1997.
Earnings from continuing operations for the three months ended June 30,
1997 increased approximately $680,000 or 72.9% from the prior year period.
The Company experienced a loss from discontinued operations, net of income
taxes, for the three months ended June 30, 1996 of $57,235.
16
<PAGE>
Net earnings for the three months ended June 30, 1997 increased
approximately $737,000 or 84.1% from the prior year period.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
on continuing operations increased approximately $1.4 million or 63.4%, rising
from approximately $2.2 million in the three months ended June 30, 1996, to
approximately $3.6 million in the three months ended June 30, 1997. EBITDA is
not determined in accordance with Generally Accepted Accounting Principles
("GAAP"), nor, as a result, is it included as a line item in the Company's
consolidated financial statements. EBITDA is not being presented as an
alternative to GAAP operating income or cash flows from operations being shown
on the Company's statements of cash flows. However, it is a commonly accepted
measure of performance in the telecommunications industry.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
For the six months ended June 30, 1997, total revenues from continuing
operations increased approximately $5.8 million or 34.3%, compared to the six
months ended June 30, 1996. This growth was primarily attributable to an
increase from 13,263 pay telephones on June 30, 1996 to 18,173 pay telephones on
June 30, 1997. Coin call revenues increased approximately $3.4 million or 41.8%
driven primarily by the growth in the number of installed pay telephones, the
acquisition and installation of pay telephones at locations with favorable coin
call traffic, and the impact of the removal during the third and fourth quarter
of 1996 of approximately 600 under-performing pay telephones and their
replacement at better locations. Non-coin call revenues increased approximately
$3.2 million or 42.5%. In addition to growth in the number of installed pay
telephones, the increase in non-coin call revenues was attributable to
additional dial-around compensation resulting from implementation of the
Telecommunications Act of 1996 which became effective in November 1996. While
non-coin call revenues increased in the period over the prior year, the Company
continued to experience lower volumes of calls per phone routed through its long
distance network due to increases in the number of dial-around calls. On July 1,
1997, the U.S. Court of Appeals for the District of Columbia Circuit issued a
decision remanding certain provisions of the Payphone Order to the FCC for
reconsideration and explanation. Among the provisions remanded to the FCC was
the methodology for calculating the amounts of interim and permanent dial-around
compensation to be paid to pay telephone providers. See "Safe Harbor--Statement
Dial-around Compensation".
Long distance income consists primarily of operator services provided
through the Company's long distance switching equipment under a contractual
relationship with Comtel. Long distance income decreased approximately $835,000
or 73.7% in the six months ended June 30, 1997 over the six months ended June
30, 1996. The decrease was primarily the result of the terms of a
Telecommunication Services Agreement connected with the sale of Comtel which
calls for the provision of certain long distance services to Comtel for a period
of one year after the effective date of the sale. The Agreement
17
<PAGE>
provides that, effective January 1, 1997, gross revenues on calls carried over
the Company's long distance network will be recorded by Comtel rather than by
the Company as was the case in previous periods. Amounts recorded by the Company
as long distance income in the period ended June 30, 1997 consist of payments to
the Company for use of its long distance network rather than the gross call
revenue.
Telephone charge expenses decreased to 20.5% of pay telephone revenues
compared to 21.3% in the prior year. The decrease in telephone charges as a
percentage of pay telephone revenues was primarily attributable to higher pay
telephone revenues.
Commission expenses decreased to 12.4% of pay telephone revenues compared
to 13.2% in the prior year. The decrease in commissions as a percentage of pay
telephone revenues was primarily attributable to higher pay telephone revenues.
Service, maintenance and network costs decreased to 20.7% of pay telephone
revenues compared to 24.2% in the prior-year period. The decrease in service,
maintenance and network costs as a percentage of pay telephone revenues was
primarily attributable to higher pay telephone revenues and increasing operating
efficiencies achieved through increasing density in the Company's pay telephone
routes resulting from expansion of its installed base of phones.
Cost of long distance income consists primarily of costs associated with
the provision of operator services to Comtel. Cost of long distance income
decreased approximately $667,000 or 79.4% in the six months ended June 30, 1997
over the six months ended June 30, 1996. Cost of long distance income in the
period ended June 30, 1996 included not only costs associated with providing
network services to Comtel, but also costs associated with billing and
collection of calls and bad debt, for which the Company is no longer
responsible. Cost of long distance income in the six months ended June 30, 1997
includes only costs associated with providing network services to Comtel.
Depreciation and amortization expense on continuing operations increased
approximately $514,000 or 37.2%, from the prior year, reflecting a 37.0%
increase in the number of installed pay telephones. Selling, general and
administrative expenses on continuing operations increased approximately $1.6
million, or 61.3%, from the prior year. The increase was primarily attributable
to costs associated with the opening and operation of four new divisional sales
and service offices and the hiring of additional support personnel needed to
service the Company's increasing pay telephone base.
Interest and other income in the six months ended June 30, 1997 increased
approximately $119,000, or 240.0%, compared to the prior year period. This
increase resulted primarily from accrued interest income of approximately
$114,000 on the note receivable related to the sale of Comtel on December 31,
1996. (See Note B of Notes to Consolidated Financial Statements).
18
<PAGE>
Interest expense in the six months ended June 30, 1997 increased
approximately $130,000, or 428.3%, compared to the prior year period. This
increase resulted from an increase in long-term debt, including current
maturities, from approximately $2.8 million on June 30, 1996, to approximately
$8.8 million on June 30, 1997.
Earnings from continuing operations for the six months ended June 30, 1997
increased approximately $997,000 or 57.3% from the prior year period.
Earnings from discontinued operations, net of income taxes, for the six
months ended June 30, 1996 was $76,375 (See Note B of Notes to Consolidated
Financial Statements).
Net earnings for the six months ended June 30, 1997 increased approximately
$920,000 or 50.7% from the prior year period.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
on continuing operations increased approximately $2.1 million or 51.1%, rising
from approximately $4.2 million in the six months ended June 30, 1996, to
approximately $6.3 million in the six months ended June 30, 1997. EBITDA is not
determined in accordance with Generally Accepted Accounting Principles ("GAAP"),
nor, as a result, is it included as a line item in the Company's consolidated
financial statements. EBITDA is not being presented as an alternative to GAAP
operating income or cash flows from operations being shown on the Company's
statements of cash flows. However, it is a commonly accepted measure of
performance in the telecommunications industry.
Liquidity and Capital Resources
As of June 30, 1997, the Company had a current ratio of 3.40 to 1, as
compared to a current ratio of 5.62 to 1 on December 31, 1996. The decrease was
primarily attributable to a decrease in working capital from approximately $12.1
million as of December 31, 1996, to approximately $10.0 million as of June 30,
1997. This decrease in working capital resulted primarily from a decrease in
cash and cash equivalents related to the application of approximately $3.0
million in cash to payments on long-term debt during the period and an increase
of approximately $1.1 million in current maturities of long-term debt related to
borrowings on the Company's credit line in the month of June 1997 for
acquisitions. The Company also experienced an increase of approximately $3.2
million in accounts receivable during the period related primarily to an
increase in dial-around call compensation receivable.
On July 1, 1997, the U.S. Court of Appeals for the District of Columbia
Circuit ("the Court of Appeals") issued a decision remanding certain provisions
of the Payphone Order to the FCC for reconsideration and explanation. Among the
provisions remanded to the FCC was the methodology for calculating the amounts
of interim and permanent dial-around compensation to be paid to pay telephone
providers. See "Safe Harbor Statement--Dial-around Compensation".
19
<PAGE>
On August 5, 1997, the FCC issued a Public Notice clarifying the status of
the Payphone Order in light of the decision of the Court of Appeals and setting
a pleading cycle for comment on remand issues in the payphone proceeding. The
Public Notice included a clarification by the FCC that virtually all provisions
of the Payphone Order remain in effect pending further action by the FCC on
remand, including the continued obligation on the part of certain long distance
providers to pay interim dial-around call compensation. The Public Notice also
placed the telecommunications industry on notice that such obligations incurred,
paid or received under the Payphone Order pending action on remand may be
subject to retroactive adjustment.
The Company's capital expenditures for the six month periods ended June 30,
1997 and 1996 were approximately $2.7 million and $3.2 million, respectively.
The Company's capital expenditures primarily consisted of the installation of
additional pay telephones. In the six months ended June 30, 1997, the Company
financed its capital expenditures primarily with approximately $2.8 million in
cash provided by continuing operations and available cash reserves. In the six
months ended June 30, 1996, the Company financed its capital expenditures and
acquisitions primarily with approximately $2.3 million in cash provided by
continuing operations and available cash reserves.
The Company has a $25 million revolving line of credit with the
NationsBank, with provisions to convert up to $17.5 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 NationsBank's Corporate Base Rate
("CBR"), which was 8.50% on June 30, 1997. 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, 2001.
Principal outstanding on each term loan under the convertible portion of the
credit facility shall be payable in 12 to 20 quarterly installments with the
last installment due no later than September 30, 2003. As of August 14, 1997,
the Company had approximately $1.2 million borrowed under the revolving portion
and $7.5 million borrowed under the term portion of the credit facility.
The Company believes that cash generated from operations and available
borrowings under the 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.
20
<PAGE>
Impact of Inflation
Inflation is not a material factor affecting the Company's business. Long
distance network and local access costs have not increased and in some cases,
have decreased in recent 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.
Safe Harbor Statement
The following "Safe Harbor Statement" is made pursuant to the Private
Securities Litigation Reform Act of 1995. 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. With respect to such forward-looking statements, the Company seeks
the protections afforded by the Private Securities Litigation Reform Act of
1995. The list set forth below is intended to identify certain of the principal
factors that could cause actual results to differ materially from those
described in the forward-looking statements included elsewhere herein. These
factors are not intended to represent a complete list of all risks and
uncertainties inherent in the Company's business. This Safe Harbor Statement
should be read in conjunction with the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, Quarterly Reports on Form 10-Q and the
consolidated financial statements and notes thereto appearing elsewhere in this
Form 10-Q.
Dial-around Compensation
One of the key mandates of the Telecommunications Act was the requirement
that pay telephone providers be paid fair compensation for each and every call
made from their pay telephones, including dial-around access code and 800
subscriber calls. Effective November 6, 1996, the FCC Rules mandated that pay
telephone providers be paid at a rate of $45.85 per pay telephone per month by
certain long distance providers. The
21
<PAGE>
interim compensation rate was based on an estimated industry-wide average of 131
access code and 800 subscriber calls per pay telephone per month at a rate of
$.35 per call. The new interim dial-around compensation system is scheduled to
be effective until October 7, 1997, and to be replaced at that time with a per-
call compensation system, with the initial per-call rate set at $.35. After
October 7, 1998, the per-call rate for dial-around compensation is set to be
equal to the local coin call rate charged at the pay telephone or a rate
negotiated between the pay telephone provider and the IXC. The FCC Rules also
allow IXCs the option to block 800 subscriber calls from pay telephones in the
event they wish to avoid payment of per call compensation for 800 subscriber
calls.
Petitions for review of the Payphone Order were filed by numerous parties
and consolidated before the U.S. Court of Appeals for the District of Columbia
Circuit. On July 1, 1997, the Court of Appeals upheld significant portions of
the Payphone Order, vacated a narrow aspect and remanded several provisions to
the FCC for reconsideration. Among the issues remanded, the Appeals Court found
that the FCC had been potentially arbitrary in the method it had used in setting
the amount of interim and permanent dial-around compensation and directed the
FCC to reconsider the issue. On August 5, 1997, the FCC in Docket No. 96-128
issued a pleading cycle for comment on the remanded issues and advised the
industry that the remanded portions of the Payphone Order, including the
obligation to pay interim dial-around compensation, were not vacated by the
Court of Appeals and remain in effect during the reconsideration on remand. The
FCC further advised that "should the equities so dictate, payphone compensation
payment obligations... may be subject to retroactive adjustment in order to undo
the effects of applying aspects of the current rules that were identified by the
court as potentially arbitrary." The Company is unable at this time to predict
the outcome of the FCC action on remand, the possibility of an adjustment to the
interim or permanent dial-around compensation rate, nor the ultimate impact on
its operations of a potential rate adjustment.
Local Coin Rates
In ensuring "fair compensation" for all calls, the FCC further determined
that local coin rates from pay telephones should be generally deregulated by
October 7, 1997, but provided for possible modifications or exemptions from
deregulation upon a detailed
22
<PAGE>
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, the U.S.
Court of Appeals for the District of Columbia Circuit issued an order which
upheld the FCC's authority to deregulate local coin call rates. The Company
believes that deregulation, where implemented, will likely result in higher
rates charged for local coin calls and increase the Company's revenues from such
calls. However, 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, 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.
Other Provisions of the Telecommunications Act and FCC Rules
There are several other provisions of the Telecommunications Act and FCC
Rules that may have substantial positive and negative impacts on the Company. As
a whole, the Telecommunications Act and FCC Rules should significantly alter the
competitive framework of the pay telephone industry. The Company believes that
implementation of the Telecommunications Act and FCC Rules will address certain
historical inequities in the pay telephone marketplace and lead to a more
equitable competitive environment for all pay telephone providers. However, due
to the recent order by the U.S. District Court of Appeals for the District of
Columbia Circuit remanding certain provisions of the Payphone Order to the FCC
for reconsideration and uncertainties related to the impact and/or timing of
implementation, the Company can provide no assurance that the Telecommunication
Act and/or FCC Rules will result in a long-term positive impact on the Company.
23
<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, 1997.
24
<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 14, 1997 /s/ Michael E. Hayes
--------------------
Michael E. Hayes
Senior Vice President and Chief Financial Officer
25
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<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> APR-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 1,902,247 1,902,247
<SECURITIES> 0 0
<RECEIVABLES> 9,507,717 9,507,717
<ALLOWANCES> 259,217 259,217
<INVENTORY> 121,812 121,812
<CURRENT-ASSETS> 14,150,076 14,150,076
<PP&E> 46,727,715 46,727,715
<DEPRECIATION> 11,267,150 11,267,150
<TOTAL-ASSETS> 50,491,644 50,491,644
<CURRENT-LIABILITIES> 4,160,815 4,160,815
<BONDS> 0 0
0 0
0 0
<COMMON> 45,813 45,813
<OTHER-SE> 35,625,370 35,625,370
<TOTAL-LIABILITY-AND-EQUITY> 50,491,644 50,491,644
<SALES> 11,881,192 22,560,740
<TOTAL-REVENUES> 11,881,192 22,560,740
<CGS> 6,235,734 12,094,957
<TOTAL-COSTS> 6,235,734 12,094,957
<OTHER-EXPENSES> 3,056,071 6,063,826
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 12,878 7,879
<INCOME-PRETAX> 2,602,265 4,409,836
<INCOME-TAX> 988,867 1,673,946
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