<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: March 31, 1997 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
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As of May 14, 1997, the number of shares outstanding of the Registrant`s Common
Stock was 4,581,269.
<PAGE>
Davel Communications Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
ASSETS March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,041,492 $ 4,629,936
Accounts receivable, at net 7,863,322 6,079,421
Accounts receivable - officers and employees 60,489 59,418
Note receivable 2,301,000 2,301,000
Inventories 95,468 50,856
Prepaid income taxes 771,768 804,945
Other current assets 392,629 230,269
Net assets of discontinued operations - 599,237
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Total current assets 12,526,168 14,755,082
PROPERTY AND EQUIPMENT - AT COST
less accumulated depreciation 29,011,695 28,417,615
OTHER ASSETS
Goodwill, less accumulated amortization 266,274 274,586
Other assets 393,694 414,844
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Total other assets 659,968 689,430
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Total assets $42,197,831 $43,862,127
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 63,456 $ 69,207
Accounts payable 850,027 1,044,179
Accrued expenses 1,812,114 1,511,803
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Total current liabilities 2,725,597 2,625,189
LONG-TERM DEBT, less current maturities 2,637,823 5,726,019
DEFERRED INCOME TAXES 2,776,626 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 14,099,892 12,977,400
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Total shareholders' equity 34,057,785 32,935,293
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Total liabilities and shareholders' equity $42,197,831 $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
March 31, 1997 March 31, 1996
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<S> <C> <C>
Revenues
Coin calls $ 5,371,245 $3,656,318
Non-coin calls 5,132,670 3,722,599
Long distance income 175,633 554,545
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Total revenues 10,679,548 7,933,462
Costs and expenses
Telephone charges - payphones 2,251,371 1,597,674
Commissions - payphones 1,311,052 948,662
Cost of long distance income 66,891 392,234
Service, maintenance and network costs 2,229,909 1,801,587
Selling, general and administrative 2,095,024 1,212,042
Depreciation and amortization 912,731 698,653
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Total operating costs and expenses 8,866,978 6,650,852
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Operating profit 1,812,570 1,282,610
Other income (expense)
Interest and other income 72,854 24,433
Interest expense (77,853) (7,378)
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Total other income (expense) (4,999) 17,055
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Earnings from continuing operations before income taxes 1,807,571 1,299,665
Income taxes 685,079 493,873
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Earnings from continuing operations 1,122,492 805,792
Discontinued operations
Gain (loss) from operations of hospitality division, net of income taxes - 133,610
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Net earnings $ 1,122,492 $ 939,402
=========== ==========
Earnings per common share
Continuing operations $ 0.25 $ 0.18
Discontinued operations - 0.03
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Total $ .25 $ .21
=========== ==========
Average shares outstanding 4,581,269 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 Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings $ 1,122,492 $ 939,402
Adjustments to reconcile net earnings to net cash provided by continuing operations
Discontinued operations - (133,610)
(Gain) loss on sale of property and equipment (4,545) 947
Depreciation and amortization 912,731 685,499
Deferred income taxes 199,297 53,475
Changes in assets and liabilities
Increase in accounts receivable (1,745,081) (582,870)
(Increase) decrease in inventories 13,129 (41,816)
Increase in other assets (123,478) (17,513)
Decrease in prepaid income taxes 468,139 237,278
Increase (decrease) in accounts payable (200,631) 258,770
Increase in accrued expenses 295,858 62,957
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Net cash provided by operating activities 937,911 1,462,519
Cash flows from investing activities
Capital expenditures (2,055,785) (1,842,476)
Proceeds from sale of property and equipment 14,300 2,000
Decrease in net assets of discontinued operations 599,237 614,494
Increase in cash value of life insurance (1,784) (5,377)
Increase in other investing assets (28,083) (8,199)
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Net cash used in investing activities (1,472,115) (1,239,558)
Cash flows from financing activities
Payments on long-term debt (3,093,947) (20,604)
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Net cash used in financing activities (3,093,947) (20,604)
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Net increase (decrease) in cash
and cash equivalents (3,628,151) 202,357
Cash and cash equivalents at beginning of year 4,669,643 2,433,143
----------- -----------
Cash and cash equivalents at end of year $ 1,041,492 $ 2,635,500
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements
4
<PAGE>
Davel Communications Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 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 three month periods ended March 31, 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 three month
periods ended March 31, 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 15,000 pay
telephones in the southeastern and midwestern United States 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 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.
5
<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 27% 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 March 31, 1997 and 1996, was $87,149
and $53,900, 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 March 31, 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, 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 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.
6
<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 three months ended March 31, 1996.
During the fourth quarter of 1996, the Company also discontinued its
remanufacturing operations. 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 three months ended March 31, 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.
7
<PAGE>
Information relating to the discontinued operations for the three months ended
March 31, 1996, is as follows:
<TABLE>
<CAPTION>
<S> <C>
Revenues $2,974,744
Costs and expenses 2,779,976
----------
Operating profit 194,768
Other income 20,761
----------
Earnings before income taxes 215,529
Income taxes 81,919
----------
Net earnings $ 133,610
==========
</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 the Boatmen's
National Bank of St. Louis ("Boatmen's"), 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 Boatmen's Corporate
Base Rate ("CBR"), which was 8.50% on March 31, 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 May 14, 1997, the Company had approximately $2.8 million borrowed
under the revolving portion of the credit facility.
8
<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. The plans provide for the grant of nonqualified options to
purchase shares of common stock. 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 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.
9
<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
litigation seeking to modify or overturn the order or portions thereof 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 15,000 pay telephones in 24 states
and the District of Columbia, of which over 14,000 are located in 20
southeastern and midwestern states, 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
10
<PAGE>
$ 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 three months ended March 31, 1996.
During the fourth quarter of 1996, the Company also discontinued its
remanufacturing operations. 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 three months ended March 31, 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
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 rates
must generally be deregulated no later than October 1, 1997.
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-needed basis, and
pays the long distance company on an unbundled basis for the operator services
actually used to complete these calls.
11
<PAGE>
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 operator, generally by dialing a 1-
800 number or a five-digit "10XXX" code. Recently enacted rules adopted by the
FCC pursuant to the Telecommunications Act of 1996 are expected to 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
mandate 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 will be effective until October 1, 1997,
and will be replaced at that time with a per-call compensation system, with the
initial per-call rate set at $.35. After October 1, 1998, the per-call rate for
dial around compensation will 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.
The initial flat-rate payment level significantly increases dial around
compensation revenues to the Company, and the Company believes that a per-call
system at a $.35 level will further increase dial around compensation received.
However, market forces and factors outside the Company's control could
significantly effect the resulting revenue impact. These factors include a stay
or change upon review by the U.S. District Court of Appeals, 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 Company also derives a small amount of
non-coin revenue from certain LECs for intraLATA cashless 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.
12
<PAGE>
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
For the three months ended March 31, 1997, total revenues from continuing
operations increased approximately $2.7 million or 34.6%, compared to the three
months ended March 31, 1996. This growth was primarily attributable to an
increase from 11,888 pay telephones on March 31, 1996 to 15,554 pay telephones
on March 31, 1997. Coin call revenues increased approximately $1.7 million or
46.9% 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
$1.4 million or 37.9%. 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.
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 $379,000
or 68.3% in the three months ended March 31, 1997 over the three months ended
March 31, 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 March 31, 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 21.4% of pay telephone revenues
compared to 21.7% 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 12.5% of pay telephone revenues compared
to 12.9% 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 21.2% of pay telephone
revenues compared to 24.4% 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
13
<PAGE>
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 $325,000 or 82.9% in the three months ended March 31.
Cost of long distance income in the period ended March 31, 1996 included not
only costs associated with use of the Company's long distance equipment, 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 March 31, 1997 includes only costs associated with providing
network services to Comtel.
Depreciation and amortization expense on continuing operations increased
approximately $214,000 or 30.6%, from the prior year, reflecting a 30.8%
increase in the number of installed pay telephones. Selling, general and
administrative expenses on continuing operations increased approximately
$880,000, or 72.9%, 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 income in the three months ended March 31, 1997 increased
approximately $48,000, or 198.2%, 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 March 31, 1997 increased
approximately $70,000, or 955.2%, compared to the prior-year period. This
increase resulted from an increase in long-term debt from approximately $190,000
on March 31, 1996, to approximately $2.6 million on March 31, 1997.
Earnings from continuing operations for the three months ended March 31,
1997 increased approximately $317,000 or 39.3% from the prior year period.
Earnings from discontinued operations for the three months ended March 31,
1996 were 133,610 (See Note B of Notes to Consolidated Financial Statements).
14
<PAGE>
Net earnings for the three months ended March 31, 1997 increased
approximately $183,000 or 19.5% from the prior year period.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")
on continuing operations increased approximately $745,000 or 37.6%, rising from
approximately $2.0 million in the three months ended March 31, 1996, to
approximately $2.7 million in the three months ended March 31, 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 March 31, 1997, the Company had a current ratio of 4.60 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 $9.8 million as of March 31,
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.
The Company`s capital expenditures for the three month periods ended March
31, 1997 and 1996 were approximately $2.1 million and $1.8 million,
respectively. The Company`s capital expenditures primarily consisted of the
installation of new pay telephones. In the three months ended March 31, 1997,
the Company financed its capital expenditures primarily with approximately
$938,000 in cash provided by continuing operations and available cash reserves.
In the three months ended March 31, 1996, the Company financed its capital
expenditures and acquisitions primarily with approximately $1.5 million in cash
provided by continuing operations and available cash reserves.
The Company has a $25 million revolving line of credit with the Boatmen's
National Bank of St. Louis ("Boatmen's"), 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 Boatmen's Corporate
Base Rate ("CBR"), which was 8.50% on March 31, 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 May 14, 1997, the Company had approximately $2.8 million borrowed
under the revolving portion of the credit facility.
15
<PAGE>
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.
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 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.
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, and should be read in
conjunction with the more detailed cautionary statements included elsewhere
herein.
16
<PAGE>
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 mandate 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 will be effective until October 1, 1997, and will be
replaced at that time with a per-call compensation system, with the initial per-
call rate set at $.35. After October 1, 1998, the per-call rate for dial around
compensation will 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.
The initial flat-rate payment level significantly increases dial around
compensation revenues to the Company, and the Company believes that a per-call
system at a $.35 level will further increase dial around compensation received.
However, market forces and factors outside the Company's control could
significantly impact the resulting revenue impact. These factors include a stay
or change upon review by the U.S. District Court of Appeals, 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.
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 1, 1997, but provided for possible modifications or exemptions from
deregulation upon a detailed showing by an individual state that there are
market failures within the state that would not allow market-based rates to
develop. 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 adequately 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, and the Company's
inability to assess the likelihood that any decision by the U.S. District Court
of Appeals will result in a stay or revision of the FCC Rules, the Company is
unable to predict the ultimate impact on its operations of local coin rate
deregulation.
17
<PAGE>
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 pending review of the FCC Rules by the U.S. District Court of Appeals 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.
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 March 31, 1997.
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: May 14, 1997 /s/ Michael E. Hayes
------------------------------------------
Michael E. Hayes
Senior Vice President and
Chief Financial Officer
20
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