<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 3
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
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 IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1429 MASSARO BOULEVARD
TAMPA, FLORIDA 33619
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (813) 623-3545
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
--
As of March 24, 1998, the aggregate market value of the voting stock held
by non-affiliates of the registrant was $60,367,371. As of March 24, 1998,
there were 4,647,812 shares of the registrant's Common Stock outstanding.
Documents incorporated by reference:
Information contained in the registrant's 1998 definitive proxy material to
be filed with the Securities and Exchange Commission has been incorporated by
reference in Part III of this Annual Report on Form 10-K.
<PAGE>
PART I
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934:
Certain of the statements contained in the body of this Report are forward-
looking statements (rather than historical facts) that are subject to risks and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements. In the preparation of this Report,
where such forward-looking statements appear, the Company has sought to
accompany such statements with meaningful cautionary statements identifying
important factors that could cause actual results to differ materially from
those described in the forward-looking statements. An additional statement
summarizing the principal risks and uncertainties inherent in the Company's
business is included herein under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations Regulatory Impact on
Revenue." Readers of this Report are encouraged to read these cautionary
statements carefully.
ITEM 1. BUSINESS
GENERAL OVERVIEW
The Company is one of the leading independent payphone service providers in
the United States. The Company owns and operates a network of approximately
38,500 payphones in 36 states and the District of Columbia and provides operator
services to those payphones through its long-distance switching equipment and
through contractual relationships with various long-distance companies. The
Company's payphones can accept coins as payment for local and long-distance
calls and process non-coin calls, including calling card, credit card and third-
party billed calls. The Company's payphones are located at convenience stores,
truck stops, service stations, grocery stores and other locations ("Location
Owners") which typically have a high demand for payphone service.
The Company employs advanced telecommunications technology that automates
many of the operations necessary for the efficient management of payphones. The
Company's payphones are computer-based "smart" phones, enabling the Company to
monitor payphones in the field from its central office or one of its divisional
offices which are strategically located to maximize the efficient operation of
the Company's payphones. This advanced technology allows the Company to monitor
call volume, identify malfunctioning equipment, dispatch service technicians,
schedule efficient coin collections, calculate commissions, print commission
checks for Location Owners, rate and process long-distance calls and generate
reports that permit management to analyze and monitor the profitability of the
payphones.
The Company was incorporated in Illinois in 1979. The Company's principal
executive offices are located at 1429 Massaro Boulevard, Tampa, Florida 33619,
and its telephone number is (813) 623-3545.
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INDUSTRY OVERVIEW
Today's telecommunications marketplace was significantly shaped by the 1984
court-ordered divestiture by American Telephone & Telegraph Company (the "AT&T
Divestiture") of its Divisional Bell Operating Companies ("RBOCs") which
provided local telephone services within their areas of operation. The AT&T
Divestiture and the many regulatory changes adopted by the Federal
Communications Commission ("FCC") and state regulatory authorities in response
to the AT&T Divestiture have resulted in the creation of new business segments
in the telecommunications industry. For example, prior to the AT&T Divestiture,
only RBOCs or other local exchange carriers ("LECs") were permitted to own and
operate payphones. Following the AT&T Divestiture, the independent payphone
industry developed as a competitive alternative to the RBOCs by providing
repsonsive customer service, lower cost of operations and higher commissions to
Location Owners.
As part of the AT&T Divestiture, the United States was divided into
geographic areas known as Local Access Transport Areas ("LATAs"). RBOCs and
other LECs provide telephone service that both originates and terminates within
the same LATA ("intraLATA") pursuant to tariffs filed with and approved by state
regulatory authorities. Until recently, RBOCs were prohibited from offering or
deriving revenues or income from telecommunications services between LATAs
("interLATA"). Long distance companies, such as AT&T, MCI and Sprint, provide
interLATA services and, in some circumstances, may also provide long distance
services within LATAs. An interLATA long distance telephone call generally
begins with an originating LEC transmitting the call from the originating
telephone to a point of connection with a long distance carrier. The long
distance carrier, through its owned or leased switching and transmission
facilities, transmits the call across its long distance network to the LEC
servicing the local area in which the recipient of the call is located. This
terminating LEC then delivers the call to the recipient.
Prior to the AT&T Divestiture, the RBOCs could refuse to provide payphone
service to a business operator or, if service was installed, would typically pay
relatively small commissions for the right to place a payphone on the business
premises. Following the AT&T Divestiture and the FCC's authorization of
payphone competition, independent payphone operators began to offer Location
Owners higher commissions on coin calls made from the payphones in order to
obtain the contractual right to install the equipment on the Location Owner's
premises. Initially, coin revenue was the only source of revenue for the
payphone operators because they were unable to participate in revenues from non-
coin calls. However, the operator service provider ("OSP") industry emerged and
enabled independent payphone providers to compete more effectively with the
regulated telephone companies by paying commissions to payphone owners for non-
coin calls. For the first time, independent payphone providers were able to
participate in long distance or non-coin call revenue from their payphones.
With this incremental source of revenue from non-coin calls, independent
payphone providers were able to compete more vigorously with RBOCs for site
location agreements by paying more competitive commissions to business
operators.
Payphones today are primarily owned and operated by RBOCs and other LECs
and independent payphone companies, such as the Company. Of the approximately
2.1 million payphones operated in the United States in 1997, industry reports
estimate that approximately 1.8
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million, or 84% were operated by RBOCs and other LECs and approximately 350,000,
or 16% were operated by independent payphone companies.
BUSINESS STRATEGY
The Company's objective is to increase revenues and earnings through
acquisitions, internal sales growth and continued reductions in its overall cost
structure. The Company has implemented the following strategy to meet its
objective.
Utilize Advanced Payphone Technology. The Company's payphones utilize
"smart" technology which provides voice synthesized calling instructions,
detects and counts coins deposited during each call, informs the caller at
certain intervals of the time remaining on each call, identifies the need for
and the amount of an additional deposit in order to continue the call, and other
functions associated with the completion of calls. Through the use of a non-
volatile, electronically erasable, programmable read-only memory chip, the
payphones can also be programmed and reprogrammed from the Company's central
computer facilities to update rate information or to direct different kinds of
calls to particular carriers. The Company's payphones can also distinguish
coins by size and weight, report to a remote location the total amount of coins
in the coin box, perform self-diagnosis and automatically report problems to a
pre-programmed service number. Virtually all of the Company's payphones operate
on power available from the payphone lines, thereby avoiding the need for and
reliance upon an additional power source at the installation location.
Apply Sophisticated Monitoring and Management Information Systems. The
Company utilizes proprietary and non-proprietary software that continuously
tracks coin and non-coin revenues from each payphone as well as expenses
relating to that payphone, including commissions payable to the Location Owners.
The software allows the Company to generate detailed financial information by
customer, by location and by payphone, which allows it to monitor the
profitability and operating condition of each location and payphone.
Provide Outstanding Customer Service. The technology used by the Company
enables it to (i) respond quickly to equipment malfunctions and (ii) maintain
accurate records of payphone activity which can be verified by customers. The
Company strives to minimize "downtime" on its payphones by identifying service
problems immediately. The Company's standard of performance is to repair
malfunctions within 24 hours of their occurrence, thereby minimizing downtime
and lost revenues. The Company's ability to service payphones promptly allows it
to retain existing customers and attract new ones. The Company employs both
advanced telecommunications technology and trained field technicians as part of
its commitment to provide superior customer service. The records generated
through the Company's technology allow for the more timely and accurate payment
of commissions to Location Owners.
Develop Strong Relationships with Service Providers and Suppliers. As part
of its strategy to continue to reduce operating costs, the Company has formed
strategic alliances with a number of service and equipment providers. The
Company has formed alliances with a number of LECs and competitive local
exchange carriers to purchase local line access services, and has agreements
with a number of interexchange carriers to provide operator services to its
payphones for call traffic not carried by its switch. In addition, the Company's
consistent volume of new payphone installations has allowed it to negotiate
favorable purchasing arrangements with a
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number of providers of payphone equipment and components. The Company expects to
be able to further strengthen its relationships with its suppliers and service
providers as its market presence continues to increase, thereby allowing it to
negotiate more favorable agreements for equipment and services.
Facilitate Growth Through Internal Sales and Marketing. The Company
actively seeks to install new payphones through its sales and marketing efforts
to obtain additional contracts with new and existing accounts. The Company
conducts site surveys to examine various factors, including population density,
traffic patterns and historical usage information. The Company intends to
install approximately 3,500 payphones in 1998, compared with 2,859 payphones
installed in 1995, 2,449 payphones installed in 1996 and 1,933 payphones
installed in 1997, exclusive of acquisitions.
Pursue Strategic Acquisitions. The Company intends to use its experience in
identifying, negotiating and integrating strategic acquisitions in its continued
consolidation of the fragmented payphone industry. Strategic acquisitions have
enabled the Company to expand its market presence and further its strategy of
concentrating its payphones more rapidly than with internal sales growth alone.
Concentrating its payphones in close proximity allows the Company to plot more
efficient collection routes. The Company believes that route density contributes
to cost savings. Because smaller companies typically are not able to achieve
the economies of scale that may be realized by the Company, acquired payphones
may be integrated into the Company's network of payphones, resulting in lower
operating costs than the seller of such payphones had been able to realize. In
addition, as the Company increases its payphone base in a geographic area,
"fill-in" and contiguous acquisitions become less attractive to other potential
acquirors as their ability to achieve significant payphone density is reduced.
The Company also believes that such growth will further enhance its ability to
negotiate favorable rates with long distance service providers, operator service
providers and suppliers of payphones, components and other related equipment.
Acquisitions
The Company generates growth by pursuing the acquisition of payphone
companies or assets within its existing market areas and in areas in which the
Company desires to establish a new market presence. In the acquisition of
Communications Central Inc. (the "CCI Acquisition"), the Company added
approximately 20,000 payphones to its network. During 1997, the Company added
2,861 payphones to its network through acquisitions. The Company believes that
it is well positioned to capitalize on the fragmented nature of the independent
payphone industry by maintaining an active acquisition program. The Company
seeks to acquire payphone companies or assets that can provide cost savings and
economies of scale through integration into the Company's service and
maintenance, long-distance and management information networks and believes that
further acquisitions present a significant growth opportunity for the Company.
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Listed below is a summary of acquisitions completed by the Company during
1997 and 1996, plus the recent CCI Acquisition.
<TABLE>
<CAPTION>
Number of Purchase Price
Company Date Payphones (In thousands)
- -------------------------------------- --------------- ------------- ----------------
<S> <C> <C> <C>
Communications Central Inc. February 1998 19,543 $ 106,400.0
Tele/Data Pay Telephone August 1997 183 510.9
Blair Telephone June 1997 1,255 3,867.9
Quarter Call June 1997 954 2,159.8
Mid-Eastern April 1997 117 233.0
Pay Telephone America, Ltd. November 1996 1,008 3,500.0
Payphone Corp. of America July 1996 653 1,785.3
Cottonwood Communications June 1996 933 2,620.1
Suntel April 1996 70 205.0
Capital Pay Phone Group, LLC January 1996 103 271.5
All others (less than 70 phones each) 352 547.4
------------- ----------------
Totals 25,171 $ 122,100.9
============= ================
</TABLE>
Integration Plan
The Company believes that it can achieve cost savings through the
combination of its payphone routes, management information systems and
administrative functions with those of CCI. The Company has formed a transition
team (the "Transition Team") consisting of senior members of management to
oversee integration of the two companies. Each senior executive on the
Transition Team will manage the transition process in one of the following major
functional areas of the Company's operations: field operations, network
operations, equipment repair and supply, human resources, finance and
accounting, legal and regulatory, sales and marketing, and customer service. The
Transition Team has begun the process of identifying and developing potential
areas of cost savings and revenue enhancement. Members of the Transition Team
will recommend strategies for achieving their objectives in the most cost-
effective manner, including specific recommendations for eliminating redundant
functions, employees and facilities. Management has already begun to identify
areas of cost savings and revenue enhancement arising out of the integration of
CCI and expects to substantially complete the integration process by the end of
1998.
OPERATIONS
As of December 31, 1997 and December 31, 1996, the Company owned and
operated 18,909 and 15,281 payphones, respectively, an increase of 3,628
installed payphones. The acquisition of CCI on February 3, 1998 increased the
number of installed payphones to approximately 38,500 units. Substantially all
of the Company's payphones accept coins as payment for local or long distance
calls and can also be used to place local or long distance non-coin calls.
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Coin Calls
The Company's payphones generate coin revenues primarily from local calls.
The maximum rate that LECs and independent payphone companies could charge for
local calls was generally set by state regulatory authorities and in most cases
was $0.25 or $0.35 through October 6, 1997. In ensuring "fair compensation" for
all calls, the FCC previously determined that local coin rates from payphones
should be generally deregulated by October 7, 1997, but provided for possible
modifications or exemptions from deregulation upon a detailed showing by an
individual state that there are market failures within the state that would not
allow market-based rates to develop. On July 1, 1997, a federal court issued an
order which upheld the FCC's authority to deregulate local coin call rates. In
accordance with the FCC's ruling and the court order, certain LECs and
independent payphone service providers, including the Company, began to increase
rates for local coin calls from $.25 to $.35 commencing October 7, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Regulatory Impact on Revenue -- Local Coin Rates."
InterLATA long distance coin calls are carried by the Company's long
distance switching equipment and long distance carriers that have agreed to
provide service to the Company's payphones. The Company pays a charge to a long
distance carrier each time that carrier transports a long distance call for
which the Company receives coin revenue. The Company's payphones also generate
coin revenue from intraLATA long distance calls. IntraLATA long distance coin
calls are generally carried by the LEC that provides service to the payphone.
The Company pays a charge to the LEC for transport of these calls.
Non-Coin Calls
The Company also receives revenues from non-coin calls made from its
payphones. Non-coin calls include credit card, calling card, collect and third-
party billed calls. Certain non-coin calls from the Company's payphones are
handled by the Company's subsidiary, DavelTel, Inc. ("DavelTel"). DavelTel's
switching equipment is located in Tampa, Florida. See "Technology." DavelTel
performs certain of the operator services necessary to complete non-coin calls.
The services needed to complete a non-coin call include providing an automated
or live operator to answer the call, verifying billing information, validating
calling cards and credit cards, routing and transmitting the call to its
destination, monitoring the call's duration and determining the charge for the
call, and billing and collecting the applicable charge. The Company has
contracted with an operator service provider to provide live operators to
handle calls that require operator services. Billing information is verified and
collect calls and credit cards are validated by the Company's switch through one
of several companies that provide on-line access to validation databases. The
Company contracts for transport of its calls over networks operated by long
distance carriers. The Company's switch is programmed to select the most cost-
effective carrier and transmission circuit then available to the Company to
complete the call as dialed. Billing and collection of call charges is performed
for the Company by one of several service bureaus specializing in that activity.
The Company believes the extensive data processing capabilities of the
switch enhance (i) the availability of management information relating to non-
coin call traffic, (ii) the services provided to property owners, and (iii) the
Company's ability to respond to any difficulties in call
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completion. The Company has begun to utilize its switching equipment to process
non-coin call traffic originating from payphones acquired in the CCI
Acquisition.
The Company realizes additional revenues from certain long distance
companies pursuant to FCC regulation as compensation for "dial-around" non-coin
calls made from its payphones. A dial-around call is made by dialing an access
code for the purpose of reaching a long distance company other than the one
designated by the payphone operator, generally by dialing a 1-800 number, a
950-number or a five-digit "10XXX" code before dialing "0" for operator service.
Recently enacted rules adopted pursuant to the Telecommunications Act are
expected to increase the amount of dial around call compensation received by the
Company and other independent payphone providers. See "Business--Regulation."
Payphone Base
In addition to payphones acquired by the Company (see "Acquisitions"), the
Company's payphone base includes payphones installed by the Company. The
following table sets forth, for the last three fiscal years, the number of
Company payphones acquired, installed and removed during the year as well as the
net increase in Company payphones in operation.
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Acquired 717 2,767 2,861
Installed 2,859 2,449 1,933
Removed (762) (1,098) (1,166)
---------- ---------- ----------
Net Increase 2,814 4,118 3,628
========== ========== ==========
</TABLE>
Most of the Company's payphones are located in proximity to one of the
Company's divisional offices, from which Company employees operate and service
payphones and conduct sales and marketing efforts. The following table sets
forth the number of payphones operated by the Company in each state as of
December 31, 1996, December 31, 1997 and March 1, 1998:
<TABLE>
<CAPTION>
December 31, December 31, March 1,
State 1996 1997 1998
- ----------------------- -------------- -------------- --------------
<S> <C> <C> <C>
Alabama 154 205 1,660
Arkansas 27 45 492
Arizona 675 713 727
California - 5 -
Colorado 3 3 398
District of Columbia 172 202 267
Delaware 54 78 94
Florida 4,148 4,202 7,281
Georgia 606 655 2,792
Iowa 870 760 786
Illinois 880 898 1,757
Indiana 202 217 429
Louisiana 105 196 961
Kentucky 346 392 636
Massachusetts - 3 3
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Maryland 513 1,297 1,435
Michigan - - 227
Minnesota - - 437
Missouri 123 147 268
Mississippi 850 990 1,876
North Carolina 2,164 2,361 3,415
North Dakota - - 5
Nebraska 24 21 20
New Hampshire - 2 2
Nevada 4 3 3
New York - 58 64
New Jersey - - 7
Ohio - 81 547
Oklahoma - - 68
Pennsylvania - 1,236 1,665
South Carolina 1,275 1,338 1,861
Tennessee 1,006 1,082 3,006
Texas 6 9 2,236
Virginia 887 1,337 2,638
Utah 187 248 248
Wisconsin - 7 156
West Virginia - 118 184
-------- -------- --------
Totals 15,281 18,909 38,651
======== ======== ========
</TABLE>
The Company selects locations for its payphones where there is high demand
for payphone service, such as convenience stores, truck stops, service stations,
grocery stores, shopping centers and hotels. For many locations, historical
information regarding an installed payphone is available because payphone
operators are often obligated pursuant to agreements to provide this information
to owners of locations of their payphones. In locations where historical revenue
information is not available, the Company relies on its site survey to examine
geographic factors, population density, traffic patterns and other factors in
determining whether to install a payphone. The Company's marketing staff is
encouraged to obtain agreements to install the Company's payphones ("Placement
Agreements") at locations with favorable historical data regarding payphone
revenues.
Placement Agreements generally provide for revenue sharing with the
applicable Location Owners. The Company's Placement Agreements generally provide
commissions based on fixed percentages of revenues and are generally of a five-
year term. The Company can generally terminate a Placement Agreement on 30 days'
notice to the Location Owner if the payphone does not generate sufficient
revenue.
The Company routinely monitors its payphone base and removes
underperforming payphones, which it relocates to locations with more potential
for profitability. In particular, the Company often removes and relocates a
number of payphones following acquisitions because its performance criteria are
generally more stringent than the criteria of the payphone operators from which
it acquires payphones. In addition, the Company often removes and relocates
payphones when Location Owners close facilities at which Company payphones are
located or when the Company loses payphone customers or locations for other
reasons.
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Service and Maintenance
The Company employs field service technicians, each of whom collects coin
boxes from, cleans and maintains between 125 and 225 payphones and responds to
trouble calls made by a Location Owner, by a user of a payphone or by the
telephone itself as part of its internal diagnostic procedures. Some
technicians are also responsible for the installation of new payphones. Due to
the proximity of most of the Company's payphones to one of the Company's
divisional offices and the ability of the field service technicians to perform
on-site service and maintenance functions, the Company is able to limit the
frequency of trips to the payphone as well as the number of employees needed to
service the payphones.
Sales and Marketing
The Company employs marketing personnel for its payphone operations in each
of its regions of operation. Divisional marketing personnel are responsible for
finding desirable locations for payphones and obtaining Placement Agreements
with Location Owners within their geographic areas. The Company believes that
using regional marketing personnel provides better market penetration because of
their familiarity with and proximity to their regions. To date, independent
payphone providers have had a competitive advantage over LECs due to their
ability to offer commissions to Location Owners for both local and long distance
calls. Historically, LECs generally were unable to derive revenues from
interstate calls and non-coin, interLATA calls, and consequently, were unable to
offer commissions on such calls. Recently enacted rules adopted pursuant to the
Telecommunications Act of 1996 grant LECs the ability to select the long
distance carrier for interLATA long distance calls in conjunction with the
Location Owner. This will enable LECs to derive revenues from and pay
commissions on these calls in the future. See "Business--Regulation."
The Company's national sales personnel are responsible for accounts that
overlap regional boundaries, such as multiple store chains and restaurant
franchises that often have hundreds or thousands of potential locations, and
also provide support to the Company's regional sales personnel. The Company has
historically installed approximately 70% of its payphones through the sales and
marketing efforts of the Company's regional marketing personnel and the
remaining 30% from the efforts of national sales personnel. The Company's
marketing personnel receive incentive compensation based upon their achievement
of sales goals.
Service and Equipment Suppliers
The Company's primary suppliers provide payphone components, local line
access, billing and collection services and long distance services. In order to
promote acceptance by end users accustomed to using LEC-owned payphone
equipment, the Company utilizes payphones designed to be identical in appearance
and operation to payphones owned by LECs.
The Company's primary supplier of circuit boards is Protel, Inc. of
Lakeland, Florida, a leading supplier of payphone equipment, and utilizes the
billing and collection services of ILD Teleservices, Inc. The Company obtains
local line access from various LECs, including Bellsouth, GTE, Ameritech,
Southwestern Bell, US West and various other suppliers of local line access.
New sources of local line access are expected to emerge as competition is
authorized in local service markets. Long distance services are provided to the
Company through the use of its
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own long distance switching equipment and by various long distance and operator
service providers, including AT&T, MCI, Sprint, Wiltel, LCI, Opticom and others.
The Company believes that multiple suppliers are available to meet all of
its product and service needs at competitive prices and rates. The Company
expects the availability of such products and services to continue in the
future, however, the continuing availability of alternative sources cannot be
assured. Transition from the Company's existing suppliers, if necessary, could
have a disruptive influence on the Company's operations and could give rise to
unforeseen delays and/or expenses. The Company is not aware of any current
circumstances that would require the Company to seek alternative suppliers for
any of the products or services used in the operation of its business.
Assembly and Repair of Payphones
The Company assembles and repairs payphone equipment for its own use. The
manufacturing of payphone equipment provides the Company with technical
expertise used in the operation, service, maintenance and repair of its
payphones. The Company assembles payphones from standard payphone components
purchased from component manufacturers. These components include a metal case,
an integrated circuit board incorporating a microprocessor, a handset and cord,
and a coin box and lock. The Company believes that the integrated circuit board
is the single most important component in an independent payphone and obtains
these boards from Protel, Inc. However, all of the components purchased by the
Company (including integrated circuit boards) are available from several
suppliers, and the Company does not believe that the loss of any supplier would
have a material adverse effect on its assembly operations.
The Company's payphones comply with all FCC requirements regarding the
performance and quality of telephone equipment and have all operating
characteristics required by the regulatory authorities of most states,
including: free access to local emergency ("911") telephone numbers and, where
not available, to the LEC operator; free access to local directory assistance;
dial-around access to all locally available long distance companies; the
capability of receiving incoming calls at no charge; and automatic coin return
capability for incomplete calls.
Technology
The payphone equipment installed by the Company makes use of
microprocessors to provide voice synthesized calling instructions, detect and
count coins deposited during each call, inform the caller at certain intervals
of the time remaining on each call, identify the need for and the amount of an
additional deposit and other functions associated with completion of calls.
Through the use of a non-volatile, electronically erasable, programmable read-
only memory chip, the payphones can also be programmed and reprogrammed from the
Company's central computer facilities to update rate information or to direct
different kinds of calls to particular carriers. The Company manufactures its
payphones from standard components and believes that they incorporate the latest
technology.
The Company's payphones can distinguish coins by size and weight, report to
a remote location the total coinage in the coin box, perform self-diagnosis and
automatically report problems to a pre-programmed service number, and
immediately report attempts of vandalism or
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theft. Virtually all of the telephones operate on power available from the
telephone lines, thereby avoiding the need for and reliance upon an additional
power source at the installation location.
The Company utilizes proprietary and non-proprietary software that
continuously tracks the coin and non-coin revenues from each telephone as well
as expenses relating to that telephone, including commissions payable to the
Location Owners. The software allows the Company to generate detailed financial
information by Location Owner, by location and by telephone, which allows the
Company to monitor the profitability and operating condition of each location
and telephone.
All technical support required to operate the payphones, such as computers
and software and hardware specialists, is provided by the Company's headquarters
in Tampa, Florida. Materials, equipment and spare parts and accessories are
provided by the Company's manufacturing support operations and inventories are
maintained at each divisional office for immediate access by field service
technicians.
The Company's switching equipment, located in Tampa, Florida, was obtained
from Harris Corporation, one of several suppliers of switches to the
telecommunications industry. Switches are digital computerized routing systems
that receive calls, route calls through transmission lines to their destination
and record information about the source, destination and duration of the call.
Switches have limits on their capacity to handle and transmit calls, but can be
upgraded to handle more calls as traffic increases. The Company's switch is
located in proximity to its headquarters in Tampa, Florida. Long distance calls
from the Company's payphones that are not handled by its switch or an unbundled
services arrangement are serviced by long distance companies that pay
commissions to the Company for those calls. If the Company experiences
sufficient long distance call volume from other LATAs, the Company will evaluate
the need to upgrade transmission circuitry to direct additional call traffic to
its switching equipment, thereby reducing transmission costs to the Company's
switch.
Using the data capabilities of its switching equipment, the Company has
implemented a management information system that the Company believes affords it
competitive advantages. The Company's management information system monitors
call traffic to provide information regarding payphone or network equipment
trouble, the fraudulent use of calling cards or credit cards, or other problems,
thereby allowing the Company to respond promptly. This management information
system has enabled the Company to increase call completion rates and enhance
site selection for its payphones. As a result, the Company has increased
revenues from its installed telephones and reduced costs through the selection
of the most economical means of completing calls. The Company believes some of
this information is unavailable to independent payphone companies that do not
maintain their own switching equipment.
REGULATION
The FCC and state regulatory authorities have traditionally regulated
payphone and long-distance services, with regulatory jurisdiction being
determined by the interstate or intrastate character of the service and the
degree of regulatory oversight varying among jurisdictions. On September 20,
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
(the "Telecommunications Act"). The Telecommunications Act substantially
restructured the telecommunications industry, included specific provisions
related to the payphone industry and
12
<PAGE>
required the FCC to develop rules necessary to implement and administer the
provisions of the Telecommunications Act on both an interstate and intrastate
basis. Among other provisions, the Telecommunications Act granted the FCC the
power to preempt state regulations to the extent that any state requirements are
inconsistent with the FCC's implementation of Section 276 thereof ("Section
276").
Federal Regulation of Local Coin and Dial-Around Calls
The Telephone Operator Consumer Services Improvement Act of 1990 ("TOCSIA")
established various requirements for companies that provide operator services
and for call aggregators who send calls to those companies. The requirements of
TOCSIA included call branding, information posting, rate quoting, the filing of
information tariffs and the right of payphone users to access any OSP to make
non-coin calls. TOCSIA also required the FCC to take action to limit the
exposure of payphone companies to undue risk of fraud.
TOCSIA also directed the FCC to consider the need to provide compensation for
owners of independent payphones for dial-around access to a long-distance
company other than the one selected by the independent payphone company.
Accordingly, the FCC ruled in May 1992 that independent payphone companies were
entitled to compensation for these calls. Because of the complexity of
establishing an accounting system for determining compensation for these calls,
the FCC temporarily set this compensation at $6.00 per payphone per month based
on an assumed average of 15 dial-around calls at $0.40 per call.
In 1996, recognizing that independent payphone providers had experienced
substantial increases in dial-around calls without a corresponding adjustment in
compensation and the need to promote competition among payphone service
providers and the wide deployment of payphones, Congress enacted Section 276 and
directed the FCC to implement rules (the "FCC Rules") by November 1996 which
would:
. establish a per call compensation plan to ensure that all payphone service
providers are fairly compensated for each and every completed intrastate
and interstate call;
. terminate subsidies for LEC payphones from LEC-regulated base operations;
. prescribe nonstructural safeguards to eliminate discrimination between LEC
and independent payphone service providers;
. provide for the RBOCs to have the same rights that independent payphone
service providers have to negotiate with location providers over the
provision of interLATA carrier services subject to the FCC's determination
that such provision is in the public interest and the subject to existing
contracts between the location providers and interLATA carriers;
. provide for the right of all payphone service providers to choose the
interLATA carrier of choice subject to the requirements of, and contractual
rights negotiated with, Location Owners; and
. preempt any state requirements which are inconsistent with the FCC's
regulations implementing Section 276.
13
<PAGE>
In September 1996, the FCC issued its first order implementing Section 276, In
the Matter of Implementation of the Payphone Reclassification and Compensation
Provisions of the Telecommunications Act of 1996, FCC 96-388 (the "1996 Payphone
Order"). In the 1996 Payphone Order, the FCC determined that the best way to
ensure fair compensation to payphone service providers ("PSPs") for each and
every call was to deregulate the price of all calls originating from payphones.
For local coin calls the FCC mandated that deregulation of the local coin rate
would occur in October 1997 to provide a period of orderly transition from the
previous system of state regulation. As a result of the deregulation of the
local coin rate, most of the RBOCs and other PSPs have announced or implemented
an increase in the local coin rate to $0.35 per call in approximately 75% of the
Company's operating markets.
To achieve fair compensation for dial-around calls through deregulation, the
FCC in the 1996 Payphone Order directed a two-step transition from a regulated
market. In the first phase, November 1996 to October 1997, the FCC prescribed
flat-rate compensation payable to the PSPs from the inter-exchange carriers
("IXCs") in the amount of $45.85 per month per payphone. This rate was computed
by applying an assumed deregulated coin rate of $0.35 per call to a finding that
there were a monthly average of 131 compensable dial-around calls. This total
included both access code calls dialed for the purpose of reaching a long-
distance company other than the one designated by the payphone service provider
and toll-free 800/888 calls. The monthly, per phone flat-rate compensation of
$45.85 was to be assessed only against IXCs with annual toll-call revenues in
excess of one hundred million dollars and allocated among such IXCs in
proportion to their gross long-distance revenues. During the second step of the
transition to deregulation (initially from October 1997 to October 1998, but
subsequently extended in a later order by one year to October 1999), the FCC
directed the IXCs to pay the PSPs on a per-call basis for dial-around calls at
the assumed deregulated coin rate of $0.35 per call. At the conclusion of the
second phase, the FCC set the market-based local coin rate as the default per-
call compensation rate in the absence of an agreement between the PSP and the
IXC. To facilitate per-call compensation, the FCC required the PSPs to transmit
payphone-specific coding digits which would identify each call as originating
from a payphone and required the LECs to make such coding available to the PSPs
as a tariffed item.
In July 1997, the United States Court of Appeals for the District of Columbia
Circuit (the "Court") responded to an appeal of the 1996 Payphone Order, finding
that the FCC erred in setting the default per call rate at $0.35 without
considering the differences in underlying costs between dial-around and local
coin calls, in assessing the flat-rate compensation against only the carriers
with annual toll-call revenues in excess of one hundred million dollars and in
allocating the assessment of the flat-rate compensation based on gross revenues
rather than on a factor more directly related to the number of dial-around
calls.
In response to the remand of the Court, the FCC issued its second payphone
order ("1997 Payphone Order") in October 1997. The FCC determined that
additional costs of $0.066 were attributable to a coin call that did not apply
to the costs incurred by the PSPs in providing a dial-around call. Accordingly
the FCC adjusted the per-call rate during the second phase of interim
compensation to $0.284 ($0.35 - $0.066). The FCC applied the $0.284 per call
rate to the second phase of interim compensation. While the FCC tentatively
concluded that the $0.284 default rate should be utilized in determining
compensation for the concluded flat-rate period and reiterated that PSPs were
entitled to compensation for each and every call during that period, it deferred
to
14
<PAGE>
a subsequent order, yet unissued, the resolution of the method of allocating the
initial interim period flat-rate assessment among the IXCs and the number of
calls to be used in determining the amount of the assessment. On March 9, 1998,
the FCC issued a Memorandum Opinion and Order, FCC 98-481, which confirmed the
obligation of IXCs to pay PSPs dial-around compensation and clarified,
confirmed, extended and waived certain requirements concerning the provision by
the LECs of payphone-specific coding digits to facilitate the payment of dial-
around compensation by IXCs to PSPs.
Various IXCs and PSPs have appealed certain aspects of the 1997 Payphone Order
to the Court. The Court has declined to stay implementation of the 1997 Payphone
Order pending its decision of the appeals.
Effect of Federal Regulation of Local Coin and Dial-Around Calls
Based on the FCC's tentative conclusion in the 1997 Payphone Order, the
Company has adjusted the amounts of dial-around compensation previously recorded
for the period November 7, 1996 to June 30, 1997 from the initial $45.85 rate to
$37.20 ($0.284 per call multiplied by 131 calls). As a result of this
adjustment, the provision recorded in the year ended December 31, 1997 for
reduced dial-around compensation is approximately $1.2 million ($.7 million net
of applicable commissions and income taxes). For periods beginning November 7,
1996, the Company has recorded dial-around compensation at the rate of $37.20
per payphone per month. The amount of dial-around revenue recognized in the
period from July 1, 1997 to October 6, 1997 for the interim period of flat-rate
compensation is approximately $2.2 million and such amount will be billed after
final resolution of the allocation obligations of the IXCs as determined by the
FCC.
The Company believes that it is legally entitled to fair compensation under
the Telecommunications Act for dial-around calls which the Company delivered to
any carrier during the period from November 7, 1996 to October 6, 1997. Based on
the information available, the Company believes that the minimum amount it is
entitled to as fair compensation under the Telecommunications Act for the period
from November 7, 1996 to October 6, 1997 is $37.20 per payphone per month and
the Company, based on the information available to it, does not believe that it
is reasonably possible that the amount will be materially less than $37.20 per
payphone per month.
While the amount of $0.284 per call constitutes the Company's assessment of
the appropriate level of fair compensation, certain IXCs have asserted in the
past, are asserting and are expected to assert in the future that the
appropriate level of fair compensation should be lower than $0.284 per call.
The payment levels for dial-around calls prescribed in the 1996 and 1997
Payphone Orders significantly increase dial-around compensation revenues to the
Company over the levels received prior to implementation of the
Telecommunications Act. However, market forces and factors outside the Company's
control could significantly affect these revenue increases. These factors
include the following: (i) resolution by the FCC of the method of allocating the
initial interim period flat-rate assessment among the IXCs and the number of
calls to be used in determining the amount of the assessment, (ii) the
resolution of the appeals by both the IXCs and representatives of the PSPs
pending before the Court of various aspects of the 1997 Payphone
15
<PAGE>
Order, (iii) the possibility of other litigation seeking to modify or overturn
the 1997 Payphone Order or portions thereof, (iv) pending litigation in the
Federal courts concerning the constitutionality or validity of the 1996
Telecommunications Act, and (v) the IXCs' reaction to the FCC's recognition that
existing regulations do not prohibit an IXC from blocking 800 subscriber numbers
from payphones in order to avoid paying per-call compensation on such calls.
In ensuring "fair compensation" for all calls, the FCC previously determined
that local coin rates from payphones should be generally deregulated by October
7, 1997, but provided for possible modifications or exemptions from deregulation
upon a detailed showing by an individual state that there are market failures
within the state that would not allow market-based rates to develop. On July 1,
1997, the Court issued an order which upheld the FCC's authority to deregulate
local coin call rates. In accordance with the FCC's ruling and the Court's
order, certain LECs and independent payphone service providers, including the
Company, began to increase rates for local coin calls from $0.25 to $0.35. 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, and the Company's
inability to provide assurance that deregulation, if and where implemented, will
lead to higher local coin call rates, the Company is unable to predict the
ultimate impact on its operations of local coin rate deregulation.
Other Provisions of the Telecommunications Act and FCC Rules
There are several other provisions of the Telecommunications Act, as
implemented by the FCC, that may have substantial impact on the Company. As a
whole, the Telecommunications Act and FCC Rules should significantly alter the
competitive framework of the payphone industry. The Company believes that
implementation of the Telecommunications Act and FCC Rules will address certain
historical inequities in the payphone marketplace and lead to a more equitable
competitive environment for all payphone providers. However, there are other
matters pending in several Federal courts which, while not directly challenging
Section 276, relate to the validity and constitutionality of the
Telecommunications Act, as well as other uncertainties related to the impact,
timing and implementation of the Telecommunications Act. Accordingly, the
Company can provide no assurance that the Telecommunications Act or FCC Rules
will result in a long-term positive impact on the Company.
The FCC Rules required that LEC payphone operations be removed from the
regulated rate base on April 15, 1997. Upon removal, LECs' regulated rate
payers were repaid for the value of the payphones on which the LECs were no
longer entitled to earn a return. The repayment was based on the net book value
of the LEC payphone equipment, defined as the original cost of the equipment
less accumulated depreciation, rather than the current market value of the
equipment. Subsequent to removal, the RBOCs, as required by the FCC Rules,
filed Comparably Efficient Interconection ("CEI") plans to describe their
methods of compliance with nondiscrimination and accounting requirements, as
well as other safeguards against subsidies and discrimination in favor of their
own payphone operations. The LECs were also required to make the access lines
provided for their own payphones equally available to independent payphone
providers.
16
<PAGE>
In the past, RBOCs were not permitted to select the interLATA carrier to serve
their payphones. Under the FCC Rules, the RBOCs will be permitted to select the
carrier of interLATA services to their payphones effective upon FCC approval of
each RBOC's CEI plan as described above. Existing contracts between Location
Owners and payphone or long-distance providers which were in effect as of
February 8, 1996 are grandfathered and will remain in effect.
The FCC Rules preempt state regulations that may require independent payphone
providers to route intraLATA calls to the LEC by containing provisions that
allow all payphone providers to select the intraLATA carrier of their choice.
The FCC Rules did not preempt state regulations that, for public safety reasons,
require routing of "0-" calls to the LEC, provided that the state does not
require that the LEC carry such calls when the call is determined to be a non-
emergency call.
The FCC Rules determined that the administration of programs for maintaining
"public interest payphones" should be left to the states within certain
guidelines. "Public interest payphones" are defined as payphones which (1)
fulfill a public policy objective in health, safety, or public welfare, (2) are
not provided for a location provider with an existing contract for the provision
of a payphone and (3) would not otherwise exist as a result of the operation of
the competitive marketplace. Each state regulatory authority is required to
complete a review by September 20, 1998 of whether such public interest
payphones are adequately provided in its jurisdiction.
Billed Party Preference
The FCC previously issued a Second Notice of Proposed Rulemaking regarding
Billed Party Preference and associated call rating issues, including potential
rate benchmarks and caller notification requirements for 0+ and 0- interstate
long-distance calls. On January 29, 1998, the FCC released its Second Report and
Order on Reconsideration entitled In the Matter of Billed Party Preference for
InterLATA 0+ Calls, Docket No. 92-77. Effective July 1, 1998, all carriers
providing operator services are required to give consumers using payphones the
option of receiving a rate quote before a call is connected when making a 0+
interstate call. The ruling could affect the financial performance of the
Company. However, the Company is unable at this time to assess the impact, if
any, on the Company's future operations or results.
State Regulation
State regulatory authorities have primarily been responsible for regulating
the rates, terms and conditions for intrastate payphone services. Regulatory
approval to operate payphones in a state typically involves submission of a
certification application and an agreement by the Company to comply with
applicable rules, regulations and reporting requirements. The 49 states that
currently permit independent payphone providers to supply local and long-
distance payphone service, and the District of Columbia, have adopted a variety
of state-specific regulations that govern rates charged for coin and non-coin
calls as well as a broad range of technical and operational requirements. The
Telecommunications Act contains provisions that require all states to allow
payphone competition. State authorities also regulate LECs' tariffs for
interconnection of independent payphones, as well as LECs' own payphone
operations and practices.
17
<PAGE>
The Company is also affected by state regulation of operator services. Most
states have capped the rates that consumers can be charged for non-coin local
and intrastate toll calls made from payphones. In addition, the Company must
comply with regulations designed to afford consumers with notice at the payphone
location of the long-distance company servicing the telephone and the ability to
access alternate carriers. The Company believes that it is currently in
compliance with regulatory requirements pertaining to its offering of operator
services directly or through other long-distance companies.
In accordance with the FCC's requirements under the Telecommunications Act,
state regulatory authorities are currently reviewing the rates that LECs charge
independent payphone providers for local line access and associated services.
Local line access charges have been reduced in certain states and the Company
believes that selected states' continuing review of local line access charges,
coupled with competition for local line access service resulting from
implementation of the Telecommunications Act, could lead to more options
available to the Company for local line access at competitive rates. No
assurance can be given, however, that such options or local line access rates
will become available. The Telecommunications Act and FCC Rules contain
provisions which could impact the rates payphone providers can charge for local
coin calls and other aspects of the regulation of payphones by the states.
COMPETITION
The Company competes for payphone locations with LECs and independent
payphones operators. The Company also competes, indirectly, with long distance
companies, which can offer Location Owners commissions on long distance calls
made from LEC-owned payphones. Most LECs and long distance companies against
which the Company competes and some independent payphone companies may have
substantially greater financial, marketing and other resources than the Company.
In addition, many LECs, faced with competition from the Company and other
independent payphone companies, have increased their compensation arrangements
with owners of payphone locations to offer more favorable commission schedules.
The Company believes the principal competitive factors in the payphone
business are (i) the commission payments to a Location Owner and the opportunity
for a Location Owner to obtain commissions on both local and long-distance calls
from the same company, (ii) the ability to serve accounts with locations in
several LATAs or states, (iii) the quality of service and the availability of
specialized services provided to a Location Owner and telephone users, and (iv)
responsiveness to customer service needs. The Company believes it is currently
competitive in these areas.
The Company competes with long distance carriers who provide dial-around
services which can be accessed through the Company's payphones. Certain
national long distance operator service providers have launched advertising
promotions which have increased dial-around activity on payphones owned by LECs
and independent payphone companies, including the Company. The Company is
receiving compensation for dial-around calls placed from its payphones and
regulatory initiatives resulting from implementation of the Telecommunications
Act of 1996 are expected to increase the amount of dial-around compensation
received on its payphones. See "Regulation."
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<PAGE>
EMPLOYEES
As of December 31, 1997, the Company had 271 full-time employees, none of
whom is the subject of a collective bargaining agreement. In connection with the
CCI Acquisition, the Company added an additional 213 employees, none of whom is
the subject of a collective bargaining agreement. The Company believes that its
relationship with its employees is good. In connection with the CCI
Acquisition, the Company also entered into employment contracts with certain
members of CCI's management.
ITEM 2. PROPERTIES
The Company leases approximately 19,000 square feet in Tampa, Florida that
includes executive office space, a divisional office for payphone operations and
facilities for the assembly of payphones. The Company also leases an aggregate
of approximately 33,000 square feet to house divisional offices for payphone
operations in Mesa, Arizona; Miami, Florida; Jacksonville, Florida; Tallahassee,
Florida; Harrisburg, Illinois; Jacksonville, Illinois; Jackson, Mississippi;
Charlotte, North Carolina; Myrtle Beach, South Carolina; Atlanta, Georgia;
Cedar Rapids, Iowa; Beltsville, Maryland; Jackson, Tennessee; Salt Lake City,
Utah, Ebensburg, Pennsylvania and Chesapeake, Virginia. In addition, the
Company's accounting, administrative and legal offices are located in
approximately 10,000 square feet of office space in Jacksonville, Illinois
leased from its largest shareholder (the "Shareholder"). The Company also
leases 18,000 square feet of warehouse space in Jacksonville, Illinois from the
Shareholder. The Company believes that these facilities are adequate to meet the
Company's needs in the foreseeable future. The Company has also assumed leases
for office and warehouse space in various locations related to the operations of
CCI. The Company is currently evaluating its space needs related to the
integration of CCI into its operations. See "Business Strategy - Integration
Plan."
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various legal proceedings arising out of the
conduct of its business. It is the opinion of the Company's management that the
ultimate disposition of these proceedings will not have a material adverse
effect on the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1997, the
Company did not submit any matter to a vote of security holders.
19
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
Market information. The Company's Common Stock trades on the NASDAQ
------------------
National Market System. The following table sets forth, for the periods
indicated, the high and low closing prices on the NASDAQ National Market System
from October 1, 1994 through December 31, 1997.
<TABLE>
<CAPTION>
High Low
----- -----
<S> <C> <C>
October 1 through December 31, 1994 14.25 10.75
January 1 through March 31, 1995 13.25 8.94
April 1 through June 30, 1995 12.88 10.75
July 1 through September 30, 1995 16.00 11.25
October 1 through December 31, 1995 15.25 12.00
January 1 through March 31, 1996 13.75 12.50
April 1 through June 30, 1996 20.00 12.75
July 1 through September 30, 1996 20.75 15.00
October 1 through December 31, 1996 19.00 15.25
January 1 through March 31, 1997 18.25 14.75
April 1 through June 30, 1997 18.00 12.00
July 1 through September 30, 1997 23.25 15.25
October 1 through December 31, 1997 29.00 21.25
</TABLE>
As of March 24, 1998, there were approximately 50 holders of record of the
Common Stock, not including stockholders whose shares were held in "nominee" or
"street" name. The last sale price of the Company's Common Stock on March 24,
1998 was $26.50 per share.
Dividends. The Company did not paid any dividends on its Common Stock
---------
during 1997 and does not intend to pay any Common Stock dividends in the
foreseeable future. It is the current policy of the Company's Board of
Directors to retain earnings to finance the growth and development of the
Company's business. The payment of dividends is effectively prohibited by the
1998 Credit Agreement. Payment of cash dividends, if made in the future, will
be determined by the Company's Board of Directors based on the conditions then
existing, including the Company's financial condition, capital requirements,
cash flow, profitability, business outlook and other factors.
20
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data presented below under the captions "Operating
Data" and "Balance Sheet Data" are derived from the audited consolidated
financial statements of the Company. The selected financial data should be read
in conjunction with the financial statements and notes thereto included
elsewhere in this Annual Report and with "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year ended December 31
----------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Operating Data
Revenues:
Coin Calls $ 25,211 $ 18,560 $ 14,357 $ 9,916 $ 6,616
Non-coin calls, net of 1997 dial-around
compensation adjustment 21,797 15,471 15,249 12,267 8,648
Switching services provided to Hospitality
Division -- 2,359 1,751 69
Administrative support provided to discontinued
subsidiaries -- 583 473 346
-------- -------- -------- -------- --------
Total revenues 47,008 36,973 31,830 22,598 15,264
Operating costs and expenses
Telephone charges 9,576 7,501 6,076 4,748 3,379
Commissions 6,202 4,605 3,852 2,848 1,944
Service, maint. and network costs 10,685 8,546 7,371 5,218 3,166
Selling, general and administrative 9,530 6,402 5,133 3,550 2,115
Depreciation and amortization 4,316 2,986 2,136 1,389 1,188
Commissions paid to Hospitality Division -- 1,681 1,116 1
-------- -------- -------- -------- --------
Total operating costs and expenses 40,309 31,721 25,684 17,754 11,792
-------- -------- -------- -------- --------
Operating profit 6,699 5,252 6,146 4,844 3,472
Interest and other income 497 100 125 106 128
Interest (expense) (475) (289) (48) (31) (302)
-------- -------- -------- -------- --------
Total other income (expense) 22 (189) 77 75 (174)
-------- -------- -------- -------- --------
Earnings from continuing operations
before income taxes 6,721 5,063 6,223 4,919 3,298
Income taxes 2,459 1,868 2,403 1,806 1,309
-------- -------- -------- -------- --------
Earnings from continuing operations 4,262 3,195 3,820 3,113 1,989
Discontinued operations
Gain (loss) from hospitality division operations -- 334 (1) (2,043) 790 --
Gain (loss) from sales of equipment and repairs -- (369) (1) (465) (150) (131)
Gain on sale of hospitality division -- 747 -- -- --
Estimated loss on disposal -- (102) -- -- --
-------- -------- -------- -------- --------
Gain (loss) from discontinued operations -- 610 (2,508) 640 (131)
-------- -------- -------- -------- --------
Net earnings $ 4,262 $ 3,805 $ 1,312 $ 3,753 $ 1,858
======== ======== ======== ======== ========
Basic earnings per share
Continuing operations $ 0.93 $ 0.70 $ 0.85 $ 0.70 $ 0.64
Discontinued operations $ -- $ 0.14 $ (0.56) $ 0.14 $ (0.04)
Net earnings $ 0.93 $ 0.84 $ 0.29 $ 0.84 $ 0.60
Fully diluted earnings per share
Continuing operations $ 0.90 $ 0.70 $ 0.86 $ 0.70 $ 0.64
Discontinued operations $ -- $ 0.13 $ (0.56) $ 0.14 $ (0.04)
Net earnings $ 0.90 $ 0.83 $ 0.29 $ 0.84 $ 0.60
Weighted average common shares outstanding 4,601 4,513 4,455 4,455 3,117
</TABLE>
<TABLE>
<CAPTION>
As of December 31
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets $ 52,958 $ 43,862 $ 33,328 $ 33,035 $ 26,169
Long-term debt, less current maturities 6,801 5,726 209 85 266
Shareholders' equity 37,970 32,935 27,990 26,678 22,918
</TABLE>
(1) Includes intangible and long-lived assets charged off related to
implementation of SFAS 121.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes thereto appearing
elsewhere herein.
Certain of the statements contained below are forward-looking statements
(rather than historical facts) that are subject to risks and uncertainties that
could cause actual results to differ materially from those described in the
forward-looking statements.
GENERAL
During 1997, the Company derived its revenues from two principal sources:
coin calls and non-coin calls. Coin calls represent calls paid for by callers
with coins deposited in the payphone. Coin call revenues are recorded in the
amount of coins collected from the payphones.
Non-coin calls made from the Company's payphones generate revenues in an
amount that depends upon whether the Company or a long distance company handles
the call. If the non-coin 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 non-coin 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 non-coin calls, uses the long
distance company's switching equipment and its other services on an as-needed
basis, and pays the long distance company on an unbundled basis for the operator
services actually used to complete these calls.
The Company also recognizes non-coin revenues from calls that are dialed
from its payphones to gain access to a long distance company other than the one
pre-programmed into the telephone; this is commonly referred to as "dial-around"
access. See "Business--Regulation." The Company also derives a small amount of
non-coin revenue from certain LECs for intraLATA non-coin calls. See "Business-
Operations."
The principal costs related to the ongoing operation of the Company's
payphones include telephone charges, commissions, and service, maintenance and
network costs. Telephone charges consist of payments made by the Company to
LECs and long distance carriers for access charges and use of their networks.
Commission expense represents payments to Location Owners. Service, maintenance
and network costs represent the cost of servicing and maintaining the payphones
on an ongoing basis, costs related to the operation of the Company's switch and,
in connection with unbundled services arrangements, the fees paid for those
services.
22
<PAGE>
REGULATORY IMPACT ON REVENUE
Local Coin Rates
In ensuring "fair compensation" for all calls, the FCC previously
determined that local coin rates from payphones should be generally deregulated
by October 7, 1997, but provided for possible modifications or exemptions from
deregulation upon a detailed showing by an individual state that there are
market failures within the state that would not allow market-based rates to
develop. On July 1, 1997, a federal court issued an order which upheld the
FCC's authority to deregulate local coin call rates. In accordance with the
FCC's ruling and the court order, certain LECs and independent payphone service
providers, including the Company, began to change charges for local coin calls
from $.25 to $.35. 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,
and the Company's inability to provide assurance that deregulation, if and where
implemented, will lead to higher local coin call rates, the Company is unable to
predict the ultimate impact on its operations of local coin rate deregulation.
Dial Around Compensation
On September 20, 1996, the Federal Communications Commission ("FCC")
adopted rules which became effective November 7, 1996 (the "1996 Payphone
Order"), initially mandating dial-around compensation for both access code calls
and 800 subscriber calls at a flat rate of $45.85 per payphone per month (131
calls multiplied by $0.35 per call). Commencing October 7, 1997 and ending
October 6, 1999 the $45.85 per payphone per month rate was to transition to a
per-call system at the rate of $0.35 per call. Several parties challenged
certain of the FCC regulations including the dial-around compensation rate. On
July 1, 1997, a federal court vacated certain portions of the FCC's 1996
Payphone Order, including the dial-around compensation rate.
In accordance with the court's mandate, on October 9, 1997, the FCC adopted
a second order (the "1997 Payphone Order"), establishing a rate of $0.284 per-
call for the first two years of per-call compensation (October 7, 1997 through
October 6, 1999). The IXCs were required to pay this per-call amount to
payphone service providers, including the Company, beginning October 7, 1997.
After the first two years of per-call compensation, the market-based local coin
rate, adjusted for certain costs defined by the FCC as $0.066 per call, is the
surrogate for the per-call rate for 800 subscriber and access code calls. These
new rule provisions were made effective as of October 7, 1997.
In addition, the 1997 Payphone Order tentatively concluded that the same
$0.284 per-call rate adopted on a going-forward basis should also govern
compensation obligations during the period from November 7, 1996 through October
6, 1997, and that payphone service providers are entitled to compensation for
all access code and 800 subscriber calls during this period. The FCC stated
that the manner in which the payment obligation of the IXCs for the period from
November 7, 1996 through October 6, 1997 will be allocated among the IXCs will
be addressed in a subsequent order.
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<PAGE>
Based on the FCC's tentative conclusion in the 1997 Payphone Order, the
Company has adjusted the amounts of dial-around compensation previously recorded
for the period November 7, 1996 to June 30, 1997 from the initial $45.85 rate to
$37.20 ($0.284 per call multiplied by 131 calls). As a result of this
adjustment, the provision recorded in the year ended December 31, 1997 for
reduced dial-around compensation is approximately $1.2 million ($0.7 million net
of applicable commissions and income taxes). For periods beginning November 7,
1996, the Company has recorded dial-around compensation at the rate of $37.20
per payphone per month. The amount of dial-around revenue recognized in the
period from July 1, 1997 to October 6, 1997 for the interim period of flat-rate
compensation is approximately $2.2 million and such amount will be billed after
final resolution of the allocation obligations of the IXCs as determined by the
FCC.
The Company recorded dial-around compensation revenue, net of the provision
for dial-around compensation, of approximately $1.2 million for the period from
November 7, 1996 through December 31, 1996 and approximately $7.7 million for
the period from January 1, 1997 through December 31, 1997.
The Company believes that it is legally entitled to fair compensation under
the Telecommunications Act for dial-around calls which the Company delivered to
any carrier during the period from November 7, 1996 to October 6, 1997. Based on
the information available, the Company believes that the minimum amount it is
entitled to as fair compensation under the Telecommunications Act for the period
from November 7, 1996 to October 6, 1997 is $37.20 per payphone per month and
the Company, based on the information available to it, does not believe that it
is reasonably possible that the amount will be materially less than $37.20 per
payphone per month.
While the amount of $0.284 per call constitutes the Company's assessment of
the appropriate level of fair compensation, certain IXCs have asserted in the
past, are asserting and are expected to assert in the future that the
appropriate level of fair compensation should be lower than $0.284 per call.
The payment levels for dial-around calls prescribed in the 1996 and 1997
Payphone Orders significantly increase dial-around compensation revenues to the
Company over the levels received prior to implementation of the
Telecommunications Act. However, market forces and factors outside the Company's
control could significantly affect these revenue increases. These factors
include the following: (i) resolution by the FCC of the method of allocating the
initial interim period flat-rate assessment among the IXCs and the number of
calls to be used in determining the amount of the assessment, (ii) the
resolution of the legal appeals by both the IXCs and representatives of the PSPs
of various aspects of the 1997 Payphone Order, (iii) the possibility of other
litigation seeking to modify or overturn the 1997 Payphone Order or portions
thereof, (iv) pending litigation in the Federal courts concerning the
constitutionality or validity of the 1996 Telecommunications Act, and (v) the
IXCs' reaction to the FCC's recognition that existing regulations do not
prohibit an IXC from blocking 800 subscriber numbers from payphones in order to
avoid paying per-call compensation on such calls.
24
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
For the year ended December 31, 1997, total revenues from continuing
operations increased approximately $10.0 million or 27.1%, compared to the year
ended December 31, 1996. This growth was primarily attributable to an increase
from 15,281 payphones on December 31, 1996 to 18,909 payphones on December 31,
1997. Coin call revenues increased approximately $6.7 million, or 35.8%, driven
primarily by an increase of approximately $5.8 million in coin call revenues
resulting from the growth in the number of installed payphones and an increase
of approximately $0.9 million resulting from the acquisition and installation of
payphones at locations with favorable coin call traffic.
Non-coin call revenues increased approximately $6.3 million or 40.9%. The
increase in non-coin call revenues was primarily attributable to approximately
$6.1 million in additional revenues resulting from an increase in the rate of
dial-around call compensation associated with the implementation of the
Telecommunications Act, which became effective in November 1996 and
approximately $4.1 million in additional non-coin call revenues resulting from
the growth in the number of installed payphones. Approximately $1.3 million of
the increase is attributed to the terms of a Telecommunications Services
Agreement (the Services Agreement) connected with the sale of its hospitality
division (ComTel) in 1996 which called 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 provided that, effective January 1, 1997, gross revenues
on calls carried over Old Davel's long distance network would be recorded by
ComTel rather than by Old Davel as was the case in the prior period. Amounts
recorded as non-coin revenues by Old Davel related to the Agreement in the year
ended December 31, 1997, consisted of payments made to Old Davel for use of its
long distance network rather than the gross call revenue. The gross call revenue
was recorded as related party revenues in 1996 and 1995. The increase in non-
coin call revenues was partially offset by the fact that during the third
quarter of 1997, the Company adjusted the amounts of dial-around compensation
previously recorded for the period November 7, 1996 to June 30, 1997 from the
initial $45.85 rate to $37.20 ($0.284 per call multiplied by 131 calls). As a
result of this adjustment, non-coin call revenues for the year ended December
31, 1997, were reduced by approximately $1.2 million ($0.7 million net of
applicable commissions and income taxes). The increase in non-coin call revenues
was also offset by a decrease of approximately $4.0 million related to lower
volumes of calls per payphone routed through its long distance network due to an
increase in the number of dial-around calls placed from its payphones.
Switching services provided to Hospitality Division decreased from $2.4
million for the year ended December 31, 1996 to $0 for the year ended December
31, 1997 resulting from the terms of the Agreement. Amounts recorded by Old
Davel related to the Agreement for payments made to Old Davel for use of its
long distance network were recorded in non-coin revenues in 1997. In addition,
there was no administrative support provided to discontinued subsidiaries during
the year ended December 31, 1997.
Telephone charges remained stable at 20.4% of total revenues compared to
20.3% in the prior year. The Company's average monthly telephone charge on a per
phone basis decreased from $47.66 in 1996 to $46.36 in 1997.
Commissions, including commissions paid to the Hospitality Division,
decreased to 13.2% of total revenues compared to 17.0% in the prior year. The
decrease in commissions as a
25
<PAGE>
percentage of total revenues was primarily attributable to higher payphone
revenues. A portion of Old Davel's contracts with location owners exclude
certain types of call traffic from commission calculations, and some others are
based on flat monthly rates set by the agreements, resulting in a
disproportionate increase in payphone revenues over commissions.
Service, maintenance and network costs decreased to 22.7% of total revenues
compared to 23.1% in the prior-year period. The decrease in service, maintenance
and network costs as a percentage of total revenues was primarily attributable
to higher payphone revenues and increasing operating efficiencies achieved
through increasing density in the Company's payphone routes resulting from
expansion of its installed base of payphones. The Company's average monthly
service, maintenance and network costs on a per phone basis decreased from
$55.87 per month in 1996, to $51.69 per month in 1997.
Selling, general and administrative expenses on continuing operations
increased approximately $4.5 million, or 47.5%, from the prior year. The
increase was partially attributable to an increase in depreciation and
amortization expense which rose approximately $1.3 million or 44.6%, from the
prior year, reflecting a net increase of 3,628 installed payphones and a slight
increase in the cost of circuit boards installed in the Company's new payphone
installations to keep pace with technological innovations and more sophisticated
call tracking capabilities. The Company also incurred additional costs
associated with the opening and operation of three new divisional sales and
service offices, and the hiring of support personnel needed to service the
Company's expanding base of installed payphones.
Other income increased approximately $397,000 or 397.0% in 1997 over 1996.
This increase resulted primarily from a currently recognizable gain of
approximately $128,000 on the sale of certain assets to the Shareholder. The
assets consisted of a life insurance policy, a home and an airplane which were
subsequently leased back to the Company on terms approved by the Company's
disinterested directors. The sale price was at the estimated fair value of the
assets as determined based upon independent appraisals. The sale of the house
and airplane are being treated as a sale/leaseback and the Company will
recognize a deferred gain over the term of the leases of the house and airplane
of approximately $139,000. In the year ended December 31, 1997, the Company also
recognized interest income of approximately $235,000 on the note receivable
related to the sale of Comtel on December 31, 1996. (See Note 3 of Notes to
Consolidated Financial Statements). Interest expense in 1997 increased
approximately $186,000, or 64.4%, compared to the prior-year period. This
increase resulted primarily from an increase in long-term debt in the last two
quarters of 1996 and during 1997 for the acquisition of payphone companies and
payphone assets.
Net income from continuing operations increased approximately $1.1 million
or 33.4% from the prior year period. Net income increased approximately $457,000
or 12.0% from approximately $3.8 million in 1996 to approximately $4.3 million
in 1997. The Company's earnings on discontinued operations in 1996 included a
gain on the sale of Comtel of approximately $746,000, net of income taxes of
$439,000. Discontinued operations in 1996, before the effect of the gain on the
sale of Comtel, generated a loss of approximately $137,000, net of income taxes
and income tax benefits.
26
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
For the year ended December 31, 1996, total revenues from continuing
operations increased approximately $5.1 million or 16.2%, compared to the year
ended December 31, 1995. This growth was primarily attributable to additional
coin call revenues resulting from an increase from 11,163 payphones on December
31, 1995 to 15,281 payphones on December 31, 1996. Coin call revenues increased
approximately $4.2 million, or 29.3%. Non-coin call revenues increased
approximately $0.2 million, or 1.5%. The increase in non-coin call revenues was
primarily attributable to approximately $1.3 million in additional revenues
resulting from an increase in the rate of dial-around call compensation
associated with the implementation of the Telecommunications Act, which became
effective in November 1996, and approximately $3.2 million in additional non-
coin call revenues resulting from the growth in the number of installed
payphones. The increase in non-coin call revenues was offset by a decrease of
approximately $4.3 million related to lower volumes of calls per payphone routed
through its long distance network due principally to an increase in the number
of dial-around calls placed from its payphones. Switching services provided to
Hospitality Division increased approximately $0.6 million from $1.8 million for
the year ended December 31, 1995 to $2.4 million for the year ended December 31,
1996. Switching services provided to Hospitality Division related to long
distance services provided through a Telecommunications Service Agreement with
its hospitality division. The increase is attributable to additional long
distance traffic routed through the Company's switching equipment.
Administrative support provided to discontinued subsidiaries increased
approximately $100,000 to approximately $600,000 for the year ended December 31,
1996 from approximately $500,000 for the year ended December 31, 1995. The
increase is attributable to the shifting of administrative functions from the
Hospitality Division's office in Colorado to the Company's administrative office
in Illinois.
Telephone charges increased to 20.3% of total revenues compared to 19.1% in
the prior year. The increase in telephone charges as a percentage of total
revenues was primarily attributable to lower monthly long distance revenues as a
result of an increase in dial-around calls placed from the Company's payphones.
However, the Company's average monthly telephone charge on a per phone basis
decreased from $50.98 in 1995 to $47.66 in 1996.
Commissions, including commissions paid to Hospitality Division, increased
to 17.0% of total revenues compared to 15.6% in the prior year. The increase in
commissions as a percentage of total revenues was primarily attributable to
lower long distance revenues as a result of an increase in dial-around calls
placed from the Company's payphones. Commissions to Location Owners in 1996
actually decreased on a per phone basis by approximately 9.5% from 1995 as a
result of lower long distance revenues resulting from an increase in dial-around
calls placed from the Company's payphones. In addition, commissions paid to its
hospitality division increased by 0.5% in 1996 over 1995, accounting for
approximately one-half of the increase in commissions as a percentage of total
revenue.
Service, maintenance and network costs remained relatively stable at 23.1%
of total revenues compared to 23.2% in the prior-year period. The Company's
average monthly service, maintenance and network costs on a per phone basis
decreased from $61.84 per month in 1995 to $55.87 per month in 1996 due to
operating efficiencies achieved through expansion of the Company's installed
payphone base.
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<PAGE>
Selling, general and administrative expenses increased approximately $2.1
million, or 29.2%, from the prior year. The increase was primarily attributable
to an increase in depreciation and amortization expense which rose approximately
$850,000 or 39.8%, from the prior year, reflecting a 36.9% increase in the
number of installed payphones. The Company also incurred additional costs
associated with the opening and operation of four new divisional sales and
service offices and the hiring of support personnel needed to service the
Company's expanding base of installed payphones.
Other income decreased approximately $25,000 or 20.0% in 1996 over
1995. This decrease resulted primarily from lower cash balances available for
investment due to the use of cash for the acquisition and installation of
additional payphones during 1996. Interest expense in 1996 increased
approximately $241,000, or 502.1%, compared to the prior-year period. This
increase was primarily attributable to the incurrence of approximately $5.6
million in debt in connection with the acquisition of payphones during 1996.
Net income from discontinued operations increased approximately $3.1
million or 124.3% over the prior year period, rising to approximately $610,000
in 1996 from a loss of approximately $2.5 million in 1995. The Company's net
income on discontinued operations in 1996 included a gain on the sale of Comtel
of approximately $746,000, net of income taxes of $439,000. Discontinued
operations in 1996, before the effect of the gain on the sale of Comtel,
generated a loss of approximately $137,000, net of income taxes and income tax
benefits. Net income from discontinued operations in 1995 included non-
recurring charges of approximately $2.9 million due to impairment of intangible
and long-lived assets after applying certain provisions of SFAS 121.
Discontinued operations in 1995, before the effect of the non-recurring charges,
generated earnings of approximately $204,000, net of income taxes and income tax
benefits.
Net income from continuing operations decreased approximately $625,000 or
16.4% from the prior year period. Net earnings increased approximately $2.5
million or 190.0% from approximately $1.3 million in 1995 to approximately $3.8
million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
As of December 31, 1997, the Company had a current ratio of 3.25 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 $10.3 million as of December
31, 1997. This decrease in working capital resulted primarily from a decrease in
cash and cash equivalents related primarily to capital expenditures for new
payphone installations and an increase of approximately $1.4 million in current
maturities of long-term debt related to borrowings on the Company's credit line
during 1997 for the acquisition of payphone companies and payphone assets. The
Company also experienced an increase of approximately $3.0 million in accounts
receivable during the period related primarily to an increase in dial-around
call compensation receivable.
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The Company's capital expenditures, exclusive of acquisitions, for the
years ended December 31, 1997 and 1996 were $4.1 million and $5.1 million,
respectively. The Company's capital expenditures primarily consisted of costs
associated with the installation of new payphones. The Company made acquisitions
of payphones totaling approximately $7.1 million and $8.6 million, respectively,
during the years 1997 and 1996. In 1997, the Company financed its capital
expenditures and acquisitions primarily with approximately $5.6 million in cash
provided by continuing operations and an increase in long-term debt and current
maturities of long term debt of approximately $2.5 million. In 1996, the
Company financed its capital expenditures and acquisitions primarily with
approximately $5.9 million in cash provided by continuing operations and an
increase in long-term debt of approximately $5.5 million.
Credit Agreement
On September 30, 1996, the Company entered into a $25 million revolving
line of credit with NationsBank, N.A. (the "1996 Credit Agreement"), with
provisions to convert up to $17.5 million of the line of credit to term loans.
The terms of the agreement called for the Company to pay interest on a graduated
scale based on NationsBank, N.A.'s Corporate Base Rate ("CBR"), which was 8.50%
on December 31, 1997. The interest rate was indexed based on the Company's ratio
of funded debt to EBITDA as defined in the 1996 Credit Agreement and adjusted
based on market interest rates for CBR and LIBOR. The maturity date of the
revolving portion of the credit facility was September 30, 2001. Principal
outstanding on each term loan under the convertible portion of the credit
facility was scheduled to be payable in 12 to 20 quarterly installments with the
last installment due no later than September 30, 2003.
In connection with the CCI Acquisition, the Company entered into a credit
agreement dated as of February 3, 1998, with NationsBank, N.A., as
Administrative Agent, SunTrust Bank, Tampa Bay, as Documentation Agent, LaSalle
National Bank, as Co-Agent, and other lenders (the "Lenders"), pursuant to which
the Lenders made available to the Company an initial revolving loan commitment
(the "Revolving Credit Facility") of $15 million, including a $5.0 million
sublimit available for the issuance of letters of credit, and a term commitment
(the "Term Loan Facility") of $110 million (the "1998 Credit Agreement"). The
balance outstanding of $8.7 million outstanding on the 1996 Credit Agreement was
refinanced simultaneously with the signing of the 1998 Credit Agreement and is
included as part of the balances outstanding on the 1998 Credit Agreement.
The loans outstanding under the Term Loan Facility and the Revolving Credit
Facility (the "Senior Indebtedness") bear interest, at the Company's option,
equal to (i) the Base Rate (as defined in the 1998 Credit Agreement ) plus a
margin of 1.25% or (ii) LIBOR (as defined in the 1998 Credit Agreement), based
on one, two, three or six month periods, plus a margin of 2.75%, with the
applicable margins for the Term Loan Facility and the Revolving Credit Facility
being subject to reductions based on the Company's ratio of Funded Debt (as
defined in the 1998 Credit Agreement) to EBITDA (as defined in the 1998 Credit
Agreement) at given times. As of March 24, 1998, the interest rates on the Term
Loan Facility and on a $2.0 million and an $8.0 million note outstanding under
the Revolving Credit Facility were 8.38%, 9.75% and 8.44%, respectively.
Amounts outstanding under the Term Loan Facility are required to be repaid
in consecutive quarterly installments, the first three of which (each in the
aggregate principal
29
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amount of approximately $3.33 million) are due on the last day of each of the
first three calendar quarters commencing with the quarter ending June 30, 1998.
The next 20 installments in the aggregate principal amount of $5.0 million each
will be due on the last day of each calendar quarter commencing with the quarter
ending March 31, 1999. The final installment under the Term Loan Facility will
be payable on February 3, 2004. The Revolving Credit Facility will mature on
February 3, 2004. As of March 31, 1998, $110.0 million in outstanding principal
amount had been borrowed under the Term Loan Facility and $10.0 million in
outstanding principal amount had been borrowed under the Revolving Credit
Facility.
Loans under the Term Loan Facility and the Revolving Credit Facility may be
prepaid at any time and are subject to certain mandatory prepayments in an
amount equal to (i) 100% of the net proceeds in excess of $1.0 million received
from the issuance of equity by the Company or its subsidiaries, (ii) 100% of the
net proceeds from certain asset sales in excess of $0.5 million in any calendar
year and (iii) 50% (75% for the Company's 1998 fiscal year) of the Company's
Excess Cash Flow (as defined in the 1998 Credit Agreement) if the ratio of its
Funded Debt to EBITDA as of the last day of the fiscal year is less than 2.5 to
1.0. It is expected that the Company will pay to the Senior Lenders 100% of the
net proceeds from the Offering described herein as a permanent reduction in the
principal amount of Senior Indebtedness. Prepayments under the Revolving Loan
Facility will be applied first to reduce Base Rate loans until they are reduced
to zero and then to reduce LIBOR loans.
The Term Loan Facility and the Revolving Credit Facility are guaranteed, on
a joint and several basis, by the Company and certain of the direct and indirect
subsidiaries of the Company. The 1998 Credit Agreement contains representations
and warranties, affirmative and negative covenants and events of default
customary for similar financings.
The Company believes that cash generated from operations and available
borrowings under the credit facility will be sufficient to fund the Company's
foreseeable cash requirements, including capital expenditures through February
3, 2004. The Company also believes that it will be able to fund any future
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.
General operating expenses such as salaries, employee benefits and occupancy
costs are, however, subject to normal inflationary pressures.
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SEASONALITY
The Company's revenues from its payphone operating regions are affected by
seasonal variations, geographic distribution of payphones and type of location.
Because many of the Company's payphones are located outdoors, weather patterns
have differing effects on the Company's results depending on the region of the
country where they are located. Most of the Company's payphones in Florida
produce substantially higher call volume in the first and second quarters than
at other times during the year, while the Company's payphones throughout the
midwestern and eastern United States produce their highest call volumes during
the second and third quarters. While the aggregate effect of the variations in
different geographical regions tend to counteract the effect of one another, the
Company has historically experienced higher revenue and income in the second and
third quarters than in the first and fourth quarters. Changes in the
geographical distribution of its payphones may in the future result in different
seasonal variations in the Company's results.
YEAR 2000 ISSUE
The Company is working to resolve the potential impact of the year 2000 on
the ability of the Company's computerized information systems to accurately
process information that may be date-sensitive. Any of the Company's programs
that recognize a date using "00" as the year 1900 rather than the year 2000
could result in errors or system failures. The Company utilizes a number of
computer programs across its entire operation. The Company has assessed the
impact of the year 2000 on both its computer programs and its computer systems.
As the Company acquires other payphone assets, it will continue to assess the
impact of the year 2000 on such acquired assets. To date, the Company has spent
approximately $0.1 million in assessing and addressing year 2000 issues and
estimates that its total costs will not exceed $0.2 million, which is
approximately 10% of the Company's budgeted expenditures for information
technology. The Company does not believe that these costs will have a material
effect on its financial position. The Company is also in the process of
addressing the potential impact of the year 2000 on its suppliers and other
parties on whom it relies in providing payphone and operator services. The
Company intends to complete this assessment by December 31, 1998. The failure
of third parties on which the Company relies to address their year 2000 issues
in a timely manner could result in a material financial risk to the Company.
Through its assessment of the impact of year 2000 on both its computer programs
and systems, the Company believes that it has sufficient resources available to
implement new and modified computer systems to address the impact of the year
2000, and accordingly, has not to date identified any need for other contingency
planning. However, the Company's continuing assessment of its assets and of
third parties external to the Company may reveal the need for contingency
planning in the future. The Company plans to devote all resources required to
resolve any significant year 2000 issues in a timely manner.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
PAGE NUMBERS
------------
<S> <C>
Independent Auditors' Report of Arthur Andersen LLP
for the year ended December 31, 1997 33
Independent Auditors' Report of Kerber, Eck & Braeckel LLP
for the years ended December 31, 1996 and 1995 34
Consolidated Balance Sheets for December 31,
1997 and 1996 35
Consolidated Statements of Income for the years
ended December 31, 1997, 1996 and 1995 36
Consolidated Statements of Shareholders'
Equity for the years ended December 31,
1997, 1996 and 1995 37
Consolidated Statements of Cash Flows for
the years ended December 31, 1997, 1996 and 1995 38
Notes to Consolidated Financial Statements 39
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no reported disagreements on any matter of accounting
principles or practice or financial statement disclosure at any time during the
twenty-four months prior to December 31, 1997.
On January 30, 1998, the Company filed a Current Report on Form 8-K to
report that it had engaged Arthur Andersen LLP as its independent auditors for
the fiscal year ended December 31, 1997. The Registrant informed its previous
independent accountants, Kerber, Eck & Braeckel LLP of its dismissal on January
26, 1998.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Davel Communications Group, Inc.:
We have audited the accompanying consolidated balance sheet of Davel
Communications Group, Inc. (an Illinois corporation) and Subsidiaries as of
December 31, 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Davel
Communications Group, Inc. and Subsidiaries as of December 31, 1997, and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
March 6, 1998
33
<PAGE>
Independent Auditors' Report
----------------------------
Board of Directors and Shareholders
Davel Communications Group, Inc.
We have audited the accompanying consolidated balance sheet of Davel
Communications Group, Inc. (an Illinois corporation) and Subsidiaries as of
December 31, 1996, and the related consolidated statements of income,
shareholders' equity, and cash flows for years ended December 31, 1996 and 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Davel
Communications Group, Inc. and Subsidiaries as of December 31, 1996, and the
consolidated results of their operations and their consolidated cash flows for
years ended December 31, 1996 and 1995, in conformity with generally accepted
accounting principles.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 14, 1997
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DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
-------------------------------------------------------
(In thousands, except per share and share data)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,567 $ 4,630
Trade accounts receivable, net of allowance for doubtful accounts of $185 and $154,
respectively 9,105 6,079
Note receivable 2,536 2,301
Other current assets 702 1,745
---------- ----------
Total current assets 14,910 14,755
PROPERTY AND EQUIPMENT 34,528 26,888
OTHER ASSETS, net 3,520 2,219
---------- ----------
Total assets $ 52,958 $ 43,862
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,501 $ 69
Accounts payable 1,257 1,044
Accrued liabilities 1,832 1,512
---------- ----------
Total current liabilities 4,590 2,625
---------- ----------
LONG-TERM DEBT 6,801 5,726
---------- ----------
DEFERRED INCOME TAXES 3,597 2,576
---------- ----------
SHAREHOLDERS' EQUITY:
Preferred stock - $.01 par value, 1,000,000 shares authorized but unissued - -
Common stock - $.01 par value, 10,000,000 shares authorized, 4,629,323 and 4,581,269
shares issued and outstanding, respectively 46 46
Additional paid-in capital 20,685 19,912
Retained earnings 17,239 12,977
---------- ----------
Total shareholders' equity 37,970 32,935
---------- ----------
Total liabilities and shareholders' equity $ 52,958 $ 43,862
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
35
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------------------------------------
(In thousands, except per share and share data)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Coin calls $ 25,211 $ 18,560 $ 14,357
Non-coin calls, net of 1997 dial-around compensation adjustment--
Note 16 21,797 15,471 15,249
Swithching services provided to Hopitality Division--Note 8 - 2,359 1,751
Administrative support provided to discontinued subsidiaries--Note 8 - 583 473
--------- --------- ---------
Total revenues 47,008 36,973 31,830
--------- --------- ---------
COSTS AND EXPENSES:
Telephone charges 9,576 7,501 6,076
Commissions 6,202 4,605 3,852
Service, maintenance and network costs 10,685 8,546 7,371
Selling, general and administrative 13,846 9,388 7,269
Commisions paid to Hospitality Division--Note 8 - 1,681 1,116
--------- --------- ---------
Total operating costs and expenses 40,309 31,721 25,684
--------- --------- ---------
Operating profit 6,699 5,252 6,146
INTEREST EXPENSE (475) (289) (48)
OTHER 497 100 125
--------- --------- ---------
Income from continuing operations before income taxes 6,721 5,063 6,223
PROVISION FOR INCOME TAXES 2,459 1,868 2,403
--------- --------- ---------
Net income from continuing operations 4,262 3,195 3,820
DISCONTINUED OPERATIONS - 610 (2,508)
--------- --------- ---------
Net income $ 4,262 $ 3,805 $ 1,312
========= ========= =========
BASIC EARNINGS PER SHARE:
Continuing operations $ .93 $ .70 $ .85
--------- --------- ---------
Discontinued operations - .14 (.56)
--------- --------- ---------
Basic earnings per share $ .93 $ .84 $ .29
========= ========= =========
DILUTED EARNINGS PER SHARE:
Continuing operations $ .90 $ .70 $ .85
--------- --------- ---------
Discontinued operations - .13 (.56)
--------- --------- ---------
Diluted earnings per share $ .90 $ .83 $ .29
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 4,600,725 4,513,035 4,455,000
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
36
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------------------------------------
(In thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional
-------------------------
Paid-In Retained
Shares Amount Capital Earnings Total
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 4,455,000 $45 $18,773 $ 7,860 $26,678
Net income for the year ended December 31,
1995 - - - 1,312 1,312
------------ ------ ----------- -------- ----------
BALANCE, December 31, 1995 4,455,000 45 18,773 9,172 27,990
Stock options and warrants exercised 126,269 1 1,139 - 1,140
Net income for the year ended December 31,
1996 - - - 3,805 3,805
------------ ------ ----------- -------- ----------
BALANCE, December 31, 1996 4,581,269 46 19,912 12,977 32,935
Stock options exercised and grants of
common stock 48,054 - 773 - 773
Net income for the year ended December 31,
1997 - - - 4,262 4,262
------------ ------ ----------- -------- ----------
BALANCE, December 31, 1997 4,629,323 $46 $20,685 $17,239 $37,970
============ ====== =========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
37
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
----------------------------------------------------
(In thousands)
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,262 $ 3,805 $ 1,312
Adjustments to reconcile net income to cash flows from operating activities-
Gain on sale of discontinued operations - (644) -
Losses from discontinued operations - 35 2,508
Depreciation and amortization 4,316 2,986 2,136
Gain on sale of property and equipment (156) (1) (6)
Deferred income taxes 1,021 833 45
Nonrecurring charge - - 215
Changes in assets and liabilities, net of effects from acquisition-
Accounts receivable (3,026) 447 (1,658)
Note receivable (235) - -
Other assets (1,102) (929) (81)
Accounts payable 213 (1,104) 392
Accrued liabilities 320 471 (364)
----------- ---------- ----------
Net cash from operating activities 5,613 5,899 4,499
Net cash from discontinued operations - 671 355
----------- ----------- ----------
Net cash flows from operating activities 5,613 6,570 4,854
----------- ----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,092) (5,092) (5,585)
Proceeds from sale of property and equipment 26 - 31
Proceeds from sale of discontinued operations - 2,654 -
(Increase) decrease in cash value of life insurance 93 (9) (6)
Purchase of payphone assets, net of cash (7,131) (8,570) (1,688)
----------- ----------- ----------
Net cash flows from investing activities (11,104) (11,017) (7,248)
----------- ----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 13,660 7,411 -
Payments on long-term debt (11,005) (1,906) (73)
Issuance of common stock through stock options and warrants 773 1,139 -
----------- ----------- ----------
Net cash flows from financing activities 3,428 6,644 (73)
----------- ----------- ----------
Net (decrease) increase in cash and cash equivalents (2,063) 2,197 (2,467)
CASH AND CASH EQUIVALENTS, beginning of period 4,630 2,433 4,900
----------- ----------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 2,567 $ 4,630 $ 2,433
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
38
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
-------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1997, 1996 AND 1995
--------------------------------
(Dollars in thousands, except per share and share data)
1. DESCRIPTION OF BUSINESS:
------------------------
Davel Communications Group, Inc. and Subsidiaries (the Company) operates,
services and maintains a system of approximately 19,000 payphones in 36 states
and provides operator services to these payphones. The Company's headquarters
is located in Tampa, Florida, with divisional and administrative facilities in
19 dispersed geographic locations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
Principles of Consolidation
- ---------------------------
The accompanying financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions are eliminated in consolidation, except as noted in Note 8.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Concentrations of Credit Risk
- -----------------------------
Receivables have a significant concentration of credit risk in the
telecommunications industry. In addition, a significant amount of receivables
are generated by approximately 22% of the Company's payphones located in the
state of Florida.
Fair Value of Financial Instruments
- -----------------------------------
The fair value of the Company's financial instruments approximate their carrying
amounts. Fair value for all financial instruments other than long-term debt,
for which no quoted market prices exist, were based on appropriate estimates.
The value of the Company's long-term debt is estimated based on market prices
for similar issues or on the current rates offered to the Company for debt of
the same remaining maturities.
Property and Equipment
- ----------------------
Property and equipment is stated at cost and depreciation is provided over the
estimated useful lives using straight-line and accelerated methods. Installed
payphones and related equipment includes installation and other costs which are
capitalized and amortized over the estimated useful lives of the equipment. The
costs associated with maintenance, repair and refurbishment of telephone
equipment are charged to expense as incurred.
39
<PAGE>
Other Assets
- ------------
Other assets include costs associated with obtaining written and signed location
contracts, goodwill and other intangibles. Costs associated with obtaining
location contracts are amortized on a straight-line basis over the life of the
contract, based on contract terms and historical renewal rates, generally 5
years. Goodwill and other intangibles are amortized on a straight-line basis
over periods estimated to be benefited, generally 10 years. Accumulated
amortization as of December 31, 1997 and 1996 was approximately $1,113 and $646,
respectively.
The Company periodically evaluates the carrying amount of other assets,
considering whether the undiscounted cash flows from related operations will be
sufficient to recover recorded asset amounts.
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
fees associated with the call.
Income Taxes
- ------------
The Company has accounted for income taxes under SFAS No. 109, an asset and
liability approach to accounting and reporting for income taxes. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
Earnings Per Share
- ------------------
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128 (SFAS 128) during the year ended December 31, 1997, and all
prior period earnings per share data has been presented on this basis.
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.
Reclassification
- ----------------
Certain reclassifications have been made to conform to the 1997 presentation.
3. DISCONTINUED OPERATIONS:
------------------------
Sale of Hospitality Division
- ----------------------------
On December 31, 1996, the Company sold its Hospitality Division, ComTel Computer
Corp. (ComTel), in a stock sale agreement for approximately $5,000 (cash
proceeds of $2,700 and a note receivable of $2,300). The note receivable was
amended as of December 31, 1997, and has a maturity date of November 30, 1998,
with a stated interest rate of 9.75% per annum. The Company holds a first
security interest in the assets and common stock of ComTel. The sale resulted
in a gain of $746, after tax expense of $439 and added $.16 to the 1996 net
earnings per share. The Company recorded a gain from operations of $334 and a
loss of $2,043, net of income taxes of $115 and $243, respectively in 1996 and
1995.
The disposal of 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 income and cash flows for all
periods presented.
40
<PAGE>
Remanufacturing Division
- ------------------------
During the fourth quarter of 1996, the Company committed to discontinue its
remanufacturing operations. This disposition has been reported as a
discontinued operation and accordingly, results of its Remanufacturing Division
have been excluded from continuing operations in the consolidated statements of
income and cash flows for all periods presented. The net assets of $599 have
been separately classified in other current assets in the accompanying balance
sheet at December 31, 1996, related to the disposal of this division. The sale
resulted in a loss of $102, after a tax benefit of $63. The Company recorded
losses from operations of $369 and $465, net of income tax benefits of $192 and
$268, respectively in 1996 and 1995.
4. NONRECURRING CHARGE:
--------------------
In 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". A nonrecurring
charge of $2,700 related to intangible assets purchased in the April 1994
acquisition of ComTel has been included in discontinued operations. Acquired
contracts with hotel and motel properties for operator services represent $2,500
of the charge, and acquired research and development costs represent the
remaining $200. The Company determined the future cash flows from these
impaired assets to be negligible and considered a complete write-down of the
remaining intangible balances to be appropriate.
5. ACQUISITIONS:
-------------
During the years ended December 31, 1997 and 1996, the Company made
acquisitions, each of which has been accounted for as a purchase. The
consolidated financial statements include the operating results of each business
from the date of acquisition. Pro forma results of operations have not been
presented because the effects of each of these acquisitions were not
significant. For all transactions, the purchase price was allocated to
payphones and associated assets and, in some instances, noncompete agreements
and goodwill. These acquisitions included a total of 2,861 and 2,767 payphones
in 1997 and 1996, respectively, for purchase prices totaling $7,131 and $8,570,
respectively.
6. OTHER CURRENT ASSETS:
---------------------
Other assets consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Prepaid income taxes $ 126 $ 805
Discontinued operations - 599
Other 576 341
------- -------
Total other current assets $ 702 $ 1,745
======= =======
</TABLE>
41
<PAGE>
7. PROPERTY AND EQUIPMENT:
-----------------------
Property and equipment is summarized as follows at December 31:
<TABLE>
<CAPTION>
Estimated
Useful Life
1997 1996 in Years
----------- ------------ --------------
<S> <C> <C> <C>
Installed payphones and related equipment $ 41,561 $30,849 10
Vehicles and other equipment 1,654 1,679 5-39
---------- ----------
43,215 32,528
Less- Accumulated depreciation (11,943) (8,567)
---------- ----------
31,272 23,961
Uninstalled payphone equipment 3,256 2,927
---------- ----------
$ 34,528 $26,888
========== ==========
</TABLE>
8. RELATED-PARTY NOTES AND TRANSACTIONS:
-------------------------------------
Transactions With Shareholder
- -----------------------------
The Company engaged in the following transactions with a shareholder.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Payments made for rent of commercial real estate and lease of long distance
switching equipment $ 196 $ 239 $ 232
======== ======== ========
Payments received for providing administrative services $ 107 $ 122 $ 127
======== ======== ========
</TABLE>
During 1997, the Company sold a life insurance policy, a house and an airplane
to Mr. David Hill (the Shareholder) who owns 50.2% of the Company's outstanding
common stock. The sale price was at the estimated fair value of the assets as
determined based upon independent appraisals and the sale resulted in a gain of
$273. The house and the airplane were subsequently leased back to the Company
and the gain was deferred and is being recognized ratably over the term of the
lease. During 1997, the Company recognized $128 of the deferred gain.
In September 1997, the Company purchased the long distance switching equipment
that had previously been leased from the Shareholder. The price of $378 was the
estimated fair market of the equipment based upon independent appraisals.
Intercompany Profits and Losses
- -------------------------------
As the Hospitality and Remanufacturing Divisions' results of operations have
been excluded from continuing operations in the consolidated statements of
income for the years ended December 31, 1996 and 1995, certain intercompany
transactions were not eliminated. These transactions include: a) revenue from
directing call traffic from the Hospitality Division to the Company's switching
equipment, b) income from providing administrative support to the discontinued
subsidiaries and c) commissions paid to the Company's Hospitality Division for
directing call traffic through the Company's switching equipment.
42
<PAGE>
The Stock Purchase Agreement for the sale of the Hospitality Division provided
for a contractual relationship between the Company and the buyer for continuing
use of the Company's switching equipment through December 31, 1997, at a rate
structure substantially as provided during 1996.
9. LONG-TERM DEBT:
---------------
Following is a summary of long-term debt as of December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Term note payable to the bank at the bank's adjusted LIBOR rate (7.66% at December
31, 1997), principal payments of $375 plus interest due quarterly beginning
October 1, 1997, collateralized by the Company's assets
$7,125 $ -
Revolving Advance on bank's line of credit at the bank's corporate base rate (8.50%
and 8.25% at December 1997 and 1996, respectively), interest due monthly with the
principal due September 30, 2001, collateralized by the Company's assets
1,176 5,590
Notes payable to banks and others with interest rates ranging from 5.90% to 9.95%
due at various dates ending March 1998 1 205
--------- ---------
8,302 5,795
Less- Current maturities 1,501 69
--------- ---------
$6,801 $5,726
========= =========
</TABLE>
<TABLE>
<CAPTION>
Annual maturities of long-term debt are as follows:
<S> <C>
Year ended December 31:
1998 $1,501
1999 1,500
2000 1,500
2001 2,676
2002 1,125
</TABLE>
Effective September 30, 1996, the Company expanded the size of its revolving
bank line of credit from $15 million to $25 million. This line of credit
provides for the conversion of 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 the bank's Corporate Base Rate (CBR). 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.
The line of credit agreement requires, among other things, that the Company meet
minimum net worth and current ratio requirements and contains certain other
restrictions related to use of proceeds, compensating balances, types of
investments and the assumption of additional debt.
43
<PAGE>
10. OPERATING LEASE COMMITMENTS:
----------------------------
The Company conducts a portion of its operations in leased facilities under
noncancelable operating leases expiring at various dates through 2004. Some of
the operating leases provide the Company pay taxes, maintenance, insurance and
other occupancy expenses applicable to leased premises.
The annual minimum rental commitments under operating leases are as follows:
<TABLE>
<CAPTION>
Year ended December 31:
<S> <C>
1998 $ 345
1999 230
2000 127
2001 103
2002 103
Thereafter 52
-----
Total minimum payments required $ 960
=====
</TABLE>
Rent expense for operating leases from continuing operations for the year ended
December 31, 1997, 1996 and 1995 was $364, $213 and $169, respectively.
11. CAPITAL STOCK TRANSACTIONS:
---------------------------
Preferred Stock
- ---------------
The Company's articles of incorporation authorize 1,000,000 shares of preferred
stock, par value $.01 per share. The Company does not have any immediate plans
to issue any shares of preferred stock.
Stock Options and Warrants
- --------------------------
The Company maintains a Stock Option Plan and a Directors' Stock Option Plan,
accounted for under APB Opinion 25. The plans provide for the grant of
nonqualified options to purchase shares of common stock and outright grants of
common stock. For the year 1997, 25,004 outright stock grants were issued. The
Company has 55,000 warrants outstanding with an exercise price of $15.60 issued
in connection with the Company's initial public offering in 1993 that are
scheduled to expire in 1998.
The maximum number of shares of common stock reserved for issuance under the
Stock Option Plan and the Directors' Stock Option Plan are 1,000,000 and 150,000
shares, respectively, and the maximum term of the options is five years.
Generally, key employee options vest in three equal installments. Nonemployee
Directors' options become fully vested upon receipt. The exercise price of each
option generally equals the market price of the Company's stock on the date of
grant. Accordingly, no compensation cost has been recognized for options
granted under the plans. Had compensation cost for the plans been determined
based on the fair value of the options at the grant dates consistent with the
method of Statement of Financial Accounting Standards 123, "Accounting for
Stock-Based Compensation" (SFAS 123), the Company's net earnings and earnings
per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C> <C>
Net earnings As reported $4,262 $3,805 $1,312
Pro forma $4,150 $3,206 $1,283
Basic earnings per common share As reported $ .93 $ .84 $ .29
Pro forma $ .90 $ .71 $ .29
</TABLE>
44
<PAGE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing method with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995: dividend yield of 0% for
all years; expected volatility of 54.0%, 32.9% and 43.4%, respectively, risk-
free interest rates of 5.7%, 6.2% and 5.9%, respectively, and expected life of
approximately five years.
A summary of the status of the Company's stock option plans as of December 31
and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- ------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ ------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year
501,900 $14.07 420,774 $12.63 414,674 $12.67
Granted 33,700 16.02 255,000 14.66 12,000 11.88
Exercised (23,050) 13.60 (173,874) 12.36 - -
Expired (1,000) 12.38 - - (5,900) 13.42
---------- ---------- ----------
Outstanding at end of
year 511,550 $14.22 501,900 $14.07 420,774 $12.63
=========== ====== ========== ====== ========== ======
Options exercisable at
year-end 511,550 $14.22 276,566 $13.44 344,672 $12.61
Weighted-average fair
value of options
granted during the
year $ 6.04 $ 3.98 $ 3.85
</TABLE>
The following information applies to options outstanding at December 31, 1997:
<TABLE>
<S> <C>
Number outstanding 511,550
Range of exercise prices $9.25 - $17.00
Weighted-average exercise price $14.22
Weighted-average remaining contractual life 2.57 years
</TABLE>
12. EARNINGS PER SHARE:
-------------------
In accordance with SFAS 128, the following tables reconcile net income and
weighted average shares outstanding to the amounts used to calculate the basic
and diluted earnings per share for each of the years ended December 31, 1997,
1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Weighted average shares outstanding 4,600,725 4,513,035 4,455,000
Assumed exercise of options and warrants
(treasury stock method) 126,016 50,557 -
------------- ------------- -------------
Diluted shares outstanding 4,726,741 4,563,592 4,455,000
============= ============= =============
</TABLE>
Options to purchase 420,774 shares of common stock at a weighted average
purchase price of $12.63 per share were outstanding during 1995 but were not
included in the computation of diluted Earnings Per Share because the options'
exercise price was greater than the average market price of the common shares.
45
<PAGE>
13. INCOME TAXES:
-------------
Deferred income taxes arise from temporary differences between the tax bases of
assets and liabilities and their reported amounts in the financial statements.
Deferred tax assets or liabilities at the end of each period are determined
using the tax rate expected to be in effect when taxes are actually paid or
recovered. Income tax provisions will increase or decrease in the same period
in which a change in tax rates is enacted.
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- --------- ----------
<S> <C> <C> <C>
Currently payable:
Federal $ 1,323 $ 828 $ 1,968
State 115 207 299
--------- --------- ---------
1,438 1,035 2,267
Deferred 1,021 833 136
--------- --------- ---------
Income tax from continuing operations 2,459 1,868 2,403
Income tax expense (benefit) from discontinued operations - 300 (25)
--------- --------- ---------
Total income tax expense $ 2,459 $ 2,168 $ 2,378
========= ========= =========
</TABLE>
Deferred tax assets and liabilities consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
Net Net Net Net
Current Noncurrent Current Noncurrent
----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Assets:
Capital loss carryforward $ - $ 561 $ - $ 561
State net operating loss and AMT carryforwards 135
- - -
Other 82 63 79 27
----- --------- ----- ---------
82 759 79 588
Liabilities:
Depreciation - (3,795) - (2,603)
----- --------- ----- ---------
Subtotals 82 (3,036) 79 (2,015)
Valuation allowance - (561) - (561)
----- --------- ----- ---------
Deferred taxes $82 $(3,597) $79 $(2,576)
</TABLE>
46
<PAGE>
A deferred tax asset of $561 has been provided for the $1.5 million of tax-basis
capital loss carryover on the sale of Com Tel. A valuation allowance for 100%
of this deferred tax asset has been provided to reduce the asset to the amount
of tax benefit management believes it will most likely realize. As time passes,
management believes it will be able to better assess the amount of tax benefit
it will realize from applying this capital loss. The capital loss carryover
expires December 31, 2001.
A reconciliation of federal statutory income taxes to the Company's effective
tax provision is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Provision for federal income tax at the statutory rate (34%) $2,285 $1,722 $2,116
State income taxes, net of federal benefit 218 167 205
Capital losses - 152 (49)
Other, net (44) (173) 131
--------- --------- ---------
Income taxes from continuing operations 2,459 1,868 2,403
Income tax expense (benefit) from discontinued operations - 300 (25)
--------- --------- ---------
Total income tax expense $2,459 $2,168 $2,378
========= ========= =========
</TABLE>
14. 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.
The Company will match 50% of the participants' elective deferrals not exceeding
3% of the participants' compensation. Profit sharing expense was $53, $46 and
$35 for 1997, 1996 and 1995, respectively.
15. STATEMENT OF CASH FLOWS:
------------------------
Cash paid during the years ended December 31 for interest and income taxes was
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- ---------
<S> <C> <C> <C>
Interest $ 196 $ 367 $ 142
======== ========= =========
Income tax payments $ 312 $2,129 $2,433
======== ========= =========
</TABLE>
In 1997, noncash investing and financing transactions included the sale of
certain fixed assets and a life insurance policy to the Shareholder in exchange
for phone switching equipment and the assumption of two corporate loans totaling
$148.
In 1996, noncash investing activities included a note receivable of $2.3 million
for the sale of the Hospitality Division.
16. PROVISION FOR DIAL-AROUND COMPENSATION:
---------------------------------------
47
<PAGE>
On September 20, 1996, the Federal Communications Commission (FCC) adopted rules
in a docket entitled In the Matter of Implementation of the Payphone
Reclassification and Compensation Provisions of the Telecommunications Act of
1996, FCC 96-388 (the 1996 Payphone Order), implementing the payphone provisions
of Section 276 of the Telecommunications Act of 1996 (the Telcom Act). The 1996
Payphone Order, which became effective November 7, 1996, initially mandated
dial-around compensation for both access code calls and 800 subscriber calls at
a flat rate of $45.85 per payphone per month (131 calls multiplied by $0.35 per
call). Commencing October 7, 1997, and ending October 6, 1998 the $45.85 per
payphone per month rate was to transition to a per-call system at the rate of
$0.35 per call. Several parties filed petitions for judicial review of certain
of the FCC regulations including the dial-around compensation rate. On July 1,
1997, the U.S. Court of Appeals for the District of Columbia Circuit (the Court)
responded to appeals related to the 1996 Payphone Order by remanding certain
issues to the FCC for reconsideration. These issues included, among other
things, the manner in which the FCC established the dial-around compensation for
800 subscriber and access code calls, the manner in which the FCC established
the interim dial-around compensation plan and the basis upon which interexchange
carriers (IXCs) would be required to compensate payphone service providers
(PSPs). The Court remanded the issue to the FCC for further consideration, and
clarified on September 16, 1997, that it had vacated certain portions of the
FCC's 1996 Payphone Order, including the dial-around compensation rate.
Specifically, the Court determined that the FCC did not adequately justify (i)
the per-call compensation rate for 800 subscriber and access code calls at the
deregulated local coin rate of $0.35, because it did not sufficiently justify
its conclusion that the costs of local coin calls are similar to those of 800
subscriber and access code calls; and (ii) the allocation of the payment
obligation among the IXCs for the period from November 7, 1996, through October
6, 1997.
In accordance with the Court's mandate, on October 9, 1997, the FCC adopted and
released its Second Report and Order in the same docket, FCC 97-371 (the 1997
Payphone Order). This order addressed the per-call compensation rate for 800
subscriber and access code calls that originate from payphones in light of the
decision of the Court which vacated and remanded certain portions of the FCC's
1996 Payphone Order. The FCC concluded that the rate for per-call compensation
for 800 subscriber and access code calls from payphones is the deregulation
local coin rate adjusted for certain cost differences. Accordingly, the FCC
established a rate of $0.284 ($0.35 - $0.066) per call for the first two years
of per-call compensation (October 7, 1997, through October 6, 1999). The IXCs
are required to pay this per-call amount to PSPs, including the Company,
beginning October 7, 1997. After the first two years of per-call compensation,
the market-based local coin rate, adjusted for certain costs defined by the FCC
as $0.066 per call, is the surrogate for the per-call rate for 800 subscriber
and access code calls. These new rule provisions were made effective as of
October 7, 1997. For the period October 7, 1997, through December 31, 1997, the
Company has recorded dial-around compensation at a rate of $0.284 multiplied by
131 calls or $37.20 per payphone per month. The Company has calculated dial-
around compensation on a per-call basis, at a rate of $0.284 per call, based on
an estimated number of calls per payphone per month. While the 1997 Payphone
Order required long distance carriers to pay dial-around compensation at a rate
of $0.284 per call to payphone providers, certain long distance carriers were
unable or unwilling to provide accurate call count reporting for the period due
to the alleged lack of reliable payphone-specific coding from the local exchange
carriers. As a result of the lack of availabiltiy of payphone-specific coding,
certain long distance carriers, including AT&T, (and only in the absence of a
contractual commitment to the contrary) were granted a waiver during the period
by the FCC to pay dial-around compensation at a flat rate surrogate based on the
average monthly number of dial-around calls generated by payphones operated by
RBOCs whose payphone lines already generate the necessary coding digits to
enable per-call tracking. The Company believes that 131 calls per payphone per
month represents the best estimate of the number of dial-around calls for which
it is entitled to payment during the period October 7, 1997 through December 31,
1997. In addition, the 1997 Payphone Order tentatively concluded that the same
$0.284 per-call rate adopted on a going-forward basis should also govern
compensation obligations during the period from November 7, 1996, through
October 6, 1997, and that PSPs are entitled to compensation for all access code
and 800 subscriber calls during the period. The FCC stated that the manner in
which the payment obligation of the IXCs for the period from November 7, 1996,
through October 6, 1997, will be allocated among the IXCs will be addressed in a
subsequent order.
48
<PAGE>
Based on the FCC's tentative conclusion in the 1997 Payphone Order, the Company
has adjusted the amounts of dial-around compensation previously recorded related
to the period from November 7, 1996, through June 30, 1997, from the initial
$45.85 rate to $37.20 ($0.284 per call multiplied by 131 calls). As a result of
this adjustment, the provision recorded for the year ended December 31, 1997,
related to reduced dial-around compensation is approximately $1.2 million ($0.7
million net of applicable commissions and income taxes). The Company previously
reported this provision as a separate component of costs and expenses. In the
third quarter of 1998, the Company reclassified the provision as a reduction in
non-coin revenue. For the period from July 1, 1997, through October 6, 1997,
the Company has recorded dial-around compensation at the rate of $37.20 per
payphone per month. The amount of dial-around revenue recognized in the period
from July 1, 1997, through October 6, 1997, is approximately $2.2 million and
such amount will be billed after final resolution of the allocation obligations
of the IXCs as determined by the FCC.
The Company recorded dial-around compensation revenue, net of the provision for
dial-around compensation, of approximately $1.2 million for the period from
November 7, 1996 through December 31, 1996 and approximately $7.7 million for
the period from January 1, 1997 through December 31, 1997.
The Company's counsel, Rammelkamp, Bradney, Kuster, Fritsche & Lindsay, P.C., is
of the opinion that the Company is legally entitled to fair compensation under
the Telcom Act for dial-around calls the Company delivered to any carrier during
the period from November 7, 1996, through October 6, 1997. Based on the
information available, the Company believes that the minimum amount it is
entitled to as fair compensation under the Telcom Act for the period from
November 7, 1996, through October 6, 1997, is $37.20 per payphone per month and
the Company, based on the information available to it, does not believe that it
is reasonably possible that the amount will be materially less than $37.20 per
payphone per month. While the amount of $0.284 per call constitutes the
Company's position of the appropriate level of fair compensation, certain IXCs
have asserted in the past, are asserting and are expected to assert in the
future that the appropriate level of fair compensation should be lower than
$0.284 per call. In a letter to the FCC dated August 15, 1997, AT&T stated its
intention to make dial-around payments to PSPs based on its imputed rate of
$0.12 per call until the FCC issues a new order setting the level of fair
compensation. If the level of fair compensation is ultimately determined to be
an amount less than $0.284 per call, such determination could result in a
material adverse impact on the Company's results of operations and financial
position.
17. COMMITMENTS AND CONTINGENCIES:
------------------------------
The Company is involved in a number of lawsuits which are incidental to its
business. Management does not believe that the resolution of these lawsuits
will have a material impact on the Company's financial position and results of
operations.
18. SUBSEQUENT EVENT:
-----------------
On February 3, 1998, the Company acquired all the issued and outstanding shares
of common stock, $.01 par value per share (the Common Stock) of Communications
Central Inc. (CCI) (including the associated rights to purchase shares of Common
Stock) at a price of $10.50 per share in cash, or approximately $70.2 million in
the aggregate, and assumed CCI's outstanding debt of $36.7 million.
In order to finance the acquisition of CCI, the Company entered into a credit
agreement dated as of February 3, 1998, with NationsBank, N.A., as
Administrative Agent, SunTrust Bank, Tampa Bay, as Documentation Agent, LaSalle
National Bank, as Co-Agent, and other lenders (Lenders), pursuant to which the
Lenders made available to the Company an initial revolving loan commitment of
$15 million and a term loan commitment of $110 million.
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
--------------------------------------------
Certain unaudited quarterly financial information for the year ended December
31, 1997, is as follows:
49
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------- -----------
Full
1997 March June September December Year
---- ------------ ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Total revenues $10,680 $11,969 $11,923 $12,436 $47,008
Operating profit 1,813 2,614 308 1,964 6,699
Net income 1,122 1,613 245 1,282 4,262
Net earnings per share:
Basic $ 0.25 $ 0.35 $ 0.05 $ 0.28 $ 0.93
Diluted $ 0.24 $ 0.34 $ 0.05 $ 0.27 $ 0.90
</TABLE>
50
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this Item 10 was contained in Amendment No. 1
to the Company's Annual Report on Form 10-K (Form 10-K/A filed on April 30,
1998).
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 was contained in Amendment No. 1
to the Company's Annual Report on Form 10-K (Form 10-K/A filed on April 30,
1998).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 was contained in Amendment No. 1
to the Company's Annual Report on Form 10-K (Form 10-K/A filed on April 30,
1998).
ITEM 13. CERTAIN TRANSACTIONS
The information required by this Item 13 was contained in Amendment No. 1
to the Company's Annual Report on Form 10-K (Form 10-K/A filed on April 30,
1998).
51
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed with, and as part of, this Annual
Report on Form 10-K.
1. FINANCIAL STATEMENTS
For a complete list of the Financial Statements filed with this Annual
Report on Form 10-K, see the Index to Financial Statements and Supplementary
Data on Page 34.
2. FINANCIAL STATEMENT SCHEDULES
The following Supplementary Schedules are filed with this Annual
Report on Form 10-K:
See Index to Financial Statements and Supplementary Data on Page 34.
3. EXHIBITS
See Exhibit Index on Page 55.
(b) Reports on Form 8-K.
On December 9, 1997, the Company filed a Current Report on Form 8-K to
report the execution of an Agreement and Plan of Merger (the "Merger Agreement")
with Communications Central Inc. ("CCI"). On January 30, 1998, the Company filed
a Current Report on Form 8-K to report that it had engaged Arthur Andersen LLP
as its independent auditors for the fiscal year ended December 31, 1997. The
Registrant informed its previous independent accountants, Kerber, Eck & Braeckel
LLP of its dismissal on January 26, 1998. On February 18, 1998, the Company
filed a Current Report on Form 8-K to report the consummation of the Agreement
and Plan of Merger (the "Merger Agreement") with CCI.
52
<PAGE>
EXHIBIT INDEX
EXHIBITS DESCRIPTION
- -------- -----------
3.1 Articles of Incorporation of Davel Communications Group, Inc. (incorporated
by reference to Exhibit 3.1 to Registration Statement on Form S-1
(Registration No. 33-67678) dated August 20, 1993).
3.2 By-laws of Davel Communications Group, Inc. (incorporated by reference to
Exhibit 3.2 to Annual Report on Form 10-K for the year ended December 31,
1996).
10.1 Agreement and Plan of Merger, dated November 24, 1997, by and between Davel
Communications Group, Inc., Panther Acquisition Corp. and Communications
Central Inc. (incorporated by reference to Exhibit 10.1 to Current Report
on Form 8-K, dated November 24, 1997 and filed on December 9, 1997.
21.1 Subsidiaries of Davel Communications Group, Inc. (incorporated by reference
to Exhibit 21.1 to Annual Report on Form 10-K for the year ended December
31, 1997).
27.1 Financial Data Schedule (incorporated by reference to Exhibit 27.1 to
Annual Report on Form 10-K for the year ended December 31, 1997).
53
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 3 on
Form 10-K/A to the Annual Report on Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized.
DAVEL COMMUNICATIONS GROUP, INC.
Date: November 18, 1998
/s/ Michael E. Hayes
--------------------
Michael E. Hayes
Senior Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ David R. Hill Chairman of the Board of Directors March 31, 1998
- ----------------------------
David R. Hill
/s/ Robert D. Hill President, Chief Executive Officer March 31, 1998
- ----------------------------
Robert D. Hill and Director
/s/ Michael E. Hayes Senior Vice President, Chief March 31, 1998
- ----------------------------
Michael E. Hayes Financial Officer and Director
/s/ Paul B. Demirdjian Senior Vice President of March 31, 1998
- ----------------------------
Paul B. Demirdjian Operations and Director
/s/ Michael G. Kouri Senior Vice President of March 31, 1998
- ----------------------------
Michael G. Kouri Development and Finance and
Director
/s/ Theodore C. Rammelkamp, Jr. Senior Vice President, General March 31, 1998
- --------------------------------
Theodore C. Rammelkamp, Jr. Counsel and Director
/s/ A. Jones Yorke Director March 31, 1998
- ----------------------------
A. Jones Yorke
/s/ Glen E. Barber Director March 31, 1998
- ----------------------------
Glen E. Barber
/s/ Thomas M. Vitale Director March 31, 1998
- ----------------------------
Thomas M. Vitale
54
