<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: September 30, 1998 Commission File Number: 0-22610
DAVEL COMMUNICATIONS GROUP, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
ILLINOIS 37-1064777
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. No.)
1429 MASSARO BOULEVARD, TAMPA, FLORIDA 33619
--------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant`s telephone number: (813) 623-3545
________________________
Indicate by check mark whether the Registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes _____ No
------
As of November 13, 1998, the number of shares outstanding of the Registrant`s
Common Stock was 5,784,209.
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except per share and share data)
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
---- ----
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 4,247 $ 2,567
Trade accounts receivable, net of allowance for doubtful accounts of $5,366 and $185,
respectively 22,707 9,105
Note receivable 2,404 2,536
Other current assets 3,890 702
---------- ----------
Total current assets 33,248 14,910
PROPERTY AND EQUIPMENT 87,434 34,528
OTHER ASSETS, net 62,556 3,520
---------- ----------
Total assets $183,238 $52,958
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 20,833 $ 1,501
Accounts payable 4,550 1,257
Accrued liabilities 8,784 1,832
---------- ----------
Total current liabilities 34,167 4,590
---------- ----------
LONG-TERM DEBT 74,927 6,801
---------- ----------
DEFERRED INCOME TAXES 10,189 3,597
---------- ----------
SHAREHOLDERS' EQUITY:
Preferred stock - $.01 par value, 1,000,000 shares authorized but unissued - -
Common stock - $.01 par value, 10,000,000 shares authorized, 5,784,209 and 4,629,323
shares issued and outstanding, respectively 58 46
Additional paid-in capital 49,382 20,685
Retained earnings 14,515 17,239
---------- ----------
Total shareholders' equity 63,955 37,970
---------- ----------
Total liabilities and shareholders' equity $183,238 $52,958
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
2
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30
(In thousands, except per share and share data)
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C> <C>
REVENUES:
Coin calls $ 14,998 $ 6,761
Non-coin calls 10,175 5,135
------------ ------------
Total revenues 25,173 11,896
------------ ------------
COSTS AND EXPENSES:
Telephone charges 5,143 2,618
Commissions 3,974 1,713
Service, maintenance and network costs 5,342 3,194
Selling, general and administrative 9,190 4,063
------------ ------------
Total operating costs and expenses 23,649 11,588
------------ ------------
Operating profit 1,524 308
INTEREST EXPENSE (2,086) (158)
OTHER (192) 227
------------ ------------
Income (loss) from operations before income taxes (754) 377
PROVISION FOR INCOME TAXES - 132
============ ============
Net income (loss) $ (754) $ 245
============ ============
BASIC EARNINGS (LOSS) PER SHARE $ (.13) $ .05
============ ============
DILUTED EARNINGS (LOSS) PER SHARE: $ (.13) $ .05
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 5,780,427 4,612,260
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30
(In thousands, except per share and share data)
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C> <C>
REVENUES:
Coin calls $ 41,430 $ 18,218
Non-coin calls 27,753 16,239
------------ ------------
Total revenues 69,183 34,457
------------ ------------
COSTS AND EXPENSES:
Telephone charges 15,019 7,187
Commissions 10,943 4,641
Service, maintenance and network costs 14,344 7,792
Restructuring costs 825 -
Selling, general and administrative 26,088 10,127
------------ ------------
Total operating costs and expenses 67,219 29,747
------------ ------------
Operating profit 1,964 4,710
INTEREST EXPENSE (6,295) (319)
OTHER 152 395
------------ ------------
Income (loss) from operations before income taxes (4,179) 4,786
PROVISION FOR INCOME TAXES (1,455) 1,806
============ ============
Net income (loss) $ (2,724) $ 2,980
BASIC EARNINGS (LOSS) PER SHARE $ (.54) $ .65
============ ============
DILUTED EARNINGS (LOSS) PER SHARE: $ (.54) $ .63
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING 5,031,652 4,591,713
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30
(In thousands)
<TABLE>
<CAPTION>
1998 1997
--------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (2,724) $ 2,980
Adjustments to reconcile net income to cash flows from operating activities-
Gain on sale of property and equipment (36) (138)
Depreciation and amortization 11,683 3,044
Deferred income taxes 192 579
Deferred gain on sale of assets - 139
Restructuring charge 825 -
Changes in assets and liabilities, net of effects from acquisitions
Accounts receivable (7,715) (2,390)
Note receivable 132 -
Other assets (3,350) 156
Accounts payable 2,630 316
Accrued liabilities 1,902 57
------------- -----------
Net cash flows from operating activities 3,539 4,743
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7,143) (4,375)
Proceeds from sale of property and equipment 51 19
Decrease in net assets of discontinued operations - 599
(Increase) decrease in cash value of life insurance - (6)
Increase in other investing assets (1,597) (164)
Purchase of pay telephones (2,990) (6,674)
Purchase of Communications Central, Inc., net of cash acquired (103,946) -
------------- -----------
Net cash flows from investing activities (115,625) (10,601)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt financing 129,000 6,160
Payments on long-term debt (43,942) (3,502)
Increase in other financing assets 28,708 681
------------- -----------
Net cash flows from financing activities 113,766 3,339
------------- -----------
Net (decrease) increase in cash and cash equivalents 1,680 (2,519)
CASH AND CASH EQUIVALENTS, beginning of period 2,567 4,630
------------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 4,247 $ 2,111
============= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
The accompanying unaudited consolidated financial statements have been prepared
by the Company and include the accounts of its subsidiaries. These statements
reflect all adjustments, consisting of only normal recurring adjustments which
are, in the opinion of management, necessary for a fair presentation of
financial results for the three- and nine-month periods ended September 30, 1998
and 1997, in accordance with generally accepted accounting principles for
interim financial reporting. Certain information and footnote disclosures
normally included in audited financial statements have been omitted pursuant to
such rules and regulations. These interim consolidated financial statements
should be read in conjunction with the Company's audited consolidated financial
statements and the notes thereto for the years ended December 31, 1997 and 1996
and Management's Discussion and Analysis of Financial Condition and Results of
Operations appearing elsewhere in this Form 10-Q and in the Company's Form 10-K
(as amended) for the year ended December 31, 1997. The results of operations for
the nine month periods ended September 30, 1998 and 1997 are not necessarily
indicative of the results for the full year.
1. DESCRIPTION OF BUSINESS
-----------------------
Davel Communications Group, Inc. and its subsidiaries taken as a whole (the
"Company") owns and operates a network of approximately 40,000 payphones in 36
states and the District of Columbia and provides operator services to these
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 which typically have a high demand
for payphone service.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
Earnings Per Share
- ------------------
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128 (SFAS 128) during the period ended December 31, 1997, and all
prior period earnings per share data has been presented on this basis.
6
<PAGE>
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. ACQUISITION
-----------
On February 3, 1998, the Company completed its acquisition of Communications
Central Inc. (the "CCI Acquisition") at a price of $10.50 per share in cash, or
approximately $70.2 million in the aggregate, assumed CCI's outstanding debt of
$36.7 million and incurred $6.9 million in transaction costs. The CCI
Acquisition has been accounted for by the purchase method, and accordingly the
results of operations are included in the Company's consolidated statement of
operations from the date of acquisition. Goodwill associated with the
acquisition will be amortized over fifteen years using straight-line
amortization. The following summarizes unaudited pro forma consolidated results
of operations for the nine months ended September 30, 1997 assuming the CCI
Acquisition occurred at the beginning of 1997. These pro forma results are
provided for comparative purposes only and do not purport to be indicative of
the results which would have been obtained if this acquisition had been effected
on the dates indicated or which may be obtained in the future.
<TABLE>
<S> <C>
Nine Months Ended September 30, 1997:
Total revenues $ 76,809
Loss from continuing operations $ (911)
==========
Basic and diluted loss from continuing
operations per share $ $(.18)
==========
</TABLE>
The allocation of the purchase price of the CCI Acquisition
is summarized as follows:
<TABLE>
<S> <C>
Working capital $ 7,955
Property and equipment, net 48,578
Goodwill 45,700
Identifiable intangible assets 11,583
----------
$ 113,816
==========
</TABLE>
7
<PAGE>
4. LINE-OF-CREDIT
--------------
In connection with the CCI Acquisition on February 3, 1998, 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 on a 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 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 November
16, 1998, the interest rates on the balance of $76.8 million outstanding under
the Term Loan Facility and on a $8.0 million, a $5.0 million, and a $1.8 million
note outstanding under the Revolving Credit Facility were 8.07%, 8.35%, 8.13%
and 7.98%, respectively.
Amounts outstanding under the Term Loan Facility are required to be repaid in
consecutive quarterly installments. The first two were paid on June 30 and
September 30, respectively. The third installment (in the aggregate principal
amount of approximately $3.33 million) is due on the last day of the calendar
quarter ending December 31, 1998. The next 20 installments in the aggregate
principal amount of $5 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 November 16, 1998, $76.8
million in outstanding principal amount had been borrowed under the Term Loan
Facility and $14.8 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
8
<PAGE>
is less than 2.5 to 1.0. 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. On June 30, 1998 and August 6, 1998, pursuant to the
terms of the 1998 Credit Agreement, the Company reduced the principal amounts
outstanding under the Term Loan Facility by $24.3 million and $5.5 million,
respectively.
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.
On September 30, 1998, the Company and the Lenders agreed to the fifth amendment
to the 1998 Credit Agreement which revised the definition of the borrowing base
to include the entire amount of the Revolving Loan Facility through January 1,
1999. As of June 30, 1998, the company was in violation of the covenant
contained in the 1998 Credit Agreement which required the ratio of funded debt
to EBITDA for the trailing twelve month period to be at or below 4.25 to 1. The
Company and the Lenders agreed to waive this requirement by entering into
the fourth amendment to the 1998 Credit Agreement to increase the maximum
allowable ratio of funded debt to EBITDA to 5.00 to 1.00 for each of the fiscal
quarters ended June 30, 1998 and September 30, 1998. The fourth amendment also
increased the amount of capital expenditures allowed from $6.0 million in the
fiscal year ended December 31, 1998, to $10.0 million to allow the Company to
pursue additional payphone acquisitions. The Company prepaid a portion of the
Term Loan Facility in August 1998 to a level within the required ratio of funded
debt to EBITDA as of June 30, 1998. The Company believes that it is probable
that it will comply with the loan covenants for the next twelve months and, as
such, has not classified the obligations under the 1998 Credit Agreement as
current liabilities.
On September 30, 1998, the Company entered into an additional revolving loan
commitment of $5.0 million with NationsBank, N.A., under the same terms as the
1998 Credit Agreement. The principal of this revolving loan commitment and all
accrued interest thereon will be payable on January 15, 1999. As of November
16, 1998, $2.5 million was outstanding under this revolving loan commitment.
5. RESTRUCTURING COSTS
-------------------
In connection with the CCI Acquisition, the Company has closed the Atlanta
office of CCI and field offices where CCI and the Company had duplicate
facilities. The office closings were completed during the third quarter of 1998.
The Company recognized restructuring costs of $825, composed of payments
incurred in connection with early lease terminations, facility closing costs and
employee termination benefits for 53 excess field operations and administrative
personnel. The Company expects to complete the restructuring related to the CCI
Acquisition by the end of 1998. Costs of $570 were incurred during the nine
months ended September 30, 1998 and taken against the reserve.
9
<PAGE>
6. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Cash paid for interest and income taxes for the nine month periods ended
September 30, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
------- -----
<S> <C> <C>
Interest $6,452 $ 319
Income taxes $ 192 $ 286
</TABLE>
7. PROVISION FOR DIAL-AROUND COMPENSATION
--------------------------------------
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
10
<PAGE>
calls from payphones is the deregulated 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 September 30, 1998, the Company has recorded dial-around
compensation at a rate of $0.284 multiplied by 131 calls or $37.20 per payphone
per month. 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.
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). Beginning on
July 1, 1997, the Company has recorded dial-around compensation at the rate of
$37.20 per payphone per month.
The Company recorded dial-around compensation revenue of approximately $4.5
million, $12.4 million, $3.2 million and $7.8 million for the three month and
nine month periods ended September 30, 1998 and 1997, respectively.
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. Various parties
have appealed certain aspects of the 1997 payphone Order to the Court of Appeals
for the District of Columbia.
11
<PAGE>
The issues being appealed include, but are not limited to, the costs included or
excluded in the FCC's determination of the appropriate per-call dial-around
compensation rate.
On May 15, 1998, the Court remanded the per-call compensation rate to the FCC
for further explanation without vacating the $0.284 per call rate. The Court
stated that any resulting overpayment would be subject to refund and directed
the FCC to conclude its proceedings within a six-month period from the effective
date of the Court's decision. Based on the information available to it, the
Company does not believe that it is reasonably possible that the amount of
compensation for dial-around calls will be materially reduced from the amount
recorded as dial-around compensation. While the amount of $0.284 per call
constitutes the Company's position on the minimum appropriate level of fair
compensation, certain IXCs have challenged this rate level, asserting that the
appropriate level of fair compensation should be lower than $0.284 per call. Any
determination by the Court upholding such a challenge could have a material
adverse impact on the Company's results of operations and financial position.
On April 3, 1998, the FCC issued a Memorandum Opinion and Order (the "1998
Payphone Order") which was made immediately effective. The 1998 Payphone Order
granted IXCs a waiver of dial-around compensation requirements to enable them to
pay per-phone compensation in lieu of per-call payments for dial-around calls
when payphone-specific coding digits are not available to track the calls as
being generated from a payphone. Payphones that are capable of providing such
digits were determined to receive compensation at a rate of $0.284 per call. For
payphones that cannot provide specific coding digits, the FCC stated that a
flat-rate, per-phone payment must be made by calculating the average monthly
number of dial-around calls received from Regional Bell Operating Company
("RBOC") payphones that can provide the coding digits. The average number of
RBOC payphones providing coding digits as of the first of each month will be
added together for the months of October 1997 through March 1998 and divided by
six to calculate an average number of RBOC payphones. The average number of
calls per month is then divided by the average number of phones per month to
arrive at an average call volume from RBOC payphones. This average multiplied by
$0.284 determines the amount of monthly flat-rate, per-phone compensation for
payphones that cannot supply payphone-specific coding digits. A six-month
average was used to calculate such compensation amounts for the fourth quarter
of 1997 and first quarter 1998 payments. Beginning in the second quarter of
1998, the individual monthly average will be used for the month in which
compensation is payable.
The FCC further determined that this weighted call average for per-phone
compensation was too high for payphones in non-equal access areas or small to
mid-sized LEC territories where payphone-specific coding digits are not
currently available and the LEC is precluded recovery of the upgrade cost. In
these areas, payers were ordered to compensate PSPs based on the weighted
average of call volumes submitted on the record. Based on data from only two
companies, the FCC found that 16 calls per payphone per
12
<PAGE>
month was the appropriate compensation level. However, the FCC invited parties
to submit additional information to enable it to further evaluate its tentative
conclusions.
At this time, the Company is not able to quantify either the amount of per-phone
compensation where digits are not provided, the number of its payphones served
by non-equal access switches, or the number of equal access switches in small
and mid-sized LEC territories. Under the 1998 Payphone Order, for each such
payphone served by a non-equal access switch or in a small or mid-sized LEC
territory, the Company could experience a reduction in dial-around compensation.
Based on currently available information, the Company believes that the number
of such payphones is less than 3% of its payphone base and any related reduction
would not have a material adverse effect on its financial condition and results
of operations. Further, upon the FCC's review of additional data and
reconsideration of the 1998 Payphone Order, the compensation methodologies
described above could be revised.
The FCC provided that the 1998 Payphone Order was applicable only to the period
beginning October 7, 1997 and not to the period November 6, 1996 to October 6,
1997. The FCC indicated that issues related to this period would be addressed
in a subsequent order.
8. COMPREHENSIVE INCOME
--------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
which establishes standards for reporting and disclosure of comprehensive income
and its components. For the three and nine month periods ended September 30,
1998 and 1997, comprehensive income equals net income.
9. 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 the three month and nine month periods ended
September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three months ended September 30,
1998 1997
------------- -------------
<S> <C> <C>
Weighted average shares outstanding 5,780,427 4,612,260
Assumed exercise of options and warrants (treasury
stock method) 95,482 128,630
------------ ------------
Diluted shares outstanding 5,875,909 4,740,890
============ ============
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Nine months ended September 30,
1998 1997
------------- -------------
<S> <C> <C>
Weighted average shares outstanding 5,031,652 4,591,713
Assumed exercise of options and warrants (treasury
stock method) 183,620 126,110
------------ ------------
Diluted shares outstanding 5,215,272 4,717,823
============ ============
</TABLE>
10. OTHER EVENTS
------------
On June 12, 1998, the Company announced the signing of a definitive agreement
(the "Davel/PhoneTel Merger Agreement") to merge with PhoneTel Technologies,
Inc, ("PhoneTel"), based in Cleveland, Ohio. Under the terms of the agreement,
shareholders of PhoneTel were to receive Company common stock equal to $3.08 per
share based on the Company's average closing price for the 30 consecutive
trading days ending on the second trading day prior to shareholders' approval;
provided, however, that, in no event, would PhoneTel shareholders receive
greater than 0.13765 shares of Company common stock for each share of PhoneTel
stock.
On June 30, 1998, the Company announced the closing of an investment by an
affiliate of Equity Group Investments, Inc., a privately-held investment company
controlled by Sam Zell. In the transaction, the Equity Group Investments
affiliate invested $28 million in the Company as payment for 1,000,000 shares of
newly issued common stock and warrants to purchase an additional 218,750 shares,
which are exercisable at a price of $32.00 per share. Proceeds of the sale were
used to reduce amounts outstanding under the Company's term loan facility.
On July 6, 1998, the Company announced the signing of a definitive agreement to
merge with Peoples Telephone Company, Inc. ("Peoples Telephone"), based in
Miami, Florida. Under the terms of the agreement, holders of common stock of
Peoples Telephone will receive 0.235 shares of Company common stock for each
outstanding share of Peoples Telephone common stock. The exchange ratio is fixed
and not subject to adjustment. The transaction, which is intended to close in
the fall of 1998, is subject to the approval of the shareholders of both
companies, receipt of required regulatory approvals and other customary
conditions. Consummation of the merger is conditioned on its eligibility for
pooling-of-interests accounting treatment. The transaction is also subject to
conversion of Peoples Telephone's convertible preferred stock into common stock
and receipt by the Company of financing for, and successful consummation of, a
cash tender offer for Peoples Telephone's 12 1/4% Senior Notes due 2002,
pursuant to which a minimum of 85% of the aggregate outstanding principal amount
of $100 million shall have been tendered. Peoples Telephone has received
irrevocable tenders of approximately $95 million principal amount of such notes
out of $100 million principal amount outstanding. The refinancing of the
combined companies' indebtedness will be achieved through a senior credit
facility.
On September 29, 1998, the Company announced that it was exercising its
contractual rights to terminate the Davel/PhoneTel Merger Agreement, based on
breaches of representations, warranties and covenants by PhoneTel. On October 1,
1998, the Company filed a lawsuit in Delaware Chancery Court seeking damages,
rescission of the Davel/PhoneTel Merger Agreement and a declaratory judgment
that such breaches occurred. On October 27, 1998, PhoneTel answered the
complaint and filed a counterclaim against the Company alleging that the
Davel/PhoneTel Merger Agreement had been wrongfully terminated, and also filed a
claim against Peoples Telephone alleging that Peoples Telephone wrongfully
caused the termination of the Davel/PhoneTel Merger Agreement. The counterclaim
seeks specific performance of the transactions contemplated by the
Davel/PhoneTel Merger Agreement and damages and other equitable relief from the
Company and Peoples Telephone. The Company believes that it has meritorious
claims against PhoneTel and intends to defend vigorously against the
counterclaim initiated by PhoneTel.
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11. NEW ACCOUNTING PRONOUNCEMENTS
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In June 1998, the Financial Accounting Standards Board (FASB) adopted SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value and that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item in
the income statement, and requires that a company must formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. The Company has not yet quantified the impacts of adopting SFAS No. 133
on its consolidated financial statements nor has it determined the timing or
method of its adoption of SFAS No. 133. However, SFAS No.133 could increase
volatility in earnings and other comprehensive income.
In April 1998, the FASB adopted Statement of Position (SOP) 98-5, "Reporting on
the Costs of Start-Up Activities," which requires costs of start-up activities
and organization costs to be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. The
Company will adopt SOP 98-5 in fiscal 1999 and does not expect adoption to have
a material impact on its consolidated financial statements.
In February 1998, the FASB adopted SFAS No. 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits," which establishes reporting
requirements related to a business's pensions and other postretirement benefits.
SFAS No. 132 is effective for fiscal years beginning after December 15, 1997,
and does not apply to interim financial statements in the year of adoption. The
Company will adopt SFAS No. 132 for the fiscal year ended December 31, 1998.
The Company does not expect adoption to have a material impact on its
consolidated financial statements.
In June 1997, the FASB adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes reporting requirements
related to a business's operating segments, products and services, geographic
areas of operations and major customers. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997, and does not apply to interim financial
statements in the year of adoption. The Company will adopt SFAS No. 131 for the
fiscal year ended December 31, 1998. The Company does not expect SFAS No. 131
to have a significant impact on its consolidated financial statements and the
related disclosures.
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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 the third quarter of 1998, 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. The Company also derives non-coin revenue from certain local exchange
carriers ("LECs") for intraLATA non-coin calls.
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, competitive local exchange carriers ("CLECs") and long distance carriers
for access charges and use of their networks. Commission expense represents
payments to owners of locations where the Company's payphones are installed.
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.
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On February 3, 1998, the Company acquired all the issued and outstanding
shares of common stock, $.01 par value per share 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 million in the
aggregate, and assumed CCI's outstanding debt of $36.4 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, 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.
OTHER EVENTS
On June 12, 1998, the Company announced the signing of a definitive
agreement (the "Davel/PhoneTel Merger Agreement") to merge with PhoneTel
Technologies, Inc, ("PhoneTel"), based in Cleveland, Ohio. Under the terms of
the agreement, shareholders of PhoneTel were to receive Company common stock
equal to $3.08 per share based on the Company's average closing price for the 30
consecutive trading days ending on the second trading day prior to shareholders'
approval; provided, however, that, in no event, would PhoneTel shareholders
receive greater than 0.13765 shares of Company common stock for each share of
PhoneTel stock.
On June 30, 1998, the Company announced the closing of an investment by an
affiliate of Equity Group Investments, Inc., a privately-held investment company
controlled by Sam Zell. In the transaction, the Equity Group Investments
affiliate invested $28 million in the Company as payment for 1,000,000 shares of
newly issued common stock and warrants to purchase an additional 218,750 shares,
which are exercisable at a price of $32.00 per share. Proceeds of the sale were
used to reduce amounts outstanding under the Company's term loan facility.
On July 6, 1998, the Company announced the signing of a definitive
agreement to merge with Peoples Telephone Company, Inc. ("Peoples Telephone"),
based in Miami, Florida. Under the terms of the agreement, holders of common
stock of Peoples Telephone will receive 0.235 shares of Company common stock for
each outstanding share of Peoples Telephone common stock. The exchange ratio is
fixed and not subject to adjustment. The transaction, which is intended to close
in the fall of 1998, is subject to the approval of the shareholders of both
companies, receipt of required regulatory approvals and other customary
conditions. Consummation of the merger is conditioned on its eligibility for
pooling-of-interests accounting treatment. The transaction is also subject to
conversion of Peoples Telephone's convertible preferred stock into common stock
and receipt by the Company of financing for, and successful consummation of, a
cash tender offer for Peoples Telephone's 12 1/4% Senior Notes due 2002,
pursuant to which a minimum of 85% of the aggregate outstanding principal amount
of $100 million shall have been tendered. Peoples Telephone has received
irrevocable tenders of approximately $95 million principal amount of such notes
out of $100 million principal amount outstanding. The refinancing of the
combined companies' indebtedness will be achieved through a senior credit
facility.
On September 29, 1998, the Company announced that it was exercising its
contractual rights to terminate the Davel/PhoneTel Merger Agreement, based on
breaches of representations, warranties and covenants by PhoneTel. On October 1,
1998, the Company filed a lawsuit in Delaware Chancery Court seeking damages,
rescission of the Davel/PhoneTel Merger Agreement and a declaratory judgment
that such breaches occurred. On October 27, 1998, PhoneTel answered the
complaint and filed a counterclaim against the Company alleging that the
Davel/PhoneTel Merger Agreement had been wrongfully terminated, and also filed a
claim against Peoples Telephone alleging that Peoples Telephone wrongfully
caused the termination of the Davel/PhoneTel Merger Agreement. The counterclaim
seeks specific performance of the transactions contemplated by the
Davel/PhoneTel Merger Agreement and damages and other equitable relief from the
Company and Peoples Telephone. The Company believes that it has meritorious
claims against PhoneTel and intends to defend vigorously against the
counterclaim initiated by PhoneTel.
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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, have increased rates for local coin calls from
$.25 to $.35. While the Company has increased the local coin call rate on its
payphones, it has experienced lower volumes of local coin calls originating from
its payphones in the fourth quarter of 1997 and the first nine months of 1998
than experienced in the prior-year periods. 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 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, 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 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
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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
deregulated 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 September 30, 1998, the
Company has recorded dial-around compensation at a rate of $0.284 multiplied by
131 calls or $37.20 per payphone per month. 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.
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).
Beginning on July 1, 1997, the Company has recorded dial-around compensation at
the rate of $37.20 per payphone per month.
The Company recorded dial-around compensation revenue of approximately $4.5
million, $12.4 million, $3.2 million and $7.8 million for the three month and
nine month periods ended September 30, 1998 and 1997, respectively.
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
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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.
Various parties have appealed certain aspects of the 1997 payphone Order to the
Court of Appeals for the District of Columbia. The issues being appealed
include, but are not limited to, the costs included or excluded in the FCC's
determination of the appropriate per-call dial-around compensation rate.
On May 15, 1998, the Court remanded the per-call compensation rate to the
FCC for further explanation without vacating the $0.284 per call rate. The Court
stated that any resulting overpayment would be subject to refund and directed
the FCC to conclude its proceedings within a six-month period from the effective
date of the Court's decision. Based on the information available to it, the
Company does not believe that it is reasonably possible that the amount of
compensation for dial-around calls will be materially reduced from the amount
recorded as dial-around compensation. While the amount of $0.284 per call
constitutes the Company's position on the minimum appropriate level of fair
compensation, certain IXCs have challenged this rate level, asserting that the
appropriate level of fair compensation should be lower than $0.284 per call. Any
determination by the Court upholding such a challenge could have a material
adverse impact on the Company's results of operations and financial position.
On April 3, 1998, the FCC issued a Memorandum Opinion and Order (the "1998
Payphone Order") which was made immediately effective. The 1998 Payphone Order
granted IXCs a waiver of dial-around compensation requirements to enable them to
pay per-phone compensation in lieu of per-call payments for dial-around calls
when payphone-specific coding digits are not available to track the calls as
being generated from a payphone. Payphones that are capable of providing such
digits were determined to receive compensation at a rate of $0.284 per call.
For payphones that cannot provide specific coding digits, the FCC stated that a
flat-rate, per-phone payment must be made by calculating the average monthly
number of dial-around calls received from Regional Bell Operating Company
("RBOC") payphones that can provide the coding digits. The average number of
RBOC payphones providing coding digits as of the first of each month will be
added together for the months of October 1997 through March 1998 and divided by
six to calculate an average number of RBOC payphones. The average number of
calls per month is then divided by the average number of phones per month to
arrive at an average call volume from RBOC payphones. This average multiplied
by $0.284 determines the amount of monthly flat-rate, per-phone compensation for
payphones that cannot supply payphone-specific coding digits. A six-month
average was used to calculate such compensation amounts for the fourth quarter
of 1997 and first quarter 1998
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payments. Beginning in the second quarter of 1998, the individual monthly
average will be used for the month in which compensation is payable.
The FCC further determined that this weighted call average for per-phone
compensation was too high for payphones in non-equal access areas or small to
mid-sized LEC territories where payphone-specific coding digits are not
currently available and the LEC is precluded recovery of the upgrade cost. In
these areas, payers were ordered to compensate PSPs based on the weighted
average of call volumes submitted on the record. Based on data from only two
companies, the FCC found that 16 calls per payphone per month was the
appropriate compensation level. However, the FCC invited parties to submit
additional information to enable it to further evaluate its tentative
conclusions.
At this time, the Company is not able to quantify either the amount of per-
phone compensation where digits are not provided, the number of its payphones
served by non-equal access switches, or the number of equal access switches in
small and mid-sized LEC territories. Under the 1998 Payphone Order, for each
such payphone served by a non-equal access switch or in a small or mid-sized LEC
territory, the Company could experience a reduction in dial-around compensation.
Based on currently available information, the Company believes that the number
of such payphones is less than 3% of its payphone base and any related reduction
would not have a material adverse effect on its financial condition or results
of operations. Further, upon the FCC's review of additional data and
reconsideration of the 1998 Payphone Order, the compensation methodologies
described above could be revised.
The FCC provided that the 1998 Payphone Order was applicable only to the
period beginning October 7, 1997 and not to the period from November 6, 1996 to
October 6, 1997. The FCC indicated that issues related to this period would be
addressed in a subsequent order.
The payment levels for dial-around calls prescribed in the 1996, 1997 and
1998 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.
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Billed Party Preference
New FCC rules regarding Billed Party Preference require payphone operators
to give payphone users the option of receiving a rate quote before a call is
connected when making a 0+ interstate call. These rules, which became effective
on July 1, 1998, could reduce revenues earned by the Company on long-distance
services provided by the Company. The Company cannot currently assess what
impact the new rules will have on its financial performance.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
For the three months ended September 30, 1998, total revenues increased
approximately $13.3 million, or 111.6%, from approximately $11.9 million for the
three months ended September 30, 1997 to approximately $25.2 million for the
three months ended September 30, 1998. This growth was primarily attributable to
an increase from 18,772 payphones on September 30, 1997 to 40,893 payphones on
September 30, 1998, an increase of 22,121 payphones or 117.8%. The increase in
the number of installed payphones was due primarily to the acquisition of
Communications Central Inc. on February 3, 1998 (the "CCI Acquisition"), which
added approximately 19,500 payphones to the Company's network. During the first
nine months of 1998, the Company also added approximately 1,333 payphones to its
network through other acquisitions.
Coin call revenues increased approximately $8.2 million, or 121.8%, from
approximately $6.8 million for the three months ended September 30, 1997, to
approximately $15.0 million for the three months ended September 30, 1998. The
growth in coin call revenues was driven by growth in the number of installed
payphones primarily due to the CCI Acquisition. In accordance with the new FCC
rules, 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. While the Company has increased the local coin call
rate on its payphones, it has experienced lower volumes of local coin calls
originating from its payphones in the fourth quarter of 1997 and the first nine
months of 1998 than experienced in the prior-year periods.
Non-coin call revenues increased approximately $5.0 million or 98.1%, from
approximately $5.1 million for the three months ended September 30, 1997, to
approximately $10.1 million for the three months ended September 30, 1998. The
growth in non-coin revenues was primarily due to an increase of approximately
$6.5 million in non-coin revenues (including approximately $2.5 million from
dial-around compensation) resulting from an increase in the number of installed
payphones. In addition, the Company adjusted the amounts of dial-around
compensation previously recorded related
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to the period from November 7, 1996 through June 30, 1997 from the initial
$45.85 rate to $37.20 ($.284 per call multiplied by 131 calls). As a result of
this adjustment to non-coin revenue, the provision recorded in the three month
period ended September 30, 1997 for reduced dial-around compensation was
approximately $1.2 million. For all periods subsequent to June 30, 1997, the
Company has recorded dial-around compensation at the rate of $37.20 per payphone
per month. The increase in non-coin call revenues was offset by a decrease of
approximately $1.5 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.
Telephone charges rose approximately $2.5 million, or 96.4%, from
approximately $2.6 million for the three months ended September 30, 1997 to
approximately $5.1 million for the three months ended September 30, 1998. The
increase was primarily due to the increase in the number of installed payphones.
Due to more favorable contracts with LECs and CLECs for local line access, the
Company's average monthly telephone charge on a per phone basis decreased from
$47.27 for the third quarter of 1997 to $43.15 for the third quarter of 1998.
The company is currently negotiating contracts that it believes will further
reduce local access charges on a per-phone basis, but is unable to provide
assurance that such contracts will be entered into or estimate the impact of
further telephone charge reductions at this time.
Commissions rose approximately $2.3 million, or 132.0%, from approximately
$1.7 million for the three months ended September 30, 1997 to approximately $4.0
million for the three months ended September 30, 1998. The increase was
primarily due to the increase in the number of installed payphones. Commissions
as a percentage of revenues increased from 14.4% for the three months ended
September 30, 1997 to 15.8% of revenues for the three months ended September 30,
1998, reflecting a higher concentration of national and regional payphone
contracts (contracts representing 50 or more payphones), primarily as a result
of the CCI Acquisition. However, this was partially offset by the fact that,
while many of the Company's contracts with location owners provide for
commission percentages proportionate with increases in revenues, some are based
on flat monthly rates set by the agreements.
Service, maintenance and network costs increased approximately $2.1
million, or 67.3%, from approximately $3.2 million for the three months ended
September 30, 1997 to approximately $5.3 million for the three months ended
September 30, 1998. The increase was primarily due to the increase in the number
of installed payphones. The Company's average monthly service, maintenance and
network costs on a per phone basis decreased from $57.68 for the three months
ended September 30, 1997 to $44.81 for the three months ended September 30,
1998. The decrease in service, maintenance and network costs on a per-phone
basis was primarily attributable to increasing operating efficiencies achieved
through increasing density in the Company's payphone routes resulting from the
CCI Acquisition and expansion of its installed base of payphones.
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Selling, general and administrative ("SG&A") expenses increased
approximately $5.1 million, or 126.2%, from the prior year, from approximately
$4.1 million for the three months ended September 30, 1997 to approximately $9.2
million for the three months ended September 30, 1998. The increase was
partially attributable to higher depreciation and amortization expense, which
rose approximately $3.1 million or 268.2%, from the prior year, primarily
reflecting depreciation and amortization expense related to the CCI Acquisition.
The Company also incurred approximately $1.9 million in additional SG&A expenses
associated with the operation of CCI administrative and field office facilities
and other acquisitions made, branch office facilities opened and increased
salaries and administrative costs during the last quarter of 1997 and the first
three quarters of 1998, and $0.1 million in bank fees related to a $2.5 million
note entered into on September 30, 1998. The Company is finalizing the
integration of its operations with the operations of CCI, having begun
eliminating redundant sales and administrative personnel and office facilities
in the second quarter of 1998.
Other income decreased approximately $0.4 million or 184.6% in the third
quarter of 1998, from income of approximately $0.2 million for the three months
ended September 30, 1997 to expense of approximately $0.2 million for the three
months ended September 30, 1998. This decrease resulted primarily from a write
off of approximately $0.4 million in costs associated with the terminated
PhoneTel transaction. Interest expense for the three months ended September 30,
1998 increased approximately $1.9 million, or 1,220.3%, compared to the prior-
year period, from approximately $158,000 for the three months ended September
30, 1997 to approximately $2.1 million for the three months ended September 30,
1998. This increase resulted primarily from the incurrence of $120.0 million in
indebtedness on February 3, 1998 in connection with the CCI Acquisition and
refinancing of the Company's existing credit facility.
Net income decreased approximately $1.0 million or 395.9% from the prior-
year period, decreasing from net income of approximately $0.2 million for the
three months ended September 30, 1997 to a net loss of approximately $0.7
million for the three months ended September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
For the nine months ended September 30, 1998, total revenues increased
approximately $34.7 million, or 100.8%, from approximately $34.5 million for the
nine months ended September 30, 1997 to approximately $69.2 million for the nine
months ended September 30, 1998. This growth was primarily attributable to an
increase from 18,772 payphones on September 30, 1997 to 40,893 payphones on
September 30, 1998, an increase of 22,121 payphones or 117.8%. The increase in
the number of installed payphones was due primarily to the CCI Acquisition,
which added approximately 19,500 payphones to the Company's network. During the
first nine months of 1998, the Company also added approximately 1,333 payphones
to its network through other acquisitions.
24
<PAGE>
Coin call revenues increased approximately $23.2 million, or 127.4%, from
approximately $18.2 million for the nine months ended September 30, 1997, to
approximately $41.4 million for the nine months ended September 30, 1998. The
growth in coin call revenues was driven by growth in the number of installed
payphones primarily due to the CCI Acquisition. In accordance with the new FCC
rules, certain LECs and independent payphone service providers, including the
Company, began to increase rates for local coin calls in many locations from
$.25 to $.35 commencing October 7, 1997. While the Company has increased the
local coin call rate on its payphones, it has experienced lower volumes of local
coin calls originating from its payphones in the fourth quarter of 1997 and the
first nine months of 1998.
Non-coin call revenues increased approximately $11.5 million or 70.9%, from
approximately $16.2 million for the nine months ended September 30, 1997, to
approximately $27.7 million for the nine months ended September 30, 1998. The
growth in non-coin revenues was primarily due to an increase of approximately
$16.5 million in non-coin revenues (including an increase of approximately $7.4
million in dial-around compensation) resulting from an increase in the number of
installed payphones. In addition, the Company 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 $37.20 ($.284 per
call multiplied by 131 calls). As a result of this adjustment to non-coin
revenue, the provision recorded in the nine month period ended September 30,
1997 for reduced dial-around compensation was approximately $1.2 million. For
all periods subsequent to June 30, 1997, the Company has recorded dial-around
compensation at the rate of $37.20 per payphone per month. The increase in non-
coin call revenues was offset by a decrease of approximately $5.0 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.
Telephone charges rose approximately $7.8 million, or 109.0%, increasing
from approximately $7.2 million for the nine months ended September 30, 1997 to
approximately $15.0 million for the nine months ended September 30, 1998. The
increase was primarily due to the increase in the number of installed payphones.
Due to more favorable contracts with LECs and CLECs for local line access, the
Company's average monthly telephone charge on a per phone basis decreased from
$47.85 in 1997 to $45.41 in 1998. The company is currently negotiating contracts
that it believes will further reduce local access charges on a per-phone basis,
but is unable to provide assurance that such contracts will be entered into or
to estimate the impact of further telephone charge reductions at this time.
Commissions rose approximately $6.3 million, or 135.8%, from approximately
$4.6 million for the nine-month period ended September 30, 1997 to approximately
$10.9 million for the nine months ended September 30, 1998. The increase was
primarily due to the increase in the number of installed payphones. Commissions
as a percentage of revenues increased from 13.5% for the nine months ended
September 30, 1997 to 15.8% for the nine months ended September 30, 1998,
reflecting a higher concentration of
25
<PAGE>
national and regional payphone contracts (contracts representing 50 or more
payphones), primarily as a result of the CCI Acquisition. However, this was
partially offset by the fact that, while many of the Company's contracts with
location owners provide for commission percentages proportionate with increases
in revenues, some are based on flat monthly rates set by the agreements.
Service, maintenance and network costs increased approximately $6.5
million, or 84.1%, from approximately $7.8 million for the nine months ended
September 30, 1997 to approximately $14.3 million for the nine months ended
September 30, 1998. The increase was primarily due to the increase in the number
of installed payphones. The Company's average monthly service, maintenance and
network costs on a per phone basis decreased from $51.88 for the first nine
months of 1997 to $43.37 for the nine months ended September 30, 1998. The
decrease in service, maintenance and network costs on a per-phone basis was
primarily attributable to increasing operating efficiencies achieved through
increasing density in the Company's payphone routes resulting from the CCI
Acquisition and expansion of its installed base of payphones.
Selling, general and administrative ("SG&A") expenses increased
approximately $15.9 million, or 157.6%, from approximately $10.1 million for the
nine months ended September 30, 1997 to approximately $26.0 million for the nine
months ended September 30, 1998. The increase was partially attributable to
higher depreciation and amortization expense, which rose approximately $8.6
million or 283.8%, from the prior year, primarily reflecting depreciation and
amortization expense related to the CCI Acquisition. The Company also incurred
approximately $7.2 million in additional SG&A expenses associated with the
operation of CCI administrative and field office facilities and other
acquisitions made, branch office facilities opened and increased salaries and
administrative costs during the last quarter of 1997 and the first three
quarters of 1998, and $0.1 million in bank fees related to a $2.5 million note
entered into on September 30, 1998. The Company is finalizing the integration of
its operations with the operations of CCI, having begun eliminating redundant
sales and administrative personnel and office facilities in the second quarter
of 1998. The Company also recognized a non-recurring charge of approximately
$0.83 million in the first quarter of 1998 related to corporate restructuring
resulting from the CCI Acquisition. The restructuring charge included reserves
of approximately $0.3 million for lease termination costs, $0.2 million for
severance pay and $0.33 million for facility closing costs.
Other income decreased approximately $0.2 million or 61.5% for the nine
month period ended September 30, 1998 over the prior-year period, from
approximately $0.4 million for the nine months ended September 30, 1997 to
approximately $0.2 million for the nine months ended September 30, 1998. This
decrease resulted primarily from a write off of approximately $0.4 million in
costs associated with the terminated PhoneTel transaction. This decrease was
partially offset by an increase in interest income resulting from higher cash
balances in the Company's interest-bearing accounts in the first three quarters
of 1998 over the same period of 1997. Interest expense in the nine months ended
September
<PAGE>
30, 1998 increased approximately $6.0 million, or 1,873.4%, from approximately
$0.3 million for the nine months ended September 30, 1997 to approximately $6.3
million for the nine months ended September 30, 1998. This increase resulted
primarily from the incurrence of $120.0 million in indebtedness on February 3,
1998 in connection with the CCI Acquisition and refinancing of the Company's
existing credit facility. On June 30, 1998 and August 6, 1998, pursuant to the
terms of the 1998 Credit Agreement, the Company reduced the principal amounts
outstanding under its credit facility by $24.3 million and $5.5 million,
respectively.
Net income decreased approximately $5.7 million or 190.4% from the prior-
year period, from net income of approximately $3.0 million, for the nine months
ended September 30, 1997 to a net loss of approximately $2.7 million for the
nine months ended September 30, 1998. Before the effect of the non-recurring
restructuring charge of approximately $0.83 million recognized in the first
quarter of 1998 and the non-recurring write-off of $0.4 million in the third
quarter of 1998 related to the terminated PhoneTel transaction, net income
decreased approximately $4.5 million or 150% from the prior year period,
decreasing from net income of approximately $3.0 million for the nine months
ended September 30, 1997 to a net loss of approximately $1.5 million for the
first three quarters of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
As of September 30, 1998, the Company had a current ratio of 0.97 to 1, as
compared to a current ratio of 3.25 to 1 on December 31, 1997. The decrease was
primarily attributable to an increase in current maturities of long-term debt of
approximately $19.3 million related to the incurrence of indebtedness in
connection with the CCI Acquisition and refinancing of the Company's existing
credit facility. The increases in the Company's assets and liabilities between
December 31, 1997 and September 30, 1998 are generally due to the CCI
Acquisition. Specifically, the allowance for doubtful accounts increased from
$0.2 million at December 31, 1997 to $5.4 million at September 30, 1998, due to
a large allowance on fully reserved receivables related to CCI's former inmate
operations which were not sold in connection with the sale of the inmate
operations to Talton Holdings, Inc. Other assets increased from $3.5 million at
December 31, 1997 to $62.6 million at September 30, 1998 due to the addition of
$45.7 million of goodwill and $11.6 million of other intangible assets in
connection with the CCI Acquisition. Additional paid-in capital increased from
$20.7 million at December 31, 1997 to $49.4 million at September 30, 1998 due to
the sale of 1.0 million shares of the Company's Common Stock for $28.0 million
on June 29, 1998 to an affiliate of Equity Group Investments, Inc., a privately-
held investment company controlled by Sam Zell. Cash flows from investing
activities decreased $115.6 million primarily as a result of the CCI
Acquisition.
The Company's capital expenditures, exclusive of acquisitions, for the nine
months ended September 30, 1998 and 1997 were $7.1 million and $4.4 million,
27
<PAGE>
respectively. The Company's capital expenditures primarily consisted of costs
associated with the installation of new payphones. In the first three quarters
of 1998, the Company financed its capital expenditures and acquisitions
primarily with approximately $113.8 million in cash provided by financing
activities. In the same period of 1997, the Company financed its capital
expenditures primarily with approximately $4.7 million in cash provided by
operating activities, approximately $6.2 million in long-term debt financing and
available cash reserves.
Credit Agreement
In connection with the CCI Acquisition on February 3, 1998, 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
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 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 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 November
16, 1998, the interest rates on the balance of $76.8 million outstanding under
the Term Loan Facility and on a $8.0 million, a $5.0 million, and a $1.8 million
note outstanding under the Revolving Credit Facility were 8.07%, 8.35%, 8.13%
and 7.98%, respectively.
Amounts outstanding under the Term Loan Facility are required to be repaid
in consecutive quarterly installments. The first two were paid on June 30 and
September 30, respectively. The third installment (in the aggregate principal
amount of approximately $3.33 million) is due on the last day of the calendar
quarter ending December 31, 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 November
16, 1998, $76.8 million in outstanding principal amount had been borrowed under
the Term Loan Facility and $14.8 million in outstanding principal amount had
been borrowed under the Revolving Credit Facility.
28
<PAGE>
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. 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. On June 30, 1998 and August 6, 1998, pursuant to the terms of the 1998
Credit Agreement, the Company reduced the principal amounts outstanding under
its credit facility by $24.3 million and $5.5 million, respectively.
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.
On September 30, 1998, the Company and the Lenders agreed to the fifth amendment
to the 1998 Credit Agreement which revised the definition of the borrowing base
to include the entire amount of the Revolving Loan Facility through January 1,
1999. As of June 30, 1998, the company was in violation of the covenant
contained in the 1998 Credit Agreement which required the ratio of funded debt
to EBITDA for the trailing twelve month period to be at or below 4.25 to 1. The
Company and the Lenders agreed to waive this requirement by entering into the
fourth amendment to the 1998 Credit Agreement to increase the maximum allowable
ratio of funded debt to EBITDA to 5.00 to 1.00 for each of the fiscal quarters
ended June 30, 1998 and September 30, 1998. The fourth amendment also increased
the amount of capital expenditures allowed from $6.0 million in the fiscal year
ended December 31, 1998, to $10.0 million to allow the Company to pursue
additional payphone acquisitions. The Company prepaid a portion of the Term Loan
Facility in August 1998 to a level within the required ratio of funded debt to
EBITDA as of June 30, 1998. The Company believes that it is probable that it
will comply with the loan covenants for the next twelve months and, as such, has
not classified the obligations under the 1998 Credit Agreement as current
liabilities.
On September 30, 1998, the Company entered into an additional revolving
loan commitment of $5.0 million with NationsBank, N.A., under the same terms as
the 1998 Credit Agreement. The principal of this revolving loan commitment and
all accrued interest thereon will be payable on January 15, 1999. As of November
16, 1998, $2.5 million was outstanding under this revolving loan commitment.
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 through February 3, 2004, including capital
expenditures. 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.
29
<PAGE>
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.
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.
30
<PAGE>
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.
PART II - OTHER INFORMATION
- ---------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K. On July 22, 1998, the Company filed a Current
Report on Form 8-K to report the signing of a definitive agreement to merge with
Peoples Telephone Company, Inc., based in Miami, Florida.
31
<PAGE>
SIGNATURE
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned thereunto duly authorized.
DAVEL COMMUNICATIONS GROUP, INC.
Date: November 16, 1998 /s/ Michael E. Hayes
------------------------------
Michael E. Hayes
Senior Vice President and
Chief Financial Officer
32
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