<PAGE>
FORM 10-Q/A
AMENDMENT NO. 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: March 31, 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 May 14, 1998, the number of shares outstanding of the Registrant's Common
Stock was 4,647,809.
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except per share and share data)
<TABLE>
<CAPTION>
March 31 December 31
ASSETS 1998 1997
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 8,091 $ 2,567
Trade accounts receivable, net of allowance
for doubtful accounts of $5,474 and $185,
respectively 19,717 9,105
Note receivable 2,362 2,536
Other current assets 2,011 702
--------- --------
Total current assets 32,181 14,910
PROPERTY AND EQUIPMENT 82,289 34,528
OTHER ASSETS 66,469 3,520
--------- --------
Total assets $ 180,939 $ 52,958
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 11,200 $ 1,501
Accounts payable 3,637 1,257
Accrued liabilities 8,335 1,832
--------- --------
Total current liabilities 23,172 4,590
LONG-TERM DEBT 110,932 6,801
DEFERRED INCOME TAXES 9,866 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, 4,647,809 and
4,629,323 shares issued and outstanding, respectively 46 46
Additional paid-in capital 21,018 20,685
Retained earnings 15,905 17,239
--------- --------
Total shareholders' equity 36,969 37,970
--------- --------
Total liabilities and shareholders' equity $ 180,939 $ 52,958
========= ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31
(In thousands, except per share and share data)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenues
Coin calls $11,536 $ 5,371
Non-coin calls 7,767 5,308
------- --------
Total revenues 19,303 10,679
Costs and expenses
Telephone charges 4,513 2,251
Commissions 3,137 1,311
Service, maintenance and network costs 4,149 2,297
Restructuring costs 825 -
Selling, general and administrative 7,522 3,008
------- ----------
Total operating costs and expenses 20,146 8,867
------- ---------
Operating profit (loss) (843) 1,812
Interest expense (1,647) (78)
Other 163 73
------- ---------
Income (loss) from operations before income taxes (2,327) 1,807
Provision (benefit) for income taxes (993) 685
Net income (loss) $(1,334) $ 1,122
========= =========
Basic earnings (loss) per share $ (.29) $ .25
========= =========
Diluted earnings (loss) per share $ (.29) $ .24
========= =========
Weighted average shares outstanding 4,641,584 4,581,269
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31
(In thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
Cash flows from operating activities
<S> <C> <C>
Net income (loss) $ (1,334) $ 1,122
Adjustments to reconcile net income (loss) to cash flows
from operating activities:
Gain on sale of property and equipment (18) (4)
Depreciation and amortization 3,216 913
Deferred income taxes (46) 199
Restructuring charge 825 -
Changes in assets and liabilities, net of
effects from acquisitions
Accounts receivable (2,303) (1,745)
Note receivable (39) -
Other assets 178 236
Accounts payable (231) (201)
Accrued liabilities (102) 295
--------- ---------
Net cash flows from operating activities 146 815
Cash flows from investing activities
Capital expenditures (1,034) (1,933)
Proceeds from sale of property and equipment 42 14
Decrease in net assets of discontinued operations - 599
(Increase) decrease in cash value of life insurance - (1)
Increase in other investing assets - (28)
Purchase of Communications Central Inc., net of cash acquired (105,208) -
--------- -
Net cash flows from investing activities (106,200) (1,349)
Cash flows from financing activities
Long-term debt financing 120,700 -
Payments on long-term debt (9,270) (3,094)
Issuance of common stock through stock options and warrants 148 -
--- -
Net cash flows from financing activities 111,578 (3,094)
--------- ---------
Net (decrease) increase in cash
and cash equivalents 5,524 (3,628)
Cash and cash equivalents, beginning of period 2,567 4,669
--------- ---------
Cash and cash equivalents, end of period
$8,091 $1,041
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
The accompanying unaudited consolidated financial statements have been prepared
by the Company and include the accounts of its subsidiaries. These statements
reflect all adjustments, consisting of only normal recurring adjustments which
are, in the opinion of management, necessary for a fair presentation of
financial results for the three month periods ended March 31, 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 for the
year ended December 31, 1997. The results of operations for the three month
periods ended March 31, 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 38,500 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 three months ended December 31, 1997,
and all prior period earnings per share data has been presented on this basis.
5
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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 three months ended March 31, 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.
Three Months Ended March 31, 1997:
Total revenues $ 24,818
=======
Income from continuing operations 133
=======
Basic Income from continuing operations
per share 0.03
=======
Diluted Income from continuing operations
per share 0.03
=======
The allocation of the purchase price of the CCI Acquisition is
summarized as follows:
Working capital $ 7,955
Property and equipment, net 48,578
Goodwill 45,700
Identifiable intangible assets 11,583
-------
$ 113,816
=========
6
<PAGE>
4. LINE-OF-CREDIT
--------------
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 acquisition of Communications Central, Inc., 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 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 May 14,
1998, the interest rates on the Term Loan Facility and on a $1.4 million and an
$8.0 million note outstanding under the Revolving Credit Facility were 8.47%,
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 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 May 14, 1998, $110.0 million in
outstanding principal amount had been borrowed under the Term Loan
7
<PAGE>
Facility and $9.5 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. 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.
As of March 31, 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 5.00 to 1. The Company has
been granted a waiver of this requirement by the Lenders through June 29, 1998.
The Company and the Lenders have also agreed to amend the 1998 Credit Agreement
by extending the deadline for delivery of certain documents which were not
available for delivery to the Lenders by the original due dates.
5. RESTRUCTURING COSTS
-------------------
In connection with the CCI Acquisition, the Company plans to close the Atlanta
office of CCI and close field offices where CCI and the Company have duplicate
facilities. The office closings are expected to be completed by the end of the
third quarter of 1998. In connection with this, the Company recognized
restructuring costs of $825. These costs are 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. Costs of $204 were incurred in the three months ended March 31, 1998
and taken against the reserve.
6. SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Cash paid for interest and income taxes for the three month periods ended March
31, 1998 and 1997 was as follows:
1998 1997
--------- --------
Interest $404,832 $77,854
Income taxes $196,407 $17,557
8
<PAGE>
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 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 March 31, 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
9
<PAGE>
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). 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 Company recorded dial-around compensation revenue of approximately $3.7
million and $2.3 million for the three month periods ended March 31, 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. 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. 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.
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
10
<PAGE>
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 will be 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 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 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 periods ended March 31, 1998 and 1997,
comprehensive income equals net income.
11
<PAGE>
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 periods ended March 31, 1998
and 1997.
1998 1997
----------- -----------
Weighted average shares outstanding 4,641,584 4,581,269
Assumed exercise of options and warrants
(treasury stock method) 134,442 69,203
----------- -----------
Diluted shares outstanding 4,776,026 4,650,472
=========== ===========
Options to purchase 500,350 shares of common stock at a weighted average
purchase price of $14.22 per share were outstanding during the three months
ended March 31, 1998 but were not included in the computation of diluted
earnings per share because the effect of the exercise of the options would be
anti-dilutive.
10. SUBSEQUENT EVENTS
-----------------
On April 22, 1998, the Company adopted a shareholder rights plan pursuant to a
Rights Agreement between the Company and ChaseMellon Shareholder Services,
L.L.C., as Rights Agent (the "Rights Agreement"). Pursuant to the Rights
Agreement, the Company declared a dividend to holders of record of the Common
Stock as of May 4, 1998 of one right per share of Common Stock. Each right is
exercisable for one one-thousandth of a share of a new series of junior
participating preferred stock for an exercise price of $100. The rights contain
provisions which are intended to protect the Company's shareholders in the event
of an unsolicited attempt to acquire the Company at an unfair price.
On May 14, 1998, the Company signed an agreement with an affiliate of Equity
Group Investments, Inc. ("EGI"), a privately-held investment company in which
the EGI affiliate will invest $28 million in the Company as payment for 1.0
million shares of newly issued common stock and warrants to purchase an
additional 218,750 shares of common stock, which will be exercisable at a price
of $32.00 per share. The transaction is expected to be consummated following a
shareholder vote at the Company's 1998 annual stockholders' meeting. The
Company intends to use the net proceeds of the sale to prepay a portion of its
credit facility.
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. The Company believes that the FCC will issue its
ruling in the current proceeding within the six-month period established by the
court. Based on the information available to it,
12
<PAGE>
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,
such determination could have a material adverse impact on the Company's results
of operations and financial position.
13
<PAGE>
MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the 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 first 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 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 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.
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
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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.
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. 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 six 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
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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
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 March 31, 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). 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 Company recorded dial-around compensation revenue of approximately $3.7
million and $2.3 million for the three month periods ended March 31, 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
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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. 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. 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.
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. The Company believes that the FCC will
issue its ruling in the current proceeding within the six-month period
established by the court. 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, such
determination 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
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determines the amount of monthly flat-rate, per-phone compensation for payphones
that cannot supply payphone-specific coding digits. A six-month average will be
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 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 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 operatiors
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 become 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 MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
For the three months ended March 31, 1998, total revenues increased
approximately $8.6 million, or 80.7%, from approximately $10.7 million in the
three months ended March 31, 1997 to approximately $19.3 million in the same
period of 1998. This growth was primarily attributable to an increase from
15,554 payphones on March 31, 1997 to 38,588 payphones on March 31, 1998, an
increase of 23,034 payphones or 148.1%. 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 1997 and the first quarter of 1998,
the Company also added 2,861 payphones to its network through other
acquisitions, and approximately 700 payphones through internal sales growth, net
of removals.
Coin call revenues increased approximately $6.2 million, or 114.8%,
increasing from approximately $5.4 million in the first quarter of 1997, to
approximately $11.5 million in the first quarter of 1998. The growth in coin
income was driven primarily by an increase of approximately $5.7 million in coin
call revenues resulting from growth in the number of installed payphones
primarily due to the CCI Acquisition, and an increase of approximately $0.5
million resulting from other acquisitions and the installation of payphones at
locations with favorable coin call traffic. 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
quarter of 1998.
Non-coin call revenues increased approximately $2.4 million or 50.1%,
rising from approximately $5.3 million in the three months ended March 31, 1997,
to approximately $7.7 million in the three months ended March 31, 1998. The
growth in non-coin revenues was primarily due to an increase of approximately
$4.1 million in non-coin revenues (including approximately $1.3 million from
dial around compensation) resulting from an increase in the number of installed
payphones. As a result of the 1997 Payphone Order, the Company recorded dial-
around compensation in the first quarter of 1998 at a rate of $37.20 per phone
per month. Dial-around compensation for the first quarter of 1997 was recorded
at a rate of $45.85 per phone per month, which reflected provisions of the 1996
Payphone Order which was in effect during the period. Had the
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Company restated the three-month period ended March 31, 1997 to reflect the 1998
presentation, growth in non-coin revenues would have been approximately $400,000
higher. The increase in non-coin call revenues was offset by a decrease of
approximately $0.9 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 and approximately $0.8 million related to
the difference in the dial-around compensation rate between periods.
Telephone charges rose approximately $2.2 million, or 100.4% , increasing
from approximately $2.3 million in 1997 to approximately $4.5 million in the
three months ended March 31, 1998. The increase was primarily due to the
increase in the number of installed payphones. The Company's telephone charges
increased at a slower rate than the 148.1% increase in the number of installed
payphones due to more favorable contracts with Local Exchange Carriers and
Competitive Local Exchange Carriers for local line access. The Company's
average monthly telephone charge on a per phone basis decreased from $48.54 in
1997 to $47.14 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 estimate the impact of further telephone charge reductions at this
time.
Commissions rose approximately $1.8 million, or 139.3%, increasing from
approximately $1.3 million in the first quarter of 1997 to approximately $3.1
million in the three months ended March 31, 1998. The increase was primarily due
to the increase in the number of installed payphones. Commissions as a
percentage of revenues increased from 12.3% in the three months ended March 31,
1997 to 16.3% of revenues in the first quarter of 1998, reflecting a higher
concentration of national and regional payphone contracts (contracts
representing 50 or more payphones) 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 exclude certain types of call traffic from
commission calculations (typically dial-around call traffic), and still others
are based on flat monthly rates set by the agreements.
Service, maintenance and network costs increased approximately $1.9
million, or 80.6%, increasing from approximately $2.3 million in the first
quarter of 1997 to approximately $4.1 million in the prior year period. 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 $48.08 in the first quarter of 1997 to $42.77 in the
three months ended March 31, 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 $4.5 million, or 150.1%, from the prior year, increasing from
approximately $3.0 million in 1997, to approximately $7.5 million in 1998. The
increase was partially attributable to higher depreciation and amortization
expense, which rose approximately $2.3 million or 252.4%, from the prior year,
primarily reflecting depreciation and amortization expense
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related to the CCI Acquisition. The Company incurred approximately $1.7 million
in additional SG&A expenses associated with the operation of CCI administrative
and field office facilities, and approximately $0.5 million in additional SG&A
expenses related to acquisitions made and branch office facilities opened during
1997. The Company is currently integrating its operations with the operations of
CCI and will begin eliminating redundant 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
includes reserves of approximately $0.3 million for lease termination costs,
$0.2 million for severance pay and $0.33 million for facility closing costs.
Interest and other income increased approximately $90,000 or 123.4% in the
first quarter of 1998 over the prior-year period, rising from approximately
$73,000 in 1997 to approximately $163,000 in 1998. This increase resulted
primarily from an increase in interest income resulting from higher cash
balances in the Company's interest-bearing accounts in the first quarter of 1998
over the first quarter of 1997. Interest expense in the three months ended March
31, 1998 increased approximately $1.6 million, or 2,014.8%, compared to the
prior-year period, increasing from approximately $78,000 in 1997 to
approximately $1.6 million in the first quarter of 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 $2.4 million or 218.9% from the prior-
year period, decreasing from net income of approximately $1.1 million, in the
three months ended March 31, 1997 to a net loss of approximately $1.3 million in
the first quarter of 1998. Before the effect of the non-recurring restructuring
charge of approximately $1.0 million recognized in the first quarter of 1998,
net income decreased approximately $2.0 million or 175.9% from the prior year
period, decreasing from net income of approximately $1.1 million in the three
months ended March 31, 1997 to a net loss of approximately $0.9 million in the
first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
As of March 31, 1998, the Company had a current ratio of 1.39 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 $9.7 million related to 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. The increases in the
Company's assets and liabilities between December 31, 1997 and March 31, 1998
are generally due to the CCI Acquisition. Specifically, the allowance for
doubtful accounts increased from $0.2 million at December 31, 1997 to $5.5
million at March 31, 1998, due to a large allowance on 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 $66.5 million at March 31, 1998 due to the
addition of $45.7 million of goodwill and $11.6 million of other intangible
assets in connection with the CCI
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Acquisition. Cash flows from investing activities decreased $104.9 million
primarily as a result of the CCI Acquisition.
The Company's capital expenditures, exclusive of acquisitions, for the
three months ended March 31, 1998 and 1997 were $1.0 million and $1.9 million,
respectively. The Company's capital expenditures primarily consisted of costs
associated with the installation of new payphones. In the first quarter of 1998,
the Company financed its capital expenditures and acquisitions primarily with
approximately $0.1 million in cash provided by operating activities and an
increase in long-term debt and current maturities of long term debt of
approximately $111.4 million. In the first quarter of 1997, the Company
financed its capital expenditures primarily with approximately $0.8 million in
cash provided by operating activities.
On May 14, 1998, the Company signed an agreement with an affiliate of Equity
Group Investments, Inc. ("EGI"), a privately-held investment company in which
the EGI affiliate will invest $28 million in the Company as payment for 1.0
million shares of newly issued common stock and warrants to purchase an
additional 218,750 shares of common stock, which will be exercisable at a price
of $32.00 per share. The transaction is expected to be consummated following a
shareholder vote at the Company's 1998 annual stockholders' meeting. The
Company intends to use the net proceeds of the sale to prepay a portion of its
credit facility.
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.
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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 May 14,
1998, the interest rates on the Term Loan Facility and on a $1.4 million and an
$8.0 million note outstanding under the Revolving Credit Facility were 8.47%,
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 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 May 15, 1998, $110.0 million in
outstanding principal amount had been borrowed under the Term Loan Facility and
$9.5 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.
As of March 31, 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 5.00 to 1. The
Company has been granted a waiver of this requirement by the Lenders through
June 29, 1998. The Company and the Lenders have also agreed to amend the 1998
Credit Agreement by extending the
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deadline for delivery of certain documents which were not available for delivery
to the Lenders by the original due dates.
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.
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
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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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PART II - OTHER INFORMATION
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K. 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 with CCI.
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SIGNATURE
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment No. 1 on Form 10-Q/A to be signed on
its behalf by the undersigned thereunto duly authorized.
DAVEL COMMUNICATIONS GROUP, INC.
Date: November 9, 1998 /s/ Michael E. Hayes
---------------------------------
Michael E. Hayes
Senior Vice President and Chief Financial Officer
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