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, 1996 Commission File Number: 0-22610
DAVEL COMMUNICATIONS GROUP, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
ILLINOIS 37-1064777
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. No.)
1429 MASSARO BOULEVARD, TAMPA, FLORIDA 33619
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(Address of principal executive offices) (Zip Code)
Registrant`s telephone number: (813) 623-3545
________________________
Indicate by check mark whether the Registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
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As of November 13, 1996, the number of shares outstanding of the Registrant`s
Common Stock was 4,556,219.
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, 1996 December 31, 1995
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Assets
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Current assets:
Cash and cash equivalents $ 3,029,786 $ 2,433,143
Accounts receivable at net 8,337,922 7,287,498
Inventory 296,431 290,627
Prepaid income taxes 866,596 --
Other current assets 480,507 487,683
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Total current assets 13,011,242 10,498,951
Property and equipment at net 26,509,708 20,058,029
Other assets:
Goodwill at net 2,179,620 2,392,745
Other assets 445,290 378,203
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Total other assets 2,624,910 2,770,948
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Total assets $42,145,860 $33,327,928
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Liabilities
-----------
Current liabilities:
Current maturities of long term debt $ 64,104 $ 86,992
Accounts payable 1,748,001 1,672,428
Accrued expenses 1,401,942 1,210,988
Cash advances on factored receivables 1,090,250 697,109
Income taxes payable -- 18,429
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Total current liabilities 4,304,297 3,685,946
Long term debt, less current maturities 4,550,859 204,810
Deferred income taxes 1,638,440 1,447,300
Stockholders' equity:
Common stock: authorized 10,000,000
shares without par value-issued and
outstanding-4,556,219 shares 45,562 44,550
Additional paid-in capital 19,587,056 18,772,736
Retained earnings 12,019,646 9,172,586
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Total stockholders' equity 31,652,264 27,989,872
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Total liabilities and
stockholders' equity $42,145,860 $33,327,928
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The accompanying notes are an integral part of these statements
2
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
For the Three For the Three
Months Ended Months Ended
September 30, 1996 September 30, 1995
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Revenues:
Coin calls $ 5,221,293 $ 3,831,504
Non-coin calls payphones 4,156,738 4,016,492
Non-coin calls hospitality 2,567,197 3,568,484
Sales of equipment 68,884 235,559
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Total revenues 12,014,112 11,652,039
Operating costs and expenses:
Telephone charges-payphones 1,981,484 1,542,955
Location commissions-payphones 1,280,215 1,096,892
Service, maintenance & network payphones 2,303,816 1,833,025
Cost of sales-hospitality 1,917,522 2,380,020
Cost of equipment sold and repairs 66,274 164,976
Selling, general, and administrative 2,054,024 1,842,613
Depreciation and amortization 935,553 902,073
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Total operating costs and expenses 10,538,888 9,762,554
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Operating profit 1,475,224 1,889,485
Interest (expense) (126,390) 7,962
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Earnings before income taxes 1,348,834 1,897,447
Income taxes 317,354 740,004
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Net earnings $ 1,031,480 $ 1,157,443
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Earnings per common share $ .23 $ .26
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Average shares outstanding 4,554,247 4,455,000
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The accompanying notes are an integral part of these statements
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DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
For the Nine For the Nine
Months Ended Months Ended
September 30, 1996 September 30, 1995
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Revenues:
Coin calls $13,302,134 $10,585,826
Non-coin calls payphones 11,738,271 11,313,918
Non-coin calls hospitality 8,271,513 10,472,139
Sales of equipment 312,961 880,051
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Total revenues 33,624,879 33,251,934
Operating costs and expenses:
Telephone charges-payphones 5,316,323 4,477,639
Location commissions-payphones 3,352,384 2,824,469
Service, maintenance & network payphones 6,100,693 5,228,488
Cost of sales-hospitality 5,992,891 7,299,957
Cost of equipment sold and repairs 278,413 637,784
Selling, general, and administrative 5,641,521 5,151,737
Depreciation and amortization 2,541,249 2,558,176
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Total operating costs and expenses 29,223,474 28,178,250
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Operating profit 4,401,405 5,073,684
Interest (expense) (124,216) 45,959
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Earnings before income taxes 4,277,189 5,119,643
Income taxes 1,430,129 1,996,661
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Net earnings $ 2,847,060 $ 3,122,982
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Earnings per common share $.63 $.70
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Average shares outstanding 4,495,672 4,455,000
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The accompanying notes are an integral part of these statements
4
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Nine For the Nine
Months Ended Months Ended
September 30, 1996 September 30, 1995
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Net earnings $ 2,847,060 $ 3,122,982
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 2,541,248 2,558,176
(Gain) loss on sale of property and equipment (1,432) 318
Deferred income taxes 191,140 115,787
Change in assets and liabilities, net of
effects from acquisitions:
Increase in accounts receivable (1,050,424) (1,785,251)
Increase in inventory (5,804) (45,467)
Increase in prepaid income taxes (866,596) ---
Increase in other assets (85,761) (437,337)
Increase (decrease) in accounts payable 75,573 (647,612)
Increase in accrued expenses 584,095 380,177
Decrease in income taxes payable (18,429) (53,150)
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Net cash provided by operating activities 4,210,670 3,208,623
Cash flows from investing activities:
Capital expenditures (4,374,793) (4,590,205)
Proceeds from sale of equipment 7,000 18,610
Increase in cash value of life insurance (7,377) (5,663)
Purchase of pay telephones (4,377,350) (1,660,837)
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Net cash used in investing activities (8,752,520) (6,238,095)
Cash flows from financing activities:
Payments on long-term debt (576,839) (60,030)
Increase (decrease) in other financing assets 815,332 ---
Long-term debt financing 4,900,000 348,749
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Net cash provided by (used in) financing activities 5,138,493 288,719
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Net increase (decrease) in cash 596,643 (2,740,753)
Cash and cash equivalents at beginning of period 2,433,143 4,900,591
----------- -----------
Cash and cash equivalents at end of period $ 3,029,786 $ 2,159,838
=========== ===========
Supplemental disclosures of cash flow information:
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Cash paid during the period:
Interest on bank loans $ 224,452 $ 121,757
Income taxes $ 1,606,698 $ 1,943,301
The accompanying notes are an integral part of these statements
5
DAVEL COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been prepared
by the Company and include the accounts of its subsidiaries. These statements
reflect all adjustments, consisting of only normal recurring adjustments which
are, in the opinion of management, necessary for a fair presentation of
financial results for the three month and nine month periods ended September 30,
1996 and 1995, 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 for the years ended December 31, 1995 and 1994. The results of
operations for the three month and nine month periods ended September 30, 1996
and 1995 are not necessarily indicative of the results for the full year.
1. The Company
Davel Communications Group, Inc. and its Subsidiaries taken as a whole (the
Company) operates, services and maintains a system of pay telephones in 24
states and provides operator services to these pay telephones as well as motel
and hotel telephones in 43 states (hospitality calls). The Company also
manufactures, remanufactures and repairs pay telephones and other
telecommunications equipment for its own use and for sale to others.
2. Principles of Consolidation
The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Intercompany transactions and balances have been
eliminated in consolidation.
3. Inventories
Inventories, which consist mainly of repair and manufacturing parts and
supplies, are carried at the lower of cost or market. Cost is determined by the
first-in, first-out method.
4. Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives using
straight-line and accelerated methods.
6
5. Intangible Assets
Intangible assets represent the unamortized excess of cost over fair market
value of net assets of businesses acquired by purchase in business combinations.
Goodwill is being amortized on a straight-line basis primarily over ten years.
Accumulated amortization of goodwill as of September 30, 1996 and 1995, was
$682,972 and $398,806, respectively.
Hospitality contracts were contracts in place to provide operator and
telecommunication management services to the hospitality industry. These
contracts were being amortized on a straight-line basis over five years, which
was the expected average length of the contracts including renewals at the time
of acquisition. Accumulated amortization of hospitality contracts as of
September 30, 1995 was $1,076,667. These contracts were written off in the
fourth quarter of 1995 in accordance with SFAS 121 (See Note B).
The company periodically evaluates the carrying amount of intangible assets,
considering whether the undiscounted cash flows from related operations will be
sufficient to recover recorded asset amounts. As of September 30, 1996,
management of the Company believes no impairment exists, and therefore no write-
downs of intangibles have been made.
6. Recognition of Revenue
Revenues from coin calls, non coin calls and hospitality calls are recognized as
calls are made. When revenue on a telephone call is recorded, an expense is
also recorded for fees associated with the call. Revenues from sales of
equipment and repairs are recognized when sales are consummated and goods are
shipped to the customer.
7. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Such temporary
differences include accumulated depreciation and amortization of property and
equipment and intangibles and allowance for doubtful accounts.
8. Earnings Per Share
Earnings per common share is computed on the basis of the weighted average
number of shares outstanding during each period.
9. Cash Equivalents
For purposes of determining cash flows, the Company defines cash and cash
equivalents as highly-liquid investments purchased with an original maturity of
three months or less.
7
10. 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.
NOTE B - NON-RECURRING CHARGE
In 1995, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of ("SFAS 121"). The
Company adopted the statement during the year ended December 31, 1995.
In the 1995 fourth quarter, the Company recorded a non-recurring charge of $3.1
million ($2.9 million after-tax or $0.65 per share) due to impairment of
intangible and long-lived assets after applying certain provisions of SFAS 121.
Of the non-recurring charge, $2.7 million related to intangible assets purchased
in the April 1994 acquisition of Comtel Computer Corp. Acquired contracts with
hotel and motel properties for operator services represented $2.5 million of the
charge, and acquired research and development costs represented the remaining
$0.2 million. The contracts written off had either disconnected from the
Company's long distance network or were expected to disconnect without providing
significant future benefits to the Company. The Company determined the future
cash flows from these impaired assets to be negligible and considered a complete
write-down of the remaining intangible balances to be appropriate.
The balance of the non-recurring charge of $0.4 million ($0.2 million net of
tax) represented a write off of uninstalled pay telephone and PBX switching
equipment which was made obsolete by 1995 changes to the North American
Numbering Plan, the telephone numbering plan used in the United States, Canada,
Bermuda, Puerto Rico and the Caribbean countries ("NANP"). This uninstalled
equipment was not upgradable to accommodate new area codes created by the
changes to the NANP and was determined by the Company to be impaired. All of
the Company's remaining equipment has been upgraded or is fully upgradable to
comply with the changes to the NANP.
NOTE C - FACTORED ACCOUNTS RECEIVABLE
The Company, through its Hospitality Division, has an agreement with one of its
billing agents which provides for the factoring of certain accounts receivable,
without recourse, through a third-party commercial finance company. The
Company's billing agent has a first lien on the Hospitality Division's accounts
receivable submitted as collateral for all of its obligations under the advanced
payment agreement. Advances under the agreement
8
bear interest at 4% above the prime rate as published in the Money Rates column
of The Wall Street Journal which is in effect on the payment date.
NOTE D - FAIR VALUES OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable, accrued liabilities and
notes payable, the carrying amounts approximate fair value due to their short
maturities. Due to floating interest rates and values determined using
borrowing rates currently available to the Company, long-term debt is also
carried at amounts that approximate fair value.
NOTE E - OFFICER'S LIFE INSURANCE
The Company maintains $ 300,000 face amount of insurance on the life of the
Chairman of its Board of Directors. In connection with this policy, the Company
is the sole beneficiary.
NOTE F - LINE-OF-CREDIT
The Company has a $25 million revolving line of credit with the Boatmen's
National Bank of St. Louis ("Boatmen's"), with provisions to convert up to $17.5
million of the line of credit to term loans. The terms of the agreement call
for the Company to pay interest on a graduated scale based on Boatmen's
Corporate Base Rate ("CBR"), which was 8.25% on September 30, 1996. The
interest rate is indexed based on the Company's ratio of funded debt to EBITDA
as defined in the credit facility and is adjusted based on market interest rates
for CBR and LIBOR. The maturity date of the revolving portion of the credit
facility is September 30, 2001. Principal outstanding on each term loan under
the convertible portion of the credit facility shall be payable in 12 to 20
quarterly installments with the last installment due no later than September 30,
2003. As of November 13, 1996, the Company had $6.2 million borrowed under the
revolving portion of the credit facility.
NOTE G - CAPITAL STOCK TRANSACTIONS
1. Preferred Stock
The Company's articles of incorporation authorize 1,000,000 shares of preferred
stock, par value $.01 per share. The Company does not have any immediate plans
to issue any shares of preferred stock.
2. Stock Options and Warrants
The Company maintains a Stock Option Plan and a Directors' Stock Option Plan.
The plans provide for the grant of nonqualified options to purchase shares of
common stock and outright grants of Common Stock. The maximum number of shares
of common stock
9
reserved for issuance under the Stock Option Plan and the Directors' Stock
Option Plan are 1,000,000 and 150,000 shares, respectively.
The Stock Option Plan conforms to the newly enacted rules regarding the
administration of employee benefit plans as set forth under Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended, and conforms
to the requirements of Section 162(m) of the Internal Revenue Code of 1986, as
amended, by placing an annual limit on the maximum aggregate number of shares
underlying options that may be granted to any Participant under the Stock Option
Plan. The Board of Directors has selected 200,000 shares of Common Stock as the
award limitation.
NOTE H - 401(K) PROFIT SHARING PLAN
The Company maintains a 401(K) profit sharing plan which covers all full-time
employees who meet the eligibility requirements as to age and length of service.
A participant may elect to have his or her compensation reduced by an amount not
to exceed 15% of compensation actually paid. The Company will match 50% of the
participants' elective deferrals not exceeding 3% of the participants'
compensation.
NOTE I - ACQUISITIONS
On June 4, 1996, the Company completed the acquisition of the assets of
Cottonwood Communications of Burlington, IA, including 933 installed pay
telephones in Arizona, Iowa and Utah. The purchase price for the assets, which
included equipment related to the installed telephones, inventory and location
agreements, was $2,592,100 in cash.
On July 12, 1996, the Company completed the acquisition of 664 installed pay
telephones and other related assets from Payphone Corporation of America for
$1,785,250 in cash. The acquired pay telephones are located primarily in the
Washington, D.C. metropolitan area.
On November 1, 1996, the Company completed the acquisition of 1,011 installed
pay telephones and other related assets from Pay Telephone America, Ltd. for
$3,500,000 in cash. The acquired pay telephones are located primarily in
Mississippi and adjoining states.
NOTE J - SALE OF HOSPITALITY DIVISION
On June 27, 1996, the Company signed a letter of intent to sell its Hospitality
Division for $5 million to Portland, Oregon-based Skylink Communications Corp.,
a privately-held multi-media and telecommunications company which provides movie
and television programming and telecommunications services to the hospitality
industry. The transaction is subject to satisfactory completion of due
diligence, receipt of appropriate regulatory approvals and other customary terms
and conditions.
10
MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements appearing elsewhere herein.
The Company derives its revenues from three principal sources: coin calls,
non-coin calls, including hospitality calls, and sales of equipment and repairs.
Coin calls represent calls paid for with coins deposited in the telephone.
Non-coin or cashless calls made from the Company`s pay telephones and
hospitality and other telephones to which the Company provides operator services
generate revenues in an amount that depends upon whether the Company or a long
distance company handles the call. If the cashless call is handled by the
Company through its switch or an "unbundled" services arrangement, the Company
recognizes non-coin revenues equal to the total amount charged for the call. If
the cashless call is handled by a long distance company, the Company generally
recognizes revenues in an amount equal to the commission on that call paid to
the Company by the long distance company. Under an unbundled services
arrangement, the Company performs certain functions necessary to service
cashless calls, uses the long distance company`s switching equipment and its
other services on an as-needed basis, and pays the long distance company on an
unbundled basis for the operator services actually used to complete these calls.
The Company also recognizes non-coin revenues from calls that are dialed
from its pay telephones to gain access to a long distance company other than the
one pre-programmed into the telephone; this is commonly referred to as "dial-
around" access. See "Recent Developments". The Company also derives non-coin
revenues from certain LECs for intraLATA and local cashless calls.
The Company also manufactures pay telephones for its own use and receives
revenues from the remanufacture and repair of telecommunications equipment such
as PBXs, key systems and small business systems for third parties.
The principal costs related to the ongoing operation of the Company`s pay
telephones include telephone charges, commissions, and service, maintenance and
network costs. Telephone charges consist of payments made by the Company to
LECs and long distance carriers for access charges and use of their networks.
Commission expense represents payments to property owners. Service, maintenance
and network costs represent the cost of servicing and maintaining the pay
telephones on an ongoing basis, costs related to operation of the Company`s
switch and, in connection with unbundled services arrangements, the fees paid
for those services, Costs of equipment sold and repairs include the cost of
purchasing new and used equipment and repair parts and the labor and materials
necessary to repair and remanufacture the equipment.
11
The principal costs related to the Company`s hospitality calls include
commissions, network costs and billing and collection costs. Commissions
represents payments to property owners. Network costs represents costs related
to unbundled services arrangements utilized in providing service to the
Company's hospitality customers. The Company provides long distance services to
its hospitality customers through use of its switching equipment in Tampa,
Florida where it is economically feasible and regulatory approvals have been
received.
ACQUISITIONS
On June 4, 1996, the Company completed the acquisition of the assets of
Cottonwood Communications of Burlington, IA, including 933 installed pay
telephones in Arizona, Iowa and Utah. The purchase price for the assets, which
included equipment related to the installed telephones, inventory and location
agreements, was $2,592,100 in cash.
On July 12, 1996, the Company completed the acquisition of 664 installed
pay telephones and other related assets from Payphone Corporation of America for
$1,785,250 in cash. The acquired pay telephones are located primarily in the
Washington, D.C. metropolitan region.
On November 1, 1996, the Company completed the acquisition of 1,011
installed pay telephones and other related assets from Pay Telephone America,
Ltd. for $3,500,000 in cash. The acquired pay telephones are located primarily
in Mississippi and adjoining states.
SALE OF HOSPITALITY DIVISION
On June 27, 1996, the Company signed a letter of intent to sell its
Hospitality Division for $5 million to Portland, Oregon-based Skylink
Communications Corp., a privately-held multi-media and telecommunications
company which provides movie and television programming and telecommunications
services to the hospitality industry. The transaction is subject to
satisfactory completion of due diligence, receipt of appropriate regulatory
approvals and other customary terms and conditions.
RECENT DEVELOPMENTS
On September 20, 1996, the Federal Communications Commission adopted rules
pursuant to the Telecommunications Act of 1996 (the "Rules") which require
certain providers of long distance services to collectively pay a flat rate of
$45.85 per pay telephone per month to providers of pay telephone services from
November 8, 1996 through October 1, 1997. The new dial around compensation
mechanism replaces the $6.00 flat rate which has been in effect since 1992 and
revokes the waivers granted to
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AT&T and Sprint which allowed them to pay compensation for dial around calls at
a rate of $0.25 per call in lieu of paying their portion of the $6.00 flat rate.
After October 1, 1997, the $45.85 flat rate will be replaced by a per-call
compensation system which will set the rate at $0.35 per dial around call
through October 1, 1998, and at a rate equal to the local coin call rate
thereafter. The Company believes that the dial around compensation rates and
mechanism prescribed in the Rules, upon implementation, will result in
additional non coin revenues and earnings for its pay telephone operations. The
Rules contain other provisions which are expected to impact the Company's
operations. While the Company expects the overall impact of the other
provisions to have a positive impact on its operations in the future, the timing
nor level of impact on operations can be determined at this time.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1995
For the three months ended September 30, 1996, total revenues increased
approximately $362,000 or 3.1%, compared to the three months ended September 30,
1995. The increase was primarily due to an increase of approximately $1.4
million in coin call revenues generated from the Company's pay telephones over
the prior year period. Non-coin revenues from the Company's pay telephones
increased approximately $140,000 or 3.5% from the prior year period.
Revenues from the Company's Hospitality Division decreased approximately
$1.0 million or 28.1% compared to the three months ended September 30, 1995
resulting from lower call volume from telephones in hotel rooms served by the
Company's Hospitality Division due to an increase in dial around calls and a
12.5% decrease in the number of hotel rooms serviced from 79,438 at September
30, 1995 to 69,549 at September 30, 1996.
Pay telephone revenues increased approximately $1.5 million or 19.5% from
the three months ended September 30, 1996. This increase was primarily
attributable to an increase in coin call revenues from the Company's pay
telephones. The growth in pay telephone revenues was also attributable to an
increase from 10,658 pay telephones on September 30, 1995 to 14,044 pay
telephones on September 30, 1996. While non-coin call revenues on the Company's
pay telephones increased by $140,000 or 3.5% in the three months ended September
30, 1996, the Company experienced lower non-coin call volumes on its pay
telephones due to an increase in dial around calls over the prior year period.
In November 1996, the Company expects to begin receiving additional compensation
for dial around calls placed from its pay telephones. See "Recent
Developments".
Revenues from sales of equipment and repairs decreased by approximately
$167,000 or 70.8% due to the closing in August 1995 of the Company's repair and
remanufacturing facility in Jacksonville, IL and a shift in the utilization of
its technical
13
personnel to the manufacture of pay telephones to accommodate its increasing
need for equipment to install additional pay telephone locations.
Telephone charges related to the Company's pay telephones increased to
21.1% of pay telephone revenues compared to 19.7% in the prior year period.
The increase in telephone charges as a percentage of pay telephone revenues was
primarily attributable to lower monthly long distance revenues as a result of an
increase in dial around calls placed from the Company's pay telephones. The
Company's average monthly telephone charge on a per phone basis did, however,
decrease from $49.26 per month in the three months ended September 30, 1995, to
$47.62 per month in the three months ended September 30, 1996. This decrease
was primarily attributable to implementation of legislation in the State of
Florida in the third quarter of 1995, which allowed the Company to select a
billing option which eliminates measured, local service on certain of the
Company's pay telephones in the State. As of September 30, 1996, the Company
had 4,171 installed pay telephones in the State of Florida.
Commissions related to the Company's pay telephone operations decreased to
13.7% of pay telephone revenues compared to 14.0% in the prior year period.
The decrease in commissions was primarily attributable to lower monthly long
distance revenues as a result of an increase in dial around calls placed from
the Company's pay telephones. Service, maintenance and network costs related to
the operation of the Company's pay telephones increased to 24.6% of pay
telephone revenues compared to 23.4% in the prior-year period. The increase as
a percentage of pay telephone revenues was primarily attributable to lower
monthly long distance revenues as a result of an increase in dial around calls
placed from the Company's pay telephones. The Company's average monthly
service, maintenance and network costs on a per phone basis did, however,
decrease from $58.53 per month in the three months ended September 30, 1995, to
$55.37 per month in the three months ended September 30, 1996 due to operating
efficiencies achieved through expansion of the Company's installed pay telephone
base.
Cost of equipment sold and repaired increased to 96.2% of sales of
equipment and repairs compared to 70.0% in the prior-year period. The increase
resulted from a decrease in revenues from sales of equipment and repairs of
approximately $167,000 or 70.8% from the three months ended September 30, 1995.
A portion of the Company's cost of equipment sold and repaired is fixed,
contributing to the increased cost as a percentage of sales.
Depreciation and amortization increased approximately $33,000, or 3.7%,
from the prior-year period. Depreciation and amortization increased less than
the proportionally with capital expenditures primarily due to the Company's
adoption of the Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). The
Company adopted the statement during the year ended December 31, 1995. The
Company recorded a non-recurring charge of $3.1 million ($2.9 million after-tax
or $0.65 per share) due to impairment of intangible and long-lived
14
assets after applying certain provisions of SFAS 121. Without the non-recurring
charge, depreciation and amortization expense would have been approximately
$200,000 higher, the increase over the prior year due primarily to the purchase
of additional capital equipment to increase the number of installed pay
telephones. Selling, general and administrative ("SG&A") expenses increased
approximately $211,000, or 11.5%, from the prior-year period. These increases
were primarily attributable to costs associated with the opening of three new
divisional sales and service offices.
Interest expense, net of interest income, increased approximately $134,000,
from net interest income of approximately $8,000 in the three months ended
September 30, 1995, to net interest expense of approximately $126,000 in the
three months ended September 30, 1996. The increase in interest expense was
attributable to an increase in long term debt from approximately $270,000 at
September 30, 1995 to approximately $4.6 million at September 30, 1996, related
to the acquisition of approximately 1,600 pay telephones in June and July 1996
for approximately $4.4 million.
Net earnings decreased approximately $126,000 or 10.9% from the prior-year
period.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
For the nine months ended September 30, 1996, total revenues increased
approximately $373,000 or 1.1%, compared to the nine months ended September 30,
1995. This increase was attributable to revenues generated by an increase in
the number of installed pay telephones.
Pay telephone revenues increased approximately $3.1 million or 14.3% over
the nine month period ended September 30, 1995. The growth in pay telephone
revenues was primarily attributable to an increase from 10,658 pay telephones on
September 30, 1995 to 14,044 pay telephones on September 30, 1996 and an
increase in coin call revenues from the Company's pay telephones. Coin call
revenues increased by approximately $2.7 million or 25.7% from the prior year
period. While non-coin call revenues on the Company's pay telephones increased
by $424,000 or 3.8% in the nine months ended September 30, 1996, the Company
experienced lower non-coin call volumes on its pay telephones due to an increase
in dial around calls over the prior year period. In November 1996, the Company
expects to begin receiving additional compensation for dial around calls placed
from its pay telephones. See "Recent Developments".
Total revenues contributed by the Company's Hospitality Division decreased
approximately $2.2 million or 21.0%, during the nine months ended September 30,
1996 compared to the prior year period. The lower call volume resulted from an
increase in dial around calls placed from motel and hotel rooms to which the
Company provides long distance services and a 12.5% decrease in the number of
hotel rooms serviced from 79,438 at September 30, 1995 to 69,549 at September
30, 1996.
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Revenues from sales of equipment and repairs decreased by approximately
$567,000 or 64.4% due to the closing in August 1995 of the Company's repair and
remanufacturing facility in Jacksonville, IL and a shift in the utilization of
its technical personnel to the manufacture of pay telephones to accommodate its
increasing need for equipment to install additional pay telephone locations.
Telephone charges related to the Company's pay telephones increased to
21.2% of pay telephone revenues compared to 20.4% in the prior year period.
The increase in telephone charges as a percentage of pay telephone revenues was
primarily attributable to lower monthly long distance revenues as a result of an
increase in dial around calls placed from the Company's pay telephones. The
Company's average monthly telephone charge on a per phone basis did, however,
decrease from $51.74 per month in the nine months ended September 30, 1995, to
$47.06 per month in the nine months ended September 30, 1996. This decrease was
primarily attributable to implementation of legislation in the State of Florida
in the third quarter 1995, which allowed the Company to select a billing option
which eliminates measured, local service on certain of the Company's pay
telephones in the State. As of September 30, 1996, the Company had 4,171
installed pay telephones in the State of Florida.
Commissions related to the Company's pay telephone operations increased to
13.4% of pay telephone revenues compared to 12.9% in the prior year period.
The increase in commissions as a percentage of pay telephone revenues was
primarily attributable to lower monthly long distance revenues as a result of an
increase in dial around calls placed from the Company's pay telephones.
Service, maintenance and network costs related to the operation of the Company's
pay telephones increased in the nine months ended September 30, 1996 to 24.4% of
pay telephone revenues compared to 23.9% of pay telephone revenues in the prior
year period. The Company's average monthly service, maintenance and network
costs on a per phone basis did, however, decrease from $60.41 per month in the
nine months ended September 30, 1995, to $54.01 per month in the nine months
ended September 30, 1996 due to operating efficiencies achieved through
expansion of the Company's installed pay telephone base.
Cost of equipment sold and repaired increased to 89.0% of sales of
equipment and repairs compared to 72.5% in the prior-year period. The increase
resulted primarily from a decrease in revenues from sales of equipment and
repairs of approximately $567,000 or 64.4% from the nine months ended September
30, 1995. A portion of the Company's cost of equipment sold and repaired is
fixed, contributing to the increased cost as a percentage of sales.
Depreciation and amortization decreased approximately $17,000, or 0.7%,
from the prior-year period, primarily attributable to the Company's adoption of
the Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). The Company
adopted the statement during the year
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ended December 31, 1995. The Company recorded a non-recurring charge of $3.1
million ($2.9 million after-tax or $0.65 per share) due to impairment of
intangible and long-lived assets after applying certain provisions of SFAS 121.
Without the non-recurring charge, depreciation and amortization expense would
have been approximately $600,000 higher, the increase over the prior year due
primarily to the purchase of additional capital equipment to increase the number
of installed pay telephones. Selling, general and administrative ("SG&A")
expenses increased approximately $490,000, or 9.5%, from the prior-year period.
This increase was primarily attributable to increases in the cost of
professional services and salaries and wages, and costs associated with the
opening of three new divisional sales and service offices.
Interest expense, net of interest income, increased approximately $170,000,
from net interest income of approximately $46,000 in the nine months ended
September 30, 1995, to net interest expense of approximately $124,000 in the
nine months ended September 30, 1996. The increase in interest expense was
primarily attributable to an increase in long term debt from approximately
$270,000 at September 30, 1995 to approximately $4.6 million at September 30,
1996, related to the acquisition of approximately 1,600 pay telephones in June
and July 1996 for approximately $4.4 million.
Net earnings decreased approximately $276,000 or 8.8% from the prior-year
period.
The Omnibus Budget Reconciliation Act of 1993 increased the top corporate
income tax rate one percentage point to 35% on taxable income in excess of $10
million, effective for tax years beginning on or after January 1, 1993. The
Company does not expect to achieve this level of taxable income in the current
year.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had a current ratio of 3.02 to 1, as
compared to a current ratio of 2.85 to 1 on December 31, 1995. The increase was
primarily attributable to an increase in working capital from approximately $6.8
million as of December 31, 1995, to approximately $8.7 million as of September
30, 1996. This increase in working capital resulted primarily from increases in
cash and cash equivalents, accounts receivable and prepaid income taxes. The
Company`s capital expenditures, exclusive of acquisitions, for the nine month
periods ended September 30, 1996 and 1995 were $4.4 million and $4.6 million,
respectively. The Company`s capital expenditures primarily consisted of the
installation of pay telephones and were financed with bank borrowings and
earnings from operations.
The Company has a $25 million revolving line of credit with the Boatmen's
National Bank of St. Louis ("Boatmen's"), with provisions to convert up to $17.5
million of the line of credit to term loans. The terms of the agreement call
for the Company to pay interest on a graduated scale based on Boatmen's
Corporate Base Rate ("CBR"), which was 8.25% on September 30, 1996. The
interest rate is indexed based on the
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Company's ratio of funded debt to EBITDA as defined in the credit facility and
is adjusted based on market interest rates for CBR and LIBOR. The maturity date
of the revolving portion of the credit facility is September 30, 2001. Principal
outstanding on each term loan under the convertible portion of the credit
facility shall be payable in 12 to 20 quarterly installments with the last
installment due no later than September 30, 2003. As of November 13, 1996, the
Company had $6.2 million borrowed under the revolving portion of the credit
facility.
The Company believes that cash generated from operations and available
borrowings under the credit facility will be sufficient to fund the Company`s
cash requirements, including capital expenditures, for the next three years.
The Company also believes that it will be able to fund any acquisitions through
a combination of cash generated from operations, additional borrowing and the
issuance of shares of its Common Stock. There can be no assurance, however,
that the Company will continue to expand at its current rate or that additional
financing will be available when needed or, if available, will be available on
terms acceptable to the Company.
IMPACT OF INFLATION
Inflation is not a material factor affecting the Company`s business.
Telephone charges and transmission costs have not increased and in some cases,
have decreased over the last several years. General operating expenses such as
salaries, employee benefits and occupancy costs are, however, subject to normal
inflationary pressures.
SEASONALITY
The Company`s revenues from its pay telephone operating regions are
affected by seasonal variations to different degrees. For example, many of the
Company`s pay telephones in Florida produce substantially higher call volume in
the first and second quarters than at other times during the year, while the
Company`s pay telephones throughout the midwestern and eastern United States
produce their highest call volumes during the second and third quarters. While
the aggregate effect of the variations in different geographical regions tend to
counteract the effect of one another, the Company has historically experienced
higher revenue and income in the second and third quarters than in the first and
fourth quarters. Changes in the geographical distribution of its pay telephones
may in the future result in different seasonal variations in the Company`s
results.
Hotel and motel room telephones to which the Company provides operator
services are located in 43 states and, as such, are also subject to seasonal
variations and may be affected by lower hotel and motel occupancy during certain
seasons throughout the year.
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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. No reports on Form 8-K were filed by the Company
during the quarter ended September 30, 1996.
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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 report to be signed on its behalf by the
undersigned thereunto duly authorized.
DAVEL COMMUNICATIONS GROUP, INC.
Date: November 13, 1996 /s/ Michael E. Hayes
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Michael E. Hayes
Vice President and Chief Financial Officer
(PRINCIPAL ACCOUNTING OFFICER)
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