UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 0-22610
DAVEL COMMUNICATIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
Illinois 37-1064777
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1429 Massaro Boulevard
Tampa, Florida 33619
(address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (813) 623-3545
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, no par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
As of March 24, 1997, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $74,445,621. As of March
24, 1997, there were 4,581,269 shares of the registrant's Common Stock
outstanding.
Documents incorporated by reference:
Information contained in the registrant's 1997 definitive proxy material to
be filed with the Securities and Exchange Commission has been incorporated by
reference in Part III of this Annual Report on Form 10-K.
PART I
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995:
Certain of the statements contained in the body of this Report are
forward-looking statements (rather than historical facts) that are subject to
risks and uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements. In the preparation of
this Report, where such forward-looking statements appear, the Company has
sought to accompany such statements with meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those described in the forward-looking statements. An
additional statement summarizing the principal risks and uncertainties inherent
in the Company's business is included herein under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Safe
Harbor Statement." Readers of the Report are encouraged to read these
cautionary statements carefully.
ITEM 1. BUSINESS
General
Davel Communications Group, Inc. (the "Company") is one of the largest
independent providers of pay telephone services in the United States. The
Company owns and operates a network of over 15,000 pay telephones in 24 states
and the District of Columbia, of which over 14,000 are located in 20
southeastern and midwestern states, and provides operator services to these pay
telephones through its long distance switching equipment and through contractual
relationships with various long distance companies. The Company's pay
telephones accept coins as payment for local and long distance calls and can
also be used to make "non-coin" or "cashless" calls, including calling card
calls, credit card calls, collect calls and third-party billed calls. The
Company's pay telephones are located at convenience stores, truck stops, service
stations, grocery stores and other locations with a high demand for pay
telephone service.
During the year ending December 31, 1996, the Company also provided
operator services to hotel and motel rooms in 43 states through its wholly-owned
subsidiary, Comtel Computer Corp. ("Comtel"). On December 31, 1996, the Company
sold 100% of the Common Stock of Comtel to Portland, Oregon based Skylink
Telecommunications Corp. ("Skylink"). All calls placed from hotel and motel
room telephones connected to the Company's network are "non-coin" calls.
Until December 31, 1996, the Company also manufactured and repaired
telecommunications equipment including sophisticated computer-based private
branch exchanges ("PBXs") as well as key systems and small business systems.
During the fourth quarter of 1996, the Company discontinued its remanufacturing
and repair operations. See Note B of Notes to Consolidated Financial Statements
for information regarding the Company's discontinued operations.
The Company's executive offices are located at 1429 Massaro Boulevard,
Tampa, Florida 33619 and its telephone number is (813) 623-3545.
2
Industry Overview
Calls made from pay telephones have been estimated to represent
revenues to the United States telecommunications industry of several billion
dollars per year. Pay telephones may be "public," meaning they are owned by
local exchange carriers ("LECs") or "independent," meaning they are owned and
operated by companies independent of the LECs. Of the approximately 2.2 million
pay telephones currently operating in the United States, it is estimated that
approximately 1.8 million are public and 350,000 are independent.
Today's telecommunications marketplace was principally shaped by the
court-ordered AT&T Divestiture of its Regional Bell Operating Companies
("RBOCs") which provided local telephone services within their areas of
operation. The AT&T Divestiture and the many regulatory changes adopted by the
FCC and state regulatory authorities in response to the AT&T Divestiture have
resulted in the creation of new business segments in the telecommunications
industry. For example, prior to the AT&T Divestiture, only RBOCs or other LECs
were permitted to own and operate pay telephones.
As part of the AT&T Divestiture, the United States was divided into
geographic areas known as Local Access Transport Areas or "LATAs." LECs provide
telephone service that both originates and terminates within the same LATA
("intraLATA traffic") pursuant to tariffs filed with and approved by state
regulatory authorities. Most state regulatory authorities require LECs to
provide local access line service to independent pay telephone companies. See
"Business-Regulation."
Long distance companies provide service between LATAs ("interLATA
traffic") and, in some circumstances, may also provide long distance service
within LATAs. An interLATA long distance telephone call begins with an
originating LEC transmitting the call from the telephone that originates the
call to a point of connection with a long distance carrier. The long distance
carrier, through its owned or leased switching and transmission facilities,
transmits the call across its long distance network to the LEC serving the local
area in which the recipient of the call is located. This terminating LEC then
delivers the call to the recipient.
Pay Telephone Operations
As of December 31, 1996 and December 31, 1995, the Company owned and
operated 15,281 and 11,163 pay telephones, respectively, an increase of 4,118
installed pay telephones. Substantially all of the Company's pay telephones
accept coins as payment for local or long distance calls and can also be used to
place local or long distance cashless calls.
Coin Calls
The Company's pay telephones generate coin revenues primarily from
local calls. In all of the territories in which the Company's pay telephones are
located, the Company charges the same rates for local coin calls as does the
LEC. The maximum rate LECs and independent pay telephone companies may charge
for local calls is typically set by state regulatory authorities and in most
cases is $0.25 or $0.35. The Company pays local line charges to LECs for each of
its installed pay telephones. These line charges cover basic service to the
telephone as well as the transport of local coin calls.
3
InterLATA long distance coin calls are carried by long distance
carriers that have agreed to provide long distance service to the Company's
telephones. The Company pays a charge to a long distance carrier each time that
carrier transports a long distance call for which the Company receives coin
revenue. The Company's pay telephones also generate coin revenue from intraLATA
long distance calls. IntraLATA long distance coin calls are carried by the LEC
that provides service to the pay telephone. The Company pays a charge to the LEC
for transport of these calls.
On September 20, 1996, the FCC adopted rules and policies to implement
Section 276 of the Communications Act of 1934, as amended by the
Telecommunications Act of 1996, governing the pay telephone industry. Among
other provisions, the new rules require that local coin rates must generally be
deregulated no later than October 1, 1997. See "Regulation-Federal Regulation."
Cashless Calls
The Company also receives revenues from cashless calls made from its
pay telephones. Cashless calls include credit card calls, calling card calls,
collect calls and third-party billed calls. Cashless calls from the Company's
pay telephones are generally handled by the Company's subsidiary, Phone Zone,
Inc. ("Phone Zone"). Phone Zone's switching equipment is located in Tampa,
Florida. See "Business--Switching Equipment." Phone Zone performs certain of
the operator services necessary to complete cashless calls.
The services needed to complete a cashless call include providing an
automated or live operator to answer the call, verifying billing information,
validating calling cards and credit cards, routing and transmitting the call to
its destination, monitoring the call's duration and determining the charge for
the call, and billing and collecting the applicable charge. The Company has
contracted with an operator service provider to provide live operators to
handle calls requiring them. Billing information is verified and collect calls
and credit cards are validated by the Company's switch through one of several
companies that provide on-line access to validation databases. The Company
contracts for transport of its calls over networks operated by long distance
carriers. The Company's switch is programmed to select the most cost-effective
carrier and transmission circuit then available to the Company to complete the
call as dialed. Billing and collection of call charges is performed for the
Company by one of several service bureaus specializing in that activity.
The Company believes the extensive data processing capabilities of the
switch enhance (i) the availability of management information relating to
cashless call traffic, (ii) the services provided to property owners, and (iii)
the Company's ability to respond to any difficulties in call completion. The
switch currently handles interstate long distance cashless calls and certain
international cashless calls from over 90% of the Company's pay telephones as
well as interLATA/intrastate long distance cashless calls from over 65% of the
Company's pay telephones.
The Company realizes additional revenues from certain long distance
companies pursuant to FCC and state regulation as compensation for "dial-around"
cashless calls made from its pay telephones. A dial-around call is made by
dialing an access code for the purpose of reaching a long distance company other
than the one designated by the pay telephone operator, generally by dialing a
1-800 number, a 950-number or a five-digit "10XXX" code before dialing "0" for
operator service. Recently enacted rules adopted pursuant to the
Telecommunications Act of
4
1996 are expected to increase the amount of dial around call compensation
received by the Company and other independent pay telephone providers. See
"Business--Regulation."
Placement of Pay Telephones
Each of the Company's pay telephones is located in proximity to one of
the Company's fifteen regional offices, from which Company employees operate and
service these telephones and conduct sales and marketing efforts within the
region. The following table sets forth the number of pay telephones installed in
each state as of December 31, 1996 and December 31, 1995:
State 1996 1995
- -------------------- ------ ------
Alabama 154 89
Arkansas 27 5
Arizona 675 -
Colorado 3 -
District of Columbia 172 26
Delaware 54 56
Florida 4,148 3,854
Georgia 606 506
Illinois 880 770
Iowa 870 736
Indiana 202 198
Louisiana 105 -
Kentucky 346 290
Maryland 513 194
Missouri 123 143
Mississippi 850 70
North Carolina 2,164 1,671
Nebraska 24 28
Nevada 4 -
South Carolina 1,275 1,196
South Dakota - 2
Tennessee 1,006 888
Texas 6 -
Virginia 887 441
Utah 187 -
------ ------
Totals 15,281 11,163
====== ======
The Company selects locations for its pay telephones where there is
high demand for pay telephone service, such as convenience stores, truck stops,
service stations, grocery stores, shopping centers and hotels. For many
locations, historical information regarding a LEC-operated pay telephone is
available because LECs are often obligated pursuant to agreements to provide
this information to owners of locations of their pay telephones. In other
locations, the Company conducts a site survey to examine geographical factors,
population density, traffic patterns and other factors in determining whether to
install a pay telephone. The Company's marketing staff is
5
encouraged to obtain agreements to install the Company's pay telephones
("Placement Agreements") for locations with favorable historical data regarding
pay telephones.
Placement Agreements generally provide for revenue sharing with the
owners of the locations at which the Company's pay telephones are located
("Property Owners"). The Company's Placement Agreements generally provide
commissions based on fixed percentages of revenues and are generally of a five-
year term. The Company can generally terminate a Placement Agreement on 30 days'
notice to the Property Owner if the pay telephone does not generate sufficient
revenue.
Marketing
The Company employs marketing personnel for its pay telephone
operations in each of its regions of operation. Regional marketing personnel are
responsible for finding desirable locations for pay telephones and obtaining
Placement Agreements with Property Owners within their geographical areas and
focus their sales efforts on small-and medium-sized business customers. The
Company believes that using regional marketing personnel provides better market
penetration because of their familiarity with and proximity to their regions. To
date, independent pay telephone providers have had a competitive advantage over
LECs due to their ability to offer commissions to location owners for both local
and long distance calls. Historically, LECs generally were unable to derive
revenues from interstate calls and non-coin, interLATA calls, and consequently,
were unable to offer commissions on such calls. Recently enacted rules adopted
pursuant to the Telecommunications Act of 1996 grant LECs the ability to select
the long distance carrier for interLATA long distance calls in conjunction with
the location owner. This will enable LECs to derive revenues and pay commissions
from these calls in the future. See "Business--Regulation."
The Company's national sales personnel are responsible for accounts
that overlap regional boundaries, such as multiple store chains and restaurant
franchises that often have hundreds or thousands of potential locations, and
also provide support to the Company's regional personnel. The Company has
historically installed approximately 70% of its pay telephones through the sales
and marketing efforts of the Company's regional marketing personnel and the
remaining 30% from the efforts of national sales personnel. The Company's
marketing personnel receive incentive compensation based upon their achievement
of sales goals.
The Company intends to install, net of pay telephone removals,
approximately 2,000 pay telephones in 1997, compared with approximately 1,407
net installations in 1994, 2,100 net installations in 1995 and 1,351 in 1996,
exclusive of acquisitions. The Company intends to obtain locations for these
additional installations by emphasizing its internal marketing efforts. The
Company surveys these locations with a view to installing Company pay telephones
in locations that are within its operating regions, that appear likely to
generate sufficient coin and cashless call revenues and that meet the Company's
other criteria. The Company may also "presubscribe" LEC-owned pay telephones at
those locations that are not within the Company's operating regions or that do
not have sufficient coin call traffic but that do generate a volume of cashless
calls that can be serviced profitably through the Company's switch or a contract
service arrangement with a long distance carrier. See "Specialized
Telecommunications Service-Presubscriptions."
6
Service and Maintenance
The Company employs field service technicians, each of whom collects
coin boxes from, and cleans and maintains, between 125 and 200 pay telephones
and responds to trouble calls made by a Property Owner, a user of a pay
telephone or by the telephone itself as part of its internal diagnostic
procedures. Some technicians are also responsible for the installation of new
telephones. Due to the proximity of each Company pay telephone to one of the
Company's fifteen regional offices and the ability of the field service
technicians to perform all service and maintenance functions, the Company is
able to limit the frequency of trips to the pay telephone as well as the number
of employees needed to service the pay telephones.
Technology
The pay telephone equipment installed by the Company makes use of
microprocessors to provide voice synthesized calling instructions, detect and
count coins deposited during each call, inform the caller at certain intervals
of the time remaining on each call, identify the need for and the amount of an
additional deposit and other functions associated with completion of calls.
Through the use of a non-volatile, electronically erasable, programmable read-
only memory ("EEProm") chip, the pay telephones can also be programmed and
reprogrammed from the Company's central computer facilities to update rate
information or to direct different kinds of calls to particular carriers. The
Company manufactures its pay telephones from standard components and believes
that they incorporate the latest technology.
The Company's pay telephones can distinguish coins by size and weight,
report to a remote location the total coinage in the coin box, perform self-
diagnosis and automatically report problems to a pre-programmed service number,
and immediately report attempts of vandalism or theft. Virtually all of the
telephones operate on power available from the telephone lines, thereby avoiding
the need for and reliance upon an additional power source at the installation
location.
The Company utilizes proprietary and non-proprietary software that
continuously tracks the coin and non-coin revenues from each telephone as well
as expenses relating to that telephone, including commissions payable to the
Property Owners. The software allows the Company to generate detailed financial
information by Property Owner, by location and by telephone, which allows the
Company to monitor the profitability and operating condition of each location
and telephone.
All technical support required to operate the pay telephones, such as
computers and software and hardware specialists, is provided by the Company's
Tampa, Florida office. Materials, equipment and spare parts and accessories are
provided by the Company's manufacturing support operations and inventories are
maintained at each regional office for immediate access by field service
technicians.
The telecommunications industry is characterized by continuous
technological change, frequent service and product introductions and steadily
evolving industry standards. The Company believes that its future success will
depend on its ability to anticipate technological changes and respond in a
timely and effective manner to meet such new industry standards.
7
Suppliers
The Company's primary suppliers provide pay telephones and pay
telephone parts, local line access, billing and collection services and long
distance services. In order to promote acceptance by end users accustomed to
using LEC-owned pay telephone equipment, the Company utilizes pay telephones
designed to be identical in appearance and operation to pay telephones owned by
LECs.
The Company's primary supplier of pay telephones and circuit boards is
Protel, Inc. of Lakeland, Florida, a leading supplier of pay telephone
equipment, and utilizes the billing and collection services of LDDS Worldcom.
The Company obtains local line access from various LECs, including Bellsouth,
GTE, Ameritech, Southwestern Bell, US West and various other suppliers of local
line access. New sources of local line access are expected to emerge as
competition is authorized in local service markets. Long distance services are
provided to the Company through the use of its own long distance switching
equipment and by various long distance and operator service providers, including
AT&T, MCI, Sprint, Wiltel, LCI, Opticom and others.
The Company believes that multiple suppliers are available to meet all
of its product and service needs at competitive prices and rates and expects the
availability of such products and services to continue in the future, however,
the continuing availability of alternative sources cannot be assured. Transition
from the Company's existing suppliers, if necessary, could have a disruptive
influence on the Company's operations and could give rise to unforeseen delays
and/or expenses. The Company is not aware of any current circumstances that
would require the Company to seek alternative suppliers for any of the products
or services used in the operation of its business.
Acquisitions
The Company supplements its growth through internal sales by pursuing
the acquisition of pay telephone companies within its market areas and in areas
in which the Company desires to establish a market presence. During 1996, the
Company added 2,767 pay telephones to its network through acquisitions. The
Company believes that it is ideally positioned to capitalize on the fragmented
nature of the independent pay telephone industry by maintaining an active
acquisition program. The Company seeks to acquire pay telephone companies that
can provide cost savings and economies of scale through integration into the
Company's service and maintenance, long distance and management information
networks and believes that further acquisitions present a significant growth
opportunity for the Company.
8
Listed below is a summary of acquisitions completed by the Company
during 1996.
Number of
Company Date States Pay Telephones Purchase Price
- ---------------------------------------------------------------------------------------------------------
Capital Pay Phone Group, LLC. January 1996 NC 103 271,500
Suntel April 1, 1996 MD,VA 70 205,000
Cottonwood Communications June 4, 1996 AZ,UT,IA 933 2,620,065
Payphone Corporation of America July 12, 1996 DC,MD,VA 653 1,785,250
Pay Telephone America, LTD. November 1, 1996 AL,AR,FL,LA,MS,TN,TX 1,008 3,500,000
---------------------
Totals 2,767 8,381,815
=====================
Hospitality Division Operations
Prior to April 1994, the Company was providing telecommunications to
the hospitality industry on a limited basis. With the purchase of Comtel on
April 29, 1994, the Company's Hospitality Division was formed. Comtel continued
to operate as the Company's Hospitality Division as a wholly-owned subsidiary of
the Company until its sale to Skylink on December 31, 1996. During 1996, Comtel
received revenues from cashless calls made from approximately 75,000 hotel and
motel room telephones to which it provided operator services. These cashless
calls included credit card calls, calling card calls, collect calls and third-
party billed calls. Cashless calls from Comtel were generally handled by long
distance carriers through unbundled services arrangements which supplied the
operator and network services necessary to complete cashless calls. The Company
also directed and continues to direct call traffic from Comtel to its switching
equipment in Tampa, Florida through a contractual agreement with Skylink. Comtel
also directed a limited amount of call traffic to long distance companies which
paid compensation on a commission basis.
The services needed to complete a cashless call for Comtel are
essentially the same as those needed to complete a cashless call for the
Company's Pay Telephone Division. See "Pay Telephone Operations--Cashless
Calls." Billing information is verified and collect calls and credit cards are
validated by one of several companies that provide access to validation
databases. Billing and collection of call charges were performed for Comtel by
one of several service bureaus specializing in that activity. At December 31,
1996, Comtel had 308 installed Voicepro units and 275 dialers serving 74,593
hotel and motel room telephones.
Switching Equipment
The Company's switching equipment was obtained from Harris
Corporation, one of several suppliers of switches to the telecommunications
industry. Switches are digital computerized routing systems that receive calls,
route calls through transmission lines to their destination and record
information about the source, destination and duration of the call. Switches
have limits on their capacity to handle and transmit calls, but can be upgraded
to handle more calls as traffic increases. The Company's switch is located in
proximity to its offices in Tampa, Florida. Long distance calls from the
Company's pay telephones that are not handled by its switch or an unbundled
services arrangement are serviced by long distance companies that pay
commissions to the Company for those calls. If the Company experiences
sufficient long distance call volume from other LATAs, the Company will evaluate
the need to upgrade transmission circuitry to direct
9
additional call traffic to its switching equipment, thereby reducing
transmission costs to the Company's switch.
Using the data capabilities of its switching equipment, the Company
has implemented a management information system that the Company believes
affords it competitive advantages. The Company's management information system
monitors call traffic to provide information regarding pay telephone or network
equipment trouble, the fraudulent use of calling cards or credit cards, or other
problems, thereby allowing the Company to respond promptly. The Company is also
able to monitor and audit telephone company billing reports using the detailed
call records maintained by the switch. This information system has enabled the
Company to increase call completion rates and enhance site selection for its pay
telephones. As a result, the Company has increased revenues from its installed
telephones and reduced costs through the selection of the most economical means
of completing calls. The Company believes some of this information is
unavailable to independent pay telephone companies that do not maintain their
own switching equipment.
Competition
The Company competes for pay telephone locations with LECs and
independent pay telephones operators. The Company also competes, indirectly,
with long distance companies, which can offer location owners commissions on
long distance calls made from LEC-owned pay telephones. Most LECs and long
distance companies against which the Company competes and some independent pay
greater financial, marketing and other resources than the Company. In addition,
many LECs, faced with competition from the Company and other independent pay
telephone companies, have increased their compensation arrangements with owners
of pay telephone locations to offer more favorable commission schedules.
The Company believes the principal competitive factors in the pay
telephone business are (i) the commission payments to a location owner and the
opportunity for a location owner to obtain commissions on both local and long-
distance calls from the same company, (ii) the ability to serve accounts with
locations in several LATAs or states, (iii) the quality of service and the
availability of specialized services provided to a location owner and telephone
users, and (iv) responsiveness to customer service needs. The Company believes
it is currently competitive in these areas.
The Company competes with long distance carriers who provide dial-
around services which can be accessed through the Company's pay telephones.
Certain national long distance operator service providers have launched
advertising promotions which have increased dial-around activity on pay
telephones owned by LECs and independent pay telephone companies, including the
Company. The Company is receiving compensation for dial-around calls placed from
its pay telephones and recent regulatory initiatives resulting from
implementation of the Telecommunications Act of 1996 are expected to increase
the amount of dial-around compensation received on its pay telephones. See
"Business--Regulation."
Specialized Telecommunications Services
The Company uses its expertise in pay telephone operations and the
data processing capability of its switching equipment to design and offer
enhanced telecommunications services and packages of specialized services to
niche market segments.
10
Presubscriptions
The Company provides long distance operator services to public pay
telephones that have been "presubscribed" by the Company. As a result of the
AT&T Divestiture, public pay telephone location owners have the right to select
a long distance company to provide long distance service to those telephones. To
presubscribe these telephones, the Company enters into agency agreements with
location owners that allow the Company to provide operator services, either
directly using its switch or an unbundled services arrangement or indirectly, by
selecting a long distance company to provide these services. The Company pays
the location owners commissions on its revenues from such arrangements.
Manufacture, Remanufacture and Repair of Telephone Equipment
Manufacture of Pay Telephones
The Company manufactures pay telephone equipment for its own use. The
manufacturing of pay telephone equipment provides the Company with technical
expertise used in the operation, service, maintenance and repair of its pay
telephones. The Company assembles pay telephones from standard pay telephone
components purchased from component manufacturers. These components include a
metal case, an integrated circuit board incorporating a microprocessor, a
handset and cord, and a coin box and lock. The Company believes that the
integrated circuit board is the single most important component in an
independent pay telephone and obtains these boards from Protel, Inc. However,
all of the components purchased by the Company (including integrated circuit
boards) are available from several suppliers, and the Company does not believe
that the loss of any supplier would have a material adverse effect on its
manufacturing operations.
The Company's pay telephones comply with all FCC requirements
regarding the performance and quality of telephone equipment and have all
operating characteristics required by the regulatory authorities of most states,
including: free access to local emergency ("911") telephone numbers and, where
not available, to the LEC operator; free access to local directory assistance;
dial-around access to all locally available long distance companies; the
capability of receiving incoming calls at no charge; and automatic coin return
capability for incomplete calls.
Repair and Remanufacturing
Until December 31, 1996, the Company operated repair and
remanufacturing facilities for a variety of telecommunications equipment
including computer-based PBXs that connect as many as 8,000 individual
telephones, as well as key systems and small business systems. The Company
remanufactured and repaired equipment manufactured by AT&T and other
manufacturers. The Company marketed its services to major businesses that own
telecommunications equipment and to LECs and other distributors of such
equipment.
As a result of competitive pressures in the telephone equipment
industry and the Company's desire to focus its efforts on its core pay telephone
business, the Company discontinued this segment of its operation in the fourth
quarter of 1996.
Regulation
The FCC and state regulatory authorities have traditionally regulated
pay telephone and long distance services, with regulatory jurisdiction being
determined by the interstate or intrastate
11
character of the service, and the degree of regulatory oversight varying among
jurisdictions. On September 20, 1996, the FCC adopted rules and policies to
implement Section 276 of the Communications Act of 1934, as amended by the
Telecommunications Act of 1996 ("the Telecommunications Act"). The
Telecommunications Act substantially restructured the telecommunications
industry, included specific provisions related to the pay telephone industry and
required the FCC to develop rules necessary to implement and administer the
provisions of the Telecommunication Act on both an interstate and intrastate
basis. Among other provisions, the Telecommunications Act granted the FCC the
power to preempt state regulations to the extent that any state requirements are
inconsistent with regulations adopted by the FCC.
Federal Regulation
The Telephone Operator Consumer Services Improvement Act of 1990 (the
"Operator Services Act") established various requirements for companies that
provide operator services and call aggregators (which send calls to these
companies). The requirements of the Operator Services Act include call branding,
information posting, rate quoting, the filing of informational tariffs and that
pay telephone users have the right to access the operator service provider of
the user's choice to make a cashless interstate call. The Company believes that
it complies with the provisions of the Operator Services Act, both as a call
aggregator and an operator service provider. The Operator Services Act also
requires the FCC to take action to limit the exposure of pay telephone companies
to undue risk of fraud.
While the FCC has not in the past actively regulated the provision of
pay telephone services by independent pay telephone companies, the
Telecommunications Act will significantly alter the FCC's role in the regulation
of the pay telephone industry. The Telecommunications Act directed the FCC to
develop and implement rules by November 6, 1996 to accomplish the following
objectives:
(1) Establish a per call compensation system to ensure pay telephone providers
receive fair compensation for each and every completed intrastate and
interstate call made from their pay telephones, excluding 911 and
Telecommunications Relay Services ("TRS") calls for hearing-impaired
individuals;
(2) Terminate interstate and intrastate subsidies for LEC pay telephones from
LEC-regulated rate base operations;
(3) Establish nonstructural safeguards to eliminate discrimination between LEC
and independent pay telephone providers;
(4) Consider the LECs' right to select and contract with interLATA carriers for
their own pay telephones, subject to: a) the FCC's finding that such
presubscription rights are in the public interest; and b) maintaining
existing contracts between location owners and interLATA carriers until
their expiration;
(5) Authorize all pay telephone providers to choose the intraLATA carrier of
choice subject to requirements of, and contractual rights negotiated with,
location owners;
(6) Determine whether "public interest pay telephones" should be maintained and
under what conditions; and
12
(7) Preempt any state regulations which are inconsistent with the rules adopted
by the FCC related to implementation of the Telecommunications Act.
On September 20, 1996, the FCC released its Report and Order adopting
regulations to implement the pay telephone provisions of the Telecommunications
Act ("the FCC Rules"). Certain provisions of the FCC Rules became effective on
November 6, 1996 while certain other provisions are scheduled to become
effective on later dates. Petitions for review of the FCC Rules have been filed
with the U.S. Court of Appeals for the District of Columbia Circuit ("the Court
of Appeals") on behalf of a number of parties. The Court of Appeals has agreed
to expedited handling of all appeals and set a briefing schedule that began
February 14, 1997 and will culminate in oral argument on May 13, 1997. A
decision is expected in late June or early July 1997. At this time, the Company
is unable to assess the likelihood that any appeals will result in a stay or
revision of the FCC Rules, if any, nor the impact of the result of such
litigation on the Company's operations. A brief summary of the key provisions of
the FCC Rules as adopted appears below.
The Operator Services Act directed the FCC to consider the need to
prescribe compensation to owners of independent pay telephones for dial-around
access to a long distance company other than the one selected by the independent
pay telephone company. The FCC ruled in May 1992 that independent pay telephone
companies are entitled to compensation for these calls. Because of the
complexity of establishing an accounting system for determining compensation for
these calls, the FCC temporarily set this compensation at $6.00 per pay
telephone per month through December 31, 1994, to be allocated in accordance
with their market share among long distance companies earning annual toll
revenues for interstate calls in excess of $100 million per year. The FCC
approved a request from AT&T, which was responsible for the majority of dial
around compensation, to begin providing dial around compensation on a per call
basis at a rate of $0.25 per call effective January 1, 1995. Sprint received FCC
approval to pay $0.25 per interstate call received from independent pay
telephones beginning July 1, 1995. Other long distance carriers continued to pay
their portions of dial around compensation under the flat rate system until
November 6, 1996, the effective date of the dial around provision of the FCC
Rules.
Recognizing that independent pay telephone providers had experienced
increases in dial-around call traffic since the implementation of dial around
compensation and the inadequacy of current dial around call tracking systems,
the FCC Rules prescribed a new interim dial around compensation system for
independent pay telephone providers. The new interim dial around compensation
system provides for compensation to pay telephone providers for both dial around
"access code" calls dialed for the purpose of reaching a long distance company
other than the one designated by the pay telephone operator, and "800
subscriber" calls placed from pay telephones for the purpose of reaching a party
subscribing to "800" toll-free service. The new interim dial around compensation
rate became effective on November 6, 1996 and is set at a rate of $45.85 per pay
telephone per month to the pay telephone provider to be paid by certain long
distance providers. The interim compensation rate is based on an estimated
industry-wide average of 131 access code and 800 subscriber calls per pay
telephone per month at a rate of $.35 per call. The new interim dial around
compensation system will be effective until October 1, 1997, and will be
replaced at that time with a per-call compensation system, with the initial per-
call rate set at $.35. The FCC has further directed IXCs to develop accurate
call tracking mechanisms by October 1, 1997, and provided for annual independent
verification of dial around compensation payments to pay telephone providers for
two years. After October 1, 1998, the per-call rate for dial around compensation
will be equal to the local coin call rate charged at the pay telephone or a rate
13
negotiated between the pay telephone provider and the IXC. The FCC Rules also
allow IXCs the option to block 800 subscriber calls from pay telephones in the
event they wish to avoid payment of per call compensation for 800 subscriber
calls. The Company is unable at this time to estimate future levels of dial
around access code and 800 subscriber call traffic, nor the impact of the change
in October 1997 to a per-call compensation mechanism, nor the most likely local
coin call rate in effect in October 1998.
The FCC Rules also directs state regulatory authorities generally to
deregulate local coin call rates charged from pay telephones by no later that
October 1, 1997, to allow market forces to determine appropriate local coin call
rates. Currently, approximately 90% of the Company's pay telephones are located
in areas where local coin call rates are $.25 per call. State regulatory
authorities are free to order deregulation of local coin call rates earlier than
October 1, 1997 and are permitted to obtain an exemption from deregulation by
demonstrating market failures within their state that would impair the
development of market-based rates for local coin calls. The FCC Rules do not
prescribe specific requirements for obtaining such an exemption. The Company is
unable at this time to estimate the impact of deregulation on local coin call
rates, if any, nor the timeframe in which deregulation may begin effecting local
coin call rates, if at all.
The FCC Rules require states by October 1, 1997 to take any additional
action necessary to promote competition in the pay telephone industry. Such
actions must include modification or elimination of existing pay telephone
regulations that act to impose market entry or exit barriers.
The FCC Rules also contain provisions which will significantly impact
LEC pay telephone operations and the competitive environment in which the
Company operates. The FCC Rules require that LEC pay telephone operations be
removed from the regulated rate base no later than April 15, 1997. This
provision requires that LECs' regulated rate payers be repaid by the newly
deregulated pay telephone operation for the value of the pay telephones on which
the LECs are no longer entitled to earn a return. The FCC determined that this
repayment must be based on the net book value of the LEC pay telephone
equipment, defined as the original cost of the equipment less accumulated
depreciation, rather than the current market value of the equipment. The FCC
Rules further required all RBOCs to file Comparably Efficient Interconnection
("CEI") plans within 90 days of the date of the Order to describe their methods
of compliance with nondiscrimination and accounting requirements, as well as
other safeguards against subsidies and discrimination in favor of their own pay
telephone operations. The LECs are also required to make access lines provided
to their own pay telephones available to independent pay telephone providers on
an equal basis.
In the past, RBOCs were not permitted to select the interLATA carrier
to serve their pay telephones. Under the FCC Rules, the RBOCs will be permitted
to select the carrier of interLATA services to their pay telephones effective
upon FCC approval of each RBOC's CEI plan as described above. Existing contracts
between location owners and pay telephone or long distance providers which were
in effect as of February 8, 1996 are grandfathered and will remain in effect.
The FCC Rules preempt state regulations that may require independent
pay telephone providers to route intraLATA calls to the LEC by containing
provisions that allow all pay telephone providers to select the intraLATA
carrier of their choice. The Rules did not preempt state regulations that, for
public safety reasons, require routing of "0-" calls to the LEC, provided that
the state does not require that the LEC carry such calls when the call is
determined to be a non-emergency call.
14
The FCC Rules determined that the administration of programs for
maintaining "public interest pay telephones" should be left to the states within
certain guidelines. "Public interest pay telephones" are defined as a pay
telephone which (1) fulfills a public policy objective in health, safety, or
public welfare, (2) is not provided for a location provider with an existing
contract for the provision of a pay telephone and (3) would not otherwise exist
as a result of the operation of the competitive marketplace. Each state
regulatory authority is required to complete a review of whether such public
interest pay telephones are adequately provided in its jurisdiction by September
20, 1998.
This summary of the provisions of the Telecommunications Act and the
FCC Rules is not intended to be complete, but is intended to highlight
provisions which are most likely to have an impact on the Company's operations.
The Company believes that the implementation of the Telecommunications Act and
the FCC Rules will act to correct certain historical inequities in the pay
telephone industry and lead to a more equitable competitive environment for all
pay telephone providers. Petitions for review of the FCC Rules have been filed
with the Court of Appeals on behalf of a number of parties. The Court of Appeals
has agreed to expedited handling of all appeals and set a briefing schedule that
began February 14, 1997 and will culminate in oral argument on May 13, 1997. A
decision is expected in late June or early July 1997.
At this time, the Company is unable to assess the likelihood that any
appeals will result in a stay or revision of the FCC Rules, if any, nor the
impact of the result of such litigation on the Company's operations. There can
also be no assurance that implementation of the Telecommunication Act and/or the
FCC Rules will actually result in a more competitive business environment, nor
that a more competitive business environment will have a positive impact on the
Company's operations. While implementation of certain provisions of the FCC
Rules are expected to have a positive impact on the Company's operations, such
benefits may be offset by the potential for increased competitive pressures by
RBOC and other LEC pay telephone operations which may also benefit from
implementation of the Telecommunications Act and the FCC Rules.
The Company's operations could also be affected by the FCC's
consideration of the implementation of a billing system known as "Billed Party
Preference" or "BPP". Under such a system, a cashless call to be carried by a
long distance company would be directed automatically to the long distance
company of the billed party's previously expressed preference. In April 1992,
the FCC tentatively concluded that BPP for interstate operator-assisted calls
was in the public interest and requested industry comments on the ramifications
of BPP. During the Summer of 1992, LECs, long distance companies and other
industry participants, a majority of which were opposed to adopting BPP,
submitted comments. These comments included references to the costs of imposing
BPP (estimated by some to exceed $1 billion in addition to hundreds of millions
of dollars in additional annual operating costs) and the lack of available
equipment for several years to implement BPP. These comments remain under
consideration by the FCC.
The FCC has also issued a Second Notice of Proposed Rulemaking in the
BPP docket which sought comment on the establishment of "rate benchmarks" and/or
caller notification, such as oral rate disclosures, as potential alternatives to
BPP. Currently, interstate rates must be "just and reasonable" as governed by
the Communications Act of 1934, as amended. If implemented, BPP could have a
significant adverse effect on the Company's business. Under BPP, the Company
would lose the ability to direct many cashless calls from its pay telephones to
its switch or a designated long distance company and would therefore lose the
revenues associated with
15
handling such calls and the ability to pay commissions to location owners on
such calls. The Company believes that the significant expense and technical
modifications necessary to implement a system of BPP as evidenced by the record
in the FCC proceeding make its adoption in the proposed form unlikely. However,
rate benchmarks or caller notification of charges could be implemented by the
FCC for interstate operator-assisted calls. Such a ruling could impact the
financial performance of the Company, depending on the specific level of the
benchmark or the particular notification requirements. There is no currently
mandated schedule for a decision on the BPP docket. Without further guidance
from the FCC, the Company is unable to assess the likelihood of adoption of BPP,
rate benchmarks or caller notification, nor the impact, if any, that such
adoption might have on the Company's operations or results.
Actions by agencies on both the state and federal level have had, and
are expected to continue to have, both positive and negative effects on the
Company. Although management is not presently aware of any action contemplated
by any state or federal agency which would have a material adverse effect on the
Company (other than those discussed above), there is no guarantee that such an
action will not be taken.
State Regulation
State regulatory authorities have primarily been responsible for
regulating the rates, terms and conditions for intrastate pay telephone
services. Regulatory approval to operate pay telephones in a state typically
involves submission of a certification application and an agreement by the
Company to comply with applicable rules, regulations and reporting requirements.
The 49 states that currently permit independent pay telephone providers to
supply local and long distance pay telephone service, and the District of
Columbia, have adopted a variety of state-specific regulations that govern rates
charged for coin and cashless calls as well as a broad range of technical and
operational requirements. The Telecommunications Act contains provision that
will require all states to allow pay telephone competition. State authorities
also regulate LECs' tariffs for interconnection of independent pay telephones,
as well as LECs' own pay telephone operations and practices.
The Company is also affected by state regulation of operator services.
Most states have capped the rates that consumers can be charged for cashless
local and intrastate toll calls made from pay telephones. In addition, the
Company must comply with regulations designed to afford consumers with notice at
the pay telephone location, of the long distance company servicing the telephone
and the ability to access alternate carriers. The Company believes that it is
currently in compliance with regulatory requirements pertaining to its offering
of operator services directly or through other long distance companies.
Certain states are reviewing the rates that LECs charge independent
pay telephone providers for local line access and associated services. Local
line access charges have been reduced in certain states and the Company believes
that selected states' continuing review of local line access charges, coupled
with competition for local line access service resulting from implementation of
the Telecommunications Act, could lead to more options available to the Company
for local line access at competitive rates. No assurance can be given, however,
that such options or local line access rates will become available. The
Telecommunications Act and FCC Rules contain provisions which could impact the
rates pay telephone providers can charge for local coin calls and other aspects
of pay telephone operations and/or regulation at the state level. See
"Regulation - Federal Regulation".
16
Employees
As of December 31, 1996, the Company had 233 full-time employees, none
of whom are the subject of a collective bargaining agreement. The Company
believes that its relationship with its employees is good.
ITEM 2. PROPERTIES
The Company leases approximately 19,000 square feet in Tampa, Florida
that includes executive office space, a regional office for pay telephone
operations and facilities for the manufacture of pay telephones. Until December
31, 1996, the Company leased approximately 8,200 square feet in Boulder,
Colorado that included executive office space and facilities for assembly and
maintenance of equipment used in Hospitality Division operations. On December
31, 1996, the Company sold 100% of the Common Stock of Comtel. See "Business -
General". The Company also leases an aggregate of approximately 22,000 square
feet to house regional offices for pay telephone operations in Mesa, Arizona;
Miami, Florida; Jacksonville, Florida; Harrisburg, Illinois; Jacksonville,
Illinois; Jackson, Mississippi; Charlotte, North Carolina; Myrtle Beach, South
Carolina; Atlanta, Georgia; Cedar Rapids, Iowa; Baltimore, Maryland; Jackson,
Tennessee; Salt Lake City, Utah and Chesapeake, Virginia. In addition, the
Company's accounting, administrative and legal offices are located in
approximately 10,000 square feet of leased office space in Jacksonville,
Illinois. The Company also leases 18,000 square feet of warehouse space in
Jacksonville, Illinois. The Company believes that these facilities are adequate
to meet the Company's needs in the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
The Company upon its purchase of Comtel was aware of a lawsuit by a
minority shareholder against the selling shareholders and Comtel. Selling
shareholders of Comtel have indemnified the Company and its shareholders against
any claims or damages asserted by the shareholder. The Company believes there is
adequate protection against any potential claims.
The Company is subject to various legal proceedings arising out of the
conduct of its business. It is the opinion of the Company's management that the
ultimate disposition of these proceedings will not have a material adverse
effect on the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1996,
the Company did not submit any matter to a vote of security holders.
17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
Market information. The Company's Common Stock trades on the NASDAQ
National Market System. The following table sets forth, for the periods
indicated, the high and low closing prices on the NASDAQ National Market System
from October 20, 1993 through December 31, 1996.
High Low
---- ---
October 20 through December 31, 1993 17.50 13.50
January 1 through March 31, 1994 16.25 8.25
April 1 through June 30, 1994 12.75 8.25
July 1 through September 30, 1994 12.00 9.00
October 1 through December 31, 1994 14.25 10.75
January 1 through March 31, 1995 13.25 8.94
April 1 through June 30, 1995 12.88 10.75
July 1 through September 30, 1995 16.00 11.25
October 1 through December 31, 1995 15.25 12.00
January 1 through March 31, 1996 13.75 12.50
April 1 through June 30, 1996 20.00 12.75
July 1 through September 30, 1996 20.75 15.00
October 1 through December 31, 1996 19.00 15.25
As of March 24, 1997, there were approximately 54 holders of record of
the Common Stock, not including stockholders whose shares were held in "nominee"
or "street" name. The last sale price of the Company's Common Stock on March 24,
1997 was $16.25 per share.
Dividends. The Company has not paid any dividends on its Common Stock
during 1996 and does not intend to pay any Common Stock dividends in the
foreseeable future. It is the current policy of the Company's Board of Directors
to retain earnings to finance the growth and development of the Company's
business. Payment of cash dividends, if made in the future, will be determined
by the Company's Board of Directors based on the conditions then existing,
including the Company's financial condition, capital requirements, cash flow,
profitability, business outlook and other factors.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data presented below under the captions
"Operating Data" and "Balance Sheet Data" are derived from the consolidated
financial statements of the Company. The selected financial data should be read
in conjunction with the financial statements and notes thereto included
elsewhere in this Annual Report and with "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
18
Year ended December 31
------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(In thousands, except per share data)
Operating Data
Revenues:
Coin Calls $18,559 $14,357 $ 9,916 $ 6,616 $5,009
Non-coin calls 16,125 15,760 12,613 8,648 4,789
Long distance income 2,289 1,713 69 -- --
------- ------- ------- ------- ------
Total revenues 36,973 31,830 22,598 15,264 9,798
Operating costs and expenses
Telephone charges-payphones 7,501 6,076 4,748 3,379 2,763
Commissions-payphones 4,606 3,852 2,848 1,944 1,434
Commissions-long distance income 1,680 1,116 1 - -
Service, maint. and network costs 8,546 7,156 5,218 3,166 1,964
Selling, general and administrative 6,402 5,133 3,550 2,115 1,684
Depreciation and amortization 2,986 2,136 1,389 1,188 800
Non-recurring charge -- 215 -- -- --
------- ------- ------- ------- ------
Total operating costs and expenses 31,721 25,684 17,754 11,792 8,645
------- ------- ------- ------- ------
Operating profit 5,252 6,146 4,844 3,472 1,153
Interest and other income 100 125 251 128 75
Interest (expense) (289) (48) (31) (302) (280)
Gain (loss) on sale of investments -- -- (145) -- --
------- ------- ------- ------- ------
Total other income (expense) (189) 77 75 (174) (205)
------- ------- ------- ------- ------
Earnings from continuing operations
before income taxes 5,063 6,223 4,919 3,298 948
Income taxes 1,868 2,403 1,806 1,309 368
------ ------- ------- ------- ------
Earnings from continuing operations 3,195 3,820 3,113 1,989 580
Discontinued operations
Extraordinary item - remanufacturing -- -- -- -- 329 (2)
Gain (loss) from hospitality division
operations 334 (2,043) (1) 790 -- --
Gain (loss) from sales of equipment
and repairs (369) (465) (1) (150) (131) (138)
Gain on sale of hospitality division 747 -- -- -- --
Estimated loss on disposal (102) -- -- -- --
------- ------- ------- ------- ------
Gain (loss) from discontinued
operations 610 (2,508) 640 (131) 191
------- ------- ------- ------- ------
Net earnings $ 3,805 $ 1,312 $ 3,753 $ 1,858 $ 771
======= ======= ======= ======= ======
Earnings per common share
Continuing operations $0.71 $0.86 $0.70 $0.64 $0.21
Discontinued operations $0.13 $(0.57) $0.14 $(0.04) $0.07
Net earnings $0.84 $0.29 $0.84 $0.60 $0.28
Average common shares outstanding 4,513 4,455 4,455 3,117 2,800
19
As of December 31
--------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
Balance Sheet Data:
Cash and cash equivalents $ 4,630 $ 2,433 $ 4,901 $ 4,791 $ 148
Working capital (deficit) 12,130 6,813 6,711 14,614 (175)
Total assets 43,862 33,328 33,035 26,169 8,780
Long-term debt, less current maturities 5,726 209 85 266 3,627
Shareholders' equity 32,935 27,990 26,678 22,918 2,251
(1) Includes intangible and long-lived assets charged off related to
implementation of SFAS 121.
(2) Represents a gain on insured property destroyed in a fire at one of the
Company's facilities on March 27, 1992, net of related income tax.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and notes thereto appearing elsewhere
herein.
General
During 1996, the Company derived 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, and the Company recognizes coin revenue in the amount
deposited.
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 "Business--Regulation." The Company also derives a
small amount of non-coin revenue from certain LECs for intraLATA cashless calls.
See "Business-Industry Overview" In addition, the Company received revenues
during 1996 from the remanufacture and repair of telecommunications equipment
such as PBXs, key systems and small business systems. The Company discontinued
this segment of its operation in the fourth quarter of 1996. See "Manufacture,
Remanufacture and Repair of Telephone Equipment--Repair and Remanufacturing."
20
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.
The principal costs related to the Company's hospitality calls
included 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. On December 31, 1996, the Company sold
100% of the Common Stock of Comtel. See "Business - General". In 1996, the
Company also provided operator services to its hospitality customers through use
of its switching equipment in Tampa, Florida and continues to provide such
services to Comtel through a contractual agreement with Skylink.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
For the year ended December 31, 1996, total revenues from continuing
operations increased approximately $5.1 million or 16.2%, compared to the year
ended December 31, 1995. This growth was primarily attributable to an increase
from 11,163 pay telephones on December 31, 1995 to 15,281 pay telephones on
December 31, 1996. Pay telephone revenues increased approximately $4.6 million
or 15.2%. In addition to growth in the number of installed pay telephones, the
increase in pay telephone revenues was attributable to the impact of the removal
during the third and fourth quarter of 1996 of approximately 600 under-
performing pay telephones and their replacement at better locations, along with
additional dial around compensation resulting from implementation of the
Telecommunications Act which became effective in November 1996. See "Regulation-
Federal Regulation".
Hospitality call revenues decreased approximately $3.3 million, from
$13.1 million in the year ended December 31, 1995 to $9.8 million in the year
ended December 31, 1996 as a result of lower call volume from telephones in
hotel rooms served by the Company's Hospitality Division due to an increase in
dial around calls. The Company discontinued its Hospitality Division operations
following the sale of Comtel on December 31, 1996.
Revenues from sales of equipment and repairs decreased by
approximately $622,000 or 62.5% due to a shift in the utilization of the
Company's technical personnel to the manufacture of pay telephones to
accommodate its increasing need for equipment to install additional pay
telephone locations and its decision to discontinue its equipment and repair
sales operations in the fourth quarter of 1996.
Telephone charge expenses increased to 21.6% of pay telephone revenues
compared to 20.1% in the prior year. 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 $50.98 in 1995, to
$47.66 per month in 1996.
21
Commission expenses increased to 13.3% of pay telephone revenues
compared to 12.8% in the prior year. The increase in commissions as a percentage
of pay telephone revenues was primarily attributable to lower long distance
revenues as a result of an increase in dial around calls placed from the
Company's pay telephones. Commissions to property owners in 1996 actually
decreased on a per phone basis by approximately 9.5% from 1995 as a result of
lower long distance revenues resulting from an increase in dial around calls
placed from the Company's pay telephones.
Service, maintenance and network costs increased to 25.4% of pay
telephone revenues compared to 24.5% in the prior-year period. The increase as a
percentage of pay telephone revenues was primarily attributable to lower 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 $61.84 per
month in 1995, to $55.87 per month in 1996 due to operating efficiencies
achieved through expansion of the Company's installed pay telephone base.
Cost of equipment sold and repairs increased to 138.9% of sales of
equipment and repairs compared to 79.3% in the prior year. This increase
resulted primarily from a write-down of the Company's equipment repair and
resale inventory of approximately $164,500 related to the discontinuation and
disposition of the equipment sale and repair operations.
Depreciation and amortization expense on continuing operations
increased approximately $850,000 or 39.8%, from the prior year, reflecting a
36.9% increase in the number of installed pay telephones. Selling, general and
administrative ("SG&A") expenses on continuing operations increased
approximately $1.3 million, or 24.7%, from the prior year. The increase was
primarily attributable to costs associated with the opening and operation of
four new divisional sales and service offices and the hiring of additional
support personnel needed to service the Company's increasing pay telephone base.
Interest income, net of interest expense, decreased approximately
$266,000, or 345.5%, compared to the prior-year period. This decrease resulted
primarily from lower cash balances available for investment due to the
application of cash for acquisitions and the installation of new pay telephones,
coupled with an increase of approximately $241,000 or 502.1% in interest expense
related to the assumption of approximately $5.6 million in debt for the
acquisition of pay telephones during 1996.
Earnings from discontinued operations increased approximately $3.1
million or 124.3% over the prior year period, rising to approximately $610,000
in 1996 from a loss of approximately $2.5 million in 1995. The Company's
earnings on discontinued operations in 1996 included a gain on the sale of
Comtel of approximately $747,000, net of income taxes of $439,000. Discontinued
operations in 1996, before the effect of the gain on the sale of Comtel,
generated a loss of approximately $137,000, net of income taxes and income tax
benefits. Earnings from discontinued operations in 1995 included non-recurring
charges of approximately $2.9 million due to impairment of intangible and long-
lived assets after applying certain provisions of SFAS 121. Discontinued
operations in 1995, before the effect of the non-recurring charges, generated
earnings of approximately $204,000, net of income taxes and income tax benefits.
Earnings from continuing operations decreased approximately $625,000
or 16.4% from the prior year period. Earnings before interest, taxes,
depreciation and amortization ("EBITDA")
22
on continuing operations remained stable in 1996 at approximately $8.2 million.
EBITDA is not determined in accordance with Generally Accepted Accounting
Principles ("GAAP"), nor, as a result, is it included as a line item in the
Company's consolidated financial statements. EBITDA is not being presented as an
alternative to GAAP operating income or cash flows from operations being shown
on the Company's statements of cash flows. However, it is a commonly accepted
measure of performance in the telecommunications industry. Net earnings
increased approximately $2.5 million or 190.0% from approximately $1.3 million
in 1995 to approximately $3.8 million in 1996.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
For the year ended December 31, 1995, total revenues from continuing
operations increased approximately $9.2 million or 40.9%, compared to the year
ended December 31, 1994. This growth was primarily attributable to an increase
from 8,349 pay telephones on December 31, 1994 to 11,163 pay telephones on
December 31, 1995. Pay telephone revenues increased approximately $7.6 million
or 33.5%.
Hospitality call revenues increased approximately $3.1 million, rising
from $10.0 million in the year ended December 31, 1994 to $13.1 million in the
year ended December 31, 1995. Hospitality call revenues for the year ended
December 31, 1995 represent twelve full months, while results for the prior year
period include only eight months. The Company discontinued its Hospitality
Division operations following the sale of Comtel on December 31, 1996.
Revenues from sales of equipment and repairs decreased by
approximately $461,000 or 31.4% 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. The Company discontinued its equipment sales and repair
operations in the fourth quarter of 1996.
Telephone charge expenses decreased to 20.1% of pay telephone revenues
compared to 21.0% in the prior year. The slight decrease in telephone charges as
a percentage of pay telephone revenues was primarily attributable to
implementation of legislation in the State of Florida in July 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. At December 31,
1995, the Company had 3,854 installed pay telephones in the State of Florida.
Commissions remained relatively flat, increasing slightly to 12.7% of pay
telephone revenues compared to 12.5% in the prior year. Service, maintenance and
network costs remained stable at 23.0% of pay telephone revenues compared to
23.0% in the prior year.
Cost of equipment sold and repairs increased to 79.3% of sales of
equipment and repairs compared to 68.9% in the prior year. This increase
resulted primarily from a higher concentration of sales of equipment during the
year as opposed to a higher concentration in the prior period of sales of
repairs. The Company has historically experienced lower costs related to the
repair of equipment than the sale of equipment. The Company discontinued its
equipment sales and repair operations in the fourth quarter of 1996.
Depreciation and amortization expense on continuing operations
increased approximately $747,000 or 53.8%, from the prior year, primarily
attributable to the increase in the number of installed pay telephones and the
purchase of additional capital equipment. Selling, general
23
and administrative ("SG&A") expenses on continuing operations increased
approximately $1.6 million, or 44.6%, from the prior year. The increase was
primarily attributable to increases in the cost of professional services,
salaries and wages and costs associated with the opening and operation of two
new divisional sales and service offices.
Interest income, net of interest expense, decreased approximately
$203,000, or 94.9%, compared to the prior-year period. This decrease resulted
primarily from lower cash balances available for investment due to the
application of cash for acquisitions and the installation of pay telephones
obtained through the Company's internal sales efforts.
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 as of 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. 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 impaired 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.
Earnings from discontinued operations decreased approximately $3.1
million or 491.9% over the prior year period, from earnings on discontinued
operations of approximately $640,000 in 1994 to a loss of approximately $2.5
million in 1995. Earnings from discontinued operations in 1995 included non-
recurring charges of approximately $2.9 million due to impairment of intangible
and long-lived assets after applying certain provisions of SFAS 121.
Discontinued operations in 1995, before the effect of the non-recurring charges,
generated earnings of approximately $204,000, net of income taxes and income tax
benefits, representing a decrease of approximately $436,000 or 68.1% from 1994.
Earnings from continuing operations increased approximately $707,000
or 22.7% from the prior year period. Earnings before interest, taxes,
depreciation and amortization ("EBITDA") on continuing operations increased
approximately $2.1 million or 33.9% from approximately $6.2 million in 1994 to
approximately $8.3 million in 1995. EBITDA is not determined in accordance
24
with Generally Accepted Accounting Principles ("GAAP"), nor, as a result, is it
included as a line item in the Company's consolidated financial statements.
EBITDA is not being presented as an alternative to GAAP operating income or cash
flows from operations being shown on the Company's statements of cash flows.
However, it is a commonly accepted measure of performance in the
telecommunications industry. Net earnings decreased approximately $2.5 million
or 65.8% from approximately $3.8 million in 1994 to approximately $1.3 million
in 1995.
Liquidity and Capital Resources
As of December 31, 1996, the Company had a current ratio of 5.62 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 $12.1 million as of
December 31, 1996. This increase in working capital resulted primarily from
increases in cash and notes receivable related to the sale of Comtel on December
31, 1996. The Company received cash proceeds of approximately $2.7 million and a
note receivable in the amount of $2.3 million due at the earlier of December 31,
1997 or a public issuance of securities by the buyer.
The Company's capital expenditures, exclusive of acquisitions, for the
years ended December 31, 1996 and 1995 were $5.1 million and $6.0 million,
respectively. The Company's capital expenditures primarily consisted of the
installation of new pay telephones. The Company made acquisitions of pay
telephones totaling approximately $8.6 million and $1.7 million, respectively,
during the years 1996 and 1995. In 1996, the Company financed its capital
expenditures and acquisitions primarily with approximately $6.5 million in cash
provided by continuing operations and an increase in long-term debt of
approximately $5.5 million. In 1995, the Company financed its capital
expenditures and acquisitions primarily with approximately $6.0 million in cash
provided by continuing operations and approximately $4.9 million in cash
reserves.
The Company has a $25 million revolving line of credit with the
Boatmen's National Bank of St. Louis ("Boatmen's"), with provisions to convert
up to $17.5 million of the line of credit to term loans. The terms of the
agreement call for the Company to pay interest on a graduated scale based on
Boatmen's Corporate Base Rate ("CBR"), which was 8.25% on December 31, 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 March 24, 1997, the Company had approximately $2.5 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.
25
Impact of Inflation
Inflation is not a material factor affecting the Company's business.
Switching equipment 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.
Safe Harbor Statement
The following "Safe Harbor Statement" is made pursuant to the Private
Securities Litigation Reform Act of 1995. Certain of the statements contained in
the body of this Report are forward-looking statements (rather than historical
facts) that are subject to risks and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. With respect to such forward-looking statements, the Company seeks
the protections afforded by the Private Securities Litigation Reform Act of
1995. The list set forth below is intended to identify certain of the principal
factors that could cause actual results to differ materially from those
described in the forward-looking statements included elsewhere herein. These
factors are not intended to represent a complete list of all risks and
uncertainties inherent in the Company's business, and should be read in
conjunction with the more detailed cautionary statements included elsewhere
herein.
Dial Around Compensation
One of the key mandates of the Telecommunications Act was the
requirement that pay telephone providers be paid fair compensation for each and
every call made from their pay telephones, including dial around access code and
800 subscriber calls. Effective November 6, 1996, the FCC Rules mandate that pay
telephone providers be paid at a rate of $45.85 per pay telephone per month by
certain long distance providers. The interim compensation rate is based on an
estimated industry-wide average of 131 access code and 800 subscriber calls per
pay telephone per month at a rate of $.35 per call. The new interim dial around
compensation system will be effective until October 1, 1997, and will be
replaced at that time with a per-call compensation system, with the initial per-
call rate set at $.35. After October 1, 1998, the per-call rate for dial around
compensation will be equal to the local coin call rate charged at the pay
telephone or a rate negotiated between the pay telephone provider and the IXC.
The FCC Rules also allow IXCs the option to block 800 subscriber calls from pay
telephones in the event they wish to avoid payment of per call compensation for
800 subscriber calls.
26
The initial flat-rate payment level significantly increases dial
around compensation revenues to the Company, and the Company believes that a
per-call system at a $.35 level will further increase dial around compensation
received. However, market forces and factors outside the Company's control could
significantly impact the resulting revenue impact. These factors include a stay
or change upon review by the U.S. District Court of Appeals, as well as the
FCC's recognition that existing regulations do not prohibit an IXC from blocking
800 subscriber numbers from pay telephones if the IXC wants to avoid paying per-
call compensation on these calls.
Local Coin Rates
In ensuring "fair compensation" for all calls, the FCC further
determined that local coin rates from pay telephones should be generally
deregulated within one year, but provided for possible modifications or
exemptions from deregulation upon a detailed showing by an individual state that
there are market failures within the state that would not allow market-based
rates to develop. The Company believes that deregulation, where implemented,
will likely result in higher rates charged for local coin calls and increase the
Company's revenues from such calls. However, given the lack of direction on the
part of the FCC on specific requirements for obtaining a state exemption, the
Company's inability to adequately predict the responses of individual states or
the market, the Company's inability to provide assurance that deregulation, if
and where implemented, will lead to higher local coin call rates, and the
Company's inability to assess the likelihood that any decision by the U.S.
District Court of Appeals will result in a stay or revision of the FCC Rules,
the Company is unable to predict the ultimate impact on its operations of local
coin rate deregulation.
Other Provisions of the Telecommunications Act and FCC Rules
There are several other provisions of the Telecommunications Act and
FCC Rules that may have substantial positive and negative impacts on the
Company. See "Regulation". Among those are cessation of subsidies upon the
removal of LEC pay telephones from the regulated rate base by April 15, 1997,
the RBOCs' development of specific plans detailing their compliance with
nondiscrimination and accounting requirements and other safeguards against
subsidies and discrimination, and the RBOCs' authority to select interLATA
carriers serving their pay telephones in conjunction with location owners. As a
whole, the Telecommunications Act and FCC Rules should significantly alter the
competitive framework of the pay telephone industry. The Company believes that
implementation of the Telecommunications Act and FCC Rules will address certain
historical inequities in the pay telephone marketplace and lead to a more
equitable competitive environment for all pay telephone providers. However, due
to the pending review of the FCC Rules by the U.S. District Court of Appeals and
uncertainties related to the impact and/or timing of implementation, the Company
can provide no assurance that the Telecommunication Act and/or FCC Rules will
result in a long-term positive impact on the Company.
Billed Party Preference
The FCC has issued a Second Notice of Proposed Rulemaking regarding
Billed Party Preference ("BPP") and associated call rating issues, including
potential rate benchmarks and caller notification requirements for 0+ and 0-
interstate long distance calls. If BPP is implemented, cashless calls would be
directed automatically to the long distance company of the
27
billed party's previously expressed preference. See "Regulation - Federal
Regulation". The Company believes that the significant expense and technical
modifications necessary to implement a system of BPP as evidenced by the record
in the FCC proceeding make its adoption in the proposed form unlikely. However,
rate benchmarks or caller notification of charges could be implemented by the
FCC for interstate operator-assisted calls. Such a ruling could impact the
financial performance of the Company, depending on the specific level of the
benchmark or the particular notification requirements. There is no currently
mandated schedule for a decision on the BPP docket. Without further guidance
from the FCC, the Company is unable to assess the likelihood of adoption of BPP,
rate benchmarks or caller notification, nor the impact, if any, that such
adoption might have on the Company's operations or results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements and Schedules
PAGE NUMBERS
------------
Independent Auditors' Report 29
Consolidated Balance Sheets for December 31,
1996 and 1995 30
Consolidated Statements of Earnings for the years
ended December 31, 1996, 1995 and 1994 31
Consolidated Statements of Stockholders'
Equity for the years ended December 31,
1996, 1995 and 1994 32
Consolidated Statements of Cash Flows for
the years ended December 31, 1996, 1995 and 1994 33
Notes to Consolidated Financial Statements 34
SCHEDULES
- ---------
II - Valuation and Qualifying Accounts 52
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no reported disagreements on any matter of accounting
principles or practice or financial statement disclosure at any time during the
twenty-four months prior to December 31, 1996.
28
Independent Auditors' Report
----------------------------
Board of Directors and Shareholders
Davel Communications Group, Inc.
We have audited the accompanying consolidated balance sheets of Davel
Communications Group, Inc. (an Illinois corporation) and Subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of earnings,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Davel
Communications Group, Inc. and Subsidiaries as of December 31, 1996 and 1995,
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
We have also audited Schedule II of Davel Communications Group, Inc.
and Subsidiaries as of December 31, 1996 and 1995, and for each of the three
years in the period ended December 31, 1996. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
KERBER, ECK & BRAECKEL LLP
Springfield, Illinois
March 14, 1997
29
Davel Communications Group, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31
ASSETS 1996 1995
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 4,629,936 $ 2,433,143
Receivables
Accounts, less allowance of $153,793
in 1996 and $370,444 in 1995 6,079,421 7,262,701
Officer and employees 59,418 24,797
Note 2,301,000 --
Inventories 50,856 290,627
Prepaid income taxes 804,945 --
Deferred income taxes 78,847 162,776
Other current assets 151,422 324,907
Net assets of discontinued operations 599,237 --
---------- ----------
Total current assets 14,755,082 10,498,951
PROPERTY AND EQUIPMENT - AT COST
less accumulated depreciation 28,417,615 20,058,029
OTHER ASSETS
Goodwill, less accumulated amortization 274,586 2,392,745
Other assets 414,844 378,203
----------- -----------
Total other assets 689,430 2,770,948
----------- -----------
Total assets $43,862,127 $33,327,928
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 69,207 $ 86,992
Accounts payable 1,044,179 1,672,428
Accrued expenses
Compensation 235,658 162,996
Other 1,276,145 1,047,992
Cash advances on factored receivables -- 697,109
Income taxes payable -- 18,429
----------- -----------
Total current liabilities 2,625,189 3,685,946
LONG-TERM DEBT, less current maturities 5,726,019 204,810
DEFERRED INCOME TAXES 2,575,626 1,447,300
SHAREHOLDERS' EQUITY
Preferred stock - authorized but unissued,
1,000,000 shares $.01 par value in 1996 and 1995 -- --
Common stock - authorized 10,000,000 shares without par
value - 4,581,269 and 4,455,000 shares issued and
outstanding at December 31, 1996 and 1995, respectively 45,813 44,550
Additional paid-in capital 19,912,080 18,772,736
Retained earnings 12,977,400 9,172,586
----------- -----------
Total shareholders' equity 32,935,293 27,989,872
----------- -----------
Total liabilities and shareholders' equity $43,862,127 $33,327,928
=========== ===========
The accompanying notes are an integral part of these statements.
30
Davel Communications Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31
1996 1995 1994
---- ---- ----
Revenues
Coin calls $18,559,523 $14,356,466 $ 9,915,749
Non-coin calls 16,125,252 15,759,967 12,612,800
Long distance income 2,288,504 1,713,179 69,142
----------- ----------- -----------
Total revenues 36,973,279 31,829,612 22,597,691
Costs and expenses
Telephone charges - payphones 7,500,818 6,075,995 4,748,291
Commissions - payphones 4,605,632 3,852,095 2,847,941
Commissions - long distance income 1,680,579 1,115,598 996
Service, maintenance and network costs 8,545,970 7,155,898 5,217,397
Selling, general and administrative 6,402,159 5,132,909 3,550,106
Depreciation and amortization 2,985,748 2,135,789 1,388,865
Non-recurring charge -- 214,891 --
----------- ----------- -----------
Total operating costs and expenses 31,720,906 25,683,175 17,753,596
----------- ----------- -----------
Operating profit 5,252,373 6,146,437 4,844,095
Other income (expense)
Interest and other income 100,060 124,979 250,765
Interest expense (288,807) (48,463) (31,096)
Loss on sale of marketable securities -- -- (145,139)
----------- ----------- -----------
Total other income (expense) (188,747) 76,516 74,530
----------- ----------- -----------
Earnings from continuing operations before income taxes 5,063,626 6,222,953 4,918,625
Income taxes 1,868,313 2,403,081 1,805,971
----------- ----------- -----------
Earnings from continuing operations 3,195,313 3,819,872 3,112,654
Discontinued operations
Gain (loss ) from operations of hospitality division, net of income
taxes of $114,941, $242,751, and $509,938 in 1996, 1995
and 1994 respectively 334,079 (2,042,731) 789,827
Gain on sale of hospitality division, net of income taxes of
$439,000 746,402 -- --
Loss from operations of remanufacturing division, net of income
tax benefit of $191,509, $267,557, and $88,516 in 1996, 1995
and 1994 respectively (368,990) (465,412) (149,362)
Estimated loss on disposal of remanufacturing division, net of
income tax benefit of $62,510 (101,990) -- --
----------- ----------- -----------
609,501 (2,508,143) 640,465
----------- ----------- -----------
Net earnings $ 3,804,814 $ 1,311,729 $ 3,753,119
=========== =========== ===========
Earnings per common share
Continuing operations $ 0.71 $ 0.86 $0.70
Discontinued operations
Gain (loss) from hospitality division 0.07 (0.46) 0.17
Gain on disposal of hospitality division 0.16 -- --
Loss from remanufacturing division (0.08) (0.11) (0.03)
Estimated loss on disposal of remanufacturing division (0.02) -- --
----------- ----------- -----------
Total $ .84 $ .29 $ .84
=========== =========== ===========
Average shares outstanding 4,513,035 4,455,000 4,455,000
=========== =========== ===========
The accompanying notes are an integral part of these statements.
31
Davel Communications Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1994, 1995 and 1996
Common Stock Additional
--------------------- Paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
Balance at December 31, 1993 4,455,000 $44,550 $18,765,762 $ 4,107,738 $22,918,050
Receipt of Section 16(b)
common stock profits -- -- 6,974 -- 6,974
Net earnings for the year
ended December 31, 1994 -- -- -- 3,753,119 3,753,119
--------- ------- ----------- ----------- -----------
Balance at December 31, 1994 4,455,000 44,550 18,772,736 7,860,857 26,678,143
Net earnings for the year
ended December 31, 1995 -- -- -- 1,311,729 1,311,729
--------- ------- ----------- ----------- -----------
Balance at December 31, 1995 4,455,000 44,550 18,772,736 9,172,586 27,989,872
Stock options and warrants
exercised 126,269 1,263 1,139,344 -- 1,140,607
Net earnings for the year
ended December 31, 1996 -- -- -- 3,804,814 3,804,814
--------- ------- ----------- ----------- -----------
Balance at December 31, 1996 4,581,269 $45,813 $19,912,080 $12,977,400 $32,935,293
========= ======= =========== =========== ===========
The accompanying notes are an integral part of these statements.
32
Davel Communications Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31
1996 1995 1994
---- ---- ----
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
Net earnings $ 3,804,814 $ 1,311,729 $ 3,753,119
Adjustments to reconcile net earnings to net cash
provided by continuing operations
Discontinued operations (609,501) 2,508,143 (640,465)
Net realized loss on sales of marketable securities -- -- 145,139
(Gain) loss on sale of property and equipment (1,432) (5,972) 8,983
Depreciation and amortization 2,985,748 3,146,707 2,068,875
Amortization of bonds -- -- 28,770
Deferred income taxes 832,791 44,735 243,532
Non-recurring charge -- 214,891 --
Changes in assets and liabilities, net of
effects from acquisitions
(Increase) decrease in accounts receivable 447,154 (1,658,337) (1,164,547)
(Increase) decrease in inventories 15,158 (8,272) 1,800
(Increase) decrease in other assets 397,055 114,786 (174,731)
Increase (decrease) in accounts payable (1,104,388) 392,001 (1,393,183)
Increase (decrease) in accrued expenses 471,184 (364,426) 1,737,187
Increase (decrease) in income taxes payable (769,607) 234,278 (683,980)
------------ ----------- -----------
Net cash provided by continuing operations 6,468,976 5,930,263 3,930,499
Net cash provided by (used in) discontinued operations 670,708 (655,535) 140,879
------------ ----------- -----------
Net cash provided by operating activities 7,139,684 5,274,728 4,071,378
Cash flows from investing activities
Capital expenditures (5,064,077) (6,005,878) (4,387,970)
Proceeds from sale of available for sale securities -- -- 11,308,281
Purchase of available for sale securities -- -- (2,524,882)
Proceeds from sale of property and equipment -- 31,394 5,025
Proceeds from sale of discontinued operations 2,653,727 -- --
Increase in net assets of assets of discontinued operations (599,237) -- --
Increase in cash value of life insurance (8,378) (6,147) (1,824)
Purchase of Comtel Computer Corporation, net of
cash deficit acquired -- -- (6,585,018)
Purchase of payphone businesses and related assets,
net of cash acquired (8,569,957) (1,688,536) (1,687,274)
------------ ----------- -----------
Net cash used in investing activities (11,587,922) (7,669,167) (3,873,662)
Cash flows from financing activities
Long-term debt financing 7,409,479 -- --
Payments on long-term debt (1,906,055) (73,009) (95,100)
Issuance of common stock through stock options and warrants 1,141,607 -- --
Receipt of Section 16(b) common stock profits -- -- 6,974
------------ ----------- -----------
Net cash provided by (used in)
financing activities 6,645,031 (73,009) (88,126)
------------ ----------- -----------
Net increase (decrease) in cash
and cash equivalents 2,196,793 (2,467,448) 109,590
Cash and cash equivalents at beginning of year 2,433,143 4,900,591 4,791,001
------------ ----------- -----------
Cash and cash equivalents at end of year $ 4,629,936 $ 2,433,143 $ 4,900,591
============ =========== ===========
The accompanying notes are an integral part of these statements.
33
Davel Communications Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. The Company
Davel Communications Group, Inc. and its Subsidiaries taken as a whole (the
Company) operates, services and maintains a system of over 15,000 pay
telephones in 24 states and provides operator services to these pay telephones.
Until December 31, 1996, the Company also provided operator services to
approximately 74,000 motel and hotel telephones in 47 states (Hospitality
Division). The Company also manufactured, remanufactured and repaired pay
telephones and other telecommunications equipment for its own use and for sale
to others through the fourth quarter of 1996 (Remanufacturing Division). The
Hospitality Division was sold and the Remanufacturing Division was discontinued
late in 1996 (See Note B).
2. Principles of Consolidation
The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Intercompany transactions and balances have
been eliminated in consolidation, except as noted in Note F.
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. Concentrations of Credit Risk
Receivables have a significant concentration of credit risk in the
telecommunications industry. In addition, a significant amount of receivables
are generated by approximately 27% of the Company's pay telephones located in
the State of Florida.
The Company and its Subsidiaries maintain cash balances at several financial
institutions located throughout the United States. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on cash and cash
equivalents.
34
Davel Communications Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
5. Fair Value 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.
6. 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.
7. 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.
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 December 31, 1996, the
management of the Company believes no additional impairment exists, and
therefore, no additional write-downs of intangibles have been made.
8. Recognition of Revenue
Revenues from coin calls and non-coin calls are recognized as calls are made.
When revenue on a telephone call is recorded, an expense is also recorded for
fees associated with the call.
9. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Such temporary
differences include a deferred gain on an involuntary conversion, accumulated
depreciation and amortization of property and equipment and intangibles,
allowance for doubtful accounts, and accrued liabilities.
35
Davel Communications Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
10. Earnings Per Share
Earnings per common share are computed on the basis of the average number of
shares outstanding during each year.
11. 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.
12. Transactions with Majority Shareholder's Businesses
Certain employees of the Company devote a portion of their time to businesses
(other than the Company) owned by Mr. David Hill ("the Shareholder"). Mr. Hill
is the owner of 50.2% of the Company's outstanding common stock. Mr. Hill's
businesses regularly reimburse the Company for an allocation of the salary and
other costs of these employees computed in proportion to the time spent by
these employees working on behalf of such businesses. These reimbursements
have been netted against the appropriate line items from the statement of
earnings in which they were classified.
13. 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.
14. Reclassification
Certain reclassifications have been made to conform to the 1996 presentation.
15. New Accounting Standard
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), in 1996. Under the
provisions of SFAS 123, companies can elect to account for stock-based
compensation plans using a fair-value based method or continue measuring
compensation expense for those plans using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) and related Interpretations. The Company has
elected to continue using the intrinsic value method to account for stock-based
compensation plans. SFAS 123 requires companies electing to continue using the
intrinsic value method to make certain pro forma disclosures (see Note J).
36
Davel Communications Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE B - DISCONTINUED OPERATIONS
1. Sale of Hospitality Division
On December 31, 1996, the Company sold its Hospitality Division (ComTel
Computer Corp.) in a stock sale agreement for approximately $ 5 million (cash
proceeds of $ 2.7 million and a note receivable of $ 2.3 million). The note
receivable has a maturity date of December 31, 1997, with a stated interest
rate of 9.75% per annum, compounded daily. The Company holds a first security
interest in the assets and common stock of ComTel. The sale resulted in a gain
of $ 746,402, after tax expense of $ 439,000 and added $ .16 to the 1996 net
earnings per share.
The disposal of this division is being accounted for as discontinued operations
and its operating results are segregated and reported as discontinued
operations in the accompanying consolidated statements of earnings and cash
flows for all periods presented.
Information relating to the discontinued operations of the Hospitality Division
for the year ended December 31, 1996, are as follows:
Revenues $9,832,330
Costs and expenses 9,413,850
----------
Operating profit 418,480
Other income 30,540
----------
Earnings before income taxes 449,020
Income taxes 114,941
----------
Net earnings $ 334,079
==========
2. Remanufacturing Division
During the fourth quarter of 1996, the Company committed to discontinue its
remanufacturing operations. This disposal has been reported as a discontinued
operation and accordingly, results of its Remanufacturing Division have been
excluded from continuing operations in the consolidated statements of earnings
and cash flows for all periods presented. The net assets to be disposed of
have been separately classified in the accompanying balance sheet at December
31, 1996. The 1995 balance sheet has not been restated.
37
Davel Communications Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE B - DISCONTINUED OPERATIONS - Continued
The Company plans to dispose of the assets by selling to other companies in the
industry. The Company has listed the assets in various trade journals. It is
anticipated that the disposal will be completed during the second quarter of
1997.
The Remanufacturing Division had revenues of $372,855 and $994,926 in 1996
and 1995, respectively.
The net assets of discontinued operations are stated at the Company's estimate
of their net realizable value. The estimated loss on disposal at December 31,
1996, included the writedown of inventory to market value based on management's
estimate. These net assets consist of:
1996
---------
Current assets $137,340
Prepaid income taxes 434,962
Property, plant and equipment 39,570
Current liabilities (10,932)
Deferred income taxes (1,703)
--------
Net assets of discontinued operations $599,237
========
NOTE C - 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 $.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 relates to intangible assets
purchased in the April 1994 acquisition of Comtel Computer Corp. (ComTel), the
Hospitality Division that was sold on December 31, 1996. This non-recurring
charge has been reclassified to discontinued operations. Acquired contracts
with hotel and motel properties for operator services represent $2.5 million
of the charge, and acquired research and development costs represent the
remaining $.2 million. 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.
38
Davel Communications Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE C - NON-RECURRING CHARGE - Continued
The balance of the non-recurring charge of $.4 million ($.2 million net of
tax) represents 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 D - ACQUISITIONS
During the years ended December 31, 1996 and 1995, the Company made
acquisitions set forth below, each of which has been accounted for as a
purchase. The consolidated financial statements include the operating results
of each business from the date of acquisition. Pro forma results of operations
have not been presented because the effects of each of these acquisitions were
not significant. For all 1996 transactions, the purchase price was completely
allocated to payphones and associated assets including inventory and, in some
instances, non-compete agreements.
On June 4, 1996, the Company completed the acquisition of the assets of
Cottonwood Communication of Burlington, Iowa, including 933 installed pay
telephones in Arizona, Iowa, and Utah in a business combination accounted for
as a purchase. The purchase price for the assets, which included equipment
related to the installed telephones, inventory and location agreements, was
$2,620,065 in cash.
On July 12, 1996, the Company completed the acquisition of 653 installed pay
telephones and other related assets from Payphone Corporation of America for
$1,785,250 in cash in a business combination accounted for as a purchase. The
acquired pay telephones are located primarily in the Washington D.C.
metropolitan area.
On November 1, 1996, the Company completed the acquisition of 1,008 installed
pay telephones and other related assets from Pay Telephone America, Ltd. for
$3,500,000 in cash in a business combination accounted for as a purchase. The
acquired telephones are located primarily in Mississippi and adjoining states.
The Company engaged in other smaller acquisitions accounted for as purchases
during the year. These acquisitions included a total of 173 pay telephones for
$476,500.
39
Davel Communications Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE D - ACQUISITIONS - Continued
On April 14, 1995, the Company completed the acquisitions of 712 pay telephones
from five different entities in a business combination accounted for as a
purchase. The purchase included five separate pay telephone routes with
operations in North Carolina, South Carolina, Maryland, Virginia, and
Washington, D.C. The Company acquired the pay telephones and the associated
assets including inventory for $ 1,693,187. The purchase price exceeded the
fair value of the assets acquired by $ 25,000 which was assigned to goodwill
and is being amortized over ten years.
NOTE E - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows at December 31:
Estimated
Useful Life
1996 1995 in Years
----------- ----------- -----------
Installed pay telephones and related
equipment $33,281,482 $21,834,933 10
Installed hospitality equipment - 1,486,217 5
Transportation equipment 882,463 763,130 5
Furniture, fixtures and office equipment 439,805 584,303 5-7
Other 356,498 683,176 7-39
----------- -----------
34,960,248 25,351,759
Less accumulated depreciation and
amortization 9,469,535 7,595,789
----------- -----------
25,490,713 17,755,970
Uninstalled pay telephone and hospitality
equipment 2,926,902 2,302,059
----------- -----------
$28,417,615 $20,058,029
=========== ===========
Maintenance and repairs expense from continuing operations was $ 1,119,986,
$ 823,448 and $ 790,977 for the years ended December 31, 1996, 1995 and 1994,
respectively.
40
Davel Communications Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE F - RELATED PARTY NOTES AND TRANSACTIONS
1. Receivables
Following is a summary of receivables from related parties:
1996 1995
------- -------
Accounts receivable from employees $51,316 $ 6,406
Accounts receivable from businesses
owned by the Shareholder 8,102 18,391
------- -------
$59,418 $24,797
======= =======
2. Transactions With Shareholder
The Company and its Subsidiaries engaged in the following transactions with the
Shareholder.
1996 1995 1994
-------- -------- --------
Payments made for rent of commercial real
estate and lease of long distance
switching equipment $239,120 $231,720 $221,680
======== ======== ========
Payments received for providing
administrative services $122,206 $126,776 $157,506
======== ======== ========
41
Davel Communications Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE F - RELATED PARTY NOTES AND TRANSACTIONS - Continued
3. Intercompany Profits and Losses
As the Hospitality and Remanufacturing Divisions' results of operations have
been excluded from continuing operations in the consolidated statements of
operations, certain intercompany transactions were not eliminated. These
transactions include: a) revenue from directing call traffic from the
Hospitality Division to the Company's switching equipment, digital computerized
routing systems that receive and route calls through transmission lines to
their destination, b) commissions paid to the Company's Hospitality Division
for directing call traffic through the Company's switching equipment, c) income
from providing administrative support to the discontinued subsidiaries.
1996 1995 1994
---------- ---------- --------
Revenue
Revenue from switching services provided
to Hospitality Division $2,358,656 $1,750,589 $ 69,142
========== ========== ========
Expenses
Commission paid to Hospitality Division $1,680,579 $1,115,598 $ 966
========== ========== ========
Other Income
Administrative Income $ 582,582 $ 472,996 $346,212
========== ========== ========
The Stock Purchase Agreement for the sale of the Hospitality Division provides
for a contractual relationship between the Company and the buyer for continuing
use of the Company's switching equipment through December 20, 1997, at a rate
structure substantially as provided during 1996.
42
Davel Communications Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE G - LONG-TERM DEBT
Following is a summary of long-term debt as of December 31:
1996 1995
---- ----
Revolving Advance on bank's line-of-credit at the
bank's corporate base rate (8.25% at December 31,
1996), interest due monthly with the principal due
September 30, 2001, collateralized by the
Company's assets. $5,590,417 $ -
Term note payable to bank at the bank's
corporate base rate (8.25% and 8.5% at
December 31, 1996 and 1995, respectively),
35 monthly payments of $3,393 principal plus
interest, beginning May 24, 1995, balance of
principal due April 24, 1998, collateralized
by transportation equipment. 98,393 139,107
Term note payable to bank at 8.092%, monthly
installments of principal and interest of
$923 due January 23, 2008, collateralized
by a mortgage on real estate. 80,464 84,830
Notes payable to banks and others with interest rates
ranging from 5.9% to 9.95% due at various dates
ending March 1998. 25,952 67,865
---------- --------
5,795,226 291,802
Less current maturities 69,207 86,992
---------- --------
$5,726,019 $204,810
========== ========
Annual maturities of long-term debt, are as follows:
Year ended December 31,
1997 $ 69,207
1998 47,592
1999 22,487
2000 5,987
2001 5,596,907
Thereafter 53,046
43
Davel Communications Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE H - LINE-OF-CREDIT
Effective September 30, 1996, the Company expanded the size of its revolving
bank line of credit from $ 15 million to $ 25 million. This line-of-credit
provides for the conversion of up to $ 17.5 million of the line-of-credit to
term loans. The terms of the agreement call for the Company to pay interest on
a graduated scale based on the bank's Corporate Base Rate ("CBR"), which was
8.25% on December 31, 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 December 31, 1996, the
Company had $ 5.6 million borrowed under the revolving portion of the credit
facility.
The line-of-credit agreement requires, among other things, that the Company
meet minimum net worth and current ratio requirements and contains certain
other restrictions related to use of proceeds, compensating balances, types of
investments and the assumption of additional debt. The Company was in
compliance with these covenants at December 31, 1996.
NOTE I - OPERATING LEASE COMMITMENTS
The Company conducts a portion of its operations in leased facilities under
noncancelable operating leases expiring at various dates through 2004. Some of
the operating leases provide the Company pay taxes, maintenance, insurance, and
other occupancy expenses applicable to leased premises.
In June of 1993, the Company entered into a lease of long distance telephone
call switching equipment with the Shareholder. All operating and maintenance
expenses related to the switching equipment are paid by the Company. Also in
June 1993, the Company entered into four noncancelable operating leases with
the Shareholder for facilities. The aggregate monthly lease payment increased
to $ 18,570 starting May 1, 1995.
44
Davel Communications Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE I - OPERATING LEASE COMMITMENTS - Continued
The annual minimum rental commitments under operating leases are as follows:
Year ended December 31,
1997 $ 390,459
1998 254,200
1999 130,757
2000 103,320
2001 103,320
Thereafter 154,980
----------
Total minimum payments required $1,137,036
==========
Rent expense for operating leases from continuing operations for the years
ended December 31, 1996, 1995 and 1994 was $ 213,384, $ 168,715 and $ 130,968
respectively.
NOTE J - 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.
45
Davel Communications Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE J - CAPITAL STOCK TRANSACTIONS - Continued
2. Stock Options and Warrants
The Company maintains a Stock Option Plan and a Directors' Stock Option Plan,
accounted for under APB Opinion 25 and related Interpretations. 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 reserved for issuance under the Stock Option Plan and the
Directors' Stock Option Plan are 1,000,000 and 150,000 shares, respectively,
and the maximum term of the options is five years. Generally, key employee
options vest in three equal installments. Nonemployee Director options become
fully vested upon receipt. The exercise price of each option generally equals
the market price of the Company's stock on the date of grant. Accordingly, no
compensation cost has been recognized for the plans. Had compensation cost for
the plans been determined based on the fair value of the options at the grant
dates consistent with the method of Statement of Financial Accounting Standards
123, Accounting for Stock-Based Compensation (SFAS 123), the Company's net
earnings and earnings per share would have been reduced to the pro forma
amounts indicated below.
1996 1995 1994
---------- ---------- -----------
Net earnings As reported $3,804,814 $1,311,729 $3,753,119
Pro forma 3,205,831 1,283,098 3,274,808
Net earnings per
common share As reported $ .84 $ .29 $ .84
Pro forma .71 .29 .74
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1996, 1995, and 1994, respectively: dividend
yield of 0% for all years; expected volatility of 32.9%, 43.4% and 47.7%;
risk-free interest rates of 6.2%, 5.9% and 5.75%; and expected life of 2.5
years.
46
Davel Communications Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE J - CAPITAL STOCK TRANSACTIONS - Continued
A summary of the status of the Company's stock option plans as of December 31,
1996, 1995 and 1994, and changes during the years ending on those dates is
presented below.
1996 1995 1994
-------------------- ------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- ------- --------- -------- --------
Outstanding at beginning of year 420,774 $12.63 414,674 $12.67 238,250 $13.63
Granted 255,000 14.66 12,000 11.88 176,424 11.42
Exercised (173,874) 12.36 - - - -
Expired - - (5,900) 13.42 - -
-------- ------ ------- -------- -------- --------
Outstanding at end of year 501,900 $14.07 420,774 $12.63 414,674 $12.67
======== ====== ======= ======== ======== ========
Options exerciseable at year end 276,566 $13.44 334,672 $12.61 292,164 $12.59
Weighted-average fair
value of options granted
during the year $ 3.98 $ 3.85 $ 3.95
The following information applies to options outstanding at December 31, 1996:
Number outstanding 501,900
Range of exercise prices $ 9.25 - $ 15.60
Weighted-average exercise price $14.07
Weighted-average remaining contractual life 3.43
NOTE K - INCOME TAXES
Deferred income taxes arise from temporary differences between the tax bases
of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets or liabilities at the end of each period are
determined using the tax rate expected to be in effect when taxes are actually
paid or recovered. Income tax provisions will increase or decrease in the same
period in which a change in tax rates is enacted.
47
Davel Communications Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE K - INCOME TAXES - Continued
The provision for income taxes is as follows:
1996 1995 1994
---------- ---------- ----------
Currently payable
Federal $ 827,752 $1,968,248 $1,387,427
State 207,770 299,121 265,990
---------- ---------- ----------
1,035,522 2,267,369 1,653,417
Deferred 832,791 135,712 152,554
---------- ---------- ----------
Income tax from continuing operations 1,868,313 2,403,081 1,805,971
Income tax expense (benefit) from
discontinued operations 299,922 (24,806) 421,422
---------- ---------- ----------
Total income tax expense $2,168,235 $2,378,275 $2,227,393
========== ========== ==========
48
Davel Communications Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE K - INCOME TAXES - Continued
Deferred tax assets and liabilities consist of the following at December 31:
1996 1995
-------------------- ---------------------
Net Net Net Net
Current Noncurrent Current Noncurrent
Assets Liabilities Assets Liabilities
------- ----------- -------- -----------
Assets
Accumulated amortization of
intangibles $ - $ 27,140 $ - $1,467,621
Allowance for doubtful accounts 58,441 - 144,473 -
Accrued liabilities 20,406 - 18,303 -
Valuation allowance - - - (988,000)
------- ---------- -------- ----------
78,847 27,140 162,776 479,621
Liabilities
Capital tax loss on sale of Hospitality Division - 561,123 - -
Valuation allowance - (561,123) - -
Differences in basis of fixed assets
primarily due to accumulated
depreciation - 2,602,766 - 1,926,921
------- ---------- -------- ----------
$78,847 $2,575,626 $162,776 $1,447,300
======= ========== ======== ==========
A deferred tax asset of $561,123 has been provided for the $1.5 million of
tax-basis capital loss carryover on the sale of ComTel. A valuation allowance
for 100% of this deferred tax asset has been provided to reduce the asset to
the amount of tax benefit management believes it will most likely realize. As
time passes, management believes it will be able to better assess the amount of
tax benefit it will realize from applying this capital loss. The capital loss
carryover expires December 31, 2001.
49
Davel Communications Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE K - INCOME TAXES - Continued
A reconciliation of Federal statutory income taxes to the Company's effective
tax provision is as follows:
1996 1995 1994
---------- ------------ ----------
Provision for Federal income tax at
the statutory rate (34%) $1,721,633 $2,115,804 $1,672,333
State income taxes, net of Federal benefit 167,099 205,358 162,314
Stock options (207,605) - -
Capital losses 152,000 (49,347) -
Other, net 35,186 131,266 (28,676)
---------- ---------- ----------
Income taxes from continuing operations 1,868,313 2,403,081 1,805,971
Income tax expense (benefit) from
discontinued operations 299,922 (24,806) 421,422
---------- ---------- ----------
Total income tax expense $2,168,235 $2,378,275 $2,227,393
========== ========== ==========
NOTE L - 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. Profit sharing expense was $ 46,263 and $ 35,428
for 1996 and 1995, respectively.
50
Davel Communications Group, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE M - STATEMENT OF CASH FLOWS
Cash paid during the year ended December 31 for interest and income taxes was
as follows:
1996 1995 1994
---------- ---------- ----------
Interest $ 367,316 $ 142,003 $ 106,101
Income tax payments 2,129,214 2,433,397 2,547,227
In 1996, non-cash investing activities included a note receivable of $ 2.3
million for the sale of the Hospitality Division.
NOTE N - MAJOR SUPPLIERS
The Telephone Division made purchases from the following major suppliers which
accounted for more than 10% of the Company's total purchases of equipment for
the years ended December 31:
1996 1995 1994
---------- ----------- ----------
Protel, Inc. $1,304,254 $1,709,778 $1,376,818
Quadrum Telecommunications 251,059 - -
Enclosures, Inc. 226,422 129,645 71,242
NOTE O - SUBSEQUENT EVENT
In January 1997, the Company was granted corporate authority to do business in
Mexico. However, they are awaiting a license to provide pay telephone services.
Operations are expected to begin in the second quarter of 1997. Organizational
costs capitalized relating to Mexico operations through December 31, 1996, were
$ 132,657.
51
Davel Communications Group, Inc. and Subsidiaries
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to
Beginning Costs and Deductions/ Balance at
Description of Year Expenses Write-offs End of Year
----------- -------- ---------- ---------- -----------
Accounts receivable
Allowance for doubtful accounts
Year ended 1994 $ 42,500 $1,000,220 $ 748,328 $294,392
Year ended 1995 294,392 1,318,038 1,241,986 370,444
Year ended 1996 370,444 889,721 1,106,372 153,793
52
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this Item 10 will be contained in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be contained in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on Form 10-K by this
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 will be contained in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on 10-K by this reference.
ITEM 13. CERTAIN TRANSACTIONS
The information required by this Item 13 will be contained in the Company's
definitive proxy materials to be filed with the Securities and Exchange
Commission and is incorporated in this Annual Report on 10-K by this reference.
53
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed with, and as part of, this Annual
Report on Form 10-K.
1. Financial Statements
For a complete list of the Financial Statements filed with this Annual
Report on Form 10-K, see the Index to Financial Statements and
Supplementary Data on Page 28.
2. Financial Statement Schedules
The following Supplementary Schedules are filed with this Annual
Report on Form 10-K:
See Index to Financial Statements and Supplementary Data on
Page 28.
3. Exhibits
See Exhibit Index on Page 55.
(b) Reports on Form 8-K.
On February 11, 1997, the Company filed a Current Report on Form 8-K
to report the sale of 100% of the Common Stock of Comtel Computer Corp. and
California Comtel Computer, Inc. to Portland, Oregon-based Skylink
Telecommunications Corp. On March 13, 1997, the Company filed a Current Report
on Form 8-K/A containing the unaudited pro forma financial statements for the
nine months ended September 30, 1996, and the fiscal year ended December 31,
1995, which were not included as part of the filing of the Current Form 8-K as
filed on March 13, 1997.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 28, 1997 By:
DAVID R. HILL
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
/s/ David R. Hill Chairman of the Board of Directors March 28, 1997
- ----------------------------------
David R. Hill
/s/ Robert D. Hill President, Chief Executive Officer March 28, 1997
- ---------------------------------- and Director
Robert D. Hill
/s/ Michael E. Hayes Chief Financial and Accounting March 28, 1997
- ---------------------------------- Officer and Director
Michael E. Hayes
/s/ Jacquelyn J. Borrowman Controller March 28, 1997
- ----------------------------------
Jacquelyn J. Borrowman
/s/ Paul B. Demirdjian Senior Vice President of March 28, 1997
- ---------------------------------- Operations and Director
Paul B. Demirdjian
/s/ Michael G. Kouri Senior Vice President of March 28, 1997
- ---------------------------------- Development and Finance and Director
Michael G. Kouri
/s/ Theodore C. Rammelkamp, Jr. Senior Vice President, General Counsel March 28, 1997
- ---------------------------------- and Director
Theodore C. Rammelkamp, Jr.
/s/ A. Jones Yorke Director March 28, 1997
- ----------------------------------
A. Jones Yorke
/s/ Glen E. Barber Director March 28, 1997
- ----------------------------------
Glen E. Barber
/s/ Thomas M. Vitale Director March 28, 1997
- ----------------------------------
Thomas M. Vitale
55
EXHIBIT INDEX
Exhibits Description
- -------- -----------
3.2 Amended and restated By-laws of the Company.(1)
10.1 Amended and Restated Loan Agreement, dated September 30, 1996, by and
between the Company and The Boatmen's National Bank of St. Louis for a
revolving/term credit facility in the principal amount of
$25,000,000.(2)
10.2 Employment Agreement, dated September 12, 1996, between the Company and
David R. Hill.
10.3 Revised Employment Agreement, dated February 28, 1997, between the
Company and Robert D. Hill.
10.4 Revised Employment Agreement, dated February 28, 1997, between the
Company and Paul B. Demirdjian.
10.5 Revised Employment Agreement, dated February 28, 1997, between the
Company and Michael G. Kouri.
10.6 Revised Employment Agreement, dated February 28, 1997, between the
Company and Marlin E. Turnipseed.
10.7 Revised Employment Agreement, dated February 28, 1997, between the
Company and Michael E. Hayes.
10.8 Revised Employment Agreement, dated February 28, 1997, between the
Company and Theodore C. Rammelkamp, Jr.
10.9 Stock Purchase agreement, dated December 20, 1996, by and between the
Company and Skylink Telecommunications Corporation for the sale of 100%
of the Common Stock of Comtel Computer Corp. and California Comtel
Computer, Inc.
10.10 Asset Purchase Agreement, dated January 1, 1996, by and between the
Company and Capital Pay Phone Group, LLC for the purchase of pay
telephone assets.
10.11 Asset Purchase Agreement, dated April 16, 1996, by and between the
Company and Suntel for the purchase of pay telephone assets.
10.12 Asset Purchase Agreement, dated June 4, 1996, by and between the
Company and Cottonwood Ventures, LC for the purchase of pay telephone
assets.
10.13 Asset Purchase Agreement, dated July 12, 1996, by and between the
Company and Payphone Corporation of America for the purchase of pay
telephone assets.
10.14 Asset Purchase Agreement, dated November 1, 1996, by and between the
Company and Pay Telephone America, Ltd. for the purchase of pay
telephone assets.
- ---------------------
(1) Incorporated herein by reference to the exhibit of the same number in the
Company's Registration Statement on Form S-1 (Registration No. 33-67678).
(2) Incorporated herein by reference to the exhibit of the same number in the
Company's Annual Report on Form 10-K for the year ended December 31, 1994
(File No. 0-22610).