<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_______________
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to sections 13 of 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1998
OR
[_] Transition report pursuant to sections 13 of 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission file number ______________
TALTON HOLDINGS, INC.
---------------------
(Exact name of registrant as specified in its charter)
Delaware 75-2680266
(State or other jurisdiction of (I.R.S. Employer
incorporation or Identification No.)
organization)
______________
1209 W. North Carrier Parkway, Suite 300
Grand Prairie, Texas 75050
(972) 988-3737
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
______________
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 31, 1998, 15,800 shares of Class A common stock, par value
$0.01 per share, were issued and outstanding and 400 shares of Class B common
stock, par value $0.01 per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Exhibits to the registrant's Registration Statement filed with the
Securities and Exchange Commission (file no. 333-33639) have been incorporated
by reference in Part II of this Quarterly Report on Form 10-Q.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TALTON HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................................... $ 7,777,996 $ 1,419,304
Accounts receivable............................................................ 17,401,907 28,452,564
Refundable income taxes........................................................ 600,388 600,388
Inventories.................................................................... 1,690,930 2,421,038
Prepaid expenses and other current assets...................................... 2,309,661 366,944
Deferred income tax asset...................................................... 1,059,752 1,176,679
------------ ------------
Total current assets........................................................ 30,840,634 34,436,917
PROPERTY AND EQUIPMENT........................................................... 24,007,039 25,933,115
INTANGIBLE AND OTHER ASSETS...................................................... 134,540,767 133,044,746
------------ ------------
TOTAL....................................................................... $189,388,440 $193,414,778
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) ============ ============
CURRENT LIABILITIES:
Accounts payable............................................................... $ 6,933,874 $ 10,354,839
Accrued expenses............................................................... 24,678,158 20,443,626
Income taxes payable........................................................... 186,544
Current portion of long-term debt.............................................. 5,545,363 6,484,175
------------ ------------
Total current liabilities................................................... 37,157,395 37,469,184
LONG-TERM DEBT................................................................... 160,040,938 169,040,938
OTHER LONG TERM LIABILITIES...................................................... 1,150,000 1,241,667
DEFERRED INCOME TAXES............................................................ 1,059,752 1,176,679
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, $.01 par value; 6,000 shares authorized, 5,925 shares
issued and outstanding (cumulative liquidation value of $5,925,000).......... 59 59
Common stock, $.01 par value; 50,000 shares authorized, 16,200
shares and 16,200 shares issued and outstanding as of
December 31, 1997 and March 31, 1998, respectively........................... 162 162
Additional paid-in capital..................................................... 22,036,963 21,918,463
Accumulated deficit............................................................ (32,056,829) (37,432,374)
------------ ------------
Total stockholders' deficit................................................. (10,019,645) (15,513,690)
------------ ------------
TOTAL....................................................................... $189,388,440 $193,414,778
============ ============
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH THREE MONTH
PERIOD ENDED PERIOD ENDED
MARCH 31, MARCH 31,
1997 1998
------------ ------------
<S> <C> <C>
OPERATING REVENUE................................................... $ 15,055,620 $ 49,224,614
OPERATING EXPENSES:
Telecommunication costs........................................... 6,195,214 20,086,682
Facility commissions.............................................. 4,004,916 15,773,247
Field operations and maintenance.................................. 587,928 2,032,553
Selling, general and administrative............................... 1,095,613 4,082,828
Depreciation...................................................... 299,348 1,312,195
Amortization of intangibles....................................... 2,219,754 6,526,433
------------- -------------
Total operating expense........................................ 14,402,773 49,813,938
------------- -------------
OPERATING INCOME (LOSS)............................................. 652,847 (589,324)
OTHER (INCOME) EXPENSE:
Interest expense, net............................................. 1,877,035 4,720,088
Other, net........................................................ 16,071 (146,555)
------------- -------------
Total other (income) expense................................... 1,893,106 4,573,533
------------- -------------
LOSS BEFORE INCOME TAXES............................................ (1,240,259) (5,162,857)
INCOME TAX EXPENSE.................................................. 67,833 212,688
------------- -------------
NET LOSS............................................................ $ (1,308,092) $ (5,375,545)
Preferred Stock Dividends........................................... 118,500 118,500
------------- -------------
NET LOSS APPLICABLE TO COMMON STOCK................................. $ (1,426,592) $ (5,494,045)
============= =============
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH THREE MONTH
PERIOD ENDED PERIOD ENDED
MARCH 31, MARCH 31,
1997 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................... $(1,308,092) $ (5,375,545)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation........................................................................ 299,348 1,312,195
Amortization of intangible assets, including deferred financing costs and
bond discount...................................................................... 2,435,754 6,749,954
Deferred income taxes............................................................... (375,000)
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable................................................................ (1,953,883) (11,050,657)
Inventories........................................................................ (16,321) (569,917)
Prepaid expenses and other assets.................................................. (352,800) 158,004
Accounts payable................................................................... 764,032 3,420,965
Accrued expenses................................................................... (9,162) (859,125)
Income taxes....................................................................... (624,933) 186,544
------------- -------------
Net cash used in operating activities............................................ (1,141,057) (6,027,582)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash............................................................ 1,919,312
Capital expenditures................................................................... (429,462) (3,046,298)
Cash outflows for acquisitions......................................................... (7,718,935)
------------- -------------
Net cash used in investing activities............................................ (429,462) (8,845,921)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt..................................................... 1,700,000 9,000,000
Repayment of debt...................................................................... (11,189)
Payment of preferred dividends......................................................... (474,000)
------------- -------------
Net cash provided by financing activities........................................ 1,700,000 8,514,811
------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................................ 129,481 (6,358,692)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......................................... 294,494 7,777,996
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................................ $ 423,975 $ 1,419,304
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................................................. $ 384,382 $ 7,702,158
============= ==============
Cash paid for income taxes............................................................. $ 1,060,500 $ 26,144
============= ==============
NONCASH TRANSACTIONS:
Dividends payable...................................................................... $ 118,500 $ 118,500
============= ==============
Issuance of debt for acquisition of assets............................................. $ -- $ 950,000
============= ==============
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
TALTON HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of March 31, 1998 and for the
three month period ended March 31, 1997 and 1998 of Talton Holdings, Inc. and
Subsidiaries (the "Company") have been prepared by the Company without audit.
In the opinion of management, all necessary adjustments (which include only
normal recurring adjustments) to present fairly, in all material respects, the
consolidated financial position, results of operations and cash flows as of and
for the respective periods, have been made. Certain information and footnote
disclosures normally included in annual consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. These financial statements should be read in conjunction with the
Company's 1997 consolidated financial statements contained in its Form 10-K as
filed with the Securities and Exchange Commission on March 31, 1998.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," became effective as of the first quarter of 1998. This
statement requires companies to report and display comprehensive income and its
components (revenues, expenses, gains and losses). Comprehensive income includes
all changes in equity during a period except those resulting from investments by
owners and distributions to owners. For the Company, comprehensive income is the
same as net loss reported in the statements of consolidated operations, since
there were no other items of comprehensive income for the periods presented.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Trade accounts receivable, net of advance payments received of $187,647
and $205,956 at December 31, 1997 and March 31, 1998, respectively......... $21,809,811 $34,879,405
Advance commissions receivable.............................................. 272,921 192,311
Receivables related to acquisitions......................................... 456,875
Universal service fund receivable........................................... 565,698
Employees and other......................................................... 178,989 212,959
--------------- --------------
22,718,596 35,850,373
Less allowance for unbillable and uncollectible chargebacks................. (5,316,689) (7,397,809)
--------------- --------------
$17,401,907 $28,452,564
=============== ==============
</TABLE>
At December 31, 1997 and March 31, 1998, the Company had advanced
commissions to certain inmate facilities of $1,290,732 and $1,052,889
(unaudited) which are recoverable from such facilities as a reduction of earned
commissions at specified monthly amounts. Amounts included in accounts
receivable represent the estimated recoverable amounts during the next fiscal
year with the remaining balance recorded in other assets.
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<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------------- -----------------
(UNAUDITED)
<S> <C> <C>
Leasehold improvements................................................. $ 493,836 $ 555,911
Telephone system equipment............................................. 24,480,777 27,161,115
Vehicles............................................................... 249,868 272,968
Office equipment....................................................... 1,075,751 1,548,509
------------------- -----------------
26,300,232 29,538,503
Less accumulated depreciation.......................................... (2,293,193) (3,605,388)
------------------- -----------------
$ 24,007,039 $ 25,933,115
=================== =================
</TABLE>
4. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------------- -----------------
(UNAUDITED)
<S> <C> <C>
Intangible assets:
Acquired telephone contracts............................................ $ 59,064,429 $ 61,003,475
Noncompete agreements................................................... 403,611 568,611
Deferred loan costs..................................................... 8,299,067 8,299,067
Goodwill................................................................ 79,970,642 83,162,862
Other intangibles....................................................... 526,385 526,983
------------------- ------------------
148,264,134 153,560,998
Less accumulated amortization............................................ (15,157,562) (21,907,516)
------------------- ------------------
Total intangible assets................................................... 133,106,572 131,653,482
Deposits.................................................................. 416,384 530,686
Other assets--noncurrent portion of commission advances to facilities..... 1,017,811 860,578
------------------- ------------------
$ 134,540,767 $ 133,044,746
=================== ==================
</TABLE>
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<PAGE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------------- ------------------
(UNAUDITED)
<S> <C> <C>
Facility commissions.................................................. $ 5,456,245 $ 6,956,002
Billing and collection fees........................................... 1,148,171 1,424,740
Uncollectible call chargebacks........................................ 990,135 1,421,622
Accrued acquisition and financing costs............................... 8,599,778 5,579,871
Accrued interest...................................................... 6,557,651 3,343,938
Accrued excise taxes payable.......................................... 1,166,003 1,144,222
Accrued dividends on preferred stock.................................. 474,000 118,500
Other................................................................. 286,175 454,731
------------------- ------------------
$24,678,158 $20,443,626
=================== ===================
</TABLE>
The accrual for uncollectible call chargebacks represents a reserve for
amounts collected from the various local exchange carriers ("LECs") or third-
party billing services which are expected to be charged back to the Company in
future periods.
6. LONG-TERM DEBT
The following is a summary of long-term debt:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------------ -------------------
(UNAUDITED)
<S> <C> <C>
Senior Notes...................................................... $115,000,000 $115,000,000
Senior Credit Agreement:
Revolving loan facility........................................ 2,000,000 4,500,000
Term loan facility............................................. 48,500,000 55,000,000
Note payable, with interest of 8.0%, due at maturity on
February 19, 1999 and subordinate to borrowings of
the Senior Notes and Senior Credit Agreement.................... 950,000
Other............................................................. 86,301 75,113
------------------ -------------------
165,586,301 175,525,113
Less current portion of long-term debt............................ (5,545,363) (6,484,175)
------------------- -------------------
$160,040,938 $169,040,938
=================== ===================
</TABLE>
7. ACQUISITIONS
Effective January 1, 1998, the Company entered into an agreement to
purchase substantially all of the net assets of the inmate payphone division of
ILD Teleservices, Inc. for a cash purchase price of $2.6 million. The
acquisition was funded with borrowings under the revolving and term loan
agreement ("Senior Credit Agreement").
Effective February 1, 1998, the Company entered into an agreement to
purchase the stock of MOG Communications, Inc. for a cash purchase price of
$1,925,000 and a note of $950,000. The acquisition was funded with borrowings
under the Senior Credit Agreement.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company derives substantially all of its revenues from its operation of
inmate telecommunication systems located in correctional facilities in 43 states
and the provision of related services. The Company enters into multi-year
agreements with the correctional facilities, pursuant to which the Company
serves as the exclusive provider of telecommunications services to inmates
within each facility. In exchange for the exclusive service rights, the Company
pays a commission to the correctional facility based upon inmate telephone use.
The Company installs and generally retains ownership of the telephones and the
associated equipment and provides additional services to the correctional
facility that are tailored to the specialized needs of the corrections industry
and to the requirements of the individual correctional facility, such as call
activity reporting and call blocking. The Company also generates revenues from
public pay telephones that are ancillary to its inmate telephone business.
The Company accumulates call activity data from its various installations
and bills its revenues related to this call activity through major LECs or
through third-party billing services for smaller volume LECs. In addition,
during the same period, the Company accrues the related telecommunications costs
for validating, transmitting, billing and collection, and line and long-distance
charges, along with commissions payable to the facilities. Allowances for bad
debts are based on historical experience.
The Company's principal operating expenses consist of (i) telecommunication
costs; (ii) commissions paid to correctional facilities, which are typically
expressed as a percentage of either gross or net revenues and are fixed for the
term of the agreements with the facilities; (iii) field operations and
maintenance costs, which consist primarily of field service on the Company's
installed base of inmate telephones; and (iv) selling, general, and
administrative costs. The Company pays monthly line and usage charges to
regional Bell operating companies ("RBOCs") and other LECs for interconnection
to the local network for local calls, which are computed on a flat monthly
charge plus, for certain LECs, on a per message or per minute usage rate based
on the time and duration of the call. The Company also pays fees to RBOCs and
other LECs and long distance carriers based on usage for long distance calls.
The Company became the holding company for the operations of AmeriTel Pay
Phones, Inc. and Talton Telecommunications Corporation and Subsidiary, effective
December 1, 1996. The Company also acquired the operations of Tri-T, Inc.
("Tataka") on April 4, 1997, Security Telecom Corporation ("STC") on June 27,
1997, Correctional Communications Corporation ("CCC") on July 31, 1997, the
inmate payphone division of Communications Central, Inc. ("InVision") on October
6, 1997, the inmate payphone division of North American InTeleCom ("NAI") on
December 1, 1997, the inmate payphone division of Peoples Telephone Corporation
("PTC") on December 18, 1997, the inmate payphone division of ILD Teleservices,
Inc. ("ILD") on January 1, 1998 and MOG Communications, Inc. ("MOG") on February
1, 1998 (collectively the "Acquisitions").
-8-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the three months ended March 31, 1997
and 1998, respectively, the results of operations of the Company.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1998
---------------------- -------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating revenues.......................................... $15,056 100.0% $49,225 100.0%
Operating expenses:
Telecommunication costs.................................... 6,195 41.1 20,087 40.8
Facility commissions....................................... 4,005 26.6 15,773 32.0
Field operations and maintenance........................... 588 3.9 2,033 4.1
Selling, general and administrative....................... 1,096 7.3 4,083 8.3
Depreciation............................................... 299 2.0 1,312 2.7
Amortization of intangibles................................ 2,220 14.7 6,526 13.3
----------- -------- ------------ -----------
Total operating expenses.................................... 14,403 95.6 49,814 101.2
----------- -------- ------------ -----------
Operating income (loss)..................................... 653 4.4 (589) (1.2)
Other (income) expense:
Interest expense, net...................................... 1,877 12.5 4,720 9.6
Other, net................................................. 16 0.1 (146) (0.3)
----------- -------- ------------ -----------
Total other expense......................................... 1,893 12.6 4,574 9.3
----------- -------- ------------ -----------
Loss before income taxes.................................... (1,240) (8.2) (5,163) (10.5)
Income tax expense.......................................... 68 0.5 213 0.4
----------- -------- ------------ -----------
Net loss.................................................... $(1,308) (8.7)% $(5,376) (10.9)%
=========== ======== ============ ===========
EBITDA...................................................... $ 3,156 21.0% $ 7,395 15.0%
=========== ======== ============ ===========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Operating Revenues. The Company's operating revenues increased by $34.1
million, or 226.9%, from $15.1 million for the three months ended March 31, 1997
to $49.2 million for the three months ended March 31, 1998. The increase in
operating revenues was primarily due to acquisitions by the Company of STC, CCC,
InVision, PTC, and NAI during 1997 and MOG and ILD acquisitions in the first
quarter of 1998 and new contract installations. Specifically, the Company
acquired inmate telephone contracts at 128 facilities in 14 states from STC; 23
facilities in 3 states from CCC; 568 facilities in 37 states from InVision; 82
facilities in 10 states from PTC's inmate telecommunications unit; 57 facilities
in 5 states from NAI's inmate telecommunications unit; 28 facilities in 12
states from ILD; and 9 facilities in 2 states from MOG.
Operating Expenses. Total operating expenses increased $35.4 million, from
$14.4 million for the three months ended March 31, 1997 to $49.8 million for the
three months ended March 31, 1998. Operating expenses as a percentage of
operating revenues increased 5.6% from 95.6% for the three months ended March
31, 1997 to 101.2% for the three months ended March 31, 1998. The increase in
operating expenses as a percentage of revenues is primarily due to the factors
discussed below.
Telecommunication costs increased by $13.9 million, from $6.2 million for
the three months ended March 31, 1997 to $20.1 million for the three months
ended March 31, 1998. Telecommunication costs represented 41.1% of operating
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<PAGE>
revenues for the three months ended March 31, 1997 and 40.8% of operating
revenues for the three months ended March 31, 1998, a decrease of 0.3%. The
dollar increase is primarily due to the acquisitions by the Company and the new
contract installations. The decrease as a percentage of operating revenues is
primarily due to lower billing and collection costs as a result of direct
billing arrangements entered into with various major LECs and lower relative
costs for long distance as a result of more favorable long distance agreements.
Facility commissions increased by $11.8 million, from $4.0 million for the
three months ended March 31, 1997 to $15.8 million for the three months ended
March 31, 1998. Facility commissions represented 26.6% of operating revenues for
the three months ended March 31, 1997 and 32.0% of operating revenues for the
three months ended March 31, 1998, an increase of 5.4%. The increase is
primarily due to higher commission rates for certain contracts associated with
the Acquisitions.
Field operations and maintenance costs increased by $1.4 million, from $0.6
million for the three months ended March 31, 1997 to $2.0 million for the three
months ended March 31, 1998. Field operations and maintenance costs represented
3.9% of operating revenues for the three months ended March 31, 1997 and 4.1% of
operating revenues for the three months ended March 31, 1998, an increase of
0.2%. The dollar increase is primarily due to the costs associated with
servicing the acquired facilities and the new contract installations.
Selling, general and administrative costs ("SG&A") increased by $3.0
million, from $1.1 million for the three months ended March 31, 1997 to $4.1
million for the three months ended March 31, 1998. SG&A represented 7.3% of
operating revenues for the three months ended March 31, 1997 and 8.3% of
operating revenues for the three months ended March 31, 1998, an increase of
1.0%. The increase in SG&A as a percentage of operating revenues is primarily
due to the increased infrastructure required to integrate the Company's
acquisitions during the integration phase and the Company's more aggressive
sales efforts.
Depreciation and Amortization. Total depreciation and amortization costs
increased by $5.3 million, from $2.5 million for the three months ended March
31, 1997 to $7.8 million for the three months ended March 31, 1998. Depreciation
and amortization costs represented 16.7% of operating revenues for the three
months ended March 31, 1997 and 16.0% of operating revenues for the three months
ended March 31, 1998, a decrease of 0.7%. The dollar increase is primarily due
to additional amortization expense associated with the Acquisitions by the
Company of inmate facility contracts.
Operating Income (Loss). The Company's operating income decreased by $1.3
million, from $0.7 million for the three months ended March 31, 1997 to an
operating loss of $0.6 million for the three months ended March 31, 1998,
substantially due to the increase in amortization of intangibles. The Company's
operating income margin decreased from 4.4% for the three months ended March 31,
1997 to a negative operating margin of 1.2% for the three months ended March 31,
1998 due to the factors described above.
Other (Income) Expense. Other (income) expense, consisting primarily of
interest expense, increased by $2.7 million from $1.9 million for the three
months ended March 31, 1997 to $4.6 million for the three months ended March 31,
1998. The increase was primarily due to interest expense associated with
indebtedness incurred by the Company in connection with the Acquisitions.
Net Loss. The Company's net loss increased by $4.1 million, from $1.3
million for the three months ended March 31, 1997 to $5.4 million for the three
months ended March 31, 1998 as a result of the factors described above.
EBITDA. EBITDA increased by $4.2 million from $3.2 million for the three
months ended March 31, 1997 to $7.4 million for the three months ended March 31,
1998. EBITDA as a percentage of operating revenues decreased from 21.0% for the
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<PAGE>
three months ended March 31, 1997 to 15.0% for the three months ended March 31,
1998 due to the factors described above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $6.0 million for the three months
ended March 31, 1998, as compared to $1.1 million for the three months ended
March 31, 1997. Net cash used in operating activities consisted primarily of
increases in accounts receivable associated with the addition of new inmate
facility contracts.
Cash used in investing activities was $8.8 million for the three months
ended March 31, 1998, consisting primarily of cash outflows to purchase ILD and
MOG and additional capital expenditures for new business activities, as compared
to $0.4 million for the three months ended March 31, 1997.
Cash provided by financing activities was $8.5 million for the three months
ended March 30, 1998 consisting primarily of borrowings to fund the ILD and MOG
acquisitions and additional capital expenditures for new business activities, as
compared to $1.7 million for the three months ended March 31, 1997.
As of March 31, 1998, the Company had approximately $176.8 of long-term
indebtedness outstanding, a deficit in stockholders' equity of $15.5 million,
and $1.4 million of cash.
The Company expects that its principal sources of liquidity will be cash
flow from operations and borrowings under the revolving loan commitment. The
Company anticipates that its principal uses of liquidity will be to provide
working capital, finance future acquisitions, and meet debt service
requirements. Management expects that cash flow from operations along with
additional borrowings under existing and future credit facilities will be
sufficient to meet the Company's requirements for the remainder of 1998. The
Company currently anticipates that interest payments of approximately $18.5
million per year through December 31, 2000 will be required under the terms of
the Senior Notes and the Senior Credit Agreement. As of March 31, 1998, the
Company has approximately $19.8 million of unused borrowing capacity under the
Senior Credit Agreement. The Company anticipates that its primary capital
expenditures for the remainder of 1998 will be approximately $8.0 million for
capital items required to implement new contracts entered into by the Company.
As of March 31, 1998, the Company had approximately $176.8 million of long-
term indebtedness outstanding, including (i) $115.0 million of Senior Notes
outstanding at an interest rate of 11.0%, (ii) $59.5 million of indebtedness
from the Senior Credit Agreement and (iii) $2.3 million of other indebtedness
consisting primarily of acquisition costs and capital leases.
The Company intends to pursue additional acquisitions to expand its base of
installed inmate telephones and consider acquisition opportunities from time to
time. There can be no assurance that the Company will have sufficient available
capital resources to realize its acquisition strategy. Such future acquisitions,
depending on their size and the form of consideration, may require the Company
to seek additional debt or equity financing.
-11-
<PAGE>
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," became effective as of the
first quarter of 1998. This statement requires companies to report and display
comprehensive income and its components (revenues, expenses, gains and losses).
Comprehensive income includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. For the
Company, comprehensive income is the same as net loss reported in the
statements of consolidated operations, since there were no other items of
comprehensive income for the periods presented.
CHANGES IN ACCOUNTING STANDARDS
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," will become effective in 1998. This statement establishes
standards for defining and reporting business segments. The Company is
currently determining its reportable segments. The adoption of SFAS No. 131
will not affect the Company's consolidated financial position, results of
operations or cash flows.
INFORMATION SYSTEMS AND THE YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company believes that it has identified all significant applications
that will require modification to ensure Year 2000 Compliance. Internal and
external resources are being used to make the required modifications and test
Year 2000 Compliance. The Company plans on completing the testing process of all
significant applications by February 1, 1999.
In addition, the Company has communicated with others with whom it does
significant business to determine their Year 2000 Compliance readiness and the
extent to which the Company is vulnerable to any third party Year 2000 issues.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimate,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans,
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, and similar
uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item is not applicable to the Registrant.
-12-
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time a party to legal proceedings that arise in
the ordinary course of business. Management does not believe that the
resolution of any threatened or pending legal proceedings will have a material
adverse affect on the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
This item is not applicable to the Registrant.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
There have been no matters to a vote of the holders of securities of the
Company since the Company became subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit
No. Description of Exhibit
- ------- ----------------------------------------------------------------------
2.1 Asset Purchase Agreement, dated as of August 21, 1997, among the
Company, Invision Telecom, Inc., and Communications Central, Inc.
(filed as Exhibit 2.1 to the Company's Registration Statement No.
333-33639 and incorporated herein by reference).
2.2 Contribution Agreement, dated as of December 20, 1996, among the
Company, Richard C. Green Jr., Robert K. Green, T.R. Thompson,
Roger K. Sallee, and certain other stockholders, and AmeriTel Pay
phones, Inc. (filed as Exhibit 2.2 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
2.3 Contribution Agreement, dated as of December 20, 1996, among the
Company, Julius E. Talton, Julius E. Talton, Jr., and James E.
Lumpkin (filed as Exhibit 2.3 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
2.4 Stock Acquisition Agreement, dated as of December 20, 1996, among
the Company, Richard C. Green, Jr., Robert K. Green, T. R.
Thompson, Roger K. Sallee, and certain other stockholders, and
AmeriTel Pay Phones, Inc. (filed as Exhibit 2.4 to the Company's
Registration Statement No. 333-33639 and incorporated herein by
reference).
2.5 Stock Acquisition Agreement, dated as of December 20, 1996, among
the Company, Julius E. Talton, Julius E. Talton, Jr., James E.
Lumpkin, Carrie T. Glover, Talton Telecommunications Corporation,
and Talton Telecommunications of Carolina, Inc. (filed as Exhibit
2.5 to the Company's Registration Statement No. 333-33639 and
incorporated herein by reference).
3.1 Certificate of Incorporation of the Company (filed as Exhibit 3.1 to
the Company's Registration Statement No. 333-33639 and incorporated
herein by reference).
3.2 Bylaws of the Company (filed as Exhibit 3.2 to the Company's
Registration Statement No. 333-33639 and incorporated herein by
reference).
10.1 Purchase Agreement dated as of June 27, 1997, between the Company
and CIBC Wood Grundy Securities Corp. (filed as Exhibit 10.1 to
the Company's Registration Statement No. 333-33639 and
incorporated herein by reference.
10.2 Amended and Restated Credit Agreement, dated as of July 30, 1997,
among the Company, Canadian Imperial Bank of Commerce, CIBC Inc.,
and First Source Financial LLP (filed as Exhibit 10.2 to the
Company's Registration Statement No. 333-33639 and incorporated
herein by reference).
10.3 Asset Purchase Agreement, dated as of May 9, 1997, among the
Company, Security Telecom Corporation, and William H. Ohland
(filed as Exhibit 10.3 to the Company's Registration Statement
No. 333-33639 and incorporated herein by reference).
10.4 First Amendment to Asset Purchase Agreement, dated as of June 21,
1997, among the Company, Security Telecom Corporation, and
William H. Ohland (filed as Exhibit 10.4 to the Company's
Registration Statement No. 333-33639 and incorporated herein by
reference).
10.5 Employment Agreement, dated as of June 2, 1997, between the
Company and John A. Crooks, Jr. (filed as Exhibit 10.5 to the
Company's Registration Statement No. 333-33639 and incorporated
herein by reference).
10.6 Consulting Agreement, dated as of December 27, 1996, between the
Company and James E. Lumpkin (filed as Exhibit 10.6 to the
Company's Registration Statement No. 333-33639 and incorporated
herein by reference).
10.7 Consulting Agreement, dated as of December 27, 1996, between the
Company and Julius E. Talton (filed as Exhibit 10.7 to the
Company's Registration Statement No. 333-33639 and incorporated
herein by reference).
10.8 Consulting and Strategic Services Agreement, dated as of December
27, 1996, between the Company and EUF Talton, L.P. (filed as
Exhibit 10.8 to the Company's Registration Statement No. 333-
33639 and incorporated herein by reference).
10.9 Employment Agreement, dated as of December 27, 1996, between the
Company and Julius E. Talton, Jr. (filed as Exhibit 10.9 to the
Company's Registration Statement No. 333-33639 and incorporated
herein by reference).
10.10 Stock Option Letter, dated as of June 2, 1997, from the Company
to John A. Crooks, Jr. (filed as Exhibit 10.11 to the Company's
Registration Statement No. 333-33639 and incorporated herein by
reference).
10.11 Employment Agreement, dated as of November 17, 1997, between the
Company and Jeffrey D. Cushman (filed as Exhibit 10.12 to the
Company's Registration Statement No. 333-33639 and incorporated
herein by reference).
27.1* Financial Data Schedule.
____________________
* Filed herewith.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the period subject
to this Quarterly Report on Form 10-Q.
The agreements set forth above described the contents of certain
exhibits thereunto which are not included. However, such exhibits will
be furnished to the Commission upon request.
-13-
<PAGE>
SIGNATURES
Pursuant to the requirement 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.
TALTON HOLDINGS, INC.
By: /s/ TODD W. FOLLMER
---------------------------------------
Todd W. Follmer
Interim Chief Executive Officer
By: /s/ JEFFREY D. CUSHMAN
---------------------------------------
Jeffrey D. Cushman
Chief Financial Officer
Date: May 15, 1998
-14-
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