<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 June 30, 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 333-33639
EVERCOM, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2680266
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
--------------------
8201 Tristar Drive
Irving, Texas 75063
(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 June 30, 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>
EVERCOM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements............................................ 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 16
Item 2. Changes in Securities and Use of Proceeds....................... 16
Item 3. Defaults Upon Senior Securities................................. 16
Item 4. Submission of Matters to a Vote of Stockholders................. 16
Item 5. Other Information............................................... 16
Item 6. Exhibits and Reports on Form 8-K................................ 16
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EVERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 7,777,996 $ 4,519,242
Accounts receivable........................................................ 17,401,907 34,758,705
Refundable income taxes.................................................... 600,388 172,428
Inventories................................................................ 1,690,930 3,056,292
Prepaid expenses and other current assets.................................. 2,309,661 560,054
Deferred income tax asset.................................................. 1,059,752 1,239,025
------------ ------------
Total current assets.................................................... 30,840,634 44,305,746
PROPERTY AND EQUIPMENT....................................................... 24,007,039 27,726,212
INTANGIBLE AND OTHER ASSETS.................................................. 134,540,767 126,720,376
------------ ------------
TOTAL................................................................... $189,388,440 $198,752,334
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable........................................................... $ 6,933,874 $ 17,428,607
Accrued expenses........................................................... 24,678,158 24,474,793
Income taxes payable....................................................... 450,408
Current portion of long-term debt.......................................... 5,545,363 11,296,302
------------ ------------
Total current liabilities............................................... 37,157,395 53,650,110
LONG-TERM DEBT............................................................... 160,040,938 164,218,290
OTHER LONG-TERM LIABILITIES.................................................. 1,150,000 1,191,667
DEFERRED INCOME TAXES........................................................ 1,059,752 1,239,025
COMMITMENTS AND CONTINGENCIES (See Notes)
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 issued and outstanding as of December 31, 1997 and
June 30, 1998, respectively.............................................. 162 162
Additional paid-in capital................................................. 22,036,963 21,799,963
Accumulated deficit........................................................ (32,056,829) (43,346,942)
------------ ------------
Total stockholders' deficit......................................... (10,019,645) (21,546,758)
------------ ------------
TOTAL............................................................... $189,388,440 $198,752,334
============ ============
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
EVERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
JUNE 30, JUNE 30,
-------------------------- ---------------------------
1997 1998 1997 1998
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
OPERATING REVENUE................................. $15,026,670 $54,380,134 $30,082,290 $103,604,748
OPERATING EXPENSES:
Telecommunication costs......................... 6,210,369 23,706,103 12,405,583 43,792,785
Facility commissions............................ 4,155,797 17,571,587 8,160,713 33,344,834
Field operations and maintenance................ 577,750 1,714,105 1,165,678 3,746,658
Selling, general and administrative............. 1,231,480 4,233,741 2,327,093 8,316,569
Depreciation.................................... 317,736 1,377,480 617,084 2,689,675
Amortization of intangibles..................... 2,518,665 6,390,631 4,738,419 12,917,064
----------- ----------- ----------- ------------
Total operating expense...................... 15,011,797 54,993,647 29,414,570 104,807,585
----------- ----------- ----------- ------------
OPERATING INCOME (LOSS)........................... 14,873 (613,513) 667,720 (1,202,837)
OTHER (INCOME) EXPENSE:
Interest expense, net........................... 2,054,850 5,043,547 3,931,885 9,763,635
Other, net...................................... (35,287) (12,400) (19,220) (158,955)
----------- ----------- ----------- ------------
Total other (income) expense................. 2,019,563 5,031,147 3,912,665 9,604,680
----------- ----------- ----------- ------------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY LOSS... (2,004,690) (5,644,660) (3,244,945) (10,807,517)
INCOME TAX (BENEFIT) EXPENSE...................... (917,447) 269,908 (849,614) 482,596
----------- ----------- ----------- ------------
NET LOSS BEFORE EXTRAORDINARY LOSS................ (1,087,243) (5,914,568) (2,395,331) (11,290,113)
EXTRAORDINARY LOSS ON DEBT EXTINGUISHMENT......... 4,395,681 4,395,681
----------- ----------- ----------- ------------
NET LOSS.......................................... $(5,482,924) $(5,914,568) $(6,791,012) $(11,290,113)
Preferred Stock Dividends......................... 118,500 118,500 237,000 237,000
----------- ----------- ----------- ------------
NET LOSS APPLICABLE TO COMMON STOCK............... $(5,601,424) $(6,033,068) $(7,028,012) $(11,527,113)
=========== =========== =========== ============
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
EVERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTH PERIOD
ENDED JUNE 30,
------------------------------
1997 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................ $ (6,791,012) $(11,290,113)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation................................................... 617,084 2,689,675
Amortization of intangible assets, including
deferred financing costs and bond discount................... 5,110,365 13,581,766
Extraordinary loss on debt extinguishment...................... 4,395,681
Deferred income taxes.......................................... (1,295,508)
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable.......................................... (505,303) (17,356,798)
Inventories.................................................. 41,541 (1,205,171)
Prepaid expenses and other .................................. (84,759) 43,202
Accounts payable............................................. 1,569,933 10,494,733
Accrued expenses............................................. (113,274) 3,607,032
Income taxes................................................. (891,873) 878,368
------------ ------------
Net cash provided by operating activities................... 2,052,875 1,442,694
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash..................................... 1,919,312
Capital expenditures............................................ (1,296,817) (6,852,626)
Cash outflows for acquisitions.................................. (10,367,497) (8,272,425)
------------ ------------
Net cash used in investing activities....................... (11,664,314) (13,205,739)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt.............................. 118,200,000 9,000,000
Repayment of advances........................................... (1,188,671)
Repayment of debt............................................... (67,400,000) (21,709)
Payment of deferred financing and acquisition costs............. (6,142,404)
Payment of preferred dividends.................................. (474,000)
------------ ------------
Net cash provided by financing activities................... 43,468,925 8,504,291
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. 33,857,486 (3,258,754)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................... 294,494 7,777,996
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................... $ 34,151,980 $ 4,519,242
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................................... $ 3,734,387 $ 8,806,228
============ ============
Cash paid for income taxes...................................... $ 1,192,215 $ 26,144
============ ============
NONCASH TRANSACTIONS:
Dividends payable............................................... $ 237,000 $ 237,000
============ ============
Issuance of stock for acquisition of assets..................... $ 900,000 $ --
============ ============
Issuance of debt for acquisition of assets...................... $ 300,000 $ 950,000
============ ============
Amounts payable for acquisition costs........................... $ 3,240,355 $ --
============ ============
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
EVERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of June 30, 1998 and for the three
and six month periods ended June 30, 1997 and 1998 of Evercom, Inc. and
Subsidiaries (formerly Talton Holdings, Inc.) (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:
DECEMBER 31, JUNE 30,
1997 1998
----------- -----------
(UNAUDITED)
Trade accounts receivable, net of advance
payments received of $187,647
and $99,687 at December 31, 1997 and
June 30, 1998, respectively $21,809,811 $41,918,193
Advance commissions receivable 272,921 562,829
Receivables related to acquisitions 456,875
Universal service fund receivable 956,032
Employees and other 178,989 271,324
----------- -----------
22,718,596 43,708,378
Less allowance for unbillable and
uncollectible chargebacks (5,316,689) (8,949,673)
----------- -----------
$17,401,907 $34,758,705
=========== ===========
At December 31, 1997 and June 30, 1998, the Company had advanced
commissions to certain inmate facilities of $1,290,732 and $1,338,295
(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:
DECEMBER 31, JUNE 30,
1997 1998
----------- -----------
(UNAUDITED)
Leasehold improvements.......................... $ 493,836 $ 740,544
Telephone system equipment...................... 24,480,777 29,508,686
Vehicles........................................ 249,868 413,207
Office equipment................................ 1,075,751 2,046,642
----------- -----------
26,300,232 32,709,079
Less accumulated depreciation................... (2,293,193) (4,982,867)
----------- -----------
$24,007,039 $27,726,212
=========== ===========
4. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
DECEMBER 31, JUNE 30,
1997 1998
------------ ------------
(UNAUDITED)
Intangible assets:
Acquired telephone contracts.................. $ 59,064,429 $ 61,564,226
Noncompete agreements......................... 403,611 568,611
Deferred loan costs........................... 8,299,067 8,299,067
Goodwill...................................... 79,970,642 83,162,862
Other intangibles............................. 526,385 601,983
------------ ------------
148,264,134 154,196,749
Less accumulated amortization.................. (15,157,562) (28,739,328)
------------ ------------
Total intangible assets......................... 133,106,572 125,457,421
Deposits........................................ 416,384 487,489
Other assets--noncurrent portion of
commission advances to facilities............. 1,017,811 775,466
------------ ------------
$134,540,767 $126,720,376
============ ============
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<PAGE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31, JUNE 30,
1997 1998
----------- -----------
(UNAUDITED)
Facility commissions......................... $ 5,456,245 $ 6,110,318
Billing and collection fees.................. 1,148,171 2,162,334
Uncollectible call chargebacks............... 990,135 1,810,064
Accrued acquisition and financing costs...... 8,599,778 5,026,381
Accrued interest............................. 6,557,651 6,871,152
Accrued excise taxes payable................. 1,166,003 1,837,684
Accrued dividends on preferred stock......... 474,000 237,000
Other........................................ 286,175 419,860
----------- -----------
$24,678,158 $24,474,793
=========== ===========
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:
DECEMBER 31, JUNE 30,
1997 1998
------------ ------------
(UNAUDITED)
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 64,592
------------ ------------
165,586,301 175,514,592
Less current portion of long-term debt..... (5,545,363) (11,296,302)
------------ ------------
$160,040,938 $164,218,290
============ ============
On June 30, 1998, the Company entered into an interest rate cap agreement
that has been designated as a hedge against the Company's variable interest rate
exposure on its loan under the Company's revolving and term loan agreement
("Senior Credit Agreement"). At June 30, 1998, the interest rate cap has an
aggregate notional amount of $30.0 million, which matures in June 2001, and caps
interest on the LIBOR portion of the term loan at 7.5%, plus the applicable
LIBOR margin.
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 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 $1.9
million and a note of $950,000. The acquisition was funded with borrowings under
the Senior Credit Agreement.
-8-
<PAGE>
8. STOCK OPTIONS
On June 30, 1998, the Company's Board of Directors adopted a Stock
Incentive Plan (the "Plan"). The Plan provides for options to be granted to key
employees and officers of the Company for the purchase of 161 shares of common
stock at an exercise price of $2,000 per share. The options granted under the
Plan have a vesting period of four to five years and expire after ten years from
the date of grant.
In connection with certain employment agreements in 1998, the Company
granted 446 options to purchase common stock at an exercise price equal to the
fair market value at the date of grant. The options vest ratably over the terms
of the employment agreements and expire ten years from the date of issuance.
9. SUBSEQUENT EVENTS
On July 1, 1998, the Company entered into an agreement to purchase Saratoga
Telephone Company for a cash purchase price of $2.0 million. The acquisition was
funded with borrowings under the Senior Credit Agreement.
******
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<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 percentage of its revenues from each correctional facility as a
commission to that facility. 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 became the holding company for the operations of AmeriTel Pay
Phones, Inc. ("AmeriTel") and Talton Telecommunications Corporation and
Subsidiary ("Talton Telecommunications"), 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"). The Acquisitions were accounted for
using the purchase method of accounting as of their respective acquisition dates
and, accordingly, only the results of operations of the acquired companies
subsequent to their respective acquisition dates are included in the operating
results of the Company.
The Company accumulates call activity data from its various installations
and bills its revenues related to this call activity through major local
exchange carriers ("LECs") or through third-party billing services. 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 and allowances for bad
debts 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.
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<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the three months and six months ended
June 30, 1997 and 1998, respectively, the results of operations of the Company.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------ --------------------------------------
1997 1998 1997 1998
---------------- ----------------- ----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues.................... $15,027 100.0% $54,380 100.0% $30,082 100.0% $103,605 100.0%
Operating expenses:
Telecommunication costs.............. 6,210 41.3 23,706 43.6 12,405 41.2 43,793 42.3
Facility commissions................. 4,156 27.7 17,572 32.3 8,161 27.1 33,345 32.2
Field operations and maintenance..... 578 3.8 1,714 3.1 1,166 3.9 3,747 3.6
Selling, general and administrative.. 1,231 8.2 4,234 7.8 2,327 7.7 8,316 8.0
Depreciation......................... 318 2.1 1,377 2.5 617 2.1 2,690 2.6
Amortization of intangibles.......... 2,519 16.8 6,391 11.8 4,738 15.8 12,917 12.5
------- ------ ------- ------ ------- ------ -------- ------
Total operating expenses............ 15,012 99.9 54,994 101.1 29,414 97.8 104,808 101.2
------- ------ ------- ------ ------- ------ -------- ------
Operating income (loss)............... 15 0.1 (614) (1.1) 668 2.2 (1,203) (1.2)
Other (income) expense:
Interest expense, net................ 2,055 13.6 5,043 9.3 3,392 13.1 9,764 9.4
Other, net........................... (35) (0.2) (12) (0.0) (19) (0.1) (159) (0.1)
------- ------ ------- ------ ------- ------ -------- ------
Total other expense................... 2,020 13.4 5,031 9.3 3,913 13.0 9,605 9.3
------- ------ ------- ------ ------- ------ -------- ------
Loss before income taxes.............. (2,005) (13.3) (5,645) (10.4) (3,245) (10.8) (10,808) (10.5)
Income tax expense (benefit).......... (918) (6.1) 270 0.5 (850) (2.8) 483 0.4
------- ------ ------- ------ ------- ------ -------- ------
Loss before extraordinary loss........ (1,087) (7.2) (5,915) (10.9) (2,395) (8.0) (11,291) (10.9)
Extraordinary loss.................... 4,396 29.3 4,396 14.6
------- ------ ------- ------ ------- ------ -------- ------
Net loss.............................. $(5,483) (36.5)% $(5,915) (10.9)% $(6,791) (22.6)% $(11,291) (10.9)%
======= ====== ======= ====== ======= ====== ======== ======
EBITDA................................ $ 2,887 19.2% $ 7,166 13.2% $ 6,042 20.1% $ 14,563 14.1%
======= ====== ======= ====== ======= ====== ======== ======
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998, COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Operating Revenues. The Company's operating revenues increased by $39.4
million, or 262.7%, from $15.0 million for the three months ended June 30, 1997
to $ 54.4 million for the three months ended June 30, 1998. The increase in
operating revenues was primarily due to acquisitions by the Company of STC,
CCC, Invision, PTC, and NAI during 1997, the acquisitions of MOG and ILD in the
first quarter of 1998, and the addition of contracts covering new facilities.
The Company acquired contracts for 905 facilities through acquisitions, winning
new bids for new contracts for county and city facilities, as well as winning
bids for new contracts in the states of North Carolina, North Dakota and Alaska.
As of June 30, 1998, the Company served 2,046 correctional facilities in 43
states, of which 51 were private facilities.
Operating Expenses. Total operating expenses increased $40.0 million, from
$15.0 million for the three months ended June 30, 1997 to $55.0 million for the
three months ended June 30, 1998. Operating expenses as a percentage of
operating revenues increased 1.2% from 99.9% for the three months ended June 30,
1997 to 101.1% for the three months ended June 30, 1998. The increase in
operating expenses as a percentage of revenues is primarily due to increased
facility commissions and bad debt expense under contracts obtained by the
Company through acquisitions.
Telecommunication costs increased by $17.5 million, from $6.2 million for
the three months ended June 30, 1997 to $23.7 million for the three months ended
June 30, 1998. Telecommunication costs represented 41.3% of operating revenues
for the three months ended June 30, 1997 and 43.6% of operating revenues for the
three months ended June 30, 1998, an increase of 2.3%. The percentage increase
is primarily due to higher bad debt expense associated with the contracts
obtained by the Company through acquisitions.
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<PAGE>
Facility commissions increased by $13.4 million, from $4.2 million for the
three months ended June 30, 1997 to $17.6 million for the three months ended
June 30, 1998. Facility commissions represented 27.7% of operating revenues for
the three months ended June 30, 1997 and 32.3% of operating revenues for the
three months ended June 30, 1998, an increase of 4.6%. The increase is primarily
due to higher commission rates for contracts obtained by the Company through
acquisitions.
Field operations and maintenance costs increased by $1.1 million, from $0.6
million for the three months ended June 30, 1997 to $1.7 million for the three
months ended June 30, 1998. Field operations and maintenance costs represented
3.8% of operating revenues for the three months ended June 30, 1997 and 3.1% of
operating revenues for the three months ended June 30, 1998, a decrease of 0.7%.
The dollar increase is primarily due to costs associated with servicing the
acquired facilities and the new contract installations. The Company is
integrating the field service and maintenance organizations of its acquired
companies and anticipates additional reductions in this cost component as a
percentage of revenue when the integration activities are complete, although
there can be no assurance in this regard.
Selling, general and administrative costs ("SG&A") increased by $3.0
million, from $1.2 million for the three months ended June 30, 1997 to $4.2
million for the three months ended June 30, 1998. SG&A represented 8.2% of
operating revenues for the three months ended June 30, 1997 and 7.8% of
operating revenues for the three months ended June 30, 1998, a decrease of 0.4%.
The dollar increase in SG&A is primarily due to the increased infrastructure
necessary to support the Company's acquisitions and the Company's more
aggressive sales efforts.
Depreciation and Amortization. Total depreciation and amortization costs
increased by $5.0 million, from $2.8 million for the three months ended June 30,
1997 to $7.8 million for the three months ended June 30, 1998. Depreciation and
amortization costs represented 18.9% of operating revenues for the three months
ended June 30, 1997 and 14.3% of operating revenues for the three months ended
June 30, 1998, a decrease of 4.6%. The dollar increase is primarily due to
additional amortization expense associated with the acquisitions by the Company
of inmate facility contracts. Amortization resulting from purchase accounting
of the Company's acquisitions is, and will continue to be, a substantial portion
of the Company's operating expenses and will increase if the Company consummates
additional acquisitions.
Other (Income) Expense. Other (income) expense, consisting primarily of
interest expense, increased by $3.0 million from $2.0 million for the three
months ended June 30, 1997 to $5.0 million for the three months ended June 30,
1998. The increase was primarily due to interest expense associated with the
indebtedness incurred by the Company in connection with the Acquisitions.
Extraordinary Loss. The Company incurred an extraordinary loss of $4.4
million in 1997 due to the write-off of the unamortized deferred loan costs and
the unamortized discount related to the senior subordinated notes originally
issued by Canadian Imperial Bank of Commerce ("CIBC"), which were repaid in
connection with the acquisitions of AmeriTel and Talton Telecommunications with
the net proceeds of the June 1997 offering of $115,000,000 principal amount of
11% Senior Notes due 2007.
Net Loss. The Company's net loss increased by $0.4 million, from $5.5
million for the three months ended June 30, 1997 to $5.9 million for the three
months ended June 30, 1998 as a result of the factors described above.
EBITDA. Earnings before interest, income taxes, depreciation and
amortization ("EBITDA") increased by $4.3 million from $2.9 million for the
three months ended June 30, 1997 to $7.2 million for the three months ended June
30, 1998. EBITDA as a percentage of operating revenues decreased from 19.2% for
the three months ended June 30, 1997 to 13.2% for the three months ended June
30, 1998 due to the factors described above. Although EBITDA is not a measure of
performance calculated in accordance with generally accepted accounting
principles, the Company has included information concerning EBITDA in this Form
10-Q because it is commonly used by certain investors and analysts as a measure
of a company's ability to service its debt obligations and is a component of the
Company's debt compliance ratios. EBITDA should not be used as an alternative
to, or be considered more meaningful than operating income, net income or cash
flows as an indicator of the Company's operating income.
SIX MONTHS ENDED JUNE 30, 1998, COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Operating Revenues. The Company's operating revenues increased by $73.5
million, or 244.2%, from $30.1 million for the six months ended June 30, 1997 to
$103.6 million for the six months ended June 30, 1998. The increase in operating
revenues was primarily due to acquisitions by the Company of STC, CCC, Invision,
-12-
<PAGE>
PTC, and NAI during 1997, the acquisitions of MOG and ILD in the first quarter
of 1998, and the addition of contracts covering new facilities. The Company
acquired contracts for 905 facilities through acquisitions, winning new bids for
new contracts for county and city facilities, as well as winning bids for new
contracts in the states of North Carolina, North Dakota and Alaska. As of June
30, 1998, the Company served 2,046 correctional facilities in 43 states, of
which 51 were private facilities.
Operating Expenses. Total operating expenses increased $75.4 million, from
$29.4 million for the six months ended June 30, 1997 to $104.8 million for the
six months ended June 30, 1998. Operating expenses as a percentage of operating
revenues increased 3.4 % from 97.8% for the six months ended June 30, 1997 to
101.2% for the six months ended June 30, 1998. The increase in operating
expenses as a percentage of revenues is primarily due to the factors discussed
below.
Telecommunication costs increased by $31.4 million, from $12.4 million for
the six months ended June 30, 1997 to $43.8 million for the six months ended
June 30, 1998. Telecommunication costs represented 41.2% of operating revenues
for the six months ended June 30, 1997 and 42.3% of operating revenues for the
six months ended June 30, 1998, an increase of 1.1%. The percentage increase is
primarily due to higher bad debt expenses associated with the contracts acquired
by the Company.
Facility commissions increased by $25.1 million, from $8.2 million for the
six months ended June 30, 1997 to $33.3 million for the six months ended June
30, 1998. Facility commissions represented 27.1% of operating revenues for the
six months ended June 30, 1997 and 32.2% of operating revenues for the six
months ended June 30, 1998, an increase of 5.1%. The increase is primarily due
to higher commission rates for contracts obtained as a result of acquisitions.
Field operations and maintenance costs increased by $2.5 million, from $1.2
million for the six months ended June 30, 1997 to $3.7 million for the six
months ended June 30, 1998. Field operations and maintenance costs represented
3.9% of operating revenues for the six months ended June 30, 1997 and 3.6% of
operating revenues for the six months ended June 30, 1998, a decrease of 0.3%.
The dollar increase is primarily due to costs associated with servicing the
acquired facilities and the new contract installations. The Company is
integrating the field service and maintenance organizations of its acquired
companies and anticipates a reduction in this cost component as a percentage of
revenue when the integration activities are complete, although there can be no
assurance in this regard.
SG&A increased by $6.0 million, from $2.3 million for the six months ended
June 30, 1997 to $8.3 million for the six months ended June 30, 1998. SG&A
represented 7.7% of operating revenues for the six months ended June 30, 1997
and 8.0% of operating revenues for the six months ended June 30, 1998, an
increase of 0.3%. The dollar increase in SG&A is primarily due to the increased
infrastructure necessary to support the Company's acquisitions and the Company's
more aggressive sales effort.
Depreciation and Amortization. Total depreciation and amortization costs
increased by $10.2 million, from $5.4 million for the six months ended June 30,
1997 to $15.6 million for the six months ended June 30, 1998. Depreciation and
amortization costs represented 17.9% of operating revenues for the six months
ended June 30, 1997 and 15.1% of operating revenues for the six months ended
June 30, 1998, a decrease of 2.8%. The dollar increase is primarily due to
additional amortization expense associated with the acquisitions by the Company
of inmate facility contracts. Amortization resulting from purchase accounting
of the Company's acquisitions is and will continue to be a substantial portion
of the Company's operating expenses and will increase if the Company consummates
the Acquisitions.
Other (Income) Expense. Other (income) expense, consisting primarily of
interest expense, increased by $5.7 million from $3.9 million for the six months
ended June 30, 1997 to $9.6 million for the six months ended June 30, 1998. The
increase was primarily due to interest expense associated with the indebtedness
incurred by the Company in connection with its acquisitions.
Extraordinary Loss. The Company incurred an extraordinary loss of $4.4
million in 1997 due to the write-off of the unamortized deferred loan costs and
the unamortized discount related to the senior subordinated notes originally
issued by CIBC, which were repaid in connection with the acquisitions of
AmeriTel and
-13-
<PAGE>
Talton Telecommunications with the net proceeds of the June 1997 offering of
$115,000,000 principal amount of 11% Senior Notes due 2007.
Net Loss. The Company's net loss increased by $4.5 million, from $6.8
million for the six months ended June 30, 1997 to $11.3 million for the six
months ended June 30, 1998 as a result of the factors described above.
EBITDA. EBITDA increased by $8.6 million from $6.0 million for the six
months ended June 30, 1997 to $14.6 million for the six months ended June 30,
1998. EBITDA as a percentage of operating revenues decreased from 20.1% for the
six months ended June 30, 1997 to 14.1% for the six months ended June 30, 1998
due to the factors described above. Although EBITDA is not a measure of
performance calculated in accordance with generally accepted accounting
principles, the Company has included information concerning EBITDA in this Form
10-Q because it is commonly used by certain investors and analysts as a
measure of a company's ability to service its debt obligation and is a component
of the Company's debt compliance ratios. EBITDA should not be used as an
alternative to, or be considered more meaningful than operating income, net
income or cash flows as an indicator of the Company's operating income.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1.4 million for the six
months ended June 30, 1998, as compared to $2.1 million provided by operating
activities for the six months ended June 30, 1997. Net cash provided by
operating activities consisted primarily of earnings before depreciation and
amortization offset by working capital associated with the addition of
new inmate facility contracts.
Cash used in investing activities was $13.2 million for the six months
ended June 30, 1998, as compared to $11.7 million for the six months ended June
30, 1997. Net cash used in investing activities consisted primarily of cash
outflows for the Company's acquisitions of MOG and ILD and additional capital
expenditures for new business activities.
Cash provided by financing activities was $8.5 million for the six months
ended June 30, 1998, as compared to $43.5 million for the six months ended June
30, 1997. Net cash provided by financing activities consisted primarily of
borrowings under the Company's Senior Credit Facility to fund the MOG and ILD
acquisitions and for additional capital expenditures for new business
activities.
As of June 30, 1998, the Company had approximately $176.7 million of long-
term indebtedness outstanding, a deficit in stockholders' equity of $21.5
million, and $4.5 million of cash.
The Company expects that its principal sources of liquidity will be cash
flow from operations and borrowings under the revolving portion of the Senior
Credit Agreement. 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 June 30, 1998, the
Company has approximately $17.7 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 $6.0 million for
capital items required to implement new contracts entered into by the Company
and $4.8 million for future acquisitions.
As of June 30, 1998, the Company had approximately $176.7 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) $2.2 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.
-14-
<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 was 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.
-15-
<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.
The Company was unsuccessful in obtaining a Federal Board of Prisons
contract and has appealed the award. There can be no assurances that the Company
will be successful in appealing this award.
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).
-16-
<PAGE>
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).
3.3* Certificate of Amendment to Restate Certificate of Incorporation
of the Company, dated as of July 23, 1998.
10.1 Purchase Agreement, dated as of June 27, 1997, between the
Company and CIBC Wood Gundy 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 Consulting 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).
-17-
<PAGE>
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.
-18-
<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.
EVERCOM, INC.
By: /s/ TODD W. FOLLMER
-----------------------------------
Todd W. Follmer
Chief Executive Officer
By: /s/ JEFFREY D. CUSHMAN
-----------------------------------
Jeffrey D. Cushman
Chief Financial Officer
Date: August 14, 1998
-19-
<PAGE>
EXHIBIT 3.3
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 9:00 AM 07/24/1998
981288159 - 2682799
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT TO
RESTATED CERTIFICATE OF INCORPORATION
OF
TALTON HOLDINGS, INC.
(changing its name to
EVERCOM, INC.)
TALTON HOLDINGS, INC., a corporation organized and existing under the
General Corporation Law of the State of Delaware DOES HEREBY CERTIFY:
FIRST: The original Certificate of Incorporation of Talton Holdings, Inc.
(hereafter the "Corporation") was filed with the Secretary of State of Delaware
on November 12, 1996.
SECOND: The Restated Certificate of Incorporation of the Corporation was
filed with the Secretary of State of Delaware on December 23, 1996.
THIRD: The Restated Certificate of Incorporation of the Corporation is
amended to change the name of the Corporation to EVERCOM, INC.
FOURTH: The amendment to the Restated Certificate of Incorporation to
change the name of the Corporation herein certified has been duly adopted in
accordance with the provisions of Section 242 of the General Corporation Law of
the State of Delaware.
[SEE FOLLOWING PAGE FOR SIGNATURE]
<PAGE>
IN WITNESS WHEREOF, this Amendment to Restated Certificate has been signed
by the Chief Executive Officer this 23rd day of July, 1998.
/s/ TODD W. FOLLMER
-----------------------------------------
Todd W. Follmer, Chief Executive Officer
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