<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_____________________
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to sections 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1999
OR
[ ] Transition report pursuant to sections 13 or 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 (I.R.S. Employer
of incorporation or Identification No.)
organization)
______________
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 March 31, 1999, 15,933 shares of Class A common stock, par value
$0.01 per share, 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 following documents filed with the Securities and Exchange
Commission have been incorporated by reference in Part II of this Quarterly
Report on Form 10-Q:
1. Registration Statement on Form S-4 (File No. 333-33639); and
2. Quarterly Report on Form 10-Q, dated as of August 14, 1998.
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EVERCOM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements....................................................................... 3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................. 27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 28
Item 2. Changes in Securities and Use of Proceeds.................................................. 28
Item 3. Defaults Upon Senior Securities............................................................ 28
Item 4. Submission of Matters to a Vote of Stockholders............................................ 28
Item 5. Other Information.......................................................................... 28
Item 6. Exhibits and Reports on Form 8-K........................................................... 29
</TABLE>
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EVERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 1,691,762 $ 254,531
Accounts receivable......................................................... 39,070,959 48,217,571
Refundable income taxes..................................................... 435,593 494,240
Inventories................................................................. 2,360,280 2,075,527
Prepaid expenses and other current assets................................... 392,448 450,222
Deferred income tax asset................................................... 1,442,122 1,636,824
--------------- ---------------
Total current assets.................................................... 45,393,164 53,128,915
PROPERTY AND EQUIPMENT......................................................... 29,485,944 28,814,067
INTANGIBLE AND OTHER ASSETS.................................................... 116,586,808 111,415,636
--------------- ---------------
TOTAL................................................................... $ 191,465,916 $ 193,358,618
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................................................ $ 21,856,484 $ 19,230,909
Accrued expenses............................................................ 23,798,055 25,318,491
Current portion of long-term debt........................................... 10,607,729 10,334,765
--------------- ---------------
Total current liabilities............................................... 56,262,268 54,884,165
LONG-TERM DEBT................................................................. 169,375,000 171,781,250
OTHER LONG-TERM LIABILITIES.................................................... 500,000 450,000
DEFERRED INCOME TAXES.......................................................... 1,442,122 1,636,824
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, Senior and First Preferred Series A, $.01
par value; 6,000 and 5,000 shares authorized, 5,925 and 5,000
shares issued and outstanding, respectively (cumulative liquidation
value of $5,925,000 and $5,000,000, respectively) as of
March 31, 1999. Senior preferred stock, $.01 par value; 6,000
shares authorized, 5,925 shares issued and outstanding as of
December 31, 1998 (cumulative liquidation value of $5,925,000)........... 59 109
Common stock, $.01 par value; 50,000 shares authorized, 16,333 shares
issued and outstanding as of December 31, 1998 and March 31, 1999........ 163 163
Additional paid-in capital.................................................. 21,829,562 26,585,919
Accumulated deficit......................................................... (57,943,258) (61,979,812)
--------------- ---------------
Total stockholders' deficit............................................. (36,113,474) (35,393,621)
--------------- ---------------
TOTAL................................................................... $ 191,465,916 $ 193,358,618
=============== ===============
</TABLE>
See notes to consolidated financial statements.
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EVERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH
PERIOD ENDED
MARCH 31,
1998 1999
--------------- ----------------
<S> <C> <C>
OPERATING REVENUE........................................................ $ 49,224,614 $ 59,175,294
OPERATING EXPENSES:
Telecommunication costs................................................ 20,086,682 26,861,372
Facility commissions................................................... 15,773,247 18,027,716
Field operations and maintenance....................................... 2,032,553 1,637,775
Selling, general, and administrative................................... 4,082,828 4,321,855
Depreciation........................................................... 1,312,195 1,706,994
Amortization of intangibles............................................ 6,526,433 5,762,125
-------------- -------------
Total operating expense............................................. 49,813,938 58,317,837
-------------- -------------
OPERATING (LOSS) INCOME.................................................. (589,324) 857,457
OTHER EXPENSE (INCOME):
Interest expense, net.................................................. 4,720,088 4,880,164
Other (income), net.................................................... (146,555)
-------------- -------------
Total other (income) expense........................................ 4,573,533 4,880,164
-------------- -------------
LOSS BEFORE INCOME TAXES................................................. (5,162,857) (4,022,707)
INCOME TAX EXPENSE....................................................... 212,688 13,847
-------------- -------------
NET LOSS................................................................. $ (5,375,545) $ (4,036,554)
PREFERRED STOCK DIVIDENDS................................................ 118,500 138,930
-------------- -------------
NET LOSS APPLICABLE TO COMMON STOCK...................................... $ (5,494,045) $ (4,175,484)
============== =============
</TABLE>
See notes to consolidated financial statements.
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EVERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTH
PERIOD ENDED
MARCH 31,
1998 1999
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................................... $ (5,375,545) $ (4,036,554)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation.............................................................................. 1,312,195 1,706,994
Amortization of intangible assets, including deferred financing costs and
bond discount........................................................................... 6,749,954 6,003,647
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable..................................................................... (11,050,657) (9,146,612)
Inventories............................................................................. (569,917) 284,753
Prepaid expenses and other assets....................................................... 158,004 31,213
Accounts payable........................................................................ 3,420,965 (2,625,575)
Accrued expenses........................................................................ (859,125) 2,854,357
Income taxes............................................................................ 186,544 (58,647)
------------ -------------
Net cash used in operating activities.................................................. (6,027,582) (4,986,424)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash................................................................ 1,919,312
Capital expenditures....................................................................... (3,046,298) (1,619,590)
Cash outflows for acquisitions............................................................. (7,718,935) (1,522,848)
------------ -------------
Net cash used in investing activities.................................................. (8,845,921) (3,142,438)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt, net of expenses........................................ 9,000,000 5,500,000
Payment of debt issuance costs............................................................. (336,992)
Repayment of debt.......................................................................... (11,189) (3,366,714)
Payment of preferred dividends............................................................. (474,000)
Proceeds from the issuance of preferred stock and warrants, net of expenses................ 4,895,337
------------ -------------
Net cash provided by financing activities.............................................. 8,514,811 6,691,631
------------ -------------
DECREASE IN CASH AND CASH EQUIVALENTS....................................................... (6,358,692) (1,437,231)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............................................. 7,777,996 1,691,762
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................................... $ 1,419,304 $ 254,531
============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest..................................................................... $ 7,702,158 $ 1,480,481
============ =============
Cash paid for income taxes................................................................. $ 26,144 $ 72,494
============ =============
NONCASH TRANSACTIONS:
Dividends payable.......................................................................... $ 118,500 $ 138,930
============ =============
Issuance of debt for acquisition of assets................................................. $ 950,000 $ --
============ =============
</TABLE>
See notes to consolidated financial statements.
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EVERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of March 31, 1999 and for the
three-month periods ended March 31, 1998 and 1999 of Evercom, Inc. and its
subsidiaries (the "Company") have been prepared by the Company without audit.
As of January 1, 1999, the Company merged five of its wholly owned
subsidiaries (AmeriTel Pay Phones, Inc., Talton Telecommunications Corporation,
Talton Telecommunications of Carolina, Inc., Talton STC, Inc., and MOG
Communications, Inc.) into Talton Invision, Inc., another of the Company's
wholly owned subsidiaries. Concurrent with the merger, the Company amended
Talton Invision, Inc.'s Certificate of Incorporation to change its name to
Evercom Systems, Inc.
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 1998 consolidated financial statements contained in its Form 10-K as
filed with the Securities and Exchange Commission on March 29, 1999.
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.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires recognition of all derivative financial instruments as either assets or
liabilities in consolidated balance sheets at fair value and determines the
method(s) of gain/loss recognition. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. The Company is currently evaluating the effect
that it may have on the consolidated financial statements.
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<PAGE>
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
---------------- ---------------
(UNAUDITED)
<S> <C> <C>
Trade accounts receivable, net of advance payments received of $141,460
and $137,574 at December 31, 1998 and March 31, 1999, respectively.......... $ 42,308,582 $ 50,003,761
Advance commissions receivable................................................. 2,020,020 1,917,470
Receivables related to acquisitions............................................ 141,044 141,044
Recoverable Universal Service Fund fees - current portion...................... 1,089,800 896,461
Receivables from joint venture partner......................................... 419,643
Employees and other............................................................ 329,749 207,162
-------------- -------------
46,308,838 53,165,898
Less allowance for unbillable and uncollectible chargebacks.................... (7,237,879) (4,948,327)
-------------- -------------
$ 39,070,959 $ 48,217,571
============== =============
</TABLE>
At December 31, 1998 and March 31, 1999, the Company had advanced
commissions to certain inmate facilities of $2,495,558 and $2,302,320
(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.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
---------------- ---------------
(UNAUDITED)
<S> <C> <C>
Leasehold improvements............................................. $ 834,051 $ 852,092
Telephone system equipment......................................... 33,776,168 34,783,492
Vehicles........................................................... 431,807 431,807
Office equipment................................................... 2,419,992 2,429,744
--------------- --------------
37,462,018 38,497,135
Less accumulated depreciation...................................... (7,976,074) (9,683,068)
--------------- --------------
$ 29,485,944 $ 28,814,067
=============== ==============
</TABLE>
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4. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
Intangible assets:
Acquired telephone contracts.............................................. $ 63,835,844 $ 64,402,268
Noncompete agreements..................................................... 568,611 568,611
Deferred loan costs....................................................... 8,299,067 8,636,059
Goodwill.................................................................. 84,530,834 84,530,834
Other intangibles......................................................... 694,493 712,539
-------------- --------------
$ 157,928,849 $ 158,850,311
Less accumulated amortization.............................................. (42,640,007) (48,643,654)
-------------- --------------
Total intangible assets..................................................... 115,288,842 110,206,657
Deposits.................................................................... 400,540 409,615
Recoverable Universal Service Fund fees - noncurrent portion................ 421,888 414,514
Other assets - noncurrent portion of commission advances to facilities...... 475,538 384,850
-------------- --------------
$ 116,586,808 $ 111,415,636
============== ==============
</TABLE>
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<PAGE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
Facility commissions............................................. $ 8,007,248 $ 7,516,244
Billing and collection fees...................................... 1,804,790 1,997,990
Uncollectible call chargebacks................................... 5,267,345 5,719,075
Accrued acquisition and financing costs.......................... 3,941,666 2,418,818
Accrued interest................................................. 218,646 3,376,807
Accrued excise taxes payable..................................... 2,072,856 1,933,960
Accrued dividends on preferred stock............................. 474,000 612,930
Accrued restructure costs........................................ 654,245 440,458
Accrued payroll and bonuses...................................... 778,633 333,033
Other............................................................ 578,626 969,176
-------------- --------------
$ 23,798,055 $ 25,318,491
============== ==============
</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 that are expected to be charged back to the Company in
future periods.
Restructuring Costs - During 1998, management authorized and committed to a
plan of restructure. The plan provides for the consolidation of certain
operations, including the closing of a number of office locations and reducing
the workforce by approximately 21 employees and certain management positions.
Based on the finalization of estimates included within the plan and the actual
undertaking of certain actions in accordance with the plan, management made
revisions to the original estimates during the fourth quarter. The revisions
primarily relate to the final determination of the number of employees
terminated, which resulted in 19 terminations, the unexpected subletting of
certain facilities, and a refinement of expected legal and other costs.
Although certain specific actions of the plan were modified, the overall plan
for restructuring the Company is expected to be completed at a total cost of
approximately $200,000 less than the original provision.
Original restructuring reserves were established totaling $1.4 million, of
which $200,000 was reversed in the fourth quarter. Of the adjusted amount,
$600,000 was reserved for severance and related costs, $200,000 for the office
leases and $400,000 for legal and other costs.
<TABLE>
<CAPTION>
Amounts Charged Amounts Amounts
to Earnings in Incurred in Incurred in
1998 1998 1999
<S> <C> <C> <C>
Severance and related costs..................... $ 614,678 $ 252,885 $ 157,582
Leased facilities............................... 217,902 68,449 55,048
Legal and other costs........................... 379,685 236,685 1,158
------------ ----------- -----------
$ 1,212,265 $ 558,019 $ 213,788
============ =========== ===========
</TABLE>
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<PAGE>
6. LONG-TERM DEBT
The following is a summary of long-term debt:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
---------------- --------------
(UNAUDITED)
<S> <C> <C>
Senior Notes.......................................................... $ 115,000,000 $ $115,000,000
Senior Credit Facility:
Revolving loan facility............................................ 14,500,000 14,500,000
Term loan acquisition facility..................................... 49,500,000 47,093,750
Additional term loan facility...................................... 5,500,000
Note payable, with interest of 8.0%, due at maturity on
February 19, 1999 and subordinate to borrowings under
the Senior Notes and Senior Credit Facility......................... 950,000
Other................................................................. 32,729 22,265
-------------- --------------
179,982,729 182,116,015
Less current portion of long-term debt................................ (10,607,729) (10,334,765)
-------------- --------------
$ 169,375,000 $ 171,781,250
============== ==============
</TABLE>
In March 1999 the Company amended its Senior Credit Facility (as defined),
as discussed further in footnote 7. Under the terms of the Senior Credit
Facility, the term loan acquisition facility is due in quarterly installments of
$2,406,250, increasing to $3,093,750 on March 31, 2000 and $3,437,500 on March
31, 2001, with the remaining unpaid balance due on December 31, 2002. The
additional term loan facility is due on December 31, 2002.
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 under the Company's revolving and term loan agreement (the "Senior
Credit Facility"). At March 31, 1999, the interest rate cap has an aggregate
notional amount of $30.0 million, which matures in June 2001, and caps interest
on the London Interbank Offering Rate ("LIBOR") portion of the term loan, up to
the aggregate notional amount, at 7.5%, plus the applicable LIBOR margin.
7. EQUITY OFFERING AND SENIOR CREDIT FACILITY AMENDMENT
In March 1999 the Company raised $5.0 million of equity from its existing
stockholders and warrant holders and/or their affiliates through the issuance of
5,000 investment units at $1,000 per unit. Each unit consists of one share of
newly authorized First Preferred Series A Stock and a warrant to acquire one
share of the Company's Class A common stock for $1,000 per share. The warrants
will expire if not exercised before December 31, 2007. In determining the value
of the First Preferred Series A Stock and the warrants, the proceeds of the
issuance were allocated based on their relative fair values.
The First Preferred Series A Stock will be entitled to receive dividends at
the applicable First Preferred Series A Rate, payable quarterly commencing on
April 1, 1999. Dividends will be payable out of funds legally available
therefore, will be payable only when, as, and if declared by the Company's Board
of Directors, shall be cumulative, and, if undeclared or unpaid, shall bear
interest at the applicable First Preferred Series A Rate until paid. The First
Preferred Series A Rate will be eight percent per annum through March 31, 2001,
ten percent per annum from April 1, 2001 through June 30, 2001, and thereafter
will increase by 0.5% for each additional three month period, up to a maximum of
16% per annum. The First Preferred Series A Stock ranks senior to all classes of
common stock but
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ranks junior to the Company's Senior Preferred Stock (the "Senior Preferred
Stock") with respect to dividend rights and rights upon liquidation.
In conjunction with the March 1999 equity offering, the preferred dividend
rates on the original Senior Preferred Stock were modified to mirror the
preferred dividend rates on the First Preferred Series A Stock.
As a result of the issuance of the First Preferred Series A Stock and
warrants discussed above, the Company was required to obtain a waiver from its
Senior Credit Facility group of lenders that waived the lenders' rights to the
proceeds raised by the Company from the issuance.
Also in March 1999, and in conjunction with the issuance of the First
Preferred Series A Stock and warrants, the Company amended its Senior Credit
Facility. The amendment increased the Company's borrowing capacity under the
term loan facility of the Senior Credit Facility by $5.5 million. The Company
borrowed the additional $5.5 million in March 1999 and concurrently repaid $5.0
million under the revolving loan facility of the Senior Credit Facility.
The Senior Credit Facility, as amended in March 1999, includes a $55.0
million term loan acquisition facility, a $5.5 million additional term loan
facility, and a $25.0 million revolving loan facility (which includes a $5.0
million letter of credit facility). Scheduled principal payments under the term
loan facilities may not be reborrowed. Under the terms of the Senior Credit
Facility, the term loan acquisition facility is amortized on a quarterly basis
over five years beginning September 30, 1998, the additional term loan facility
matures on December 31, 2002, and the revolving loan facility expires on
December 31, 2002.
Amounts borrowed under the additional term loan facility bear interest, at
the option of the Company, at either (i) the Base Rate (as defined in the Senior
Credit Facility) plus 250 basis points or (ii) the LIBOR plus 350 basis points.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the financial
statements and the notes thereto contained elsewhere in this report. Certain
information contained in the discussion and analysis set forth below includes
forward-looking statements that involve risks and uncertainties. See "Special
Note Regarding Forward-Looking Information; Risk Factors."
OVERVIEW
The Company is the largest independent provider of collect, prepaid, and
debit calling services to local, county, state, and private correctional
facilities in the U.S. The Company derives substantially all of its revenues
from its operation of inmate telecommunications systems located in correctional
facilities in approximately 43 states.
The Company's inmate telecommunications services consist of collect call,
prepaid, and debit card services. The Company enters into multi-year agreements
(generally three to five years) 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 revenue from each correctional
facility as a commission to that facility. Typically, the Company installs and
retains ownership of the telephones and related equipment and provides
additional services to correctional facilities 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 LECs or through
third-party billing services. In addition, 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 uncollectible accounts based on historical
experience.
The Company's traditional inmate business consists of collect, prepaid, and
debit calling services provided to correctional facilities. In May 1998, the
Company began providing validation, billing, and collection services for the
inmate calls of a major regional bell operating company ("RBOC"), and began
processing call traffic under the contract. Under the terms of the agreement,
the Company acquires at a discount the related accounts receivable from the RBOC
for the calls that the Company processes. When the receivables are purchased,
the Company accepts responsibility for all validation, uncollectible accounts,
and billing and collections costs, with no recourse to the RBOC. However, under
the terms of the agreement, all purchased receivables must be processed and
validated through the Company's call management and billing system. The
Company's revenues from this service equal the difference between the face value
of the receivables purchased and the amount it pays the RBOC for the discounted
accounts receivable. Because the Company's revenues associated with this
contract represent only a percentage of the face value of the receivables
purchased, the associated uncollectible account expense and billing and
collection fees represent a much higher percentage of revenue as compared to the
Company's traditional inmate business. Consequently, the Company's
telecommunications costs represent a higher percentage of revenue under this
contract. There are minimal selling, general, and
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<PAGE>
administrative ("SG&A") costs associated with this contract. The contract term
is three years and has no minimum volume commitment. The Company pays no
facility commissions under this agreement.
The Company's principal operating expenses consists of (i)
telecommunication costs; (ii) commissions paid to correctional facilities, which
are typically expressed as a percentage of either gross or net revenues, fixed
for the term of the agreements with the facilities, and in some cases are
subject to monthly minimum amounts; (iii) field operations and maintenance
costs, which consist primarily of field service on the Company's installed base
of inmate telephones; and (iv) SG&A costs.
Telecommunications Costs. The principal components of telecommunication
costs are long distance transmission costs, local access costs, third party
billing costs, and costs of uncollectible accounts. Historically, long distance
costs have consisted of charges for minutes of use purchased from interexchange
carriers ("IXCs").
Local access charges consist of monthly line and usage charges paid to
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, a per
message or per minute usage rate based on the time and duration of the call.
Third party billing charges consist of payments to LECs and other billing
service providers for billing and collecting revenues from called parties. The
Company believes that it experiences faster payments and lower expenses
associated with uncollectible accounts when using direct billing than when using
other billing services providers. Expenses associated with uncollectible
accounts are a significant cost in providing inmate telecommunications services.
Commissions. The Company pays a percentage of its revenue from each
facility to that facility as a commission. Commissions are generally set for the
duration of the Company's multi-year contract with the facility. Commission
rates are the principal basis of competition for obtaining and retaining
contracts. The Company's ability to offer increasingly attractive commission
rates to facilities depends on its ability to control its operating expenses.
Generally, contracts for larger facilities have higher commission rates, but
these higher commission rates are typically offset as a percentage of revenue by
lower network charges, field maintenance, and SG&A expenses. The commission
rates paid by the Company have increased in each period, from 23.8% in 1995 to
30.5% for the quarter ended March 31, 1999. This is due primarily to higher
facility commissions on contracts obtained by the Company through acquisitions,
competition for larger facilities, and increased commission rates on renewals.
Commission rates are expected to gradually increase as a percentage of revenues
in the future. The overall commission percentage to total revenues of 30.5% for
the quarter ended March 31, 1999 includes the effect of the validation, billing,
and collection services provided under the Company's agreement with a major
RBOC, under which no commissions are paid.
Field Operations and Maintenance. Field operations and maintenance consist
of maintenance costs associated with inmate phones and related equipment. These
costs are relatively small and more constant components of operating expenses.
Selling, General, and Administrative. SG&A expenses consist of corporate
overhead and selling expenses. These costs are also relatively small and more
constant components of operating expenses.
Effective December 1, 1996, the Company became the holding company for the
operations of AmeriTel Pay Phones, Inc. and Talton Telecommunications
Corporation and its subsidiary. The Company
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<PAGE>
also acquired the operations of Tri-T, Inc. on April 4, 1997, Security Telecom
Corporation on June 27, 1997, Correctional Communications Corporation on July
31, 1997, the inmate payphone division of Communications Central, Inc. on
October 6, 1997, the inmate payphone division of North American InTeleCom on
December 1, 1997, the inmate payphone division of Peoples Telephone Company on
December 19, 1997, the inmate payphone division of ILD Teleservices, Inc.
("ILD") on January 1, 1998, MOG Communications, Inc. ("MOG") on February 1,
1998, and Saratoga Telephone Company, Inc. ("Saratoga") on July 1, 1998
(collectively, the "Acquisitions").
RESULTS OF OPERATIONS
The following table sets forth, for the three months ended March 31, 1998
and 1999, respectively, the results of operations of the Company.
<TABLE>
<CAPTION>
THREE MONTH
PERIOD ENDED
MARCH 31,
1998 1999
------------------------ -------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating revenues........................................... $ 49,225 100.0% $ 59,175 100.0%
Operating expenses:
Telecommunication costs..................................... 20,087 40.8 26,861 45.4
Facility commissions........................................ 15,773 32.0 18,028 30.5
Field operations and maintenance............................ 2,033 4.1 1,638 2.8
Selling, general, and administrative........................ 4,083 8.3 4,322 7.3
Depreciation................................................ 1,312 2.7 1,707 2.9
Amortization of intangibles................................. 6,526 13.3 5,762 9.7
--------- ------- --------- -------
Total operating expenses..................................... 49,814 101.2 58,318 98.6
--------- ------- --------- -------
Operating (loss) income...................................... (589) (1.2) 857 1.4
Other (income) expense:
Interest expense, net....................................... 4,720 9.6 4,880 8.2
Other, net.................................................. (146) (0.3)
--------- ------- --------- -------
Total other expense.......................................... 4,574 9.3 4,880 8.2
--------- ------- --------- -------
Loss before income taxes..................................... (5,163) (10.5) (4,023) (6.8)
Income tax expense........................................... 213 0.4 14 --
--------- ------- --------- -------
Net loss..................................................... $ (5,376) (10.9)% $ (4,037) (6.8)%
========= ======= ========= =======
EBITDA....................................................... $ 7,395 15.0% $ 8,326 14.1 %
========= ======= ========= =======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31,
1998
Operating Revenues. The Company's operating revenues increased by $10.0
million, or 20.3%, from $49.2 million for the three months ended March 31, 1998
to $59.2 million for the three months ended March 31, 1999. The increase in
operating revenues was primarily due to the new services provided to a major
RBOC, the acquisition by the Company of MOG in the first quarter of 1998 and of
Saratoga in the third quarter of 1998, and new contract installations.
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<PAGE>
Operating Expenses. Total operating expenses increased $8.5 million, from
$49.8 million for the three months ended March 31, 1998 to $58.3 million for the
three months ended March 31, 1999. Operating expenses as a percentage of
operating revenues decreased 2.6% from 101.2% for the three months ended March
31, 1998 to 98.6% for the three months ended March 31, 1999. The decrease in
operating expenses as a percentage of revenues is primarily due to the factors
discussed below.
Telecommunication costs increased by $6.8 million, from $20.1 million for
the three months ended March 31, 1998 to $26.9 million for the three months
ended March 31, 1999. Telecommunication costs represented 40.8% of operating
revenues for the three months ended March 31, 1998 and 45.4% of operating
revenues for the three months ended March 31, 1999, an increase of 4.6%. The
dollar increase is primarily due to the Company's acquisitions of MOG and
Saratoga, new contract installations, and new services provided to a major RBOC
commencing in May 1998. The increase as a percentage of operating revenues is
primarily due to higher uncollectible account expense and billing and collection
costs associated with the new services provided to a major RBOC. As further
explained in the "Overview," the services provided to this RBOC exhibit higher
uncollectible account expense and billing and collection costs than the
Company's traditional inmate business. The increase as a percentage of operating
revenues is also due to higher uncollectible accounts caused by (i) an increase
in competitive local exchange carrier ("CLEC") activity and (ii) as a result of
the Company's recent acquisition and consolidation activities. In most cases
CLECs are unable to bill the Company's traffic, which limits the Company's
ability to collect receivables from CLEC customers. The Company is responding to
this problem by offering prepaid services to these customers. Higher
uncollectibles caused by the Company's acquisition and consolidation activities
were a result of some of the Company's systems not being fully integrated until
March 1999.
Facility commissions increased by $2.2 million, from $15.8 million for the
three months ended March 31, 1998 to $18.0 million for the three months ended
March 31, 1999. Facility commissions represented 32.0% of operating revenues for
the three months ended March 31, 1998 and 30.5% of operating revenues for the
three months ended March 31, 1999, a decrease of 1.5%. The decrease as a
percentage of operating revenues is primarily due to the effect of the new
services provided to a major RBOC, as further explained in the "Overview."
Commission rates are expected to gradually increase in the future due to
competition for larger facilities and increased commission rates on renewals.
Field operations and maintenance costs decreased by $0.4 million, from $2.0
million for the three months ended March 31, 1998 to $1.6 million for the three
months ended March 31, 1999. Field operations and maintenance costs represented
4.1% of operating revenues for the three months ended March 31, 1998 and 2.8% of
operating revenues for the three months ended March 31, 1999, a decrease of
1.3%. The decrease as a percentage of operating revenues is primarily due to the
savings associated with the consolidation of the Company's operations during
1998.
SG&A costs increased by $0.2 million, from $4.1 million for the three
months ended March 31, 1998 to $4.3 million for the three months ended March 31,
1999. SG&A represented 8.3% of operating revenues for the three months ended
March 31, 1998 and 7.3% of operating revenues for the three months ended March
31, 1999, a decrease of 1.0%. The decrease in SG&A as a percentage of operating
revenues is primarily due to the consolidation of the Company's operations
during 1998.
Depreciation and amortization costs decreased by $0.3 million, from $7.8
million for the three months ended March 31, 1998 to $7.5 million for the three
months ended March 31, 1999. Depreciation
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<PAGE>
and amortization costs represented 16.0% of operating revenues for the three
months ended March 31, 1998 and 12.6% of operating revenues for the three months
ended March 31, 1999, a decrease of 3.4%. The decrease as a percentage of
operating revenues is primarily due to amortization expense associated with the
acquisitions of inmate facility contracts by the Company. The Company amortizes
acquired inmate facility contracts over each contract's remaining term at the
acquisition date. As the contract terms expire, the acquired inmate facility
contracts become fully amortized and amortization expense declines.
Operating Income (Loss). The Company's operating income increased by $1.5
million, from a loss of $0.6 million for the three months ended March 31, 1998
to operating income of $0.9 million for the three months ended March 31, 1999,
substantially due to the decrease in amortization of intangibles and the other
factors described above. The Company's operating income margin increased from a
negative operating margin of 1.2% for the three months ended March 31, 1998 to a
positive operating margin of 1.4% for the three months ended March 31, 1999,
primarily as a result of the factors described above.
Other (Income) Expense. Other (income) expense, consisting primarily of
interest expense, increased by $0.3 million from $4.6 million for the three
months ended March 31, 1998 to $4.9 million for the three months ended March 31,
1999. 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 decreased by $1.4 million, from $5.4
million for the three months ended March 31, 1998 to $4.0 million for the three
months ended March 31, 1999, primarily as a result of the factors described
above.
EBITDA. Earnings before interest, taxes, depreciation, and amortization
("EBITDA") increased by $0.9 million, from $7.4 million for the three months
ended March 31, 1998 to $8.3 million for the three months ended March 31, 1999.
EBITDA as a percentage of operating revenues decreased from 15.0% for the three
months ended March 31, 1998 to 14.1% for the three months ended March 31, 1999,
primarily 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. All of the Company's
subsidiaries are subject to state income taxes. Consequently, the Company
accrues income tax expense even in a loss period.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects that its principal sources of liquidity will be cash
flow from operations and borrowings under the revolving loan facility of the
Senior Credit Facility. 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 1999. The Company currently anticipates that, under the terms of
the Senior Notes and the Senior Credit Facility, interest payments will be
required of approximately $18.5 million for fiscal year ending December 31, 1999
and the fiscal year ending December 31, 2000. As of March 31, 1999, the Company
has approximately $9.0 million of unused borrowing capacity under the Senior
Credit Facility. The Company anticipates that its primary capital expenditures
for the remainder of 1999 will be approximately $7.8 million for capital items
required to implement new contracts and contract renewals entered into by the
Company.
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<PAGE>
In March 1999 the Company raised $5.0 million of equity from its existing
stockholders and warrant holders and/or their affiliates through the issuance of
5,000 investment units at $1,000 per unit. Each unit consists of one share of
newly authorized First Preferred Series A Stock and a warrant to acquire one
share of the Company's Class A common stock for $1,000 per share.
The First Preferred Series A Stock will be entitled to receive dividends at
the applicable First Preferred Series A Rate, payable quarterly commencing on
April 1, 1999. Dividends will be payable out of funds legally available
therefore, will be payable only when, as, and if declared by the Company's Board
of Directors, shall be cumulative, and, if undeclared or unpaid, shall bear
interest at the applicable First Preferred Series A Rate until paid. The First
Preferred Series A Rate will be eight percent per annum through March 31, 2001,
ten percent per annum from April 1, 2001 through June 30, 2001, and thereafter
will increase by 0.5% for each additional three month period, up to a maximum of
16% per annum. The First Preferred Series A Stock ranks senior to all classes of
common stock but ranks junior to the Senior Preferred Stock with respect to
dividend rights and rights upon liquidation. The warrants have a strike price of
$1,000 per share and will expire if not exercised before December 31, 2007. As a
result of the issuance of the First Preferred Series A Stock and warrants, the
Company was required to obtain a waiver from its Senior Credit Facility group of
lenders that waived the lenders' rights to the proceeds raised by the Company
from the issuance.
In conjunction with the March 1999 equity offering, the preferred dividend
rates on the original Senior Preferred Stock were modified to mirror the
preferred dividend rates on the First Preferred Series A Stock.
Also in March 1999, and in conjunction with the issuance of the First
Preferred Series A Stock and warrants, the Company amended its Senior Credit
Facility. The amendment increased the Company's borrowing capacity under the
term loan facility of the Senior Credit Facility by $5.5 million. Amounts
borrowed under the additional term loan facility bear interest, at the option of
the Company, at either (i) the Base Rate (as defined in the Senior Credit
Facility) plus 250 basis points or (ii) LIBOR plus 350 basis points. The Company
borrowed the additional $5.5 million in March 1999 and concurrently repaid $5.0
million under the revolving loan facility of the Senior Credit Facility.
Net cash used in operating activities was $5.0 million for the three months
ended March 31, 1999 as compared to $6.0 million for the three months ended
March 31, 1998, consisting primarily of $6.9 million of cash received on trade
receivables during the first week of April that normally would be received by
the end of March.
Cash used in investing activities was $3.1 million for the three months
ended March 31, 1999 as compared to $8.8 million for the three months ended
March 31, 1998, consisting primarily of both cash outflows for investments in
new business and customer contract renewals and the payment of $1.5 million of
acquisition costs relating to the Acquisitions.
Cash provided by financing activities was $6.7 million for the three months
ended March 31, 1999 as compared to $8.5 million for the three months ended
March 31, 1998, consisting primarily of the issuance $5.0 million of new equity,
$5.5 million of new borrowings under the Senior Credit Facility, and offset by
repayments of principal under the Senior Credit Facility and repayment of a $0.9
million note relating to the acquisition of MOG.
The Senior Credit Facility consists of (a) a $55.0 million term loan
acquisition facility, (b) a $5.5 million additional term loan facility, and (c)
a $25.0 million revolving loan facility (which includes a $5.0 million letter of
credit facility). Scheduled principal payments under the term loan facilities
may
-17-
<PAGE>
not be reborrowed. Amounts borrowed under the Senior Credit Facility bear
interest, at the option of the Company, at either (i) the Base Rate (as defined
in the Senior Credit Facility) plus a margin that varies from 75 to 225 basis
points, depending on the Company's Total Debt to EBITDA Ratio (as defined in the
Senior Credit Facility); or (ii) the LIBOR plus a margin that varies from 200 to
350 basis points, depending on the Company's Total Debt to EBITDA Ratio.
The Senior Credit Facility requires quarterly interest payments to be made
on base rate loans and periodic interest-only payments based on the applicable
interest period on LIBOR loans, at least quarterly, in each case until maturity.
In addition, the Senior Credit Facility requires mandatory prepayments out of
the proceeds of certain equity or debt offerings, asset dispositions, receipt of
insurance proceeds not applied as provided in the Senior Credit Facility, and
receipts of funds from certain escrow accounts. Remaining scheduled principal
payments on the term loan facility are approximately $7.2 million, $12.4
million, $13.8 million, and $19.3 million during the years ending 1999, 2000,
2001, and 2002, respectively. All outstanding principal and interest under the
Senior Credit Facility is due December 31, 2002. The Senior Credit Facility is
secured by substantially all the assets of the Company and its subsidiaries.
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 under the Senior Credit Facility. At March 31, 1999, 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, up to the
aggregate notional amount, at 7.5%, plus the applicable LIBOR margin.
As of May 4, 1999, the Company had $9.0 million of available borrowing
capacity under the Senior Credit Facility.
As of March 31, 1999, the Company had approximately $182.6 million of long-
term indebtedness outstanding including the current portion, a deficit in
stockholders' equity of $35.4 million, and $0.3 million of cash.
As of March 31, 1999, the Company's long-term indebtedness included (i)
$115.0 million principal amount of 11.0% Senior Notes due 2007 (the "Senior
Notes"), (ii) $67.1 million of indebtedness under the Senior Credit Facility,
and (iii) $0.5 million of other indebtedness.
The Company intends to evaluate additional acquisitions to expand its base
of installed inmate telephones and value added services and will continue to
evaluate possible acquisition opportunities. 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.
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.
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<PAGE>
CHANGES IN ACCOUNTING STANDARDS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June 1998, and requires recognition of all derivative
financial instruments as either assets or liabilities in consolidated balance
sheets at fair value and determines the method(s) of gain/loss recognition. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999. The Company
is currently evaluating the effect that it may have on the Company's
consolidated financial statements.
INFORMATION SYSTEMS AND THE YEAR 2000
The following statements and all other statements made in this Quarterly
Report on Form 10-Q with respect to the Company's Year 2000 processing
capabilities or readiness are "Year 2000 Readiness Disclosures" in conformance
with the Year 2000 Information and Readiness Disclosure Act of 1998 (Public Law
105-271, 112 Stat. 2386).
Some computers, software, and other equipment include computer code in
which calendar year data is abbreviated to only two digits. As a result of this
design decision, some of these systems could fail to operate or fail to produce
correct results if "00" is interpreted to mean 1900, rather than 2000. These
problems are widely expected to increase in frequency and severity as the year
2000 approaches, and are commonly referred to as the "Year 2000 Problem."
Assessment. The Year 2000 Problem affects computers, software, and other
equipment used, operated, or maintained by the Company. Accordingly, the
Company has organized a program team comprised of internal and external staff
responsible for monitoring the assessment and remediation status of the
Company's Year 2000 projects and reporting such status to the Company's senior
management. This project team is currently assessing the potential effect of,
and costs of remediating, the Year 2000 Problem for the Company's internal
systems.
For reporting purposes, the Company is using a methodology involving the
following six phases: Discovery, Assessment, Planning, Remediation, Testing, and
Implementation. At March 31, 1999, the Discovery, Assessment, and Planning
phases were substantially complete for all program areas. The target completion
date for priority items by remaining steps are as follows: Remediation - May
1999; Testing - July 1999; and Implementation - August 1999.
Internal Infrastructure. The Company believes that it has identified most
of the major computers, software applications, and related other equipment used
in connection with its internal operations that must be modified, upgraded, or
replaced in order to minimize the possibility of a material disruption to its
business from the Year 2000 Problem. The Company has commenced the process of
modifying, upgrading, and replacing major systems that have been assessed as
adversely affected, and expects to complete this process before the occurrence
of any material disruption of its business. However, there can be no assurance
in this regard.
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<PAGE>
Systems Other than Information Technology Systems. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, photocopiers, telephone switches, security systems, elevators, and
other common devices may be affected by the Year 2000 Problem. The Company is
currently assessing the potential effect of, and costs of remediating, the Year
2000 compliance on its office and facilities equipment.
The Company estimates the total cost to the Company of completing any
required modifications, upgrades, or replacements of these internal systems to
be approximately $0.3 million, almost all of which the Company believes will be
incurred during 1999. The Company is currently evaluating for purchase new
internal systems. Management believes that these systems, if purchased, will
enable the Company to resolve any potential Year 2000 Problems. In addition, the
purchase of new internal systems would also provide the Company with increased
functionability. The total cost to the Company of new internal systems is
estimated to be between $1.0 million and $1.5 million, most of which the Company
expects to incur in 1999. This estimate is being monitored and will be revised
as additional information becomes available.
Based on the activities described above, the Company does not believe that
the Year 2000 Problem will have a material adverse effect on the Company's
business or results of operations. In addition, the Company has not deferred any
material information technology projects as a result of its Year 2000 Problem
activities.
Customers and Suppliers. The Company has initiated communications with its
customers and third party suppliers of the major computers, software, and other
equipment used, operated, or maintained by the Company to identify and, to the
extent possible, resolve issues involving the Year 2000 Problem. However, the
Company has limited or no control over the actions of these customers and third
party suppliers. Thus, while the Company expects that it will be able to
resolve any significant Year 2000 Problems with these systems, there can be no
assurance that these customers and suppliers will resolve any or all Year 2000
Problems with these systems before the occurrence of a material disruption to
the business of the Company or any of its clients. Any failure of these third
parties to timely resolve Year 2000 Problems with their systems could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Most Likely Consequences of Year 2000 Problem. The Company expects to
identify and resolve all Year 2000 Problems that could have a material adverse
affect on its business operations. However, management believes that it is not
possible to determine with complete certainty that all Year 2000 Problems
affecting the Company or its clients have been identified or corrected. The
number of devices that could be affected and the interactions among these
devices are simply too numerous. In addition, no one can accurately predict how
many Year 2000 Problem-related failures will occur or the severity, duration, or
financial consequences of these perhaps inevitable failures. As a result,
management believes that the following consequences are possible:
- a significant number of operational inconveniences and
inefficiencies for the Company and its clients that will divert
management's time and attention and financial and human resources
from ordinary business activities;
- a lesser number of serious systems failures that will require
significant efforts by the Company or its clients to prevent or
alleviate material business disruptions;
- several routine business disputes and claims for pricing
adjustments or penalties by clients due to Year 2000 Problems,
which will be resolved in the ordinary course of business; and
- a few serious business disputes alleging that the Company failed to
comply with the terms of contracts or industry standards of
performance, some of which could result in litigation or contract
termination.
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<PAGE>
Contingency Plans. The Company is currently developing contingency plans
to be implemented if its efforts to identify and correct Year 2000 Problems
affecting its internal systems are not effective. The Company expects to
complete its contingency plans by June 1999. Depending on the systems affected,
these plans could include accelerated replacement of affected equipment or
software; short - to medium- term use of backup sites, equipment, and software;
increased work hours for Company personnel; use of contract personnel to correct
on an accelerated schedule any Year 2000 Problems that arise or to provide
manual workarounds for information systems; and other similar approaches. If the
Company is required to implement any of these contingency plans, it could have a
material adverse effect on the Company's financial condition and results of
operations.
Disclaimer. The discussion of the Company's efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking statements.
The Company's ability to achieve Year 2000 compliance, and the level of
incremental costs associated therewith, could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' ability to modify proprietary software, and unanticipated problems
identified in the ongoing compliance review.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION; RISK FACTORS
Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements. These forward-looking statements are all statements
that are not statements of historical fact or that might otherwise be considered
opinion, belief, or projection. These forward-looking statements involve known
and unknown risks, uncertainties, and other factors that may cause the actual
results, levels of activity, performance, or achievements of the Company, or
industry results, to be materially different from any future results, levels of
activity, performance, or achievements expressed or implied by such forward-
looking statements.
The risks described below are not the only risks facing the Company.
Additional risks that the Company does not yet know of or that the Company
thinks are not material may also have an adverse effect on the Company. If any
of those risks or any of the risks described below actually occur, the Company's
business, financial condition, results of operations, or prospects could be
materially adversely affected. All subsequent written or oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by such factors.
This Quarterly Report on Form 10-Q contains or incorporates by reference
statements about our future that are not statements of historical fact. In some
cases, you can identify these statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates," "intends,"
"predicts," "potential," or "continue" or the negative of those terms and other
comparable terminology. Although the Company believes that the assumptions and
expectations reflected in such forward-looking statements are reasonable, as a
result of the foregoing and other factors, no assurance can be given as to
future results, levels of activity, performance, or achievements, and neither
the Company nor any other person assumes responsibility for the accuracy and
completeness of such forward-looking statements. These statements are only
predictions, and in evaluating those statements, you should specifically
consider the risks outlined below. Actual performance or results may differ
materially and adversely. All forward-looking statements included in this
Quarterly Report on Form 10-Q are based on information available to us on the
date hereof, and we are under no duty to update any of the forward-looking
statements after the date hereof.
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<PAGE>
COMPETITORS WITH GREATER RESOURCES
The inmate telecommunications industry is highly competitive. The Company
competes with numerous providers of inmate telephone services such as RBOCs,
LECs, IXCs, including major long distance carriers
such as AT&T Corp., MCI WorldCom, and Sprint Corporation, and independent public
pay telephone and inmate telephone companies. Many of the Company's competitors
are larger and better capitalized with significantly greater financial resources
than the Company. The Company believes that the principal competitive factors
in the inmate telecommunications industry are:
. rates of commissions paid to the correctional facilities;
. system features and functionality;
. system reliability and service;
. the ability to customize inmate call processing systems to the
specifications and needs of the particular correctional facility;
and
. relationships with correctional facilities.
As a result of these competitive factors, the Company may be required to pay
higher commissions to retain its existing contracts or obtain new contracts.
Historically, federal and state facilities, which are generally bid on a
system-wide basis, have been served by RBOCs, large LECs, and IXCs, which are
able to leverage their existing systems and infrastructure to serve these large,
high volume customers without the need for additional significant capital
expenditures. These providers have generally not, however, focused on the
smaller city and county correctional systems, which are typically negotiated on
a facility-by-facility basis. As a result, a significant portion of city and
county correctional facilities, which constitute a substantial majority of the
Company's customers, are served by independent inmate telephone and independent
public pay telephone companies. RBOCs, LECs, or IXCs could decide to pursue
actively contracts with city and county correctional facilities.
The Company's ability to offer competitive commission rates depends on
effectively controlling costs, which in turn necessitates capital expenditures
for software and systems. If RBOCs, LECs, and IXCs that have significantly
greater financial resources than the Company and are able to connect calls on
their owned networks for a negligible marginal cost were to focus on the inmate
telecommunications market, the Company could face substantial competition and
subsequent increases in commission rates or reduction in market share.
RISKS ASSOCIATED WITH UNCOLLECTIBLE ACCOUNTS
The Company is required to carry a reserve on its books for future charge-
backs from LECs and third party clearinghouses for uncollectible amounts when
such amounts exceed the reserves initially withheld by the LECs and
clearinghouses. The Company sets the reserves on its books using historical
data on charge-backs for each LEC or other billing service providers. The
setting of these reserves requires substantial use of estimation. Actual
expenses associated with uncollectible accounts could differ from the Company's
estimates. Factors that could cause actual expenses associated with
uncollectible accounts to vary from the Company's estimates include difficulties
in estimating reserves for acquired contracts and variations in expenses
associated with uncollectible accounts among LECs. These variations could
potentially lead to an increase in the Company's expenses associated with
uncollectible accounts.
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<PAGE>
DIFFICULTY OF EXECUTING ACQUISITION STRATEGY; RISKS ASSOCIATED WITH ANTICIPATED
GROWTH
The Company has experienced rapid growth, and intends to continue to grow
through further expansion of its existing operations and through acquisitions.
The Company intends to evaluate additional acquisitions to expand its base of
installed inmate telephones and value added services and will continue to
evaluate possible acquisition opportunities. The Company evaluates specific
acquisition opportunities based on market conditions and economic factors
existing at the time, and intends to pursue favorable opportunities as they
arise. The Company may encounter increased competition for acquisitions in the
future, which could result in higher prices for acquisition candidates. There
can be no assurance that the Company will find suitable acquisition candidates
at acceptable prices, have sufficient available capital resources to realize its
acquisition strategy, be successful in entering into definitive agreements for
desired acquisitions, or that any such acquisitions, if consummated, will prove
to be advantageous to the Company. Such future acquisitions, depending on
their size and the form of consideration, may require the Company to seek
additional debt or equity financing, or both.
The success of the Company's growth strategy is also dependent on the
ability of the Company to integrate acquired operations into existing
operations. In addition, the Company's success is dependent on the ability of
the Company to expand internal operations. The Company's ability to manage its
anticipated future growth will depend on a number of factors, including its
ability to evaluate new contract opportunities, monitor operations, control
costs, maintain effective quality control, obtain satisfactory and cost-
effective lease rights from and interconnection agreements with companies that
own transmission lines, and expand the Company's internal management, technical,
and accounting systems. The Company's rapid growth has placed, and its planned
future growth will continue to place, a significant strain on the Company's
financial, management, and operational resources. There can be no assurance that
the integration of acquired operations and continued expansion of internal
operations will not require the investment of capital or result in unforeseen
difficulties or absorb significant management resources at levels higher than
that anticipated by management, or that the Company will realize meaningful
economies of scale or operating efficiencies from its acquisitions. In addition,
acquisitions and the establishment of new operations will entail considerable
expenses in advance of anticipated revenues and may cause substantial
fluctuations in the Company's operating results.
The Company will need to integrate its acquired businesses with its
existing operations. This will entail, among other things, integration of
switching, transmission, technical, sales, marketing, billing, accounting,
quality control, management, payroll, personnel, regulatory compliance, and
other systems and operating hardware and software, some or all of which may be
incompatible with the Company's existing operations. In addition, the Company
has no prior experience in acquiring operations from RBOCs or LECs, and there
can be no assurance that the Company would be successful in consummating such
acquisitions or in integrating such operations. The Company's acquisition
strategy results in the amortization of acquired contracts over a relatively
short period of time, generally one to three years. As of March 31, 1999, the
Company had capitalized $27.1 million of acquired facility contracts and $75.7
million of goodwill, which could lead to operating losses.
SUBSTANTIAL LEVERAGE; RESTRICTIVE COVENANTS
The Company has significant debt and debt service obligations. The Senior
Credit Facility with CIBC as an agent for a syndicate of lenders consists of (a)
a $55.0 term loan acquisition facility, (b) a $5.5 million additional term loan
facility, and (c) a $25.0 revolving loan facility (which includes a $5.0 million
letter of credit facility). In addition, on June 27, 1997, the Company
consummated the offering of the Senior Notes. At March 31, 1999, the Company
had approximately $182.6 million of long-term indebtedness outstanding
(including the current portion).
-23-
<PAGE>
The significant leverage of the Company has several important consequences,
including, but not limited to, the following:
. the Company is required to dedicate a substantial portion of its
cash flow from operations to the payment of interest and principal
repayment obligations in connection with the Senior Notes, the
Senior Credit Facility, and other permitted indebtedness, thereby
reducing the funds available for its operations, capital
expenditures, and other purposes;
. the Company's leveraged position and the covenants contained in the
Senior Credit Facility and the Indenture governing the Senior Notes
limits the Company's ability to obtain additional financing, pay
dividends, repurchase stock, make investments, grant liens, and
take other actions that may be in the best interests of the
Company's stockholders; and
. the Company's substantial leverage may make it more vulnerable to
economic fluctuations, limit its ability to withstand competitive
pressures, and reduce its flexibility in responding to changing
business and economic conditions.
In addition, the Company's indebtedness under the Senior Credit Facility
bears interest at floating rates, which could adversely affect the Company's
ability to service its debt if interest rates rise.
There can be no assurance that the Company will be able to meet its debt
service obligations. If the Company is unable to generate sufficient cash flow
or otherwise obtain funds necessary to make required payments, or if the Company
otherwise fails to comply with the various covenants contained in its debt
obligations, it would be in default under the terms thereof, which would permit
the holders of such indebtedness to accelerate the maturity thereof and could
cause defaults under other indebtedness of the Company. The Company's ability
to repay or refinance its obligations with respect to its indebtedness will
depend on its future financial and operating results, which in turn, will be
subject to prevailing economic and competitive conditions and to certain
financial, business, and other factors, many of which are beyond the Company's
control.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; ANTICIPATED LOSSES
The Company was founded in December 1996. Accordingly, the Company has a
limited operating history upon which an evaluation of the Company and its
prospects can be based. Because the Company anticipates that it will incur
operating losses for the foreseeable future, the Company believes that its
future success will depend on its ability to significantly increase revenues,
which cannot be assured. Additionally, the limited operating history of the
Company makes the accurate prediction of future operating results difficult or
impossible, and there can be no assurance that the Company's revenues will
increase or even continue at their current level or that the Company will
achieve or maintain profitability or generate cash from operations in future
periods. Since its inception, the Company has incurred losses and, as of March
31, 1999, had an accumulated deficit of approximately $62.0 million. The
Company expects to continue to incur significant losses on a quarterly and
annual basis for the foreseeable future.
DEPENDENCE ON TRANSMISSION FACILITIES-BASED CARRIERS
The Company does not own telecommunications transmission lines.
Accordingly, telephone calls made from correctional facilities are connected
through transmission lines that the Company leases under a variety of
arrangements with transmission facilities-based long distance carriers, some of
which are or may become competitors of the Company. The Company's calls are
transmitted via facilities leased on a per minute or monthly basis. Accordingly,
the Company is vulnerable to increases in its cost basis. If there is an
increase in demand for telecommunications services (for example, data services)
beyond the increase in supply of transmission facilities, the Company's costs
could increase.
-24-
<PAGE>
CHANGES IN REGULATION COULD ADVERSELY AFFECT THE COMPANY
The inmate telecommunications industry is regulated at both the federal
level by the Federal Communications Commission (the "FCC") and at the state
level by the public utility commissions of the various states. In addition, from
time to time, legislation may be enacted by Congress or the various state
legislatures that affects the telecommunications industry generally and the
inmate telephone industry specifically. Court decisions interpreting applicable
laws and regulations may also have a significant effect on the inmate telephone
industry. There could be changes in existing laws and regulations, as well as
the adoption of new laws and regulations applicable to the activities of the
Company or other telecommunications business.
At the federal level, the industry is currently in a period of substantial
regulatory change in the aftermath of the Telecommunications Act of 1996 (the
"Telecom Act"), which, among other things, directed the FCC to restructure and
to change the regulatory framework of the pay telephone industry, including the
inmate telephone industry. Because the FCC is still in the process of
implementing its new regulations, and because several aspects of rule changes
proposed by the FCC are subject to requests for reconsideration, clarification,
and final resolution in related proceedings, the ultimate effect of regulatory
changes on the Company's business is uncertain. In particular, whether the
FCC's rules designed to eliminate subsidization and discrimination by the LECs
prove to be effective will significantly affect the level of competition faced
by the Company in the inmate telecommunications market in the future.
Historically, LECs that have operated in the inmate telephone industry have been
able to subsidize their inmate operations with revenue from regulated telephone
service in other sectors. The Telecom Act requires that this subsidization be
brought to an end. It is not clear how the FCC will effect this statutory
mandate. Similarly, because the rules issued under the Telecom Act have only
recently been adopted, it is too early to assess the LECs' competitive responses
to them.
In addition to adopting regulations implementing the Telecom Act, the FCC
also adopted new regulations for interstate calls requiring inmate telephone
service providers to announce to called parties, before the called party incurs
any charges, that rate quotes may be obtained by dialing no more than two digits
or remaining on the line. The Company must come into compliance with these new
rules by October 1, 1999. These new regulations could result in an increase in
the Company's costs by slightly increasing the non-billable network hold time
for interstate collect calls. And, since the Company may comply with the new
federal requirement by implementing rate disclosure on all calls, including
intrastate calls, the new regulations may lead to increases in the costs for all
inmate collect calls carried by the Company. In addition, the announcement of
rate quotes may lead to called parties refusing to accept calls. The exact
effect of the new regulations is difficult to predict, as it will depend in
large part on how frequently called parties opt to receive a rate quote.
The Company charges relatively high rates for completing inmate collect,
debit, and prepaid calls. Many states have set maximum rates that can be
charged for inmate collect calls. Regulators could reduce the rates that may be
charged by the Company. From time to time, inmate telecommunications providers
are parties to proceedings initiated by consumer protection advocates or
individual called parties alleging that excessive rates are being charged with
respect to inmate collect calls. One such proceeding is currently pending in
the United States District Court in the State of Kentucky. Although the Company
has not been named in the proceeding, the plaintiffs in such proceeding are
seeking class action certification as to all inmate telecommunications providers
as defendants and all recipients of calls from inmate facilities as plaintiffs.
The proceeding is in its preliminary stages.
-25-
<PAGE>
RISKS ASSOCIATED WITH MARKET GROWTH STAGNATING OR DECLINING
The Company's future growth could be affected by negative trends in the
growth of the number of correctional facilities or the number of prisoners. If
the societal and political trends that have led to this growth rate abate, the
growth of the corrections industry could stagnate or decline. In particular, if
the drug laws or mandatory sentencing laws that have been enacted in the last
decade are repealed or reduced in scope, there could be an adverse effect on the
growth of the inmate population. In addition, state prison authorities in the
State of Texas have adopted policies severely restricting the making of
telephone calls by inmates in state correctional facilities. The adoption of
similar policies by other states could severely reduce the size of the inmate
telecommunications market.
RISK OF NEW BUSINESS AREAS
The Company is pursuing opportunities to market its specialized billing,
bad-debt and fraud management, and call validation services to RBOCs, LECs,
IXCs, and other inmate telecommunication providers. In May 1998, the Company
entered into a contract with a major RBOC, under which the Company performs all
of the validation, billing, and collection services for the RBOC's inmate calls.
The Company has assumed the risk of managing all billing and collections costs
related to this contract, with no recourse to the RBOC. The Company has limited
experience in obtaining contracts to provide, and in providing, such services to
third parties, and there can therefore be no assurance that the Company will be
successful in either of these endeavors.
LEASED LINE AND OTHER NETWORK COST REDUCTION STRATEGIES
The Company is currently pursuing a strategy of utilizing leased lines for
traffic in certain states to reduce its purchases of minutes of use. The Company
believes that this strategy will allow it to decrease operating expenses as a
percentage of revenue. There can, however, be no assurance that this strategy
will be implemented successfully or that, if the strategy is implemented
successfully, that such decrease in operating expenses as a percentage of
revenue will occur. In particular, the economic benefit to the Company of the
leased line strategy is substantially dependent upon the existence of a
sufficient level of traffic over the leased lines, and there can be no assurance
that sufficient traffic levels will be experienced by the Company. In addition,
the Company is pursuing additional alternative network solutions, including
purchasing lower per minute rates from second and third tier IXCs, carrying
voice traffic over frame relay facilities, and provisioning local lines through
CLECs rather than LECs. The Company could fail to successfully implement these
strategies, decrease operating expenses as a percentage of revenue through the
implementation of these strategies, or experience the traffic levels necessary
to obtain the economic benefits of the leased line strategy.
DIFFICULTY OF EXECUTING STRATEGY IF KEY PERSONNEL CANNOT BE RECRUITED AND
RETAINED
The Company's success is dependent on the efforts of certain of its of
officers, senior management, technical, and other personnel, and on its ability
to continue to attract, retain, and motivate qualified personnel, particularly
financial and accounting personnel. The competition for such employees is
intense, and the Company believes that it would be difficult to replace the
expertise and experience of such persons in the event that the services of one
or more such persons were to become unavailable. Accordingly, the loss of the
services of one or more of these individuals without adequate replacement could
have a material adverse effect on the Company and its ability to implement its
business strategy and to achieve its goals.
-26-
<PAGE>
LACK OF PATENTS AND POSSIBLE INFRINGEMENT
None of the Company's internally developed call processing technology has
been patented. Accordingly, such technology and intellectual property rights
could infringe on other parties' intellectual property rights and could be
contested or challenged. The Company has received notice from two parties that
certain features of the Company's call processing technology may infringe upon
such parties' patents. Should the Company's call processor or any material
feature thereof be determined to violate applicable patents, the Company would
be required to cease using these features or to obtain appropriate licenses for
the use of such technology.
GOVERNMENTAL ENTITIES AS CUSTOMERS
The Company's customers include state and local governmental entities
responsible for the administration and operation of correctional facilities. The
Company is subject, therefore, to the administrative policies and procedures
employed by, and the regulations that govern the activities of, these
governmental entities, including policies, procedures, and regulations
concerning the procurement and retention of contract rights and the provision of
services. There can be no assurance that the Company's operations will not be
adversely affected by the policies and procedures employed by, or the
regulations that govern the activities of, these governmental entities, or that
the Company will not be limited in its ability to secure additional customer
contracts, renew existing customer contracts, or consummate acquisitions as a
result of such policies, procedures, and regulations.
TECHNOLOGICAL CHANGE AND NEW SERVICES
The telecommunications industry has been characterized by rapid
technological advancements, frequent new service introductions, and evolving
industry standards. Management believes that the Company's future success will
depend on its ability to anticipate and respond to such changes and new
technology. There can be no assurance that the Company will not be materially
adversely affected by the introduction and acceptance of new technology. Some of
the Company's technology, such as its call processor technology, has not yet
been implemented in all of the facilities, which the Company services.
CONTROL BY PRINCIPAL SHAREHOLDERS
To the extent that certain of the Company's shareholders exercise their
voting rights in concert, they effectively have the ability to control the
election of all of the Company's Board of Directors, the outcome of most matters
submitted to a vote of the holders of Class A common stock, and generally are
able to direct the affairs of the Company. This could make it more difficult to
effect certain corporate actions, including replacing incumbent directors or
completing a merger, tender offer, or other takeover attempt.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company uses fixed and variable rate debt to partially finance budgeted
expenditures. These agreements expose the Company to market risk associated with
changes in interest rates. The Company does not hold or issue derivative
financial instruments for trading purposes. 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 risk exposure under the Senior
Credit Facility. At December 31, 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 portion of the Senior Credit Facility at 7.5%,
plus the LIBOR margin.
The following table presents the carrying and fair value of the Company's
debt along with average interest rates, as of December 31, 1998. Fair values are
calculated as the net present value of the expected cash flows of the financial
instrument.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Expected Maturity
Date............... 1999 2000 2001 2002 2003 Thereafter Total Fair Value
Variable Rate
Debt (1) ......... $ 9,657,729 $12,375,000 $13,750,000 $28,250,000 $ 64,032,729 $ 64,032,729
Fixed Rate
Debt............... $ 950,000 $115,000,000 $115,950,000 $110,384,000
Average Interest
Rate............... 8%
</TABLE>
- ----------------
(1) The average interest rate on variable debt is 9.74%
-27-
<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 Bureau of Prisons
contract, and has appealed the award. There can be no assurances that the
Company will be successful in appealing this award.
None of the Company's internally developed call processing technology has
been patented. Accordingly, such technology and intellectual property rights
could infringe on other parties' intellectual property rights and could be
contested or challenged. The Company has received notice from two parties that
certain features of the Company's call processing technology may infringe upon
such parties' patents. Should the Company's call processor or any material
feature thereof be determined to violate applicable patents, the Company would
be required to cease using these features or to obtain appropriate licenses for
the use of such technology.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In March 1999 the Company sold to certain of its existing stockholders and
warrant holders, and their affiliates, 5,000 investment units at a price of
$1,000 per unit. Each unit consists of one share of First Preferred Series A
Stock and a warrant to acquire one share of the Company's Class A common stock.
The warrants are exercisable at the holder's option for a strike price of $1,000
per unit. No underwriters were involved in the transaction, and the Company did
not pay any underwriting discounts or commissions. This issuance was exempt from
the registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) thereof.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
During the period subject to this Quarterly Report on Form 10-Q, an
amendment to the Restated Certificate of Incorporation was adopted by the
written consent of the Company's stockholders, as permitted by the terms of the
Company's Restated Certificate of Incorporation. Such amendment (i) increased
the authorized shares of preferred stock, (ii) established the class of First
Preferred Series A Stock, and (iii) amended the dividend rights of the Senior
Preferred Stock.
Votes for: 13,778 Votes Against: 0 Did Not Vote: 2,155
ITEM 5. OTHER INFORMATION
None.
-28-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Description of Exhibit
- -------------- ------------------------------------------------------------
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 Restated Certificate of
Incorporation of the Company, dated as of July 23, 1998 (filed
as Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q,
dated as of August 14, 1998 and incorporated herein by
reference).
3.4* Certificate of Amendment to Restated Certificate of
Incorporation of the Company, dated as February 11, 1999.
4.1* Form of Stock Certificate for the First Preferred Series A
Stock.
4.2* Form of Warrant Agreement.
10.1* Amendment No. 2 to Second Amended and Restated Credit
Agreement, dated as of March 3, 1999, by and among the Company,
Evercom Systems, Inc., Saratoga Telephone Company, Inc.,
Canadian Imperial Bank of Commerce as Administrative Agent for
the Lenders (as defined therein), and the Lenders (as defined
therein).
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.
-29-
<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/ DENNIS WHIPPLE
-------------------
Dennis Whipple
Chief Executive Officer
By: /s/ JEFFREY D. CUSHMAN
-----------------------
Jeffrey D. Cushman
Chief Financial Officer
Date: May 12, 1999
-30-
<PAGE>
EXHIBIT 3.4
CERTIFICATE OF AMENDMENT TO
RESTATED CERTIFICATE OF INCORPORATION
OF
EVERCOM, INC.
EVERCOM, 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 Evercom, Inc. (formerly
known as 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 as follows:
Section FOURTH, Subsection A of the Restated Certificate of Incorporation
of Evercom, Inc. is to be amended in its entirety to read as follows:
"A. The total number of shares of stock which the Corporation shall
have authority to issue is 100,000 shares (the "Capital Stock") of which
50,000 shares shall be common stock, par value $0.01 per share (the "Common
Stock"), and 50,000 shares shall be preferred stock, par value $0.01 per
share (the "Preferred Stock"). The Common Stock shall be divided into two
classes. The first class shall consist of 49,600 shares and is designated
Class A Common Stock ("Class A Common"). The second class shall consist of
400 shares and is designated Class B Common Stock ("Class B Common"). The
Preferred Stock shall be divided into three classes. The first class shall
consist of 6,000 shares and is designated Senior Preferred Stock ("Senior
Preferred"). The second class shall consist of 39,000 shares and is
designated Junior Preferred Stock ("Junior Preferred"). The third class
shall consist of 5,000 shares and is designated First Preferred Stock
("First Preferred"). The First Preferred may be issued in one or more
series, from time to time, with each such series to consist of such number
of shares and to have such voting powers, full or limited, or no voting
powers, and
<PAGE>
such designations, preferences and relative, participating, optional or
other special rights, and qualifications, limitations or restrictions
thereof, as shall be stated in the resolution or resolutions providing for
the issue of such series adopted by the Board of Directors of the
Corporation, and the Board of Directors is hereby expressly vested with
authority, to the full extent now or hereafter provided by law, to adopt
any such resolution or resolutions, subject to the provisions of this
Certificate, including without limitation the restrictions and limitations
set forth in Section FOURTH, Subsection C7. thereof."
Section FOURTH, Subsection C1. of the Restated Certificate of Incorporation
of Evercom, Inc. is to be amended in its entirety to read as follows:
"1. DIVIDENDS
The holders of the Senior Preferred shall be entitled to receive
dividends at the applicable Senior Preferred Rate (hereinafter defined),
payable quarterly, out of funds legally available therefor. Such dividends
shall be payable only when, as, and if declared by the Board of Directors
of the Corporation and shall be cumulative. No dividends (other than those
payable solely in the Common Stock of the Corporation) shall be paid on any
Common Stock, Junior Preferred Stock or First Preferred Stock of the
Corporation during any fiscal year of the Corporation until dividends on
the Senior Preferred at the applicable Senior Preferred Rate shall have
been paid or declared and set apart during that fiscal year and any prior
year in which dividends accumulated but remain unpaid. Any undeclared or
unpaid dividends payable prior to April 1, 1999 shall not bear interest.
Any undeclared or unpaid dividends payable after April 1, 1999, shall
accrue interest at the applicable Senior Preferred Rate until declared and
paid. Except for the fact that the dividends shall be cumulative, no
further right shall accrue to holders of shares of the Senior Preferred in
the event that dividends on said shares are not declared in any prior year.
For purposes hereof, the Senior Preferred Rate shall be based upon $1000
per share and shall be eight percent (8%) per annum through March 31, 2001,
shall be ten percent (10%) per annum from April 1, 2001 through June 30,
2001, and thereafter shall increase by 0.5% per annum for each additional
three month period up to a maximum of 16% per annum."
FOURTH: The amendments to the Restated Certificate of Incorporation
herein certified have been duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, this Amendment to Restated Certificate has been signed
effective as of the 11th day of February, 1999.
EVERCOM, INC.
By: /s/ JEFFREY D. CUSHMAN
----------------------------------
Jeffrey D. Cushman, Vice President
<PAGE>
EXHIBIT 4.1
- --------- ---------
NUMBER SHARES
- --------- ---------
[LOGO]
EVERCOM, INC.
a corporation organized under the laws of the state of Delaware
5,000 Shares of FIRST PREFERRED SERIES A STOCK Authorized - Par Value: $0.01
SEE REVERSE SIDE FOR RESTRICTIONS ON TRANSFERABILITY AND OTHER LIMITATIONS
THIS CERTIFIES THAT_____________________________________________is the owner of
_________________________________________________fully paid and non-assessable
Shares of the above Corporation transferable only on the books of the
Corporation by the holder hereof in person or by duly authorized Attorney upon
surrender of this Certificate properly endorsed.
In Witness Whereof, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and to be sealed with the Seal of the
Corporation.
Dated_____________________________
<PAGE>
THE TRANSFER AND VOTING OF ANY SECURITIES REPRESENTED BY THIS CERTIFICATE ARE
RESTRICTED BY THE TERMS OF A SHAREHOLDERS AGREEMENT AMONG TALTON HOLDINGS, INC.
(NOW KNOWN AS EVERCOM, INC.) (THE "COMPANY" AND ITS SHAREHOLDERS AND
WARRANTHOLDERS (THE "SHAREHOLDERS AGREEMENT"), A COPY OF WHICH MAY BE INSPECTED
AT THE COMPANY'S PRINCIPAL OFFICE.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT)". SUCH SECURITIES
MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, EXCHANGED, MORTGAGED, PLEDGED OR
OTHERWISE DISPOSED OF EXCEPT (1) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR (II) UPON RECEIPT OF
AN OPINION OF THE COUNSEL TO THE TRANSFEROR, REASONABLY ACCEPTABLE TO THE
ISSUER, THAT SUCH SALE, TRANSFER, PLEDGE, HYPOTHECATION, OR OTHER DISPOSITION IS
PURSUANT TO AN AVAILABLE EXEMPTION FROM SUCH REGISTRATION. BY ITS ACCEPTANCE
HEREOF, THE HOLDER OF THIS CERTIFICATE REPRESENTS THAT IT IS ACQUIRING SUCH
SECURITIES FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TOWARD THE
DISTRIBUTION OR RESALE THEREOF, AND AGREES TO COMPLY WITH THE REGISTRATION
RIGHTS AGREEMENT DATED AS OF DECEMBER 27, 1996 BY AND AMONG THE COMPANY AND ITS
SHAREHOLDERS AND WARRANTHOLDERS, AND THE SHAREHOLDERS AGREEMENT.
THE COMPANY WILL FURNISH TO ANY SHAREHOLDER UPON REQUEST AND WITHOUT CHARGE A
SUMMARY OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR SPECIAL RIGHTS OF THE SHARES OF EACH CLASS AND OF EACH SERIES OF
STOCK AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES
AND/OR RIGHTS, SO FAR AS THE SAME HAVE BEEN FIXED, AND THE AUTHORITY OF THE
BOARD OF DIRECTORS TO ESTABLISH OTHER SERIES AND TO FIX THE RELATIVE RIGHTS,
PREFERENCES AND LIMITATIONS OF THE SHARES OF ANY CLASS OR SERIES BY AMENDMENT OF
THE CERTIFICATE OF INCORPORATION.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations. Additional abbreviations may also
be used though not in the list.
<TABLE>
<S> <C>
TEN COM ___ as tenants in common UNIF GIFT MIN ACT-- ...........Custodian................(Minor)
TEN ENT ___ as tenants by the entireties under Uniform Gifts to Minors Act......................(State)
JT TEN ___ as joint tenants with the right of survivorship
and not as tenants in common
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
For value received, the undersigned hereby sells, assigns and transfers unto ----------------------------------------
.................................................................................. ----------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
....................................................................................................................................
..............................................................................................................................Shares
represented by the within Certificate, and hereby irrevocably constitutes and appoints..............................................
...................................... Attorney to transfer the said shares on the books of the within-named Corporation with full
power of substitution in the premises.
Dated, ............................................
In presence of ......................................................................
.....................................................
</TABLE>
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the certificate in every particular without alteration
or enlargement, or any change whatever.
<PAGE>
EXHIBIT 4.2
WARRANT AGREEMENT
This WARRANT AGREEMENT (the "Agreement") is entered into as of March 12,
1999 by and between Evercom, Inc., a Delaware corporation (the "Company") and
SHAREHOLDER~ (the "Holder").
Contemporaneously with the execution of this Agreement, the Holder has
agreed to acquire SHARES~ shares of the Company's First Preferred Series A
Stock, $0.01 par value stock ("First Preferred Series A") and, in connection
therewith, the Company has agreed to issue and sell to the Holder a Warrant, as
hereinafter described (the "Warrant"), to purchase SHARES~ shares (the "Shares")
of the Company's Class A Common Stock, $0.01 par value ("Class A Common"). The
issuance of the Warrant by the Company shall occur concurrently with the
Holder's acquisition of the shares of First Preferred Series A Stock.
In consideration of the foregoing and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
for the purpose of defining the terms and provisions of the Warrant and the
respective rights and obligations thereunder, the Company and the Holder hereby
agree as follows:
1. Transferability and Form of Warrant.
-----------------------------------
1.1. Registration. The Warrant shall be numbered and shall be registered
------------
on the books of the Company when issued. This Agreement, the Warrant and any
Shares issued hereunder are subject to the rights and obligations of that
certain Shareholders Agreement (the "Shareholders Agreement") dated as of
December 27, 1996, between the Company, and the shareholders and warrantholders
of the Company.
1.2. Non-Transferability. The Warrant may be freely traded separate and
-------------------
apart from the shares of First Preferred Series A. However, neither the Warrant
nor the right, title or interest of the Holder in this Agreement may be
transferred or assigned unless such transfer or assignment is to an "accredited
investor," as defined in Rule 501 promulgated under the Securities Act of 1933,
as amended, compliance with said standard to be demonstrated by evidence
reasonably satisfactory to the Company; provided, however, in the event the
-------- -------
Holder assigns or transfers its interest in this Agreement, the assignee or
transferee of said interest shall be subject to all Section 1.3 restrictions and
shall acquire only such partial exercise rights as remain pursuant thereto. This
Agreement and all rights and interests hereunder are assignable or transferable
by the Holder only in whole and not in part. Any Shares issued pursuant to a
Warrant issued hereunder shall be subject to the rights and obligations of that
certain Registration Rights Agreement dated as of December 27, 1996, between the
Company and its shareholders and warrantholders, and the Shareholders Agreement.
1.3. Securities Law Restrictions on Transfer of the Warrant. Neither this
------------------------------------------------------
Agreement, the Warrant, any of the Shares, nor any interest herein or therein
may be sold, transferred, or
-1-
<PAGE>
otherwise disposed of in the absence of registration or qualification, as the
case may be, of the same under the Securities Act of 1933, as amended, and
applicable state securities laws, or an exemption therefrom. The Warrant may be
divided, upon request to the Company by the Holder, into a certificate or
certificates representing the right to purchase the same aggregate number of
Shares. Unless the context indicates otherwise, the term "Holder" shall include
any transferee or transferee of the Warrant and the term "Warrant" shall include
any and all warrants outstanding pursuant to this Agreement, including those
evidenced by a certificate or certificates issued upon division, exchange,
substitution or permitted transfer pursuant to this Agreement.
1.4. Form of Warrant. The text of the Warrant and the form of election to
---------------
purchase Shares shall be substantially as set forth in EXHIBIT 1.4A and EXHIBIT
------------ -------
1.4B attached hereto and hereby made a part hereof. The Warrant shall be
- ----
executed on behalf of the Company by its Chairman, President or any Vice
President.
A Warrant bearing the signature of an individual who was at any time the
proper officer of the Company shall bind the Company, notwithstanding that such
individual shall have ceased to hold such office prior to the delivery of such
Warrant or did not hold such office on the date of this Agreement.
The Warrant shall be dated as of the date of signature thereof by the
Company either upon initial issuance or upon division, exchange, substitution or
transfer.
1.5. Legend on Warrant Shares. The Warrant and each certificate for Shares
------------------------
initially issued upon exercise of the Warrant, shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT").
SUCH SECURITIES MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, EXCHANGED, MORTGAGED,
PLEDGED OR OTHERWISE DISPOSED OF EXCEPT (I) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS,
OR (II) UPON RECEIPT OF AN OPINION OF THE COUNSEL TO THE TRANSFEROR, REASONABLY
ACCEPTABLE TO THE ISSUER, THAT SUCH SALE, TRANSFER, PLEDGE, HYPOTHECATION, OR
OTHER DISPOSITION IS PURSUANT TO AN AVAILABLE EXEMPTION FROM SUCH REGISTRATION.
BY ITS ACCEPTANCE HEREOF, THE HOLDER OF THIS CERTIFICATE REPRESENTS THAT IT IS
ACQUIRING SUCH SECURITIES FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW
TOWARD THE DISTRIBUTION OR RESALE THEREOF, AND AGREES TO COMPLY WITH THE WARRANT
AGREEMENT, DATED AS OF MARCH 12, 1999, BY AND AMONG EVERCOM, INC., A DELAWARE
CORPORATION (THE "COMPANY") AND THE HOLDER, THE REGISTRATION RIGHTS AGREEMENT
DATED AS OF DECEMBER 27, 1996 BY AND AMONG THE COMPANY, AND ITS SHAREHOLDERS AND
WARRANTHOLDERS, AND THE SHAREHOLDERS AGREEMENT DATED AS OF
-2-
<PAGE>
DECEMBER 27, 1996 BY AND AMONG THE COMPANY, AND ITS SHAREHOLDERS AND
WARRANTHOLDERS.
Any warrant or certificate issued at any time in exchange or substitution
for any warrant or certificate bearing such legend shall also bear the above
legend unless, in the opinion of the Company's counsel or such other counsel as
shall be reasonably approved by the Company, the securities represented thereby
are no longer subject to the restrictions referred to in such legend.
1.6. Investment Letter. Simultaneously with the delivery to the Holder of
-----------------
certificates or other documents representing the Shares and/or any substitute
Warrant, the Holder will execute and deliver to the Company a letter, in the
following form of EXHIBIT 1.6 hereto, representing to the Company as follows:
-----------
(a) The Holder is acquiring the Shares and the Warrant for the
Holder's own account (and not for the account of others), for investment and not
with a view to the distribution or resale thereof;
(b) The Holder is an "accredited investor", as defined in Rule 501
promulgated under the Securities Act of 1933, as amended (the "1933 Act");
(c) The Holder understands that the Holder may not sell or dispose of
the Shares or the Warrant in the absence of either a registration statement
under the 1933 Act or an exemption from the registration provisions of the 1933
Act;
(d) The Holder understands that the Warrant and the Shares are subject
to restrictions on transfer as provided in the Shareholders Agreement;
(e) The Holder understands and agrees that if he should decide to
dispose of or transfer any of the Shares or the Warrant, he may dispose of them
only (i) to an "accredited investor", (ii) in compliance with the 1933 Act, as
then in effect, and (iii) upon delivery to the Company of an opinion, in form
and substance reasonably satisfactory to the Company, of recognized securities
counsel to the effect that the disposition or transfer is to be made in
compliance with all applicable federal and state securities laws; and
(f) The Holder understands that stop-transfer instructions to the
foregoing effect will be in effect with respect to the Shares and the Warrant.
2. Exchange of Warrant Certificate. Subject in all respects to the
-------------------------------
limitations on transferability and divisibility of Section 1 hereof, any
certificate evidencing all or a portion of the Warrant may be exchanged for
another certificate or certificates entitling the Holder to purchase a like
aggregate number of Shares as the certificate or certificates surrendered then
entitling such Holder to purchase. Any Holder desiring to exchange a certificate
evidencing all or a portion of the Warrant, shall make such request in writing
delivered to the Company, and shall surrender, properly endorsed, the
certificate evidencing the portion of the Warrant to be so exchanged.
-3-
<PAGE>
Thereupon, the Company shall, within five (5) business days, execute and deliver
to the person entitled thereto a new certificate evidencing all or a portion of
the Warrant as so requested.
3. Term of Warrants; Exercise of Warrants.
--------------------------------------
(a) Subject to the terms of this Agreement, the Holder shall have the
right, at any time during the period commencing at 9:00 a.m. New York, New York
time, on March 12, 1999 (the "Exercisability Date" ), and ending at 5:00 p.m.,
New York, New York time, on December 31, 2007 (the "Termination Date"), to
purchase from the Company up to the number of Shares which the Holder may at the
time be entitled to purchase pursuant to this Agreement and the portion of the
Warrant (or certificate therefor) then held by it, upon surrender to the
Company, at its principal office in Dallas, Texas, of the certificate evidencing
the portion of the Warrant to be exercised together with the purchase form duly
filled in and signed, and upon payment to the Company of the portion of the
Warrant Price, as defined in and determined in accordance with the provisions of
Sections 6 and 7 hereof, allocable to the number of Shares with respect to which
such portion of the Warrant is then exercised. Payment of the Warrant Price
shall be made (i) in cash, by cashier's check or by wire transfer or (ii)
through the surrender of debt, preferred equity securities or Common Stock of
the Company having a principal amount, liquidation preference, or current market
price, as the case may be, equal to the aggregate Warrant Price to be paid (to
the extent then due and payable, the Company will pay the accrued interest or
dividends on such surrendered debt, preferred equity securities, or Common Stock
in cash at the time of surrender and, if not due and payable at the time of
surrender, the Company will issue a like debt instrument or preferred equity
securities in the amount of such accrued interest or dividend, as the case may
be) or (iii) through "cashless" or "net-issue" exercise provided in Section 3(b)
below.
(b) The holder of the Warrant may also exercise the Warrant in a
"cashless" or "net-issue" exercise by delivery to the Company of (a) the written
notice described in Section 3(a) above, (b) the Warrant and (c) written notice
that the holder elects to make payment of the Warrant Price, in full or in part,
by surrender of its right to purchase certain shares of Common Stock pursuant to
the Warrant. For purposes of this Section 3(b), the value of the surrender of
the right to purchase a share of Common Stock shall be attributed a value equal
to (i) the current market price per share of Common Stock minus (ii) the then
Warrant Price per share of Common Stock. If the determination of current market
price per share of Common Stock is to be made for a "cashless" or "net-issue"
exercise in connection with an initial public offering of Common Stock, the
current market price per share of Common Stock shall equal the per share
offering price without deductions for any compensation, discounts or expenses
paid or incurred by the Company in connection with such offering. Otherwise, the
current market price shall be determined in accordance with the provisions of
Section 7.1(f) hereof.
(c) Upon such surrender of the Warrant (or certificate therefor) and
payment of such Warrant Price as aforesaid, or after "cashless" or "net issue"
exercise, the Company shall, within five (5) business days, issue and cause to
be delivered to or upon the written order of the Holder, and in such name or
names as the Holder may designate, certificate or certificates for the
-4-
<PAGE>
number of full Shares so purchased upon the exercise of the Warrant, together
with cash, as provided in Section 8 hereof, with respect to any fractional
Shares otherwise issuable upon such surrender and the cash, property and other
securities to which the Holder is entitled pursuant to the provisions of Section
7. The Warrant shall be exercisable, at the election of the Holder, either in
whole or from time to time in part and, in the event that the certificate
evidencing the Warrant is exercised with respect to less than all of the Shares
specified therein at any time prior to the Termination Date, a new certificate
evidencing the remaining Warrant shall be issued by the Company.
4. Payment of Taxes. The Company shall pay all documentary stamp taxes,
----------------
if any, attributable to the initial issuance of the Shares; provided that the
Company shall not be required to pay any tax or taxes which may be payable with
respect to any secondary transfer of the Warrant or the Shares.
5. Mutilated or Missing Warrant. In case the certificate or certificates
----------------------------
evidencing the Warrant shall be mutilated, lost, stolen or destroyed, the
Company shall, at the request of the Holder, issue and deliver in exchange and
substitution for and upon cancellation of the mutilated certificate or
certificates, or in lieu of and substitution for the certificate or certificates
lost, stolen or destroyed, a new Warrant certificate or certificates of like
tenor and representing an equivalent right or interest, but only upon receipt of
evidence satisfactory to the Company of such loss, theft or destruction of such
Warrant and of a bond of indemnity, if requested, also satisfactory in form and
amount at the applicant's cost. Applicants for such substitute Warrant
certificate shall also comply with such other reasonable regulations and pay
such other reasonable charges as the Company may prescribe, not to exceed Two
Hundred Fifty and no/100 Dollars ($250) per occurrence.
6. Warrant Price.
-------------
6.1. Warrant Price. The per Share price (the "Warrant Price") at which
-------------
Shares shall be purchasable upon the exercise of the Warrant is $1,000, subject
to adjustment pursuant to Section 7 hereof.
7. Adjustment of Warrant Price and Number of Shares.
------------------------------------------------
7.1. Adjustment of Warrant Price and Number of Shares. After the issuance
------------------------------------------------
of the Warrant, the number and kind of securities purchasable upon the exercise
of the Warrant and the Warrant Price shall be subject to adjustment from time to
time upon the happening of certain events, as follows:
(a) Adjustments for Change in Capital Stock. In the event the Company
---------------------------------------
shall (A) pay a stock dividend or make a distribution to holders of Common Stock
in shares of its Common Stock, (B) subdivide its outstanding shares of Common
Stock into a larger number of shares, (C) combine its outstanding shares of
Common Stock into a smaller number of shares, (D) make a distribution on its
Common Stock in shares of its capital stock other than Common Stock
-5-
<PAGE>
or preferred stock, (E) issue by reclassification of its shares of Common Stock
any shares of capital stock of the Company, or (F) take any action which would
result in any of the foregoing, then the Warrant Price and the number and kind
of shares of capital stock of the Company issuable upon exercise of a Warrant as
in effect immediately prior to such action shall then be proportionally adjusted
so that the holder of any Warrant thereafter exercised may receive the aggregate
number and kind of shares of capital stock of the Company which he would have
owned immediately following such action if such Warrant had been exercised
immediately prior to such action.
An adjustment made pursuant to this Section 7.1(a)(i) shall become
effective retroactively immediately after the record date in the case of a
dividend or distribution of Common Stock and shall become effective immediately
after the effective date in the case of a subdivision, combination or
reclassification. If after an adjustment a holder of a Warrant upon exercise of
it may receive shares of two or more classes of capital stock of the Company,
the Company shall determine the allocation of the adjusted Warrant Price between
the classes of capital stock. After such allocation, the exercise privilege and
the Warrant Price of each class of capital stock shall thereafter be subject to
adjustment on terms comparable to those applicable to Common Stock in this
Section.
(b) Adjustment for Rights Issue. If the Company distributes any
---------------------------
rights, options or warrants to any holder of its Common Stock entitling them for
a period expiring within 60 days after the record date mentioned below to
purchase shares of Common Stock at a price per share less than the current
market price per share on that record date, the Warrant Price shall be adjusted
in accordance with the formula:
O + N x P
----------------
W' = W x M
--------------------
O + N
Where:
W' = the adjusted Warrant Price
W = the current Warrant Price
O = the number of shares of Common Stock outstanding on the record
date
N = the number of additional shares of Common Stock offered
P = the offering price per share of the additional shares
M = the current market price per share of Common Stock on the record
date
-6-
<PAGE>
The adjustment shall be made successively whenever any such rights,
options or warrants are issued and shall become effective immediately after the
record date for the determination of stockholders entitled to receive the right,
options or warrants. If at the end of the period during which such rights,
options or warrants are exercisable, not all rights, options or warrants shall
have been exercised, the Warrant Price shall be immediately readjusted to what
it would have been if "N" in the above formula had been the number of shares
actually issued.
(c) Adjustment for Other Distributions. If the Company distributes to
----------------------------------
any holder of its Common Stock any of its assets (including but not limited to
cash, debt securities, preferred stock, or any rights or warrants to purchase
debt securities, preferred stock, assets or other securities of the Company),
the Warrant Price shall be adjusted in accordance with the formula:
W' = W x M - F
-----------------
M
Where:
W' = the adjusted Warrant Price
W = the current Warrant Price
M = the current market price per share of Common Stock outstanding on
the record date mentioned below
F = the Fair Market Value on the record date of the net assets,
securities, rights or warrants applicable to one share of Common Stock.
The adjustment shall be made successively whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of stockholders entitled to receive the distribution.
This subsection does not apply to rights, options or warrants referred
to in subsection (b) of this Section 7.1.
(d) Adjustment for Common Stock Issue. If the Company issues shares
---------------------------------
of Common Stock for a consideration per share less than the current market price
per share on the date the Company fixes the offering price of such additional
shares, the Warrant Price shall be adjusted in accordance with the formula:
P
------------------
W' = W x O + M
------------------
A
-7-
<PAGE>
Where:
W' = the adjusted Warrant Price
W = the then current Warrant Price
O = the number of shares outstanding immediately prior to the
issuance of such additional shares
P = the aggregate consideration received for the issuance of such
additional shares
M = the current market price per share on the date of issuance of
such additional shares
A = the number of shares outstanding immediately after the issuance
of such additional shares
The adjustment shall be made successively whenever any such issuance
is made, and shall become effective after such issuance.
This subsection (d) does not apply to:
(1) any of the transactions described in subsections (b) and (c)
of this Section 7.1 or
(2) Common Stock issued in a bona fide public offering pursuant
to a firm commitment underwriting or
(3) Shares of Common Stock issued pursuant to existing options or
the exchange of convertible securities on the date hereof.
(e) Adjustment for Convertible Securities or Options Issue. If the
------------------------------------------------------
Company issues any securities convertible into or exchangeable for Common Stock
or options, rights or warrants to subscribe for, purchase or otherwise acquire
any class of Common Stock or convertible securities (other than securities
issued in transactions described in subsections (b) and (c) of this Section 7.1)
for a consideration per share of Common Stock initially deliverable upon
conversion or exchange of such securities less than the current market price per
share on the date of issuance of such securities, the Warrant Price shall be
adjusted in accordance with this formula:
P
------------------
W' = W x O + M
------------------
O + D
-8-
<PAGE>
Where:
W' = the adjusted Warrant Price
W = the then current Warrant Price
O = the number of shares outstanding immediately prior to the
issuance of such securities
P = the aggregate consideration received for the issuance of such
securities
M = the current market price per share on the date of issuance of
such securities or to be received upon the exercise of such securities
D = the maximum number of shares deliverable upon conversion,
exercise or in exchange for such securities at the initial conversion price,
exercise price or exchange rate
The adjustment shall be made successively whenever any such issuance
is made, and shall become effective immediately after such issuance.
No further adjustment in the Warrant Price shall be made upon the
subsequent issue of convertible securities or shares of Common Stock upon the
exercise of options or conversion or exchange of such convertible securities.
If all of the Common Stock deliverable upon conversion or exchange of
such securities have not been issued when such securities are no longer
outstanding, then the Warrant Price shall promptly be readjusted to the Warrant
Price which would then be in effect had the adjustment upon the issuance of such
securities been made on the basis of the actual number of shares of Common Stock
issued upon conversion or exchange of such securities.
This subsection (e) does not apply to convertible securities issued in
a bona fide public offering pursuant to a firm commitment underwriting.
(f) Current Market Price.
--------------------
(1) In Section 3(b) and subsections (b), (c), (d) and (e) of this
Section 7.1(a) the current market price per share of Common Stock on any
date is:
(i) if the Common Stock is not registered under the Exchange Act,
then, based upon the Fair Market Value of 100% of the Company if sold as a
going concern and without regard to any discount for the lack of liquidity
or on the basis that the relevant shares of the Common Stock do not
constitute a majority or controlling interest in the Company; or
-9-
<PAGE>
(ii) if the Common Stock is registered under the Exchange Act, the
average of the Quoted Prices of the Common Stock for 20 consecutive trading
days before the date in question. The "Quoted Price" of the Common Stock is
the last reported sales price of the Common Stock as reported by Nasdaq
National Market, or if the Common Stock is listed on a national securities
exchange, the last reported sales price of the Common Stock on such
exchange (which shall be for consolidated trading if applicable to such
exchange), or if neither so reported or listed, the last reported bid price
of the Common Stock. In the absence of one or more such quotations, the
current market price of the Common Stock shall be determined as if the
Common Stock was not registered under the Exchange Act.
(2) Fair Market Value. Fair Market Value means the value
-----------------
obtainable upon a sale in an arm's length transaction to a third party
under usual and normal circumstances, with neither the buyer nor the seller
under any compulsion to act, with equity to both, as determined by the
Board in good faith; provided, however, that if the holder of this Warrant
-------- -------
shall dispute the Fair Market Value as determined by the Board, such holder
may undertake to have it and the Company retain an Independent Expert. The
determination of Fair Market Value by the Independent Expert shall be
final, binding and conclusive on the Company and such holder. All costs and
expenses of the Independent Expert shall be borne by such holder unless the
Fair Market Value as determined by the Independent Expert exceeds the Fair
Market Value as determined by the Board by 5% but less than 10%, in which
case the cost of the Independent Expert shall be shared equally by such
holder and the Company, and unless the Fair Market Value as determined by
the Independent Expert exceeds the Fair Market Value as determined by the
Board by 10% or more, in which case the cost of the Independent Expert
shall be borne solely by the Company.
(3) Independent Expert. Independent Expert means an investment
------------------
banking firm reasonably agreeable to the Company and the holder of this
Warrant who does not (and whose affiliates do not) have a financial
interest in the Company or any of its affiliates.
(g) Consideration Received. For purposes of any computation
----------------------
respecting consideration received pursuant to subsections (d) and (e) of this
Section 7.1, the following shall apply:
(1) in the case of the issuance of shares of Common Stock for
cash, the consideration shall be the amount of such cash, provided that in
no case shall any deduction be made for any commissions, discounts or other
expenses incurred by the Company for any underwriting of the issue or
otherwise in connection therewith;
(2) in the case of the issuance of shares of Common Stock for a
consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the Fair Market Value thereof;
-10-
<PAGE>
(3) in the case of the issuance of securities convertible into or
exchangeable for shares, the aggregate consideration received therefor
shall be deemed to be the consideration received by the Company for the
issuance of such securities plus the additional minimum consideration, if
any, to be received by the Company upon the conversion or exchange thereof
(the consideration in each case to be determined in the same manner as
provided in clauses (1) and (2) of this subsection).
(h) When De Minimis Adjustment May Be Deferred. No adjustment in the
------------------------------------------
Warrant Price need be made unless the adjustment would require an increase or
decrease of at least 1% in the Warrant Price. Any adjustments that are not made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations under this Section shall be made to the nearest cent
or to the nearest 1/100th of a share, as the case may be.
(i) Notice of Adjustment. Whenever the Warrant Price is adjusted, the
--------------------
Company shall provide the notice required by Section 11 hereof.
(j) Voluntary Reduction. The Company from time to time may reduce the
-------------------
Warrant Price by any amount for any period of time if the period is at least 20
days and if the reduction is irrevocable during the period; provided, however,
-------- -------
that in no event may the Warrant Price be less than the par value of a share of
Common Stock.
Whenever the Warrant Price is reduced, the Company shall mail to
Warrant holders a notice of the reduction. The Company shall mail the notice at
least 15 days before the date the reduced Warrant Price takes effect. The notice
shall state the reduced Warrant Price and the period it will be effect.
A reduction of the Warrant Price does not change or adjust the Warrant
Price otherwise in effect for purposes of subsections (a), (b), (c), (d) and (e)
of this Section 7.1.
(k) Adjustment in Number of Shares. Upon each adjustment of the
------------------------------
Warrant Price pursuant to this Section 7.1, each Warrant outstanding prior to
the making of the adjustment in the Warrant Price shall thereafter evidence the
right to receive upon payment of the adjusted Warrant Price that number of
shares of Common Stock (calculated to the nearest hundredth) obtained from the
following formula:
N' = N x W
---
W'
Where:
N' = the adjusted number of Warrant Shares issuable upon exercise of a
Warrant by payment of the adjusted Warrant Price
-11-
<PAGE>
N = the number of Warrant Shares previously issuable upon exercise of
a Warrant by payment of the Warrant Price prior to adjustment
W' = the adjusted Warrant Price
W = the Warrant Price prior to adjustment.
(l) In calculating any adjustment hereunder, the Warrant Price shall
be calculated to the nearest cent and the number of Shares purchasable hereunder
shall be calculated to the nearest .001 of a share.
(m) In the event that at any time, as a result of an adjustment made
pursuant to this Section 7, the Holder shall become entitled to purchase any
securities of the Company other than Class A Common Stock, the Company shall
duly reserve such securities for issuance and thereafter the number of such
other securities so purchasable upon exercise of the Warrant and the Warrant
Price of such securities shall be subject to the adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Shares contained in this Section 7.
(n) In any case in which the provisions of this Section 7.1 require
that the adjustment shall be effective immediately after a record date for an
event, the Company may defer until the occurrence of such event (1) issuing to
the holder of the Warrant or portion thereof exercised after such record date
and before the occurrence of such event the additional shares of Common Stock
issuable upon such exercise by reason of the adjustment required by such event
over and above the shares of Common Stock issuable upon such exercise before
giving effect to such adjustment, and (2) paying to such holder any cash in lieu
of a fractional share of Common Stock pursuant to Section 8 hereof; provided,
however, that the Company shall deliver to the holder a due bill or other
appropriate instrument evidencing such holder's right to receive additional
shares, other capital stock and cash upon the occurrence of the event requiring
such adjustment.
7.2. Statement on Warrants. Irrespective of any adjustment in the Warrant
---------------------
Price or the number or kind of Shares purchasable upon the exercise of the
Warrant, the Warrant certificate or certificates theretofore issued may continue
to express the same price and number and kind of shares as are stated in the
Warrant initially issuable pursuant to this Agreement.
7.3. Reservation. The Company shall at all times reserve and keep
-----------
available, free from preemptive rights, so long as the Warrant remains
outstanding, out of its authorized but unissued Common Stock the full number of
shares of Common Stock deliverable upon the exercise of the Warrant and shall
take all such action and obtain all such permits or orders as may be necessary
to enable the Company lawfully to issue such Common Stock.
-12-
<PAGE>
The Company or, if appointed, the transfer agent for the Common Stock (the
"Transfer Agent") and every subsequent transfer agent for any shares of the
Company's capital stock issuable upon the exercise of any of the rights of
purchase aforesaid will be irrevocably authorized and directed at all times to
reserve such number of authorized shares as shall be required for such purpose.
The Company will keep a copy of this Agreement on file with the Transfer Agent
and with every subsequent transfer agent for any shares of the Company's capital
stock issuable upon the exercise of the rights of purchase represented by the
Warrants. The Company will furnish such Transfer Agent a copy of all notices of
adjustments and certificates related thereto, transmitted to each holder
pursuant to Section 11 hereof.
Before taking any action which would cause an adjustment pursuant to
Section 7.1 hereof to reduce the Warrant Price below the then par value (if any)
of the Shares, the Company will take any corporate action which may, in the
opinion of its counsel (which may be counsel employed by the Company), be
necessary in order that the Company may validly and legally issue fully paid and
nonassessable Shares at the Warrant Price as so adjusted.
The Company covenants that all Shares which may be issued upon exercise of
Warrants will, upon issue, be fully paid, nonassessable, free of preemptive
rights and free from all taxes, liens, charges and security interests with
respect to the issue thereof.
7.4. Change in Control; Merger; Reorganization. Notwithstanding anything
-----------------------------------------
to the contrary contained herein, in the event of (i) a Change of Control (as
hereinafter defined), (ii) any acquisition of the Corporation by means of merger
or other form of corporate reorganization in which outstanding shares of the
Corporation are exchanged for securities or other consideration issued, or
caused to be issued, by the acquiring corporation or its subsidiary (other than
a mere reincorporation transaction), or (iii) the sale or transfer of all or
substantially all of the assets of the Company to another person, (each, a
"Major Event"), the Company shall provide written notice of such occurrence to
the Holder (the "Change of Control Notice") at least ten (10) business days
prior to the occurrence of such Major Event. The Holder may, within ten (10)
business days of receipt of a Change of Control Notice (the "Notice Cutoff
Date"), exercise the Warrant and purchase, in accordance with the procedures set
forth in Section 3 hereof, up to such number of Shares as the Holder may be
entitled to purchase hereunder, provided however, the Holder (i) may condition
the exercise of the Warrant and the purchase of the Shares upon consummation of
the Major Event, (ii) may require that the acquisition of the Shares and tender
of the Warrant Price occur contemporaneously with the consummation of the Major
Event, and (iii) may offset and/or credit against the Warrant Price any
consideration to be received by the Holder as part of the consummation of the
Major Event.
For purposes of this Agreement, Change of Control shall mean the
acquisition by any person or group (as such term is defined in Section 13(d)(3)
of the Securities Exchange Act of 1934, as amended, (the "1934 Act") of
beneficial ownership (as such term is defined in Rule 13d-3 promulgated under
the 1934 Act) of more than 25% of the outstanding shares of Common Stock of the
Company.
-13-
<PAGE>
8. Obtaining Stock Exchange Listings. The Company will from time to time
---------------------------------
take all action which may be necessary so that the Shares, immediately upon
their issuance upon the exercise of Warrants, will be listed on the principal
securities exchanges and markets within the United States of America, if any, on
which other shares of Common Stock are then listed.
9. Fractional Interests. The Company shall be required to issue
--------------------
fractional Shares on the exercise of the Warrant.
10. No Rights as Stockholder. Nothing contained in this Agreement or in
------------------------
the Warrant shall be construed as conferring upon the Holder or its transferee
any rights as a stockholder of the Company.
11. Notices. Any notice pursuant to this Agreement by the Company or by
-------
the Holder shall be in writing and shall be deemed to have been duly given if
delivered personally with written receipt acknowledged or mailed by certified
mail five days after mailing, return receipt requested:
If to the Holder:
SHAREHOLDER
COMPANY
ADDRESS
CITY, STATE ZIP
CONFIDENTIAL
If to the Company:
8201 Tristar Drive
Irving, Texas 75063
Attention: Chief Executive Officer
Each party hereto may from time to time change the address to which notices
to it are to be delivered or mailed hereunder by notice in accordance herewith
to the other party.
Upon any adjustment of the Warrant Price pursuant to Section 7.1, the
Company shall promptly thereafter (i) cause to be filed with the Company a
certificate of a firm of independent public accountants of recognized standing
selected by the Board of Directors of the Company (who may be the regular
auditors of the Company) setting forth the Warrant Price after such adjustment
and setting forth in reasonable detail the method of calculation and the facts
upon which such calculations are based and setting forth the number of Shares
(or portion thereof) issuable after such adjustment in the Warrant Price, upon
exercise of a Warrant and payment of the adjusted Warrant Price, which
certificate shall be conclusive evidence of the correctness of the matters set
forth therein, and (ii) cause to be given to each of the registered holders of
the Warrants at his address appearing on the Warrant register written notice of
such adjustments by first class mail, postage prepaid. Where appropriate, such
notice may be given in advance and
-14-
<PAGE>
included as a part of the notice required to be mailed under the other
provisions of this Section 11.
In case: (a) the Company shall authorize the issuance to all holders of
shares of Common Stock of rights, options or warrants to subscribe for or
purchase shares of Common Stock or of any other subscription rights or warrants;
(b) the Company shall authorize the distribution to all holders of shares of
Common Stock of evidences of its indebtedness or assets (other than cash
dividends or cash distributions payable out of consolidated earnings or earned
surplus or dividends payable in shares of Common Stock or distributions referred
to in subsection (1) of Section 7.1 hereof); (c) of the voluntary or involuntary
dissolution, liquidation or winding up of the Company; or (d) the Company
proposes to take any action (other than actions of the character described in
Section 7.1(a)) which would require an adjustment of the Warrant Price pursuant
to Section 7; then the Company shall cause to be given to each of the registered
holders of the Warrants at his address appearing on the Warrant register, at
least 20 days prior to the applicable record date hereinafter specified, or
promptly in the case of events for which there is no record date, by first-class
mail, postage prepaid, a written notice stating (i) the date as of which the
holders of record of shares of Common Stock to be entitled to receive any such
rights, options, warrants or distribution are to be determined, or (ii) the
initial expiration date set forth in any tender offer or exchange offer for
shares of Common Stock. The failure to give the notice required by this Section
11 or any defect therein shall not affect the legality or validity of any
distribution, right, option, warrant, conveyance, transfer, dissolution,
liquidation or winding up, or the vote upon any action.
12. Successors. All the covenants and provisions of this Agreement by or
----------
for the benefit of the Company or the Holder shall bind and inure to the benefit
of their respective successors, heirs and permitted assigns.
13. Benefits of this Agreement. Except as otherwise provided herein,
--------------------------
nothing in this Agreement shall be construed to give to any person or
corporation other than the Company and the Holder any legal or equitable right,
remedy or claim under this Agreement, and this Agreement shall be for the sole
and exclusive benefit of the Company and the Holder.
14. Further Assurances. The Company hereby agrees promptly to execute, at
------------------
the Holder's reasonable request after the issuance of the Warrant, any documents
or materials related to the transactions contemplated by this Agreement.
15. Time of Essence. Time is of the essence in interpreting and
---------------
performing this Agreement.
16. Severability. In case any provision in this Agreement shall be held
------------
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions hereof will not in any way be affected or impaired
hereby.
-15-
<PAGE>
17. Jury Trial; Jurisdiction. The parties waive the right to a jury
------------------------
trial with respect to any controversy or claim between or among the parties
hereto, including but not limited to those arising out of or relating to this
Agreement, including any claim based on or arising from an alleged tort.
18. Governing Law. This Agreement shall be governed by and interpreted
-------------
in accordance with the laws of the State of Delaware. The parties, in
acknowledgment that they have been represented by counsel and that this
Agreement has been carefully negotiated, agree that the construction and
interpretation of this Agreement and other documents entered into in connection
herewith shall not be affected by the identity of the party under whose
direction or at whose expense this Agreement and such documents were prepared or
drafted.
19. Attorneys' Fees. In the event of any disputes arising hereunder
---------------
concerning the interpretation or enforcement of this Agreement, a party shall be
entitled to recover from the party determined to be in breach its attorneys'
fees, costs and expenses.
20. Specific Performance. Each of the parties shall be entitled to
--------------------
specific performance in the event of a breach by the other party of their
respective obligations hereunder. Such remedy shall be in addition to, but shall
not replace, any other remedies which might be available under this Agreement,
at law or in equity, including without limitation, actions for attorney's fees.
21. Registration Rights. The Shares issuable upon exercise of this
-------------------
Warrant are subject to certain rights and restrictions pursuant to the
Registration Rights Agreement and the Shareholders Agreement.
22. Representations of Company. The Company represents and warrants to
--------------------------
Holder as follows:
22.1. Corporate Organization and Good Standing. The Company is a
----------------------------------------
corporation duly organized, validly existing, and in good standing under the
laws of the State of Delaware and is duly qualified and in good standing in all
other states where the nature of its business or operations or the ownership of
its property requires such qualification.
22.2. Corporate Approval. The Company has full corporate power and
------------------
authority to execute and deliver this Agreement and all other documents and
agreements to be executed and delivered by it hereunder ("Transaction
Documents") and to consummate the transactions contemplated hereby. The board of
directors of the Company has duly and validly approved the execution, delivery,
and performance of this Agreement and the transactions contemplated herein. No
other corporate or legal proceedings on the part of the Company are necessary to
approve and authorize the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby. This Agreement
constitutes, and the other Transaction Documents, when executed, will
constitute, the legal, valid, and binding obligation and agreement of the
Company enforceable against the Company in accordance with its terms, subject
only to the general law of creditors' rights.
-16-
<PAGE>
23. Certain Terms. As used herein, the following terms shall have the
-------------
meanings set forth below:
"Common Stock" shall mean (A) the class of stock designated as the
------------
Class A Common Stock and Class B Common Stock of the Company at the date of this
Agreement, or (B) any other class of stock resulting from successive changes or
reclassifications of such Common Stock.
"Common Stock Equivalents" shall mean (without duplication with any
------------------------
other Common Stock or Common Stock Equivalents) rights, warrants, options,
convertible securities or indebtedness, exchangeable securities or indebtedness,
or other rights, exercisable for or convertible or exchangeable into, directly
or indirectly, Common Stock and securities convertible or exchangeable into
Common Stock, whether at the time of issuance, upon the passage of time, or upon
the occurrence of some future event.
[SEE FOLLOWING PAGES FOR SIGNATURES]
-17-
<PAGE>
Corporation or Trust: Address:
-------
____________________________________ ___________________________________
___________________________________
____________________________________ ___________________________________
(name of entity)
By:_________________________________ __________________________________
Print Name:______________________ Tax Payer Id. No.
Title:___________________________
Partnership: Address:
-------
____________________________________ ___________________________________
(name of partnership) ___________________________________
___________________________________
By:_________________________________ ___________________________________
(name of general partner) Tax Payer Id. No.
By:_________________________________
Print Name:______________________
Title:___________________________
Individual(s): Address:
-------
(indicate style of ownership if more
than one (1) individual (e.g. JTWROS) ___________________________________
___________________________________
____________________________________ ___________________________________
Print Name:______________________ ___________________________________
Social Security No.
____________________________________ ___________________________________
Print Name:______________________ Social Security No.
Style of Ownership:______________
SIGNATURE PAGE FOR THE HOLDER
<PAGE>
"Company" EVERCOM, INC.,
a Delaware corporation
By: /s/ JEFFREY D. CUSHMAN
----------------------------
Name: Jeffrey D. Cushman
Title: Vice President
<PAGE>
EXHIBIT 1.4A to
- ------------
Warrant Agreement
WARRANT NO.___________
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). SUCH
SECURITIES MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, EXCHANGED, MORTGAGED,
PLEDGED OR OTHERWISE DISPOSED OF EXCEPT (I) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES
LAWS, OR (II) UPON RECEIPT OF AN OPINION OF THE COUNSEL TO THE TRANSFEROR,
REASONABLY ACCEPTABLE TO THE ISSUER, THAT SUCH SALE, TRANSFER, PLEDGE,
HYPOTHECATION, OR OTHER DISPOSITION IS PURSUANT TO AN AVAILABLE EXEMPTION
FROM SUCH REGISTRATION. BY ITS ACCEPTANCE HEREOF, THE HOLDER OF THIS
CERTIFICATE REPRESENTS THAT IT IS ACQUIRING SUCH SECURITIES FOR INVESTMENT
PURPOSES ONLY AND NOT WITH A VIEW TOWARD THE DISTRIBUTION OR RESALE
THEREOF, AND AGREES TO COMPLY WITH THE WARRANT AGREEMENT, DATED AS OF MARCH
12, 1999, BY AND AMONG EVERCOM, INC., A DELAWARE CORPORATION (THE
"COMPANY") AND ____________________________ (THE "HOLDER"), THE
REGISTRATION RIGHTS AGREEMENT DATED AS OF DECEMBER 27, 1996 BY AND AMONG
THE COMPANY, AND ITS SHAREHOLDERS AND WARRANTHOLDERS, AND THE SHAREHOLDERS
AGREEMENT DATED AS OF DECEMBER 27, 1996 BY AND AMONG THE COMPANY, AND ITS
SHAREHOLDERS AND WARRANTHOLDERS."
WARRANT TO PURCHASE SHARES
OF CLASS A COMMON STOCK OF
EVERCOM, INC. $.01 PAR VALUE
Exercisable commencing March 12, 1999;
Void after December 31, 2007;
THIS CERTIFIES that, for value received, _______________________________
____________________________________________________ ("Holder"), or registered
assigns, is entitled, subject to the terms and conditions set forth in this
Warrant, to purchase from Evercom, Inc., a Delaware corporation (the "Company"),
up to ___________ shares of Class A Common Stock, $0.01 par value ("Shares"), of
the Company commencing at 9:00 a.m., Eastern
Exhibit 1.4A - Page 1 of 3
<PAGE>
time, on March 12, 1999, and continuing up to 5 p.m. Eastern time on December
31, 2007, at an initial per share price of $1,000.00. This Warrant is issued
pursuant to a Warrant Agreement between the Holder and the Company dated as of
March 12, 1999, the terms of which are incorporated by reference herein and made
a part of this instrument and are referred to for a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders of the Warrant. This Warrant is also subject to the
terms and obligations of the Shareholders Agreement dated December 27, 1996 by
and among the Company, the Holder and the other warrantholders and shareholders
of the Company.
This Warrant may be exercised by the holder hereof, in whole or in part by
the presentation and surrender of this Warrant with the form of Election to
Purchase duly executed, at the principal office of the Company (or at such other
address as the Company may designate by notice in writing to the holder hereof
at the address of such holder appearing on the books of the Company), and upon
payment to the Company of the purchase price in cash, by cashier's check, or by
wire transfer or partially in cash, cashier's check or wire transfer and the
remainder pursuant to Section 3 of the Warrant Agreement. Certificates for the
Shares so purchased shall be delivered or mailed to the Holder promptly after
this Warrant shall have been so exercised, and, unless this Warrant has expired
or has been exercised in full, a new Warrant identical in form but representing
the number of Shares with respect to which this Warrant shall not have been
exercised shall also be issued to the holder hereof.
The Warrant Agreement provides that upon the occurrence of certain events
the Warrant Price set forth on the face hereof may, subject to certain
conditions, be adjusted. If the Warrant Price is adjusted, the Warrant Agreement
provides that the number of shares of Common Stock issuable upon the exercise of
each Warrant shall be adjusted. Fractions of a share of Common Stock may be
issued upon the exercise of any Warrant.
Nothing contained herein shall be construed to confer upon the holder of
this Warrant, as such, any of the rights of a shareholder of the Company.
Exhibit 1.4A - Page 2 of 3
<PAGE>
Dated: March 12, 1999 EVERCOM, INC.,
a Delaware corporation
By: ________________________________
Exhibit 1.4A - Page 3 of 3
<PAGE>
EXHIBIT 1.4B to
- ------------
Warrant Agreement
___________________________
ELECTION TO PURCHASE
--------------------
___________________:
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Warrant for, and to purchase thereunder, _________
Shares provided for therein, and requests that certificates for the Shares be
issued in the name of:
(Please Print Name, Address and Tax Identification Number) and, if said
number of Shares shall not be the total number of Shares purchasable hereunder,
that a new Warrant certificate for the balance of the Shares purchasable under
the within Warrant certificate be registered in the name of the undersigned
Holder or its assignee as below indicated and delivered to the address stated
below:
Dated: ________________, _________
Name of Holder or Assignee (Please Print):
_____________________________________
Address: _________________________________________
Signature:________________________________________
Signature Guaranteed: Note: The above signature must correspond with the
name as written upon the face of this Warrant certificate in every particular,
without alteration or enlargement or any change whatever, unless this Warrant
has been assigned.
(To be signed only upon assignment of Warrant)
Exhibit 1.4B - Page 1 of 2
<PAGE>
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto
__________________________________
__________________________________
__________________________________
__________________________________
__________________________________
(Name and Address of Assignee must be Printed or Typewritten) the within
Warrant, hereby irrevocably constituting and appointing ___________________
Attorney to transfer said Warrant on the books of the Company, with full power
of substitution in the premises.
Dated: _________________, __________
____________________________________
Signature of Registered Holder
Signature Guaranteed: Note: The above signature of this assignment
must correspond with the name as
written upon the face of the within
Warrant certificate in every
particular, without alteration or
enlargement or any change whatever.
Exhibit 1.4B - Page 2 of 2
<PAGE>
EXHIBIT 1.6 to
- -----------
Warrant Agreement
[letterhead of Holder]
____________________, 19 _____
EVERCOM, INC.:
The undersigned warrantholder ("Holder") hereby represents and warrants to
you as follows:
(a) The Holder is acquiring the Shares and the Warrant for Holder's
own account (and not for the account of others), for investment and not
with a view to the distribution or resale thereof;
(b) The Holder is an "accredited investor", as defined in Rule 501
promulgated under the Securities act of 1933, as amended (the "1933 Act");
(c) The Holder understands that Holder may not sell or dispose of the
Shares or the Warrant in the absence of either a registration statement
under the 1933 Act or an exemption from the registration provisions of the
1933 Act;
(d) The Holder understands that the Warrant and the Shares are subject
to restrictions on transfer as provided in the Shareholders Agreement;
(e) The Holder understands and agrees that if he should decide to
dispose of or transfer any of the Shares or the Warrant, he may dispose of
them only (i) to an "accredited investor", (ii) in compliance with the 1933
Act, as then in effect, and (iii) upon delivery to the Company of an
opinion, in form and substance reasonably satisfactory to the Company, of
recognized securities counsel to the effect that the disposition or
transfer is to be made in compliance with all applicable federal and state
securities laws; and
(f) The Holder understands that stop-transfer instructions to the
foregoing effect will be in effect with respect to the Shares and the
Warrant.
Exhibit 1.6 - Page 1 of 2
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this letter to be duly
executed, all as of the day and year first above written.
[HOLDER]
By: ________________________________
Title: ___________________________
Exhibit 1.6 - Page 2 of 2
<PAGE>
Exhibit 10.1
------------
AMENDMENT NO. 2 TO SECOND AMENDED
AND RESTATED CREDIT AGREEMENT
AMENDMENT NO. 2, dated as of March 3, 1999 (this "Amendment"), to the
---------
Existing Credit Agreement (as defined below), among EVERCOM, INC. (formerly
known as Talton Holdings, Inc.), a Delaware corporation (the "Borrower"), each
--------
of the Borrower's Subsidiaries (the "Consenting Obligors"), Canadian Imperial
-------------------
Bank of Commerce, as Administrative Agent for the Lenders and the Lenders (such
capitalized term and other capitalized terms used in this preamble and the
recitals below to have the meanings set forth in, or as defined by reference in,
Article I).
- ---------
W I T N E S S E T H:
-------------------
WHEREAS, the Borrower, the Lenders and the Administrative Agent are parties
to the Second Amended and Restated Credit Agreement, dated as of December 19,
1997 (as heretofore modified, the "Existing Credit Agreement", and together with
-------------------------
this Amendment, the "Credit Agreement");
----------------
WHEREAS, the Borrower desires to amend the Existing Credit Agreement as set
forth herein;
WHEREAS, the Borrower desires that the Lenders consent to certain
transactions as set forth herein; and
WHEREAS, the Required Lenders have agreed, subject to the terms and
conditions hereinafter set forth, to amend the Existing Credit Agreement in
certain respects as provided below;
NOW, THEREFORE, in consideration of the agreements herein contained, the
parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION I.1. Certain Definitions. The following terms (whether or not
-------------------
underscored) when used in this Amendment shall have the following meanings (such
meanings to be equally applicable to the singular and plural form thereof):
"Amendment" is defined in the preamble.
--------- --------
"Borrower" is defined in the preamble.
-------- --------
"Consenting Obligors" is defined in the preamble.
------------------- --------
"Credit Agreement" is defined in the first recital.
---------------- -------------
<PAGE>
"Existing Credit Agreement" is defined in the first recital.
------------------------- -------------
"Subject Transaction" means (a) the making of Additional Term Loans in a
-------------------
maximum principal amount of $5,500,000 and on the other terms and conditions set
forth in this Amendment and (b) the sale by the Borrower of preferred stock and
warrants to the Investors in exchange for net cash proceeds of at least
$5,000,000 on terms consistent with the terms set forth in Exhibit A hereto.
---------
"Second Amendment Effective Date" is defined in Section 4.1.
------------------------------- -----------
SECTION I.2. Other Definitions. Terms for which meanings are provided in
-----------------
the Existing Credit Agreement are, unless otherwise defined herein or the
context otherwise requires, used in this Amendment with such meanings.
ARTICLE II
AMENDMENTS TO CREDIT AGREEMENT
Effective on (and subject to the occurrence of) the Second Amendment
Effective Date, the Existing Credit Agreement is hereby amended in accordance
with this Article II; except as so amended, the Existing Credit Agreement shall
----------
continue in full force and effect.
SECTION II.1. Amendments to Recitals. Clause (a) of the fifth recital of
----------------------
the Existing Credit Agreement is hereby amended and restated in its entirety to
read as follows:
"(a) (i) a Term Loan Commitment pursuant to which Borrowings of Term
Loans were made, in a maximum aggregate principal amount of $55,000,000, to
the Borrower in multiple Borrowings occurring on and subsequent to the
Closing Date but prior to the Term Loan Commitment Termination Date
(collectively, the "Existing Term Loans"; and
-------------------
(ii) an Additional Term Loan Commitment pursuant to which Borrowings
of Additional Term Loans will be made, in a maximum aggregate principal
amount not to exceed $5,500,000, to the Borrower in a single Borrowing
occurring on a Business Day on or subsequent to the Second Amendment
Effective Date but prior to the Additional Term Loan Commitment Termination
Date; and"
SECTION II.2. Amendments to Article I. Article I of the Existing Credit
-----------------------
Agreement is hereby amended as follows:
SECTION II.2.1. Section 1.1 of the Existing Credit Agreement is hereby
amended by inserting the following definitions in such Section in the
appropriate alphabetical sequence:
"Additional Term Loan" is defined in clause (b) of Section 2.1.1.
-------------------- ---------- -------------
"Additional Term Loan Commitment" means, relative to any Lender, such
-------------------------------
Lender's obligation to make Term Loans pursuant to clause (b) of Section
---------- -------
2.1.1.
-----
-2-
<PAGE>
"Additional Term Loan Commitment Amount" means, on any date,
--------------------------------------
$5,500,000, as such amount may be reduced from time to time pursuant to
Section 2.2.
-----------
"Additional Term Loan Commitment Termination Date" means the earliest
------------------------------------------------
of:
(a) the date on which the Additional Term Loans are made;
(b) the date on which any Commitment Termination Event occurs;
or
(c) March 31, 1999.
Upon the occurrence of any event described in clauses (b) or (c), the
----------- ---
Additional Term Loan Commitment shall terminate automatically and without
any further action.
"Additional Term Note" means a promissory note of the Borrower payable
--------------------
to any Lender, substantially in the form of Exhibit A-3 hereto (as such
-----------
promissory note may be amended, endorsed or otherwise modified from time to
time), evidencing the aggregate Indebtedness of the Borrower to such Lender
resulting from outstanding Additional Term Loans, and also means all other
promissory notes accepted from time to time in substitution therefor or
renewal thereof.
"Additional Term Percentage" means, relative to any Lender, the
--------------------------
applicable percentage relating to Additional Term Loans set forth opposite
its name on Schedule II hereto under the Additional Term Loan column or set
-----------
forth in a Lender Assignment Agreement under the Additional Term Loan
column, as such percentage may be adjusted from time to time pursuant to
Lender Assignment Agreements executed by such Lender and its assignee
Lender and delivered pursuant to Section 10.11.1. A Lender shall not have
-------
any Additional Term Loan Commitment if its percentage under the Additional
Term Loan column is zero.
"Amendment No. 2" means Amendment No. 2, dated as of March 3, 1999, to
---------------
Second Amended and Restated Credit Agreement, among the Borrower, the
Administrative Agent and the Lenders parties thereto, and consented to by
the Consenting Obligors listed at the end thereof.
"Existing Term Loans" is defined in clause (a)(i) of the fifth
------------------- ------------- -----
recital.
- -------
"Existing Term Note" means a promissory note of the Borrower payable
------------------
to any Lender, substantially in the form of Exhibit A-2 hereto (as such
-----------
promissory note may be amended, endorsed or otherwise modified from time to
time), evidencing the aggregate Indebtedness of the Borrower to such Lender
resulting from outstanding Existing Term Loans, and also means all other
promissory notes accepted from time to time in substitution therefor or
renewal thereof.
"Existing Term Percentage" means, relative to any Lender, the
------------------------
applicable percentage relating to Existing Term Loans set forth opposite
its name on Schedule II hereto under the Existing Term Loans column or set
-----------
forth in a Lender Assignment Agreement under the Existing Term Loans
column, as such percentage may be adjusted from time to time pursuant
to Lender Assignment Agreements executed by such Lender and its assignee
Lender and delivered pursuant
-3-
<PAGE>
to Section 10.11.1. A Lender shall not have made any Existing Term Loans if
-------
its percentage under the Existing Term Loans column is zero.
"Maintenance Capital Expenditures" means, for any period, Capital
--------------------------------
Expenditures but solely to the extent that such Capital Expenditures are
associated with existing accounts, existing incarceration facilities and
existing pay telephone services.
"Second Amendment Effective Date" is defined in Section 4.1 of
-------------------------------
Amendment No. 2.
SECTION II.2.2. Section 1.1 of the Existing Credit Agreement is hereby
amended by amending and restating the following definitions in such Section so
that they read in their entireties as follows:
"Percentage" means, relative to any Lender, the applicable percentage
----------
relating to Revolving Loans, Existing Term Loans, Additional Term Loans or
its aggregate percentage for all facilities provided herein, as the case
may be, as set forth opposite its name on Schedule II hereto under the
-----------
applicable column heading or set forth in Lender Assignment Agreement(s)
under the applicable column heading, as such percentage may be adjusted
from time to time pursuant to Lender Assignment Agreement(s) executed by
such Lender and its Assignee Lender(s) and delivered pursuant to Section
-------
10.11. A Lender shall not have any Commitment to make Existing Term Loans,
-----
Additional Term Loans or Revolving Loans (as the case may be) if its
percentage under the applicable column heading on Schedule II is zero. As
-----------
used herein, "Percentage" as it relates to a Lender's Percentage of Letter
of Credit Outstandings or Swing Line Loans shall be equal to such Lender's
Percentage of Revolving Loans.
"Term Loan Commitment" means, relative to any Lender, such Lender's
--------------------
obligation to make Existing Term Loans pursuant to clause (a) of Section
---------- -------
2.1.1 and/or to make Additional Term Loans pursuant to clause (b) of
----- ----------
Section 2.1.1, as the context may require.
-------------
"Term Loans" means, collectively, the Existing Term Loans and the
----------
Additional Term Loans.
"Term Note" means, as the context may require, an Additional Term Note
---------
or an Existing Term Note.
SECTION II.2.3. Section 1.1 of the Existing Credit Agreement is hereby
amended by amending
(a) the definition of "EBITDA to Fixed Charges Ratio" by inserting the
word "Maintenance" before the words "Capital Expenditures" in clause (ii)
thereof;
(b) the definition of "Applicable Base Rate Margin" by inserting the
following sentence at the end thereof: "Notwithstanding anything contained
in this definition, the Applicable Base Rate Margin for Additional Term
Loans shall be 2.5% per annum at all times."; and
(c) the definition of "Applicable LIBO Rate Margin" by inserting the
following sentence at the end thereof: "Notwithstanding anything contained
in this definition, the Applicable LIBO Rate Margin for Additional Term
Loans shall be 3.5% per annum at all times."
-4-
<PAGE>
SECTION II.3. Amendments to Article II. Article II of the Existing Credit
------------------------
Agreement is hereby amended as follows:
SECTION II.3.1. Section 2.1.1 of the Existing Credit Agreement is hereby
amended by inserting an "(a)" prior to the initial sentence thereof and adding a
new clause (b) at the end of such Section to read as follows:
"(b) Subject to compliance by the Borrower with the terms hereof, in a
single Borrowing occurring on or after the Second Amendment Effective Date
but prior to the Additional Term Loan Termination Date, each Lender with a
Percentage in excess of zero of the Additional Term Loan Commitment Amount
will make loans (relative to such Lender, its "Additional Term Loans") to
---------------------
the Borrower equal to such Lender's Percentage of the aggregate amount of
the Borrowing of Additional Term Loans requested by the Borrower to be made
on such day (the commitment of each such Lender described in this Section
-------
2.1.1 is herein referred to as its "Additional Term Loan Commitment"). No
----- -------------------------------
amounts paid or prepaid with respect to any Additional Term Loans may be
reborrowed."
SECTION II.3.2. Section 2.1.4 of the Existing Credit Agreement is hereby
amended by adding a new clause (d) thereto to read as follows:
"(d) make any Additional Term Loan if, after giving effect thereto,
the aggregate outstanding principal amount of all the Additional Term Loans
(i) of all Lenders with an Additional Term Loan Commitments
would exceed the Additional Term Loan Commitment Amount; or
(ii) of such Lender with an Additional Term Loan Commitment
would exceed such Lender's Percentage of the Additional Term Loan
Commitment Amount."
SECTION II.4. Amendments to Article III. Article III of the Existing
-------------------------
Credit Agreement is hereby amended as follows:
SECTION II.4.1. Section 3.1.1. of the Existing Credit Agreement is hereby
amended as follows:
(a) clause (c) thereof is hereby amended by inserting the word
"Existing" before the word "Term" in each place such word appears therein.
(b) the word "and" is deleted from the end of clause (h) thereof and
the period at the end of clause (i) thereof is deleted and replaced with ";
and".
(c) a new clause (j) is inserted following clause (i) of Section 3.1.1
thereof to read as follows:
"(j) shall, on December 31, 2002, make a scheduled repayment of
the aggregate outstanding principal amount, if any, of all Additional
Term Loans, as such amount may
-5-
<PAGE>
be reduced from time to time pursuant to prepayments in accordance
with the terms hereof."
SECTION II.4.2. Section 3.1.2. of the Existing Credit Agreement is hereby
amended by inserting the reference to "and Section 3.1.1(j)" immediately
----------------
following the reference to "Section 3.1.1(c)" in clause (b) thereof.
----------------
SECTION II.5. Amendments to Article V. Article V of the Existing Credit
-----------------------
Agreement is hereby amended by adding a new Section 5.4 to read as follows:
SECTION 5.4 Condition Precedent to Additional Term Loans. In addition
--------------------------------------------
to any other requirements contained in Section 5.2, prior to the making of
-----------
any Additional Term Loans, the Administrative Agent shall have received a
certificate, substantially in the form of Exhibit I hereto, dated as of the
---------
date of the initial Borrowing of Additional Term Loans, duly executed by an
Authorized Officer of the Borrower, in which the Borrower shall acknowledge
that the Borrower shall have received net cash proceeds of at least
$5,000,000 from clause (b) of the Subject Transaction, and such funds shall
actually have been received by the Borrower, on terms and conditions
satisfactory to the Administrative Agent.
SECTION II.6. Amendments to Article VII. Article VII of the Existing
-------------------------
Credit Agreement is hereby amended as follows:
SECTION II.6.1. Section 7.1.11. of the Existing Credit Agreement is hereby
amended by inserting the word "Existing" immediately prior to the words "Term
Loans" in the first line thereof and inserting the words "and Additional Term
Loans" immediately following the words "of Revolving Loans" in the fifth line
thereof.
SECTION II.6.2. Section 7.1.12. of the Existing Credit Agreement is hereby
amended by inserting the word "Existing" immediately prior to the word "Term" in
each place where such word appears therein.
SECTION II.6.3. A new clause (e) is inserted at the end of Section 7.2.4 of
the Existing Credit Agreement to read as follows:
(e) its EBITDA to be less than the following amounts as of the last
day of each Fiscal Quarter occurring on or during each measurement period
set forth below:
Period Minimum
------ EBITDA
-------
Fiscal Quarter ending 3/31/99 $6,800,000
Fiscal Quarter ending 6/30/99 $8,500,000
Fiscal Quarter ending 9/30/99 $9,400,000
Fiscal Quarter ending 12/31/99 $9,500,000
-6-
<PAGE>
Period Minimum
------ EBITDA
-------
Each Fiscal Quarter in the Fiscal $9,600,000
Year ending 12/31/00
Each Fiscal Quarter in the Fiscal $11,300,000
Year ending 12/31/01
Each Fiscal Quarter thereafter $12,700,000
SECTION II.6.4. A new Section 7.2.16 is of the Existing Credit Agreement is
hereby inserted following Section 7.2.15 of the Existing Credit Agreement to
read as follows:
SECTION 7.2.16 Capital Expenditures, etc. The Borrower will not, and
-------------------------
will not permit any of its Subsidiaries to, make or commit to make Capital
Expenditures in any Fiscal Year which aggregate in excess of the amount set
forth below opposite such Fiscal Year:
Fiscal Year Capital Expenditure Amount
----------- --------------------------
1998 $14,000,000
1999 $12,000,000
2000 and thereafter $10,000,000
SECTION II.7. Schedule II to Credit Agreement. The Existing Credit
-------------------------------
Agreement is hereby amended by adding a new Schedule II thereto in the form of
Schedule II hereto.
- -----------
SECTION II.8. Exhibit I to Credit Agreement. The Existing Credit
-----------------------------
Agreement is hereby amended by adding a new Exhibit I thereto in the form of
Exhibit I hereto.
- ---------
ARTICLE III
CONSENT AND INTEREST RATE ADJUSTMENT
Subject to the terms of this Amendment, effective on the Second Amendment
Effective Date, and in reliance upon the representations and warranties made
herein and in each other Loan Document, the parties hereto agree that, any term
or provision of the Credit Agreement to the contrary notwithstanding, (a) the
Subject Transaction shall be deemed to be permitted for purposes of the Credit
Agreement, (b) no part of the Subject Transaction shall be deemed to breach any
covenant contained therein or in any other Loan Document, (c) no prepayment of
the Loans shall be required pursuant to clause (f) of Section 3.1.1 of the
Credit Agreement in connection with the Net Equity Proceeds received in
accordance with Section 4.1.7, (d) the Lenders hereby waive any Default with
-------------
respect to (i) any financial covenant contained in clause (d) of Section 7.2.4
of the Credit Agreement prior to the Second Amendment Effective Date, (ii) the
payment of fees in connection with Section 7.2.7 of the Credit Agreement prior
to the Second Amendment Effective Date (to the extent such fees were paid for
Related Acquisitions), and (iii) the delivery of a Compliance Certificate
pursuant to clause (d)(i) of Section 7.1.1 of the Credit Agreement for the last
Fiscal
-7-
<PAGE>
Quarter of 1998 so long as such Compliance Certificate (giving effect to this
Amendment) is delivered on or before March 3, 1999, and (e) for the period
commencing on the Second Amendment Effective Date through (and including) the
date upon which the Compliance Certificate is delivered for the Fiscal Quarter
ending December 31, 1999, the Applicable LIBO Rate Margin shall be 3.50% per
annum and the Applicable Base Rate Margin shall be 2.25% per annum, in each
case, for all Revolving Loans and Existing Term Loans. Except as expressly
provided in this Amendment, the Credit Agreement and each other Loan Document
shall continue in full force and effect in accordance with their respective
terms.
ARTICLE IV
CONDITIONS TO EFFECTIVENESS
SECTION IV.1. Amendment Effective Date. This Amendment (and the
------------------------
amendments and modifications contained herein) shall become effective, and shall
thereafter be referred to as "Amendment No. 2", on the date (the "Second
--------------- ------
Amendment Effective Date") when all of the conditions set forth in this Section
- ------------------------ -------
4.1 have been satisfied.
- ---
SECTION IV.1.1. Execution of Counterparts. The Administrative Agent shall
-------------------------
have received counterparts of this Amendment, duly executed and delivered on
behalf of the Borrower, the Required Lenders and each Lender with an Additional
Term Loan Commitment.
SECTION IV.1.2. Resolutions, etc. The Administrative Agent shall have
----------------
received from the Borrower a certificate, dated the Second Amendment Effective
Date, in form and substance satisfactory to the Administrative Agent, of its
Secretary or Assistant Secretary as to (a) resolutions of its Board of Directors
then in full force and effect authorizing the execution, delivery and
performance of this Amendment and each other Loan Document to be executed by it;
and (b) the incumbency and signatures of those of its officers authorized to act
with respect to this Amendment and each other Loan Document executed by it, upon
which certificate each Lender may conclusively rely until it shall have received
a further certificate of the Secretary or Assistant Secretary of the Borrower
canceling or amending such prior certificate.
SECTION IV.1.3. Delivery of Notes. The Administrative Agent shall have
-----------------
received, for the account of each Lender making Additional Term Loans, its
Additional Term Notes duly executed and delivered by the Borrower.
SECTION IV.1.4. Opinions of Counsel. The Administrative Agent shall have
-------------------
received legal opinions, dated the Second Amendment Effective Date and addressed
to the Administrative Agent and all Lenders, from (a) Stutzman & Bromberg, a
professional corporation, counsel to the Obligors and (b) Shustak, Jalil &
Heller, New York counsel to the Obligors, each satisfactory in form and
substance to the Administrative Agent.
SECTION IV.1.5. Amendment Fee and Additional Term Loan Fee. The
------------------------------------------
Administrative Agent shall have received, (a) for the account of each Lender
signatory hereto prior to or on the date hereof, an amendment fee equal to .375%
of each such Lender's Percentage of the outstanding principal amount of the
Notes and Commitments; and (b) for the account of each Lender that has an
Additional Term Loan Commitment, an up-front fee in an amount equal to 1.25% of
each such Lender's Additional Term Loan Commitment Amount.
-8-
<PAGE>
SECTION IV.1.6. Closing Fees, Expenses, etc. The Administrative Agent
---------------------------
shall have received for the account of each Lender, all fees, costs and expenses
due and payable pursuant to Sections 3.3 and 10.3 of the Credit Agreement or
payable hereunder, if then invoiced.
SECTION IV.1.7. Investor Pledge Agreement Supplement. The Administrative
------------------------------------
Agent shall have received a supplement to the Investor Pledge Agreement, dated
on or prior to the Second Amendment Effective Date, duly executed and delivered
by each Investor pledging all additional preferred stock and warrants of the
Borrower comprising the Subject Transaction.
SECTION IV.1.8. Legal Details, etc. All documents executed or submitted
-------------------
pursuant hereto shall be satisfactory in form and substance to the
Administrative Agent and its counsel. The Administrative Agent and their
counsel shall have received all information and such counterpart originals or
such certified or other copies or such materials, as the Administrative Agent or
its counsel may reasonably request, and all legal matters incident to the
transactions contemplated by this Amendment shall be satisfactory to the
Administrative Agent and its counsel.
ARTICLE V
AFFIRMATION AND CONSENT
SECTION V.1. Acknowledgment and Reaffirmation. The Borrower and each
--------------------------------
Consenting Obligor hereby reaffirms, as of the Second Amendment Effective Date,
(a) the covenants and agreements contained in each Loan Document to which it is
a party, including, in each case, as such covenants and agreements may be
modified by this Amendment and the transactions contemplated thereby, (b) its
guarantee of payment of the Obligations pursuant to the Subsidiary Guaranty and
(c) its obligations with respect to collateral security under each other Loan
Document to which it is a party.
SECTION V.2. Representations and Warranties, etc. The Borrower and each
-----------------------------------
Consenting Obligor hereby certifies that, as of the date hereof (both before and
after giving effect to the occurrence of the Second Amendment Effective Date),
the representations and warranties made by it contained in the Loan Documents to
which it is a party are true and correct in all material respects with the same
effect as if made on the date hereof, except to the extent any such
representation or warranty refers or pertains solely to a date prior to the date
hereof (in which case such representation and warranty was true and correct in
all material respects as of such earlier date).
SECTION V.3. Loan Documents. The Borrower and each Consenting Obligor
--------------
further confirms that each Loan Document to which it is a party (a) is and shall
continue to be in full force and effect and the same are hereby ratified and
confirmed in all respects, except that upon the occurrence of the Second
Amendment Effective Date, all references in such Loan Documents to the "Credit
Agreement", "Loan Documents", "thereunder", "thereof", or words of similar
import shall mean the Credit Agreement and the Loan Documents, as the case may
be, in each case after giving effect to the amendments and other modifications
provided for in this Amendment, (b) if such Loan Document relates to collateral
security, such document shall also expressly and completely secure all
Additional Term Loans and all Obligations related thereto and (c) if such Loan
Document relates to a guarantee, such document shall also expressly and
completely guarantee all Additional Term Loans and all Obligations related
thereto.
-9-
<PAGE>
SECTION V.4. Course of Dealing, etc. Each Consenting Obligor hereby
----------------------
acknowledges and agrees that the acceptance by each Lender of this document
shall not be construed in any manner to establish any course of dealing on any
Lender's part, including the providing of any notice or the requesting of any
acknowledgment not otherwise expressly provided for in any Loan Document with
respect to any future amendment, waiver, supplement or other modification to any
Loan Document or any arrangement contemplated by any Loan Document.
ARTICLE VI
MISCELLANEOUS
SECTION VI.1. Borrowing Request. The Borrower hereby requests from each
-----------------
Lender that has a Percentage in excess of zero of the Additional Term Loan
Commitment a Borrowing of Additional Term Loans in an aggregate principal amount
of $5,500,000 on March 11, 1999 as a Base Rate Loan in an amount equal to such
Lender's Percentage with respect to the Additional Term Loan Commitment. The
Borrower hereby acknowledges that, pursuant to Section 5.2.2 of the Credit
Agreement, each of the delivery of this Amendment (which all parties hereto
agree shall be deemed to be a Borrowing Request) and the acceptance by the
Borrower of the proceeds of the Loans requested hereby constitute a
representation and warranty by the Borrower that, on the date of such Loans, and
immediately before and after giving effect thereto and to the application of the
proceeds therefrom, all the statements set forth in Section 5.2.1 of the Credit
Agreement are true and correct in all material respects.
SECTION VI.2. Cross-References. References in this Amendment to any
----------------
Article or Section are, unless otherwise specified or otherwise required by the
context, to such Article or Section of this Amendment.
SECTION VI.3. Loan Document Pursuant to Credit Agreement. This Amendment
------------------------------------------
is a Loan Document executed pursuant to the Credit Agreement and shall be
construed, administered and applied in accordance with all of the terms and
provisions of the Credit Agreement.
SECTION VI.4. Successors and Assigns. This Amendment shall be binding
----------------------
upon and inure to the benefit of the parties hereto and their respective
successors and assigns.
SECTION VI.5. Counterparts. This Amendment may be executed by the parties
------------
hereto in several counterparts, each of which when executed and delivered shall
be deemed to be an original and all of which shall constitute together but one
and the same agreement.
SECTION VI.6. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK.
-10-
<PAGE>
IN WITNESS WHEREOF, the signatories hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
BORROWER:
EVERCOM, INC.
By: /s/ Jeffrey Cushman
---------------------------
Title: Vice President and Chief Financial Officer
CONSENTING OBLIGORS:
EVERCOM SYSTEMS, INC.
By: /s/ Jeffrey Cushman
---------------------------
Title: Vice President and Chief Financial Officer
SARATOGA TELEPHONE COMPANY, INC.
By: /s/ Jeffrey Cushman
---------------------------
Title: Vice President and Chief Financial Officer
ADMINISTRATIVE AGENT:
CANADIAN IMPERIAL BANK OF COMMERCE
By: /s/ Harold Birk
---------------------------
Title: Executive Director
<PAGE>
CIBC INC.
By: /s/ Harold Birk
---------------------------
Title: Executive Director
FIRST SOURCE FINANCIAL LLP
By: First Source Financial, Inc.
its Agent/Manager
By: /s/ David Wagner
---------------------------
Title: Vice President
IBJ WHITEHALL BANK & TRUST COMPANY
By: /s/ David Thalmann
---------------------------
Title: Director
PARIBAS
By: /s/ Lynn S. Randall
---------------------------
Title: Director
AMERICAN NATIONAL BANK
By:
---------------------------
Title:
ARES LEVERAGED INVESTMENT
FUND L.P.
By: Ares Management L.P.
By: /s/ Jeff Moore
---------------------------
Title: Director
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
Revolving Loan Existing Term Additional Term Aggregate
Commitment Loans Loans Percentage
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CIBC Inc. 32.8125% 19.17613636% 36.36363636% 24.619140625%
First Source Financial LLP 23.4375% 23.43750000% 0% 21.826171875%
IBJ Whitehall Bank & Trust 12.5000% 12.50000000% 0% 11.640625000%
Company
Paribas 12.5000% 12.5000000% 0% 11.640625000%
American National Bank 18.7500% 18.75000000% 0% 17.460937500%
Ares Leveraged Investment 0.0000% 13.63636364% 63.63636364% 12.812500000%
Fund L.P.
</TABLE>
<PAGE>
CERTIFICATE
EVERCOM, INC.
-------------
This Certificate (this "Certificate") is delivered pursuant to Section
-----------
4.1.7 of the Second Amendment, dated as of March 11, 1999, to the Second Amended
and Restated Credit Agreement, among Evercom, Inc., a Delaware corporation (the
"Borrower"), the Lenders parties thereto, Canadian Imperial Bank of Commerce, as
--------
Administrative Agent for the Lenders and the Consenting Obligors. Unless
otherwise defined herein or the context otherwise requires, terms used herein
have the meanings provided in the Credit Agreement.
The Borrower hereby certifies, represents and warrants for and on behalf of
itself and its Subsidiaries, as of the date of the Borrowings of Additional Term
Loans, the Borrower has received new net cash proceeds of at least $5,000,000
from the capital contributions and/or equity issuances which require no
redemptions, repayments, repurchases and no cash dividends or other such cash
payments, in each case, prior to December 31, 2007.
EVERCOM, INC.
By: /s/ Jeffrey Cushman
--------------------------------
Title: Vice President and Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 254,531
<SECURITIES> 0
<RECEIVABLES> 53,165,898
<ALLOWANCES> (4,948,327)
<INVENTORY> 2,075,527
<CURRENT-ASSETS> 53,128,915
<PP&E> 38,497,135
<DEPRECIATION> (9,683,068)
<TOTAL-ASSETS> 193,358,618
<CURRENT-LIABILITIES> 54,884,165
<BONDS> 172,231,250
0
109
<COMMON> 163
<OTHER-SE> (35,393,893)
<TOTAL-LIABILITY-AND-EQUITY> 193,358,618
<SALES> 59,175,294
<TOTAL-REVENUES> 59,175,294
<CGS> 58,317,837
<TOTAL-COSTS> 58,317,837
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,880,164
<INCOME-PRETAX> (4,022,707)
<INCOME-TAX> 13,847
<INCOME-CONTINUING> (4,036,554)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,036,554)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
