<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to sections 13 of 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1999
OR
[ ] Transition report pursuant to sections 13 of 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to ___________
Commission file number 333-33639
EVERCOM, INC.
(Exact name of Registrant as specified in its charter)
Delaware 75-2680266
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8201 Tristar Drive
Irving, Texas 75063
(972) 988-3737
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of September 30, 1999, 16,033 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.
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EVERCOM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Stockholders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 28
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EVERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 1,691,762 $ 3,820,307
Accounts receivable................................ 39,070,959 37,298,854
Refundable income taxes............................ 435,593 445,482
Inventories........................................ 2,360,280 2,799,656
Prepaid expenses and other current assets.......... 392,448 351,796
Deferred income tax asset.......................... 1,442,122 1,973,146
------------ ------------
Total current assets............................. 45,393,164 46,689,241
PROPERTY AND EQUIPMENT.............................. 29,485,944 28,208,311
INTANGIBLE AND OTHER ASSETS......................... 116,586,808 102,277,012
------------ ------------
TOTAL........................................... $191,465,916 $177,174,564
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable................................... $ 21,856,484 $ 18,050,448
Accrued expenses................................... 23,798,055 25,525,507
Current portion of long-term debt.................. 10,607,729 11,753,370
------------ ------------
Total current liabilities........................ 56,262,268 55,329,325
LONG-TERM DEBT...................................... 169,375,000 158,635,999
OTHER LONG-TERM LIABILITIES......................... 500,000 818,463
DEFERRED INCOME TAXES............................... 1,442,122 1,973,146
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, 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).
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 September 30, 1999............................. 59 109
Common stock, $.01 par value; 50,000 shares
authorized, 16,333 shares and 16,433 issued and
outstanding as of December 31, 1998 and
September 30, 1999, respectively.................. 163 164
Additional paid-in capital......................... 21,829,562 26,298,917
Accumulated deficit................................ (57,943,258) (65,881,559)
------------ ------------
Total stockholders' deficit...................... (36,113,474) (39,582,369)
------------ ------------
TOTAL............................................ $191,465,916 $177,174,564
============ ============
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
EVERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
----------------------------- -----------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
OPERATING REVENUE...................................... $ 60,564,379 $ 59,126,639 $164,169,127 $178,461,997
OPERATING EXPENSES:
Telecommunication costs............................... 27,315,069 24,404,796 71,107,854 77,717,419
Facility commissions.................................. 18,638,901 17,786,625 51,983,735 53,899,519
Field operations and maintenance...................... 2,037,557 1,764,280 5,784,215 5,107,713
Selling, general, and administrative.................. 4,865,391 4,233,144 13,181,960 12,871,682
Depreciation.......................................... 1,543,809 1,836,722 4,233,484 5,302,114
Amortization of intangibles........................... 6,324,118 5,310,427 19,241,182 16,647,884
Restructuring costs................................... 1,401,868 1,401,868
----------- ------------ ------------ ------------
Total operating expenses............................. 62,126,713 55,335,994 166,934,298 171,546,331
----------- ------------ ------------ ------------
OPERATING (LOSS) INCOME................................ (1,562,334) 3,790,645 (2,765,171) 6,915,666
OTHER EXPENSE (INCOME):
Interest expense, net................................. 4,904,852 4,951,302 14,668,487 14,688,069
Other (income), net................................... (39,962) (198,917)
----------- ------------ ------------ ------------
Total other (income) expense......................... 4,864,890 4,951,302 14,469,570 14,688,069
----------- ------------ ------------ ------------
LOSS BEFORE INCOME TAXES............................... (6,427,224) (1,160,657) (17,234,741) (7,772,403)
INCOME TAX EXPENSE..................................... 375,164 69,656 857,760 165,898
----------- ------------ ------------ ------------
NET LOSS............................................... $(6,802,388) $ (1,230,313) $(18,092,501) $ (7,938,301)
PREFERRED STOCK DIVIDENDS AND
ACCRETION OF DISCOUNT................................. 118,500 364,885 355,500 867,357
----------- ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK.................... $(6,920,888) $ (1,595,198) $(18,448,001) $ (8,805,658)
=========== ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
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EVERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Month Period
Ended September 30,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................................... $(18,092,501) $ (7,938,301)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation.................................................................... 4,233,484 5,302,114
Amortization of intangible assets, including deferred financing costs........... 20,145,275 17,414,720
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable........................................................... (26,534,813) 1,631,061
Inventories................................................................... (1,278,164) (439,376)
Prepaid expenses and other assets............................................. (602,828) 720,751
Accounts payable.............................................................. 17,604,407 (3,806,036)
Accrued expenses.............................................................. 5,165,401 2,507,941
Income taxes.................................................................. 809,277 (9,889)
------------ ------------
Net cash provided by operating activities................................... 1,449,538 15,382,985
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash...................................................... 1,919,312
Capital expenditures............................................................. (10,302,164) (5,784,516)
Cash outflows for acquisitions................................................... (10,470,803) (2,434,909)
------------ ------------
Net cash used in investing activities....................................... (18,853,655) (8,219,425)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt............................................... 15,000,000 5,500,000
Payment of debt issuance costs................................................... (336,992)
Repayment of debt................................................................ (2,787,311) (15,093,360)
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 (used in) financing activities......................... 11,738,689 (5,035,015)
------------ ------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................. (5,665,428) 2,128,545
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................... 7,777,996 1,691,762
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................... $ 2,112,568 $ 3,820,307
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................................................... $ 17,183,491 $ 10,718,189
============ ============
Cash paid for income taxes....................................................... $ 467,370 $ 175,787
============ ============
NONCASH TRANSACTIONS:
Dividends payable................................................................ $ 355,500 $ 575,931
============ ============
Issuance of debt for acquisition of assets....................................... $ 950,000 $
============ ============
Stock issued for acquisition of assets........................................... $ $ 150,000
============ ============
Exercise of common stock options issued in connection with acquisition........... $ 200,000 $
============ ============
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
EVERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of September 30, 1999 and for the
three and nine-month periods ended September 30, 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 continue its existence
as 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," 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, 2000. The Company is currently evaluating the effect
that SFAS No. 133 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, September 30,
1998 1999
------------- --------------
(Unaudited)
<S> <C> <C>
Trade accounts receivable, net of advance payments received of $141,460
and $36,334 at December 31, 1998 and September 30, 1999, respectively...................... $ 42,308,582 $36,580,929
Advance commissions receivable.............................................................. 2,020,020 2,311,985
Receivables related to acquisitions......................................................... 141,044 242,173
Recoverable Universal Service Fund fees - current portion................................... 1,089,800 1,079,710
Receivables from joint venture partner...................................................... 419,643
Employees and other......................................................................... 329,749 49,170
----------- -----------
46,308,838 40,263,967
Less allowance for unbillable and uncollectible chargebacks................................. (7,237,879) (2,965,113)
----------- -----------
$39,070,959 $37,298,854
=========== ===========
</TABLE>
At December 31, 1998 and September 30, 1999, the Company had advanced
commissions to certain inmate facilities of $2,495,558 and $2,504,200
(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, September 30,
1998 1999
------------- --------------
(Unaudited)
<S> <C> <C>
Leasehold improvements...................................................................... $ 834,051 $ 866,923
Telephone system equipment.................................................................. 33,776,168 37,641,708
Vehicles.................................................................................... 431,807 431,807
Office equipment............................................................................ 2,419,992 2,546,061
----------- ------------
$37,462,018 $ 41,486,499
Less accumulated depreciation............................................................... (7,976,074) (13,278,188)
----------- ------------
$29,485,944 $ 28,208,311
=========== ============
</TABLE>
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<PAGE>
4. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------- --------------
(Unaudited)
<S> <C> <C>
Intangible assets:
Acquired telephone contracts.............................................. $ 63,835,844 $ 67,211,863
Noncompete agreements..................................................... 568,611 568,611
Deferred loan costs....................................................... 8,299,067 8,636,059
Goodwill.................................................................. 84,530,834 84,530,834
Other intangibles......................................................... 694,493 766,502
------------ ------------
$157,928,849 $161,713,869
Less accumulated amortization.............................................. (42,640,007) (60,054,724)
------------ ------------
Total intangible assets..................................................... 115,288,842 101,659,145
Deposits.................................................................... 400,540 425,652
Recoverable Universal Service Fund fees - noncurrent portion................ 421,888
Other assets - noncurrent portion of commission advances to facilities...... 475,538 192,215
------------ ------------
$116,586,808 $102,277,012
============ ============
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------- --------------
(Unaudited)
<S> <C> <C>
Facility commissions................................................. $ 8,007,248 $ 7,273,226
Billing and collection fees.......................................... 1,804,790 1,623,029
Uncollectible call chargebacks....................................... 5,267,345 4,730,456
Accrued acquisition and financing costs.............................. 3,941,666 2,585,246
Accrued interest..................................................... 218,646 3,421,693
Accrued excise taxes payable......................................... 2,072,856 2,461,674
Accrued dividends on preferred stock................................. 474,000 1,049,931
Accrued restructure costs............................................ 654,245 117,894
Accrued payroll and bonuses.......................................... 778,633 1,252,630
Other................................................................ 578,626 1,009,728
----------- -----------
$23,798,055 $25,525,507
=========== ===========
</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
restructuring plan. The plan provides for the consolidation of certain
operations, including closing a number of office locations, reducing the
workforce by approximately 21 employees and eliminating certain management
positions. Based on the finalization of estimates included within the plan and
the undertaking of certain actions in accordance with the plan, management made
revisions to the original estimates during the fourth quarter of 1998. The
revisions primarily resulted from the final determination of the number of
employees terminated, which resulted in 19
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<PAGE>
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
restructuring plan 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 to Amounts Amounts
Earnings in Incurred in Incurred in
1998 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Severance and related costs........................... $ 614,678 $252,885 $361,793
Leased facilities..................................... 217,902 68,449 82,340
Legal and other costs................................. 379,685 236,685 92,219
---------- -------- --------
$1,212,265 $558,019 $536,352
========== ======== ========
</TABLE>
6. LONG-TERM DEBT
The following is a summary of long-term debt:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------- --------------
(Unaudited)
<S> <C> <C>
Senior Notes............................................. $115,000,000 $115,000,000
Senior Credit Facility:
Revolving loan facility................................. 14,500,000 7,500,000
Term loan acquisition facility.......................... 49,500,000 42,281,250
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.................................................... 32,729 108,119
------------ ------------
179,982,729 170,389,369
Less current portion of long-term debt................... (10,607,729) (11,753,370)
------------ ------------
$169,375,000 $158,635,999
============ ============
</TABLE>
In March 1999, the Company amended its revolving and term loan agreement
(the "Senior Credit Facility"), 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.
In September 1999, the Company amended its Senior Credit Facility. The
amendment simplified certain ratios in the financial covenants.
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<PAGE>
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 September 30, 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 net proceeds were
allocated based on their relative fair values.
The First Preferred Series A Stock is entitled to receive dividends at the
applicable First Preferred Series A Rate, payable quarterly commencing on April
1, 1999. Dividends are 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 is eight percent per annum through March 31, 2001, will be 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 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 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 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). 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. Scheduled
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<PAGE>
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) LIBOR plus 350 basis points
through the remainder of 1999.
In September 1999, the Company amended its Senior Credit Facility. The
amendment simplified certain ratios in the financial covenants.
8. ACQUISITION
Effective June 1, 1999, the Company entered into an agreement to purchase
substantially all of the net assets of the inmate payphone divisions of Alliance
Tel-Com, Inc., KR&K Communications, Inc., U.S. Connect, Inc., Tele-
Communications, Inc., and Lake-Tel, Inc. (collectively, "Alliance"), which are
all part of an affiliated group of companies. The purchase price consisted of
100 shares of the Company's common stock, a contingent payment of up to an
additional 440 shares of the Company's common stock if certain financial
objectives are met, assumption of $275,000 of liabilities, and a cash payment of
$10.
9. STOCK OPTIONS
On July 1, 1999, the Company granted certain executives and employees 315
options to acquire common stock at an exercise price of $2,000 per share.
- 11 -
<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 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 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
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<PAGE>
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 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.
In July of 1999, the Company began providing validation, billing, and
collection services for the inmate calls of an additional RBOC.
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 rather 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 facilities. Commission rates
are the principal basis of competition for obtaining and retaining contracts.
The Company's ability to offer 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 from 23.8% in 1995 to 30.1% for the three months ended September
30, 1999. This is due primarily to higher facility commissions on contracts
obtained by
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<PAGE>
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 30.1% for the three months ended
September 30, 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 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, Saratoga Telephone Company,
Inc. ("Saratoga") on July 1, 1998, and Alliance as of June 1, 1999
(collectively, the "Acquisitions").
- 14 -
<PAGE>
Results of Operations
The following table sets forth, for the three months and nine months ended
September 30, 1998 and 1999, respectively, the results of operations of the
Company.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------- ------------------------------------------
1998 1999 1998 1999
------------------ ----------------- ------------------ ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenue.................... $ 60,564 100.0% $59,127 100.0% $164,169 100.0% $178,462 100.0%
Operating expenses:
Telecommunication costs............... 27,315 45.1 24,405 41.3 71,108 43.3 77,717 43.5
Facility commissions.................. 18,639 30.8 17,787 30.1 51,984 31.7 53,899 30.2
Field operations & maintenance........ 2,038 3.4 1,764 3.0 5,784 3.5 5,108 2.9
Selling, general &
administrative....................... 4,865 8.1 4,233 7.1 13,182 8.0 12,872 7.2
Depreciation.......................... 1,544 2.5 1,837 3.1 4,233 2.6 5,302 3.0
Amortization of intangibles........... 6,324 10.4 5,310 9.0 19,241 11.7 16,648 9.3
Restructuring costs................... 1,402 2.3 1,402 0.9
------- ----- ------- ----- -------- ----- -------- -----
Total operating expenses............ 62,127 102.6 55,336 93.6 166,934 101.7 171,546 96.1
------- ----- ------- ----- -------- ----- -------- -----
Operating (loss) income................ (1,563) (2.6) 3,791 6.4 (2,765) (1.7) 6,916 3.9
Other (income) expense:
Interest expense, net................ 4,905 8.1 4,951 8.4 14,669 8.9 14,688 8.2
Other, net........................... (40) (0.1) (199) (0.1)
------- ----- ------- ----- -------- ----- -------- -----
Total other (income) expense........... 4,865 8.0 4,951 8.4 14,470 8.8 14,688 8.2
------- ----- ------- ----- -------- ----- -------- -----
Loss before income taxes............... (6,428) (10.6) (1,160) (2.0) (17,235) (10.5) (7,772) (4.3)
Income tax expense..................... 375 0.6 70 0.1 858 0.5 166 0.1
------- ----- ------- ----- -------- ----- -------- -----
Net loss............................... $ (6,803) (11.2)% $(1,230) (2.1)% $(18,093) (11.0)% $ (7,938) (4.4)%
======= ===== ======= ===== ======== ===== ======== =====
EBITDA................................. $ 6,345 10.5% $10,938 18.5% $ 20,908 12.7% $ 28,866 16.2%
======= ===== ======= ===== ======== ===== ======== =====
</TABLE>
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Operating Revenues. The Company's operating revenues decreased by $1.5
million, or 2.4%, from $60.6 million for the three months ended September 30,
1998 to $59.1 million for the three months ended September 30, 1999. The
decrease in operating revenues was primarily due to enhancements by the Company
to its validation process and refinements to its credit policies relating to the
integration of the Acquisitions by which the Company seeks to avoid revenue with
higher collection risk. The decrease in operating revenues is also due to the
expiration of the Company's contract with the State of Alabama during February
1999, which was not renewed. The decrease in operating revenues was offset by
revenues generated by the acquisition of Alliance in the second quarter of 1999
and new contract installations.
Operating Expenses. Total operating expenses decreased $6.8 million, from
$62.1 million for the three months ended September 30, 1998 to $55.3 million for
the three months ended September 30, 1999. Operating expenses as a percentage of
operating revenues decreased 9.0% from 102.6% for the three months ended
September 30, 1998 to 93.6% for the three months ended September 30, 1999. The
decrease in operating expenses as a percentage of revenues is primarily due to
the factors discussed below.
Telecommunication costs decreased by $2.9 million, from $27.3 million for
the three months ended September 30, 1998 to $24.4 million for the
- 15 -
<PAGE>
three months ended September 30, 1999. Telecommunication costs represented 45.1%
of operating revenues for the three months ended September 30, 1998 and 41.3% of
operating revenues for the three months ended September 30, 1999.
Telecommunication costs in total, and as a percentage of revenue, decreased
primarily due to savings generated by new long distance contracts.
Facility commissions decreased by $0.8 million, from $18.6 million for the
three months ended September 30, 1998 to $17.8 million for the three months
ended September 30, 1999. Facility commissions represented 30.8% of operating
revenues for the three months ended September 30, 1998 and 30.1% of operating
revenues for the three months ended September 30, 1999, a decrease of 0.7%. The
decrease as a percentage of operating revenues is primarily due to the
validation, billing, and collection services provided to the major RBOCs, as
further discussed in the "Overview." Commission expense as a percentage of
revenue for the Company's traditional inmate business was 33.5% and 33.7% for
the three months ended September 30, 1998 and 1999, respectively. Commission
rates are expected to gradually increase in the future, as discussed in
"Overview."
Field operations and maintenance costs decreased by $0.2 million, from $2.0
million for the three months ended September 30, 1998 to $1.8 million for the
three months ended September 30, 1999. Field operations and maintenance costs
represented 3.4% of operating revenues for the three months ended September 30,
1998 and 3.0% of operating revenues for the three months ended September 30,
1999, a decrease of 0.4%. 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 decreased by $0.7 million, from $4.9 million for the three
months ended September 30, 1998 to $4.2 million for the three months ended
September 30, 1999. SG&A represented 8.1% of operating revenues for the three
months ended September 30, 1998 and 7.2% of operating revenues for the three
months ended September 30, 1999, a decrease of 0.9%. 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 $0.8 million, from $7.9
million for the three months ended September 30, 1998 to $7.1 million for the
three months ended September 30, 1999. Depreciation and amortization costs
represented 12.9% of operating revenues for the three months ended September 30,
1998 and 12.1% of operating revenues for the three months ended September 30,
1999, a decrease of 0.8%. 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 overall amortization expense declines.
In September of 1998, the Company recorded a restructuring charge of $1.4
million as a result of its integration of the Acquisitions. The restructuring
charge was subsequently reduced by $0.2 million in the fourth quarter of 1998
due to a revision of the original estimate.
Operating Income (Loss). The Company's operating income increased by $5.4
million, from a loss of $1.6 million for the three months ended
- 16 -
<PAGE>
September 30, 1998 to operating income of $3.8 million for the three months
ended September 30, 1999, due to the factors described above. The Company's
operating income margin increased from a negative operating margin of 2.6% for
the three months ended September 30, 1998 to a positive operating margin of 6.4%
for the three months ended September 30, 1999, primarily as a result of the
factors described above.
Other (Income) Expense. Other (income) expense, consisting primarily of
interest expense, increased by $0.1 million from $4.9 million for the three
months ended September 30, 1998 to $5.0 million for the three months ended
September 30, 1999. The increase was primarily due to higher interest expense
associated with indebtedness incurred by the Company in connection with the
Acquisitions.
Net Loss. The Company's net loss decreased by $5.6 million, from $6.8
million for the three months ended September 30, 1998 to $1.2 million for the
three months ended September 30, 1999, primarily as a result of the factors
described above.
EBITDA. Earnings before interest, taxes, depreciation, and amortization
("EBITDA") increased by $4.6 million from $6.3 million for the three months
ended September 30, 1998 to $10.9 million for the three months ended September
30, 1999. EBITDA as a percentage of operating revenues increased from 10.5% for
the three months ended September 30, 1998 to 18.5% for the three months ended
September 30, 1999, primarily due to savings generated by new long distance
contracts, a restructuring charge in September of 1998 resulting from the
Company's integration of the Acquisitions and reduced costs as a result of
consolidation of the Company's operations. 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 performance. Two of the
Company's subsidiaries are subject to state income taxes. Consequently, the
Company accrues income tax expense even in a loss period.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Operating Revenues. The Company's operating revenues increased by $14.3
million, or 8.7%, from $164.2 million for the nine months ended September 30,
1998 to $178.5 million for the nine months ended September 30, 1999. The
increase in operating revenues was primarily due to the validation, billing and
collection services for the inmate calls of the major RBOCs, the acquisition by
the Company of MOG, Saratoga and Alliance in the first quarter of 1998, third
quarter of 1998 and second quarter of 1999, respectively, and new contract
installations.
Operating Expenses. Total operating expenses increased $4.6 million, from
$166.9 million for the nine months ended September 30, 1998 to $171.5 million
for the nine months ended September 30, 1999. Operating expenses as a percentage
of operating revenues decreased 5.6% from 101.7% for the nine months ended
September 30, 1998 to 96.1% for the nine months ended
- 17 -
<PAGE>
September 30, 1999. The decrease in operating expenses as a percentage of
revenues is primarily due to the factors discussed below.
Telecommunication costs increased by $6.6 million, from $71.1 million for
the nine months ended September 30, 1998 to $77.7 million for the nine months
ended September 30, 1999. Telecommunication costs represented 43.3% of operating
revenues for the nine months ended September 30, 1998 and 43.5% of operating
revenues for the nine months ended September 30, 1999. The dollar increase is
primarily due to the Company's acquisition of MOG, Saratoga and Alliance, new
contract installations, and new billing services provided to a major RBOC
commencing in May 1998. Telecommunication costs as a percentage of revenue
increased due to the growth in the billing services business that has a larger
component of telecommunication costs as a percentage of revenue than the
Company's traditional inmate business, as further explained in the "Overview."
The increase was also due to (i) higher uncollectible accounts resulting from
the Company's acquisition and consolidation activities and (ii) an increase in
competitive local exchange carrier ("CLEC") activity. 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. The increase in
telecommunication costs as a percentage of revenue was partially offset by
savings resulting from new contracts with long distance carriers.
Facility commissions increased by $1.9 million, from $52.0 million for the
nine months ended September 30, 1998 to $53.9 million for the nine months ended
September 30, 1999. Facility commissions represented 31.7% of operating revenues
for the nine months ended September 30, 1998 and 30.2% of operating revenues for
the nine months ended September 30, 1999, a decrease of 1.5%. The decrease as a
percentage of operating revenues is primarily due to the effect of the new
billing services provided to a major RBOC, as further explained in the
"Overview." Commission expense as a percentage of revenue for the Company's
traditional inmate business was 32.9% and 33.8% for the nine months ended
September 30, 1998 and 1999, respectively. Commission rates are expected to
gradually increase in the future, as discussed in "Overview."
Field operations and maintenance costs decreased by $0.7 million, from $5.8
million for the nine months ended September 30, 1998 to $5.1 million for the
nine months ended September 30, 1999. Field operations and maintenance costs
represented 3.5% of operating revenues for the nine months ended September 30,
1998 and 2.9% of operating revenues for the nine months ended September 30,
1999, a decrease of 0.6%. 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 decreased by $0.3 million, from $13.2 million for the nine
months ended September 30, 1998 to $12.9 million for the nine months ended
September 30, 1999. SG&A represented 8.0% of operating revenues for the nine
months ended September 30, 1998 and 7.2% of operating revenues for the nine
months ended September 30, 1999, a decrease of 0.8%. 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 $1.5 million, from $23.5
million for the nine months ended September 30, 1998 to $22.0 million for the
nine months ended September 30, 1999. Depreciation and amortization
- 18 -
<PAGE>
costs represented 14.3% of operating revenues for the nine months ended
September 30, 1998 and 12.3% of operating revenues for the nine months ended
September 30, 1999, a decrease of 2.0%. 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 overall amortization expense declines.
In September of 1998, the Company recorded a restructuring charge of $1.4
million as a result of its integration of the Acquisitions. The restructuring
charge was subsequently reduced by $0.2 million in the fourth quarter of 1998
due to a revision of the original estimate.
Operating Income (Loss). The Company's operating income increased by $9.7
million, from a loss of $2.8 million for the nine months ended September 30,
1998 to operating income of $6.9 million for the nine months ended September 30,
1999, due to the factors described above. The Company's operating income margin
increased from a negative operating margin of 1.7% for the nine months ended
September 30, 1998 to a positive operating margin of 3.9% for the nine months
ended September 30, 1999, primarily as a result of the factors described above.
Other (Income) Expense. Other (income) expense, consisting primarily of
interest expense, increased by $0.2 million, from $14.5 million for the nine
months ended September 30, 1998 to $14.7 million for the nine months ended
September 30, 1999.
Net Loss. The Company's net loss decreased by $10.2 million, from $18.1
million for the nine months ended September 30, 1998 to $7.9 million for the
nine months ended September 30, 1999, primarily as a result of the factors
described above.
EBITDA. EBITDA increased by $8.0 million from $20.9 million for the nine
months ended September 30, 1998 to $28.9 million for the nine months ended
September 30, 1999. EBITDA as a percentage of operating revenues increased from
12.7% for the nine months ended September 30, 1998 to 16.2% for the nine months
ended September 30, 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
performance. Two 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 and meet debt service
- 19 -
<PAGE>
requirements. Management expects that cash flow from operations, along with
additional borrowings under existing credit facilities, will be sufficient to
meet the Company's operating requirements for the next twelve months. The
Company currently anticipates that interest payments of approximately $18.5
million and $18.0 million for each of the fiscal years ending December 31, 1999
and December 31, 2000 respectively, will be required under the terms of the
Senior Notes and the Senior Credit Facility. As of September 30, 1999, the
Company had approximately $16.0 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 $3.0 million for
capital items required to implement new contracts and contract renewals entered
into by the Company.
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 is entitled to receive dividends at the
applicable First Preferred Series A Rate, payable quarterly commencing on April
1, 1999. Dividends are 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 is eight percent per annum through March 31, 2001, will be 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 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, which bears
interest at similar rates to the existing borrowings under the Senior Credit
Facility. 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.
In September 1999, the Company amended its Senior Credit Facility. The
amendment simplified certain ratios in the financial covenants.
- 20 -
<PAGE>
Net cash provided by operating activities was $15.4 million for the nine
months ended September 30, 1999, as compared to $1.4 million for the nine months
ended September 30, 1998. Cash flows from the Company's operations were affected
by the change in operating assets and liabilities, primarily due to the timing
of receivables collections, establishment of reserves by the Company's LECs and
the timing of vendor payments.
Cash used in investing activities was $8.2 million for the nine months
ended September 30, 1999, as compared to cash provided by financing activities
of $18.9 million for the nine months ended September 30, 1998, consisting
primarily of both cash outflows for investments in new business and customer
contract renewals and the payment of $2.4 million of acquisition costs primarily
relating to the acquisitions made by the Company in 1997 and 1998.
Cash used in financing activities was $5.0 million for the nine months
ended September 30, 1999, as compared to cash provided by financing activities
of $11.7 million for the nine months ended September 30, 1998, consisting
primarily of $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 not be reborrowed. Amounts borrowed under the Senior Credit Facility bear
interest, at the option of the Company, at either (i) the Base Rate (i.e., the
higher of Canadian Imperial Bank of Commerce's ("CIBC") reference rate or the
overnight federal funds rate plus 0.5%) 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 $2.4 million, $12.4
million, $13.8 million, and $19.3 million during the years ended 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
- 21 -
<PAGE>
September 30, 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 December 31, 1998 and September 30, 1999, the Company had outstanding
letters of credit of $2.8 million and $1.5 million, respectively, to certain
states for performance bonds related to inmate contracts.
As of September 30, 1999, the Company had approximately $171.2 million of
indebtedness outstanding, including the current portion, a stockholders' deficit
of $39.6 million, and $3.8 million of cash.
As of September 30, 1999, the Company's indebtedness included (i) $115.0
million of 11.0% Senior Notes due 2007 (the "Senior Notes"), (ii) $55.3 million
of indebtedness under the Senior Credit Facility, and (iii) $0.9 million of
other indebtedness.
As of November 10, 1999, the Company had $17.7 million of available
borrowing capacity under the Senior Credit Facility.
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," requires companies to
report and display comprehensive income and its components (revenues, expenses,
gains, and losses). Comprehensive income includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. For the Company, comprehensive income is the same as net loss reported
in the statements of consolidated operations, since there were no other items of
comprehensive income for the periods presented.
Changes in Accounting Standards
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, 2000. The Company is currently evaluating the effect
that SFAS No. 133 may have on the consolidated financial statements.
- 22 -
<PAGE>
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 has assessed 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 September 30, 1999, the Discovery, Assessment, Planning,
Remediation, and Testing phases were substantially complete for all program
areas.
Internal Infrastructure. The Company believes that it has identified 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.
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, 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 $0.6 million, almost all of which the Company believes will be
incurred during 1999, of which $0.4 million has already been
- 23 -
<PAGE>
incurred. 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
effect 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.
- 24 -
<PAGE>
Contingency Plans. The Company has developed contingency plans to be
implemented if its efforts to identify and correct Year 2000 Problems affecting
its internal systems are not effective. 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. 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.
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.
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 referred to 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.
Among the factors that could cause actual results, levels of activity,
performance, and achievements of the Company to differ from those contemplated
by forward-looking statements are the risk factors discussed in our annual
report on Form 10-K for the year ended December 31, 1998. A copy of such annual
report may be obtained from the Securities and Exchange Commission at
http://www.sec.gov or by written request to the Company.
- 25 -
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required hereunder for the Company is not significantly
different from the information set forth in Item 7A Quantitative and Qualitative
Disclosures About Market Risk included in the 1998 Form 10-K and is therefore
not presented herein.
- 26 -
<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 effect on the Company.
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
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
- 27 -
<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
(filed as Exhibit 3.4 to the Company's Quarterly Report on
Form 10-Q, dated as of May 13, 1999 and incorporated
herein by reference).
10.1* Amendment No. 3 to Second Amended and Restated Credit Agreement,
dated as of September 13, 1999, by and among the Company, the
Lenders (as defined therein), and Canadian Imperial Bank of
Commerce, as Administrative Agent and Documentation Agent.
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.
- 28 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EVERCOM, INC.
By: /s/ DENNIS WHIPPLE
-------------------------------
Dennis Whipple
Chief Executive Officer
By: /s/ JEFFREY D. CUSHMAN
------------------------------
Jeffrey D. Cushman
Chief Financial Officer
Date: November 10, 1999
- 29 -
<PAGE>
EXHIBIT 10.1
AMENDMENT NO. 3 TO SECOND AMENDED
AND RESTATED CREDIT AGREEMENT
AMENDMENT NO. 3, dated as of September 13, 1999 (this "Amendment"), to the
---------
Existing Credit Agreement (as defined below), among EVERCOM, INC., a Delaware
corporation (the "Borrower"), the various financial institutions as are, or may
--------
from time to time become, parties thereto (the "Lenders") and CANADIAN IMPERIAL
-------
BANK OF COMMERCE, acting through one or more of its affiliates, branches or
agencies ("CIBC"), as Administrative Agent and Documentation Agent.
----
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; and
WHEREAS, the 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.
-------- --------
"Credit Agreement" is defined in the first recital.
---------------- -------------
"Existing Credit Agreement" is defined in the first recital.
------------------------- -------------
"Third Amendment Effective Date" is defined in Section 3.1.
------------------------------ -----------
<PAGE>
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 Third 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 Article I. Article I of the Existing Credit
-----------------------
Agreement is hereby amended as follows:
SECTION II.1.1. Section 1.1 of the Existing Credit Agreement is hereby
amended by inserting the following definitions in such Section in the
appropriate alphabetical sequence:
"Amendment No. 3" means Amendment No. 3 to Second Amended and Restated
---------------
Credit Agreement, dated as of September 13, 1999, among the Borrower, the
Lenders parties thereto and the Administrative Agent.
"Carry-Forward Amount" is defined in Section 7.2.16.
-------------------- --------------
"Third Amendment Effective Date" is defined in Section 3.1 of
------------------------------
Amendment No. 3.
"Unused Amount" is defined in Section 7.2.16.
------------- --------------
SECTION II.1.2. Section 1.1 of the Existing Credit Agreement is hereby
amended by deleting in their entirety the definitions of "Acquisition
Adjustment" and "Maintenance Capital Expenditures".
SECTION II.1.3. 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 entirety as follows:
"Debt Service" means, for any period, (a) all maturities of short-term
------------
Funded Debt and all current maturities of long term Funded Debt (including
actual scheduled payments in respect of Capitalized Lease Liabilities)
actually paid during such period, plus (b) Cash Interest Expense actually
----
paid during such period.
"EBITDA" means, with respect to any applicable fiscal period, the Net
------
Income (excluding profits generated from the amortization of negative good
will) of the Borrower and its Subsidiaries on a consolidated basis before
taxes for such period (excluding pre-tax gains or losses of the Borrower
and its Subsidiaries on a consolidated basis on the sale of assets (other
than the sale of inventory in the ordinary course of business) and
excluding other pre-tax extraordinary gains or losses of the Borrower and
its Subsidiaries on a consolidated basis), plus Interest Expense,
----
depreciation and amortization deducted in determining Net Income for such
period; provided, however, that with respect to EBITDA calculated for a
-------- -------
Rolling Period (unless otherwise specified), (i) for the period ended June
30, 1999, EBITDA shall include the sum of EBITDA for
-2-
<PAGE>
the two Fiscal Quarters ended June 30, 1999, multiplied by two; (ii) for
the period ended September 30, 1999, EBITDA shall include the sum of EBITDA
for the three Fiscal Quarters ended September 30, 1999, multiplied by
1.333; and (iii) for the period ended December 31, 1999 and for each
Rolling Period thereafter, EBITDA shall include the sum of EBITDA for such
period.
SECTION II.1.4. Section 1.1 of the Existing Credit Agreement is hereby
amended by amending the definition of "EBITDA to Fixed Charges Ratio" by
deleting the word "Maintenance" before the words "Capital Expenditures" in
clause (ii) thereof;
SECTION II.2. Amendments to Article VI. Article VI of the Existing Credit
------------------------
Agreement is hereby amended as follows:
SECTION II.2.1. Clause (d) of Section 7.1.1 of the Existing Credit
Agreement is hereby amended by inserting "(other than each fourth Fiscal
Quarter) and 90 days after the end of each fourth Fiscal Quarter" immediately
following the words "each Fiscal Quarter" appearing therein.
SECTION II.3. Amendments to Article VII. Article VII of the Existing
-------------------------
Credit Agreement is hereby amended as follows:
SECTION II.3.1. Clauses (a) through (e) of Section 7.2.4 of the Existing
Credit Agreement are hereby amended and restated in their entirety to read as
follows:
(a) the Total Debt to EBITDA Ratio at any time during any period set
forth below to be greater than the ratio set forth opposite such period:
Total Debt
Period to EBITDA Ratio
------ ---------------
04/01/99 to (and 6.20:1
including) 09/29/99
09/30/99 to (and 6.00:1
including) 12/30/99
12/31/99 to (and 5.40:1
including) 03/30/00
03/31/00 to (and 5.25:1
including) 09/29/00
09/30/00 to (and 5.00:1
including) 12/30/00
12/31/00 to (and 4.50:1
including) 12/30/01
12/31/01 to (and 4.25:1
including) 12/30/02
-3-
<PAGE>
Total Debt
Period to EBITDA Ratio
------ ---------------
12/31/02 and thereafter 4.00:1;
(b) the Senior Secured Debt to EBITDA Ratio at any time during any
period set forth below to be greater than the ratio set forth opposite such
period:
Secured Secured Debt
Period to EBITDA Ratio
------ ---------------
04/01/99 to (and 3.00:1
including) 12/30/99
12/31/99 to (and 2.75:1
including) 12/30/00
12/31/00 to (and 2.50:1
including) 12/30/01
12/31/01 and thereafter 2.25:1;
(c) the EBITDA to Cash Interest Expense Ratio as at the last day of
any Fiscal Quarter ending on a date set forth below to be less than the
ratio set forth opposite such date:
EBITDA to Cash
Period Interest Expense Ratio
------ ----------------------
04/01/99 to (and 1.60:1
including) 12/30/00
12/31/00 to (and 2.00:1
including) 12/30/01
12/31/01 to (and 2.25:1
including) 12/30/02
12/31/02 and thereafter 2.50:1;
(d) the EBITDA to Fixed Charges Ratio as at the last day of any
Fiscal Quarter ending on a date set forth below to be less than the ratio
set forth opposite such date:
EBITDA to
Period Fixed Charges Ratio
------ -------------------
04/01/99 to (and 0.80:1
including) 03/30/00
-4-
<PAGE>
EBITDA to
Period Fixed Charges Ratio
------ -------------------
03/31/00 to (and 0.90:1
including) 03/30/01
03/31/01 and thereafter 1.00:1
(e) EBITDA for any period set forth below to be less than the amount
set forth opposite such period:
Period EBITDA
------ ------
Six months ended 06/30/99 15,300,000
Nine months ended 09/30/99 24,700,000
Rolling Period ended 12/31/99 34,200,000
Rolling Period ended 03/31/00 37,000,000
Rolling Period ended 06/30/00 38,100,000
Rolling Period ended 09/30/00 38,300,000
Rolling Period ended 12/31/00 38,400,000
Rolling Period ended 03/31/01 40,100,000
Rolling Period ended 06/30/01 41,800,000
Rolling Period ended 09/30/01 43,500,000
Rolling Period ended 12/31/01 45,200,000
Rolling Period ended 03/31/02 45,600,000
Rolling Period ended 06/30/02 48,000,000
Rolling Period ended 09/30/02 49,400,000
Rolling Period ended 12/31/02 50,800,000
SECTION II.3.2. Section 7.2.16 of the Existing Credit Agreement is hereby
amended and restated in its entirety 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 (a) in the 1999 Fiscal Year, which aggregate in excess of
$14,000,000 and (b) for each Fiscal Year thereafter, which aggregate in
excess of $12,000,000; provided, however, that for each such Fiscal Year
-------- -------
after the 1999 Fiscal Year, the amount of Capital Expenditures in any
Fiscal Quarter or group of Fiscal Quarters set forth below shall not exceed
the amount set forth below opposite such period:
-5-
<PAGE>
Period Capital Expenditure Amount
------ --------------------------
first Fiscal Quarter $ 3,500,000
first and second Fiscal $ 7,000,000
Quarters, collectively
first, second and third Fiscal $10,500,000
Quarters, collectively
first, second, third and fourth $12,000,000
Fiscal Quarters, collectively
provided, further, that
-------- -------
(i) to the extent Capital Expenditures are made in any Fiscal
Year in an amount less than the maximum amount permitted for such
Fiscal Year as provided in this Section, the Capital Expenditures that
the Borrower or any of its Subsidiaries may make in the next following
Fiscal Year shall be increased by an amount (the "Carry-Forward
-------------
Amount") equal to the amount of the permitted Capital Expenditures not
------
so made in the immediately preceding Fiscal year (the "Unused
------
Amount"); provided that the Carry-Forward Amount created in any Fiscal
------ --------
Year shall not exceed $4,000,000; and
(ii) no portion of any Carry-Forward Amount shall be used in any
Fiscal Year until the entire amount of the Capital Expenditures
permitted to be made in such Fiscal Year as provided in clause (a) or
----------
clause (b) above shall have been used.
----------
ARTICLE III
CONDITIONS TO EFFECTIVENESS
SECTION III.1. Amendment Effective Date. This Amendment (and the
------------------------
amendments and modifications contained herein) shall become effective as of the
date first above written, (the "Third Amendment Effective Date") when all of the
------------------------------
conditions set forth in this Section 3.1 have been satisfied.
-----------
SECTION III.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 Administrative Agent and the Lenders.
SECTION III.1.2. 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.
-6-
<PAGE>
ARTICLE IV
MISCELLANEOUS
SECTION IV.1. 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 IV.2. 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 IV.3. Representations and Warranties. The Borrower hereby
------------------------------
represents and warrants that after giving effect to this Amendment, the
statements contained in Section 5.2.1 of the Existing Credit Agreement are true
and correct in all material respects.
SECTION IV.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 IV.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 IV.6. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK.
-7-
<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.
EVERCOM, INC.
By: /s/ Jeffrey D. Cushman
-----------------------------------
Title: Chief Financial Officer and
Vice President
CANADIAN IMPERIAL BANK
OF COMMERCE,
as Administrative Agent
By: /s/ Laura Hom
-----------------------------------
Title: Executive Director
LENDERS:
-------
CIBC INC.
By: /s/ Laura Hom
-----------------------------------
Title: Executive Director
FIRST SOURCE FINANCIAL LLP
By: First Source Financial, Inc.
its Agent/Manager
By: /s/ David C. Wagner
-----------------------------------
Title: Vice President
-8-
<PAGE>
IBJ WHITEHALL BANK & TRUST
COMPANY
By: /s/ Laura Chapman
-----------------------------------
Title: Director
BANQUE PARIBAS
By:
-----------------------------------
Title:
AMERICAN NATIONAL BANK
By: /s/ Richard Jonscher
-----------------------------------
Title: Vice President
ARES LEVERAGED INVESTMENT
FUND L.P.
By: /s/ Jeff Moore
-----------------------------------
Title: Principal
-9-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,820,307
<SECURITIES> 0
<RECEIVABLES> 40,263,967
<ALLOWANCES> (2,965,113)
<INVENTORY> 2,799,656
<CURRENT-ASSETS> 46,689,241
<PP&E> 41,486,499
<DEPRECIATION> (13,278,188)
<TOTAL-ASSETS> 177,174,564
<CURRENT-LIABILITIES> 55,329,325
<BONDS> 159,454,462
0
109
<COMMON> 164
<OTHER-SE> (39,582,642)
<TOTAL-LIABILITY-AND-EQUITY> 177,174,564
<SALES> 178,461,997
<TOTAL-REVENUES> 178,461,997
<CGS> 171,546,331
<TOTAL-COSTS> 171,546,331
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,688,069
<INCOME-PRETAX> (7,772,403)
<INCOME-TAX> 165,898
<INCOME-CONTINUING> (7,938,301)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,938,301)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
