<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-----------
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to sections 13 of 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2000
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 (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, 2000, 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.
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);
2. Quarterly Report on Form 10-Q, dated as of August 14, 1998; and
3. Quarterly Report on Form 10-Q, dated as of May 12, 1999.
<PAGE>
EVERCOM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.......................................... 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................. 18
Item 2. Changes in Securities and Use of Proceeds..................... 18
Item 3. Defaults Upon Senior Securities............................... 18
Item 4. Submission of Matters to a Vote of Stockholders............... 18
Item 5. Other Information............................................. 18
Item 6. Exhibits and Reports on Form 8-K.............................. 19
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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,
1999 2000
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................................... $ 1,987,732 $ 567,041
Accounts receivable........................................................... 38,262,832 42,370,725
Refundable income taxes....................................................... 364,204 206,317
Inventories................................................................... 3,512,073 3,420,250
Prepaid expenses and other current assets..................................... 380,797 663,884
Deferred income tax asset..................................................... 1,496,528 1,242,921
-------------- --------------
Total current assets....................................................... 46,004,166 48,471,138
PROPERTY AND EQUIPMENT.......................................................... 28,375,357 28,297,280
INTANGIBLE AND OTHER ASSETS..................................................... 97,729,033 93,691,886
-------------- --------------
TOTAL...................................................................... $ 172,108,556 $ 170,460,304
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.............................................................. $ 19,492,283 $ 23,075,815
Income taxes payable.......................................................... 250,000 229,611
Accrued expenses.............................................................. 21,201,463 22,533,864
Current portion of long-term debt............................................. 12,434,468 12,779,869
-------------- --------------
Total current liabilities.................................................. 53,378,214 58,619,159
LONG-TERM DEBT.................................................................. 159,526,766 155,073,353
OTHER LONG-TERM LIABILITIES..................................................... 705,000 427,933
DEFERRED INCOME TAXES........................................................... 1,496,528 1,242,921
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 December 31, 1999 and March 31, 2000................... 109 109
Common stock, $.01 par value; 50,000 shares authorized, 16,433 shares
issued and outstanding as of December 31, 1999 and March 31, 2000.......... 164 164
Additional paid-in capital................................................... 26,080,416 25,861,916
Accumulated deficit.......................................................... (69,078,641) (70,765,251)
-------------- --------------
Total stockholders' deficit................................................ (42,997,952) (44,903,062)
-------------- --------------
TOTAL...................................................................... $ 172,108,556 $ 170,460,304
============== ==============
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
EVERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Month
Period Ended
March 31,
1999 2000
------------- -------------
<S> <C> <C>
OPERATING REVENUE......................................................... $ 59,175,294 $ 59,271,846
OPERATING EXPENSES:
Telecommunication costs................................................. 26,861,372 24,707,083
Facility commissions.................................................... 18,027,716 18,777,906
Field operations and maintenance........................................ 1,637,775 1,731,145
Selling, general, and administrative.................................... 4,321,855 4,383,422
Depreciation............................................................ 1,706,994 1,966,394
Amortization of intangibles............................................. 5,762,125 4,473,958
------------- -------------
Total operating expense.............................................. 58,317,837 56,039,908
------------- -------------
OPERATING INCOME.......................................................... 857,457 3,231,938
INTEREST EXPENSE, NET..................................................... 4,880,164 4,897,288
------------- -------------
LOSS BEFORE INCOME TAXES.................................................. (4,022,707) (1,665,350)
INCOME TAX EXPENSE........................................................ 13,847 21,260
------------- -------------
NET LOSS.................................................................. $ (4,036,554) $ (1,686,610)
PREFERRED STOCK DIVIDENDS AND ACCRETION OF DISCOUNT..................... 138,930 367,654
------------- -------------
NET LOSS APPLICABLE TO COMMON STOCK ..................................... $ (4,175,484) $ (2,054,264)
============= =============
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
EVERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Month
Period Ended
March 31,
1999 2000
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................................. $ (4,036,554) $ (1,686,610)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation............................................................................ 1,706,994 1,966,394
Amortization of intangible assets, including deferred financing costs and
bond discount......................................................................... 6,003,647 4,736,349
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable................................................................... (9,146,612) (4,107,893)
Inventories........................................................................... 284,753 91,823
Prepaid expenses and other assets..................................................... 31,213 (238,337)
Accounts payable...................................................................... (2,625,575) 3,583,532
Accrued expenses...................................................................... 2,854,357 1,209,078
Income taxes.......................................................................... (58,647) 137,498
------------- -------------
Net cash (used in) provided by operating activities................................ (4,986,424) 5,691,834
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................................................... (1,619,590) (2,632,269)
Cash outflows for acquisitions........................................................... (1,522,848) (372,244)
------------- -------------
Net cash used in investing activities.............................................. (3,142,438) (3,004,513)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt, net of expenses...................................... 5,500,000
Payment of debt issuance costs........................................................... (336,992)
Repayment of debt........................................................................ (3,366,714) (4,108,012)
Proceeds from the issuance of preferred stock and warrants, net of expenses.............. 4,895,337
------------- -------------
Net cash provided by (used in) financing activities................................ 6,691,631 (4,108,012)
------------- -------------
DECREASE IN CASH AND CASH EQUIVALENTS..................................................... (1,437,231) (1,420,691)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................................ 1,691,762 1,987,732
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................................. $ 254,531 $ 567,041
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................................................... $ 1,480,481 $ 1,446,236
============= =============
Cash paid for income taxes............................................................... $ 72,494 $ 116,235
============= =============
NONCASH TRANSACTIONS:
Dividends payable........................................................................ $ 138,930 $ 218,500
============= =============
</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 March 31, 2000 and for the
three-month periods ended March 31, 1999 and 2000 of Evercom, Inc. and its
subsidiaries (the "Company") have been prepared by the Company without audit.
In the opinion of management, all necessary adjustments (which include only
normal recurring adjustments) to present fairly, in all material respects, the
consolidated financial position, results of operations, and cash flows as of and
for the respective periods, have been made. Certain information and footnote
disclosures normally included in annual consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. These financial statements should be read in conjunction with the
Company's 1999 consolidated financial statements contained in its Form 10-K as
filed with the Securities and Exchange Commission on March 30, 2000.
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, 2000. 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,
1999 2000
------------ ------------
(Unaudited)
<S> <C> <C>
Trade accounts receivable, net of advance payments received of $137,574
and $494 at December 31, 1999 and March 31, 2000, respectively............... $ 38,384,376 $ 42,933,882
Advance commissions receivable.................................................. 1,870,475 1,348,562
Receivables related to acquisitions............................................. 226,015 226,015
Recoverable Universal Service Fund fees - current portion....................... 1,123,165 985,132
Employees and other............................................................. 251,419 55,974
------------ ------------
41,855,450 45,549,565
Less allowance for unbillable and uncollectible chargebacks..................... (3,592,618) (3,178,840)
------------ ------------
$ 38,262,832 $ 42,370,725
============ ============
</TABLE>
At December 31, 1999 and March 31, 2000, the Company had advanced
commissions to certain inmate facilities of $2,100,149 and $1,533,784
(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,
1999 2000
------------ ------------
(Unaudited)
<S> <C> <C>
Leasehold improvements.......................................................... $ 913,420 $ 926,583
Telephone system equipment...................................................... 39,666,667 41,478,732
Vehicles........................................................................ 429,460 430,548
Office equipment................................................................ 2,540,215 2,602,216
------------ ------------
43,549,762 45,438,079
Less accumulated depreciation................................................... (15,174,405) (17,140,799)
------------ ------------
$ 28,375,357 $ 28,297,280
============ ============
</TABLE>
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<PAGE>
4. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
-------------- --------------
(Unaudited)
<S> <C> <C>
Intangible assets:
Acquired telephone contracts................................................ $ 67,761,060 $ 68,502,488
Noncompete agreements....................................................... 568,611 568,611
Deferred loan costs......................................................... 8,636,059 8,636,059
Goodwill.................................................................... 84,530,834 84,530,834
Other intangibles........................................................... 766,502 769,026
-------------- --------------
$162,263,066 $163,007,018
Less accumulated amortization................................................ (65,195,703) (69,932,052)
-------------- --------------
Total intangible assets....................................................... 97,067,363 93,074,966
Deposits...................................................................... 431,996 431,698
Other assets - noncurrent portion of commission advances to facilities........ 229,674 185,222
-------------- --------------
$ 97,729,033 $ 93,691,886
============== ==============
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
-------------- --------------
(Unaudited)
<S> <C> <C>
Facility commissions....................................................... $ 7,303,783 $ 7,699,995
Billing and collection fees................................................ 1,411,127 1,695,421
Uncollectible call chargebacks............................................. 4,554,260 3,389,519
Accrued acquisition and financing costs.................................... 1,493,164 1,397,987
Accrued interest........................................................... 64,782 3,253,443
Accrued excise taxes payable............................................... 1,847,889 1,732,018
Accrued dividends on preferred stock....................................... 1,268,432 1,486,932
Accrued restructure costs.................................................. 17,796
Accrued payroll and bonuses................................................ 1,689,438 866,181
Other...................................................................... 1,550,792 1,012,368
-------------- --------------
$ 21,201,463 $ 22,533,864
============== ==============
</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.
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<PAGE>
6. LONG-TERM DEBT
The following is a summary of long-term debt:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
-------------- --------------
(Unaudited)
<S> <C> <C>
Senior Notes............................................... $ 115,000,000 $ 115,000,000
Senior Credit Facility:
Revolving loan facility................................. 11,500,000 10,500,000
Term loan acquisition facility.......................... 39,875,000 36,781,250
Additional term loan facility........................... 5,500,000 5,500,000
Other...................................................... 86,234 71,972
-------------- --------------
171,961,234 167,853,222
Less current portion of long-term debt..................... (12,434,468) (12,779,869)
-------------- --------------
$ 159,526,766 $ 155,073,353
============== ==============
</TABLE>
Under the terms of the Senior Credit Facility, the term loan acquisition
facility is due in quarterly installments of $3,093,750, increasing to
$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, 2000, 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.
-9-
<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 direct 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 44 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. The Company also
provides validation, billing, and collection services for the inmate calls of a
major regional bell operating company ("RBOC"). 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. 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. The contract term is three years and has no minimum volume
commitment. The Company pays no facility commissions under this agreement. In
August 1999 the Company began providing validation, billing and collection
services to a second inmate telecommunications provider. Under this agreement,
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<PAGE>
the Company charges this customer a transaction fee and charges back all
uncollectible accounts to the customer.
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"). The Company has also entered into agreements to lease lines
connecting urban areas and correctional facilities. 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, and on 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. 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 by lower network charges,
field maintenance, and SG&A expenses as a percentage of revenue. The commission
rates paid by the Company have increased in each period, from 23.8% in 1995 to
31.7% for the quarter ended March 31, 2000. This increase is due primarily to
higher facility commissions on renewals and new business. Commission rates are
expected to gradually increase as a percentage of revenues in the future. The
overall commission percentage to total revenues of 31.7% for the quarter ended
March 31, 2000 includes the effect of the 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.
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<PAGE>
Results of Operations
The following table sets forth, for the three months ended March 31, 1999
and 2000, respectively, the results of operations of the Company.
<TABLE>
<CAPTION>
Three Month
Period Ended
March 31,
1999 2000
--------------------- ---------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Operating revenues.............................................. $ 59,175 100.0% $ 59,272 100.0%
Operating expenses:
Telecommunication costs........................................ 26,861 45.4 24,707 41.7
Facility commissions........................................... 18,028 30.5 18,778 31.7
Field operations and maintenance............................... 1,638 2.8 1,731 2.9
Selling, general, and administrative........................... 4,322 7.3 4,384 7.4
Depreciation................................................... 1,707 2.9 1,966 3.3
Amortization of intangibles.................................... 5,762 9.7 4,474 7.5
-------- ----- -------- -----
Total operating expenses........................................ 58,318 98.6 56,040 94.5
-------- ----- -------- -----
Operating income................................................ 857 1.4 3,232 5.5
Interest expense, net........................................... 4,880 8.2 4,897 8.3
-------- ----- -------- -----
Loss before income taxes........................................ (4,023) (6.8) (1,665) (2.8)
Income tax expense.............................................. 14 -- 21 --
-------- ----- -------- -----
Net loss........................................................ $ (4,037) (6.8)% $ (1,686) (2.8)%
======== ===== ======== =====
EBITDA.......................................................... $ 8,326 14.1% $ 9,672 16.3 %
======== ===== ======== =====
</TABLE>
Three Months Ended March 31, 2000 Compared to Three Months ended March 31, 1999
Operating Revenues. The Company's operating revenues increased by $0.1
million, or 0.2%, from $59.2 million for the three months ended March 31, 1999
to $59.3 million for the three months ended March 31, 2000. The increase in
operating revenues was primarily due to $1.2 million of incremental revenue
generated from facilities acquired on June 1, 1999 from the inmate payphone
divisions of Alliance Tel-Comm, Inc., KR&K Communications, Inc., U.S. Connect,
Inc., Tele-Communications, Inc., and Lake-Tel, Inc. (collectively, "Alliance").
The increase due to the Alliance acquisition was offset by the loss of the State
of Alabama contract which contributed $1.3 million of revenue during the three
months ended March 31, 1999. The remaining variance is due to new business and
contract renewal activity.
Operating Expenses. Total operating expenses decreased $2.3 million, from
$58.3 million for the three months ended March 31, 1999 to $56.0 million for the
three months ended March 31, 2000. Operating expenses as a percentage of
operating revenues decreased 4.1% from 98.6% for the three months ended March
31, 1999 to 94.5% for the three months ended March 31, 2000. The decrease in
operating expenses as a percentage of revenues is primarily due to the factors
discussed below.
Telecommunication costs decreased by $2.2 million, from $26.9 million for
the three months ended March 31, 1999 to $24.7 million for the three months
ended March 31, 2000. Telecommunication costs represented 45.4% of operating
revenues for the three months ended March 31, 1999 and 41.7% of operating
revenues for the three months ended March 31, 2000, a decrease of 3.7%. The
percentage decrease is primarily due to savings generated from new long distance
contracts.
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<PAGE>
Facility commissions increased by $0.8 million, from $18.0 million for the
three months ended March 31, 1999 to $18.8 million for the three months ended
March 31, 2000. Facility commissions represented 30.5% of operating revenues for
the three months ended March 31, 1999 and 31.7% of operating revenues for the
three months ended March 31, 2000, an increase of 1.2%. Commission expense as a
percentage of revenue for the Company's traditional inmate business increased
from 34.0% in the first quarter of 1999 to 35.8% in the first quarter of 2000.
This increase is due to competition for new business and increased commission
rates on renewals. Commission rates are expected to gradually increase in the
future.
Field operations and maintenance costs increased by $0.1 million, from $1.6
million for the three months ended March 31, 1999 to $1.7 million for the three
months ended March 31, 2000. Field operations and maintenance costs represented
2.8% of operating revenues for the three months ended March 31, 1999 and 2.9% of
operating revenues for the three months ended March 31, 2000, an increase of
0.1%. This increase is primarily due to higher field equipment replacements
during the three months ended March 31, 2000.
SG&A costs increased by $0.1 million, from $4.3 million for the three
months ended March 31, 1999 to $4.4 million for the three months ended March 31,
2000. SG&A represented 7.3% of operating revenues for the three months ended
March 31, 1999 and 7.4% of operating revenues for the three months ended March
31, 2000, an increase of 0.1%. The increase is primarily due to increased
staffing to support enhancements to the Company's information systems and to
execute new sales initiatives. The increase is also due to executive search fees
incurred during the three months ended March 31, 2000.
Depreciation and amortization costs decreased by $1.1 million, from $7.5
million for the three months ended March 31, 1999 to $6.4 million for the three
months ended March 31, 2000. Depreciation and amortization costs represented
12.6% of operating revenues for the three months ended March 31, 1999 and 10.8%
of operating revenues for the three months ended March 31, 2000, a decrease of
1.8%. 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 amortization expense declines.
Operating Income. The Company's operating income increased by $2.3
million, from $0.9 million for the three months ended March 31, 1999 to $3.2
million for the three months ended March 31, 2000, substantially due to the
factors described above. The Company's operating income margin increased from
1.4% for the three months ended March 31, 1999 to 5.5% for the three months
ended March 31, 2000, primarily as a result of the factors described above.
Interest Expense. Interest expense remained constant at $4.9 million.
Net Loss. The Company's net loss decreased by $2.3 million, from $4.0
million for the three months ended March 31, 1999 to $1.7 million for the three
months ended March 31, 2000, primarily as a result of the factors described
above.
EBITDA. Earnings before interest, taxes, depreciation, and amortization
("EBITDA") increased by $1.4 million from $8.3 million for the three months
ended March 31, 1999 to $9.7 million for the three months ended March 31, 2000.
EBITDA as a percentage of operating revenues increased from 14.1% for the three
months ended March 31, 1999 to 16.3% for the three months ended March 31, 2000,
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
-13-
<PAGE>
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. Three
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 requirements.
Management expects that cash flow from operations, along with additional
borrowings under present and future credit facilities, will be sufficient to
meet the Company's requirements for the next twelve months. The Company
currently anticipates that interest payments will be required of approximately
$18.5 million for the fiscal years ending December 31, 2000 and December 31,
2001, under the terms of the Senior Notes and the Senior Credit Facility. As of
March 31, 2000, the Company had approximately $12.8 million of unused borrowing
capacity under the Senior Credit Facility. The Company anticipates that its
primary capital expenditures for the remainder of 2000 will be approximately
$10.9 million for capital items required to implement new contracts and contract
renewals entered into by the Company and to enhance internal information
systems.
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. Dividends are
payable out of funds legally available therefor, and are payable only when, as,
and if declared by the Company's Board of Directors, are 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 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 and restated 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.
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<PAGE>
Net cash used in operating activities was $5.0 million for the three months
ended March 31, 1999, as compared to net cash provided by operating activities
of $5.7 million for the three months ended March 31, 2000. This increase was due
to a $1.3 million increase in operating income before consideration of
depreciation and amortization coupled with a $9.3 million increase due to timing
of certain cash receipts and disbursements. During the three months ended March
31, 2000, the Company's LEC's increased reserves for uncollectible chargebacks,
thereby reducing cash payments to the Company for receivable collections. The
Company expects the LECs to continue this trend over the next several quarters.
Cash used in investing activities was $3.1 million for the three months
ended March 31, 1999 as compared to $3.0 million for the three months ended
March 31, 2000, consisting primarily of both cash outflows for investments in
new business and customer contract renewals and payments of acquisition costs
relating to acquisitions made in prior years.
Cash provided by financing activities was $6.7 million for the three months
ended March 31, 1999 as compared to cash used in financing activities of $4.1
million for the three months ended March 31, 2000, consisting primarily of
principal repayments under the Senior Credit Facility. Cash provided by
financing activities for the three months ended March 31, 1999 consisted of
funds raised through the issuance of the First Preferred Series A Stock,
proceeds from borrowings under the Senior Credit Facility, offset by principal
repayments of borrowings under the Senior Credit Facility.
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 $9.3 million, $13.8
million, and $19.3 million during the years ended 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, 2000, 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, 2000, the Company had $12.8 million of available borrowing
capacity under the Senior Credit Facility.
As of March 31, 2000 the Company had approximately $168.3 million of long-
term indebtedness outstanding including the current portion, a deficit in
stockholders' equity of $44.9 million, and $0.6 million of cash.
-15-
<PAGE>
As of March 31, 2000, the Company's long-term indebtedness included (i)
$115.0 million of 11.0% Senior Notes due 2007 (the "Senior Notes"), (ii) $52.8
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.
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, 2000. The Company
is currently evaluating the effect that it may have on the consolidated
financial statements.
Special Note Regarding Forward-Looking Information
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 many future results, levels or
activity, performance, or achievements expressed or implied by such
forward-looking statements. The risks, uncertainties, and other factors to which
forward-looking statements are subject include, among others, those set forth
under the caption "Risk Factors" in the Company's Form 10-Q filed on May 12,
1999, which is available from the Company, from the Securities and Exchange
Commission at prescribed rates, and at the web-site www.sec.gov. Such factors
include without limitation, the following: competitors with greater resources;
risks associated with uncollectible accounts; risks associated with anticipated
growth; risks associated with market growth stagnating or declining; lack of
patents and possible infringement; technological change and new services;
control by principal shareholders; changes in the telecommunications industry;
availability of key personnel; and changes in or the failure to comply with,
governmental regulations. 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.
In some cases, forward-looking statements can be identified by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the negative
of such terms or 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. All forward-looking statements included in this Annual Report on
Form 10-K are based on information available to the Company on the date hereof,
and the Company is under no duty to update any of the forward-looking statements
after the date hereof.
-16-
<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 1999 Form 10-K and is therefore
not presented herein.
-17-
<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.
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 received notice in 1998 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
This item is not applicable to the Registrant.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
-18-
<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 12, 1999 and incorporated herein by reference).
4.1 Indenture, dated as of June 27, 1997, between the Company and
U.S. Trust Company of Texas, N.A. (filed as Exhibit 4.1 to the
Company's Registration Statement No. 333-33639 and incorporated
herein by reference).
4.2 Form of Note (contained in Indenture filed as Exhibit 4.2 to
the Company's Registration Statement No. 333-33639 and
incorporated herein by reference).
4.3 Form of Subsidiary Guaranty (contained in Indenture filed as
Exhibit 4.3 to the Company's Registration Statement
No. 333-33639 and incorporated herein by reference).
4.4 Registration Rights Agreement, dated as of June 27, 1997,
between the Company and the Initial Purchaser (filed as
Exhibit 4.4 to the Company's Registration Statement
No. 333-33639 and incorporated herein by reference).
4.5 Registration Rights Agreement, dated as of December 27, 1996,
by and among the Company and certain Holders named therein
(filed as Exhibit 4.5 to the Company's Registration Statement
No. 333-33639 and incorporated herein by reference).
4.6 Shareholders Agreement, dated as December 27, 1996, by and
among the Company and certain Persons named therein (filed as
Exhibit 4.6 to the Company's Registration Statement
No. 333-33639 and incorporated herein by reference).
4.7 Warrant Agreement, dated as of December 27, 1996, between the
Company and CIBC Wood Gundy Ventures, Inc. (filed as
Exhibit 4.7 to the Company's Registration Statement
No. 333-33639 and incorporated herein by reference).
4.8 Warrant Agreement, dated as of December 27, 1996, between the
Company and Gregg L. Engles (filed as Exhibit 4.8 to the
Company's Registrations Statement No. 333-33639 and
incorporated herein by reference).
4.9 Warrant Agreement, dated as of December 27, 1996, between the
Company and Gregg L. Engles (filed as Exhibit 4.9 to the
Company's Registration Statement No. 333-33639 and incorporated
herein by reference).
4.10 Warrant Agreement, dated as of December 27, 1996, between the
Company and Gregg L. Engles (filed as Exhibit 4.10 to the
Company's Registration Statement No. 333-33639 and incorporated
herein by reference).
4.11 Warrant Agreement, dated as of December 27, 1996, between the
Company and Onyx Talton Partners, L.P. (filed as Exhibit 4.11
to the Company's Registration Statement No. 333-33639 and
incorporated herein by reference).
-19-
<PAGE>
Exhibit
No. Description of Exhibit
- -------------- --------------------------------------------------------------
4.12 Warrant Agreement, dated as of December 27, 1996, between the
Company and Onyx Talton partners, L.P. (filed as Exhibit 4.12
to the Company's Registration Statement No. 333-33639 and
incorporated herein by reference).
4.13 Warrant Agreement, dated as of December 27, 1996, between the
Company and Onyx Talton Partners, L.P. (filed as Exhibit 4.13
to the Company's Registration Statement No. 333-33639 and
incorporated herein by reference).
4.14 Warrant Agreement, dated as of December 27, 1996, between the
Company and Joseph P. Urso (filed as Exhibit 4.14 to the
Company's Registration Statement No. 333-33639 and incorporated
herein by reference).
4.15 Warrant Agreement, dated as of December 27, 1996, between the
Company and Joseph P. Urso (filed as Exhibit 4.15 to the
Company's Registration Statement No. 333-33639 and incorporated
herein by reference).
4.16 Warrant Agreement, dated as of December 27, 1996, between the
Company and Joseph P. Urso (filed as Exhibit 4.16 to the
Company's Registration Statement No. 333-33639 and incorporated
herein by reference).
4.17 Warrant Agreement, dated as of December 27, 1996, between the
Company and Todd W. Follmer (filed as Exhibit 4.17 to the
Company's Registration Statement No. 333-33639 and incorporated
herein by reference).
4.18 Warrant Agreement, dated as of December 27, 1996, between the
Company and Todd W. Follmer (filed as Exhibit 4.18 to the
Company's Registration Statement No. 333-33639 and incorporated
herein by reference).
4.19 Warrant Agreement, dated as of December 27, 1996, between the
Company and Todd W. Follmer (filed as Exhibit 4.19 to the
Company's Registration Statement No. 333-33639 and incorporated
herein by reference).
4.20 Form of Warrant Agreement, dated as of March 12, 1999 (filed as
Exhibit 4.2 to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999 and incorporated herein by
reference).
27.1* Financial Data Schedule
---------------
* Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the period subject to
this Quarterly Report on Form 10-Q.
-20-
<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/ TERRY MATLACK
-----------------------
Terry Matlack
Chief Executive Officer
By: /s/ KEITH KELSON
-----------------------
Keith Kelson
Chief Financial Officer
Date: May 9, 2000
-21-
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