SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to sections 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2000
OR
[_] Transition report pursuant to sections 13 or 15 (d) of the Securities
Exchange Act of 1934 For the transition period from _____ to _____
Commission file number 333-33639
EVERCOM, INC.
(Exact name of Registrant as specified in its charter)
Delaware 75-2680266
(State or other jurisdiction 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, 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.
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;
3. Quarterly Report on Form 10-Q, dated as of May 12, 1999; and
4. Quarterly Report on Form 10-Q, dated as of August 11, 2000.
1
<PAGE>
EVERCOM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Item 1. Financial Statements........................................... 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.................................................... 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 22
Item 2. Changes in Securities and Use of Proceeds...................... 22
Item 3. Defaults Upon Senior Securities................................ 22
Item 4. Submission of Matters to a Vote of Stockholders................ 22
Item 5. Other Information.............................................. 22
Item 6. Exhibits and Reports on Form 8-K............................... 23
</TABLE>
2
<PAGE>
>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EVERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................................. $ 1,987,732 $ 822,314
Accounts receivable, net................................................... 38,262,832 38,787,830
Refundable income taxes.................................................... 364,204 199,097
Inventories................................................................ 3,512,073 3,597,643
Prepaid expenses and other current assets.................................. 380,797 694,317
Deferred income tax asset.................................................. 1,496,528 664,514
-------------- -------------
Total current assets.................................................. 46,004,166 44,765,715
PROPERTY AND EQUIPMENT, NET..................................................... 28,375,357 27,745,613
INTANGIBLE AND OTHER ASSETS, NET................................................ 97,729,033 88,419,030
-------------- -------------
TOTAL $ 172,108,556 $ 160,930,358
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable........................................................... $ 19,492,283 $ 20,859,535
Income taxes payable....................................................... 250,000 189,132
Accrued expenses........................................................... 21,201,463 20,117,251
Current portion of long-term debt.......................................... 12,434,468 13,453,566
-------------- -------------
Total current liabilities............................................. 53,378,214 54,619,484
LONG-TERM DEBT.................................................................. 159,526,766 152,187,500
OTHER LONG-TERM LIABILITIES..................................................... 705,000 162,500
DEFERRED INCOME TAXES........................................................... 1,496,528 664,514
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 September 30, 2000.................................................. 109 109
Common stock, $.01 par value; 50,000 shares authorized, 16,433 shares
issued and outstanding as of December 31, 1999 and September 30, 2000... 164 164
Additional paid-in capital................................................. 26,080,416 25,424,915
Accumulated deficit........................................................ (69,078,641) (72,128,828)
------------- -------------
Total stockholders' deficit........................................... (42,997,952) (46,703,640)
------------- -------------
TOTAL................................................................. $ 172,108,556 $ 160,930,358
============= =============
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
EVERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
-----------------------------------------------------------------------
1999 2000 1999 2000
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATING REVENUE . . . . . . . . . . . . . . $ 59,126,639 $ 57,742,914 $ 178,461,997 $ 175,800,481
OPERATING EXPENSES: . . . . . . . . . . . . .
Telecommunications costs . . . . . . . . . 24,404,796 23,069,692 77,717,419 71,723,497
Facility commissions . . . . . . . . . . . 17,786,625 18,598,601 53,899,519 56,326,410
Field operations and maintenance . . . . . 1,764,280 1,725,027 5,107,713 5,001,794
Selling, general, and administrative . . . 4,233,144 4,416,322 12,871,682 13,304,697
Depreciation . . . . . . . . . . . . . . . 1,836,722 2,071,508 5,302,114 6,086,530
Amortization of intangibles . . . . . . . 5,310,427 3,347,335 16,647,884 11,878,101
-------------- -------------- -------------- --------------
Total operating expenses . . . . . . . 55,335,994 53,228,485 171,546,331 164,321,029
-------------- -------------- -------------- --------------
OPERATING INCOME . . . . . . . . . . . . . . 3,790,645 4,514,429 6,915,666 11,479,452
INTEREST EXPENSE, NET. . . . . . . . . . . . 4,951,302 4,780,033 14,688,069 14,445,986
-------------- -------------- -------------- --------------
LOSS BEFORE INCOME TAXES . . . . . . . . . . (1,160,657) (265,604) (7,772,403) (2,966,534)
INCOME TAX EXPENSE . . . . . . . . . . . . . 69,656 30,518 165,898 83,653
-------------- -------------- -------------- --------------
NET LOSS . . . . . . . . . . . . . . . . . . $ (1,230,313) $ (296,122) $ (7,938,301) $ (3,050,187)
PREFERRED STOCK DIVIDEND AND ACCRETION
OF DISCOUNT. . . . . . . . . . . . . . . . 364,885 370,535 867,357 1,107,269
-------------- -------------- -------------- --------------
NET LOSS APPLICABLE TO COMMON STOCK. . . . . $ (1,595,198) $ (666,657) $ (8,805,658) $ (4,157,456)
============== ============== ============== ==============
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
EVERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Month Period
Ended September 30,
-----------------------------------
1999 2000
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (7,938,301) $ (3,050,187)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation............................................................... 5,302,114 6,086,530
Amortization of intangible assets, including deferred
financing costs ......................................................... 17,414,720 12,678,922
Changes in operating assets and liabilities, net of
effects of acquisitions:
Accounts receivable .................................................... 1,631,061 (524,998)
Inventories ............................................................ (439,376) (85,570)
Prepaid expenses and other assets....................................... 720,751 (212,879)
Accounts payable........................................................ (3,806,036) 1,367,252
Accrued expenses........................................................ 2,507,941 (990,845)
Income taxes............................................................ (9,889) 104,239
-------------- --------------
Net cash provided by operating activities............................. 15,382,985 15,372,464
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................................... (5,784,516) (8,105,921)
Cash outflows for acquisitions................................................ (2,434,909) (1,729,607)
----------- --------------
Net cash used in investing activities...................................... (8,219,425) (9,835,528)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt............................................ 5,500,000 5,000,000
Payment of debt issuance costs................................................ (336,992) (382,186)
Repayment of debt............................................................. (15,093,360) (11,320,168)
Proceeds from the issuance of preferred stock and warrants,
net of expenses............................................................. 4,895,337
-------------- --------------
Net cash used in financing activities...................................... (5,035,015) (6,702,354)
-------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............................. 2,128,545 (1,165,418)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................ 1,691,762 1,987,732
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD..................................... $ 3,820,307 $ 822,314
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest....................................................... $ 10,718,189 $ 10,317,573
============== ==============
Cash paid (refunded) for income taxes........................................ $ 175,787 $ (20,586)
============== ==============
NONCASH TRANSACTIONS:
Dividends payable............................................................ $ 575,931 $ 665,501
============== ==============
Stock issued for acquisition of assets....................................... $ 150,000 $ -
============== ==============
</TABLE>
See notes to consolidated financial statements
5
<PAGE>
EVERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of September 30, 2000 and for
the three-month and nine-month periods ended September 30, 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.
Revenue Recognition
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in
Financial Statements. In March 2000, SAB 101 was amended by SAB 101A which
delayed the implementation date of SAB 101 for calendar year end reporting
companies to the quarter ending June 30, 2000. In June 2000, SAB 101 was amended
a second time by SAB 101B further delaying the implementation date to no later
than the quarter ending December 31, 2000. The Company is currently evaluating
SAB 101 and does not believe SAB 101 will have a material effect on its revenues
and results of operations.
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
6
<PAGE>
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 expects that the
derivative identified to date will result in a cash flow hedge which will
require the Company to record the derivative asset or liability at fair value on
its statement of financial position with an offset in Other Comprehensive Income
to the extent the hedge is effective. The Company continues to evaluate the
impact of SFAS No. 133 as well as the ongoing implementation issues currently
being addressed by the Derivatives Implementation Group. As a result, the direct
financial impact of the application of hedge accounting and the transition
adjustment on the Company's financial position and results of operations has yet
to be determined.
7
<PAGE>
2. Accounts Receivable
Accounts receivable consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
(Unaudited)
-------------- --------------
<S> <C> <C>
Trade accounts receivable.................................................... $ 38,384,376 $ 38,705,285
Advance commissions receivable............................................... 1,870,475 1,932,290
Receivables related to acquisitions.......................................... 226,015 226,015
Recoverable Universal Service Fund fees...................................... 1,123,165 491,242
Employees and other.......................................................... 251,419 41,081
Less allowance for unbillable and -------------- --------------
$ 41,855,450 41,395,913
Less allowance for unbillable and
uncollectible chargebacks.................................................. (3,592,618) (2,608,083)
-------------- --------------
$ 38,262,832 $ 38,787,830
============== ==============
</TABLE>
At December 31, 1999 and September 30, 2000, the Company had advanced
commissions to certain inmate facilities of $2,100,149 and $2,070,416
(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,
1999 2000
-------------- --------------
(Unaudited)
<S> <C> <C>
Leasehold improvements....................................................... $ 913,420 $ 944,292
Telephone system equipment................................................... 39,666,667 44,907,845
Vehicles..................................................................... 429,460 430,548
Office equipment............................................................. 2,540,215 2,723,863
-------------- --------------
43,549,762 49,006,548
Less accumulated depreciation................................................ (15,174,405) (21,260,935)
-------------- --------------
$ 28,375,357 $27,745,613
============== ==============
</TABLE>
8
<PAGE>
4. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
-------------- --------------
(Unaudited)
<S> <C> <C>
Intangible assets:
Acquired telephone contracts................................................ $ 67,761,060 $ 70,845,909
Noncompete agreements....................................................... 568,611 568,611
Deferred loan costs......................................................... 8,636,059 9,018,245
Goodwill.................................................................... 84,530,834 84,530,834
Other intangibles........................................................... 766,502 769,027
-------------- --------------
162,263,066 165,732,626
Less accumulated amortization................................................. (65,195,703) (77,874,625)
-------------- --------------
Total intangible assets.......................................................... 97,067,363 87,858,001
Deposits......................................................................... 431,996 422,903
Other assets - noncurrent portion of commission advances to facilities........... 229,674 138,126
-------------- --------------
$ 97,729,033 $ 88,419,030
============== ==============
</TABLE>
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
-------------- --------------
(Unaudited)
<S> <C> <C>
Facility commissions............................................... $ 7,303,783 $ 7,826,934
Billing and collection fees........................................ 1,411,127 1,648,473
Uncollectible call chargebacks..................................... 4,554,260
Accrued acquisition and financing costs............................ 1,493,164 744,296
Accrued interest................................................... 64,782 3,392,374
Accrued excise taxes payable....................................... 1,847,889 1,508,570
Accrued dividends on preferred stock............................... 1,268,432 1,923,933
Accrued restructure costs.......................................... 17,796
Accrued payroll and bonuses........................................ 1,689,438 1,521,245
Other.............................................................. 1,550,792 1,551,426
-------------- --------------
$ 21,201,463 $ 20,117,251
============== ==============
</TABLE>
The accrual for uncollectible call chargebacks represented a reserve for
amounts collected from the various local exchange carriers ("LECs") or
third-party billing services that were expected to be charged back to the
Company in future periods. At September 30, 2000, no accrual for uncollectible
call chargebacks is required because all LECs and third-party billing services
have established reserves to cover future chargebacks by withholding funds from
the Company.
9
<PAGE>
6. LONG-TERM DEBT
The following is a summary of long-term debt:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
-------------- --------------
(Unaudited)
<S> <C> <C>
Senior Notes....................................................... $ 115,000,000 $ 115,000,000
Senior Credit Facility:
Revolving loan facility........................................ 11,500,000 9,500,000
Term loan acquisition facility................................. 39,875,000 30,593,750
Additional term loan facility.................................. 5,500,000 5,500,000
Second Additional term loan facility........................... 5,000,000
Other ........................................................... 86,234 47,316
-------------- --------------
171,961,234 165,641,066
Less current portion of long-term debt............................. (12,434,468) (13,453,566)
-------------- --------------
$ 159,526,766 $ 152,187,500
============== ==============
</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 August 9, 2000, the Company's Senior Credit Facility group of lenders
approved an amendment to provide a second additional $7.5 million term loan
facility to the Company under the Senior Credit Facility. $5.0 million of this
additional term facility is immediately available to the Company and the
remaining $2.5 million will be made available in the first quarter of 2001 if
the Company achieves $40.0 million of earnings before interest, income taxes,
depreciation, and amortization ("EBITDA") for the fiscal year ending December
31, 2000. All borrowings under this second additional term loan facility are due
on December 31, 2002. The amendment increases the interest rate on all
previously existing debt balances under the Senior Credit Facility by 0.25%. The
interest rate on borrowings under the second new term loan facility is the
London Interbank Offering Rate ("LIBOR") plus 4.0%. The amendment increases the
Company's letter of credit facility under the revolving portion of the Senior
Credit Facility from $5.0 million to $10.0 million but does not increase the
Company's total borrowing capacity under the revolving portion of the Senior
Credit Facility. The Company negotiated this amendment to provide additional
capital for new business opportunities and to increase its working capital.
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 September 30, 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.
7. ACQUISITION
Effective September 1, 2000, the Company purchased substantially all of
the assets of Firstel Communications, Inc., for a cash purchase price of
$325,000. The acquisition was funded with borrowings under the Senior Credit
Facility.
10
<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 a provider of collect, prepaid, and debit calling services
to local, county, state, federal 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 and the District of Columbia.
The Company's inmate telecommunications services consist of collect call,
prepaid, and debit card services. The Company generally enters into multi-year
agreements (typically 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 local exchange
carriers ("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 LEC. Under the terms of the agreement, the Company acquires at a discount
the related accounts receivable from the LEC for the calls that the Company
processes. When the receivables are purchased, the Company accepts
responsibility for all validation, uncollectible accounts, and billing and
collection costs, with no recourse to the LEC. The Company's revenues from this
service equal the difference between the face value of the receivables purchased
and the amount it pays the LEC for the discounted accounts receivable. The
contract 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 the Company charges this
customer a transaction fee and charges back all uncollectible accounts to the
customer.
11
<PAGE>
The Company's principal operating expenses consist of (i)
telecommunications costs; (ii) commissions paid to correctional facilities,
which are typically expressed as a percentage of either gross or net revenues,
(iii) field operations and maintenance costs, which consist primarily of field
service on the Company's installed base of inmate telephones; and (iv) selling,
general and administrative ("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 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, and in some
cases are subject to monthly minimum amounts. Commission rates are one of the
primary bases 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 30.1% for the quarter
ended September 30, 1999 to 32.2% for the quarter ended September 30, 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.
Field Operations and Maintenance. Field operations and maintenance consist
of maintenance costs associated with inmate phones and related equipment.
Selling, General and Administrative. SG&A expenses consist of corporate
overhead and selling expenses.
12
<PAGE>
Results of Operations
The following table sets forth, for the three months and nine months
ended September 30, 1999 and 2000, respectively, the unaudited results of
operations of the Company.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------- ----------------------------------------
1999 2000 1999 2000
--------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Operating Revenue . . . . . $ 59,127 100.0 % $ 57,743 100.0 % $ 178,462 100.0% $ 175,800 100.0%
Operating Expenses:
Telecommunications
costs . . . . . . . . . 24,405 41.3 23,070 40.0 77,717 43.5 71,723 40.8
Facility commissions . . 17,787 30.1 18,599 32.2 53,899 30.2 56,326 32.0
Field operations and
maintenance . . . . . . 1,764 3.0 1,725 3.0 5,108 2.9 5,002 2.8
Selling, general and
administrative . . . 4,233 7.1 4,416 7.6 12,872 7.2 13,305 7.6
.
Depreciation . . . . . 1,837 3.1 2,072 3.6 5,302 3.0 6,087 3.5
.
Amortization of
intangibles. . . . . . 5,310 9.0 3,347 5.8 16,648 9.3 11,878 6.8
--------- ----- --------- ----- --------- ----- --------- -----
Total operating
expenses. . . . . 55,336 93.6 53,229 92.2 171,546 96.1 164,321 93.5
--------- ----- --------- ----- --------- ----- --------- -----
Operating income . . . . . 3,791 6.4 4,514 7.8 6,916 3.9 11,479 6.5
Interest expense, net. . . 4,951 8.4 4,780 8.3 14,688 8.2 14,446 8.2
--------- ----- --------- ----- --------- ----- --------- -----
Loss before income taxes . (1,160) (2.0) (266) (0.5) (7,772) (4.3) (2,967) (1.7)
Income tax expense . . . . 70 0.1 30 0.0 166 0.1 83 0.0
--------- ----- --------- ----- --------- ------ ---------- -----
Net loss . . . . . . . . . $ (1,230) (2.1)% $ (296) (0.5)% $ (7,938) (4.4)% $ (3,050) (1.7)%
========= ===== ========= ===== ========= ===== ========= =====
EBITDA . . . . . . . . . . $ 10,938 18.5 % $ 9,933 17.2 % $ 28,866 16.2 % $ 29,444 16.7 %
========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999.
Operating Revenues. The Company's operating revenues decreased by $1.4
million, or 2.3%, from $59.1 million for the three months ended September 30,
1999 to $57.7 million for the three months ended September 30, 2000. The
decrease in operating revenue was caused by the loss of certain contracts to
service inmate facilities as a result of market competition. The decrease was
also due in part to enhanced validation procedures, which are a result of the
Company's recent system integrations. Validation is designed to reduce the
Company's exposure to bad debt by denying access to calls to customers with
higher credit risk, thereby reducing revenue along with bad debt expense.
Operating Expenses. Total operating expenses decreased $2.1 million, from
$55.3 million for the three months ended September 30, 1999 to $53.2 million for
the three months ended September 30, 2000. Operating expenses as a percentage of
operating revenues decreased 1.4% from 93.6% for the three months ended
September 30, 1999 to 92.2% for the three months ended September 30, 2000. The
decrease in operating expenses as a percentage of revenues is primarily due to
the factors discussed below.
Telecommunication costs decreased by $1.3 million, from $24.4 million for
the three months ended September 30, 1999 to $23.1 million for the three months
ended September 30, 2000. Telecommunications costs represented 41.3% of
operating revenues for the three months ended September 30, 1999 and 40.0% of
operating revenues for the three months ended September 30, 2000. The decrease
in telecommunications costs as a percentage of operating
13
<PAGE>
revenues is primarily due to (i) a decline in bad debt expense as a result of
enhanced validation due to the Company's recent system integrations and (ii)
savings generated from new long distance contracts.
Facility commissions increased by $0.8 million, from $17.8 million for
the three months ended September 30, 1999 to $18.6 million for the three months
ended September 30, 2000. Facility commissions represented 30.1% of operating
revenues for the three months ended September 30, 1999 and 32.2% of operating
revenues for the three months ended September 30, 2000, an increase of 2.1%.
Commission expense as a percentage of revenue for the Company's traditional
inmate business was 33.7% and 36.1% for the three months ended September 30,
1999 and 2000, respectively. 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 were $1.8 million for the three
months ended September 30, 1999 and $1.7 million for the three months ended
September 30, 2000. Field operations and maintenance costs represented 3.0% of
operating revenues for the three months ended September 30, 1999, and 2000.
SG&A costs increased by $0.2 million, from $4.2 million for the three
months ended September 30, 1999 to $4.4 million for the three months ended
September 30, 2000. SG&A represented 7.1% of operating revenues for the three
months ended September 30, 1999 and 7.6% of operating revenues for the three
months ended September 30, 2000, an increase of 0.5%. The increase is primarily
due to increased staffing to support enhancements to the Company's information
systems and to execute new sales initiatives.
Depreciation and amortization costs decreased by $1.7 million, from $7.1
million for the three months ended September 30, 1999 to $5.4 million for the
three months ended September 30, 2000. Depreciation and amortization costs
represented 12.1% of operating revenues for the three months ended September 30,
1999 and 9.4% of operating revenues for the three months ended September 30,
2000, a decrease of 2.7%. 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 $0.7
million, from $3.8 million for the three months ended September 30, 1999 to $4.5
million for the three months ended September 30, 2000, substantially due to the
factors described above. The Company's operating income margin increased from
6.4% for the three months ended September 30, 1999 to 7.8% for the three months
ended September 30, 2000, primarily as a result of the factors described above.
Interest Expense. Interest expense decreased from $4.9 million for the
three months ended September 30, 1999 to $4.8 million for the three months ended
September 30, 2000. This decrease is primarily due to lower average debt
outstanding during the three months ended September 30, 2000.
Net Loss. The Company's net loss decreased by $0.9 million, from $1.2
million for the three months ended September 30, 1999 to $0.3 million for the
three months ended September 30, 2000, primarily as a result of the factors
described above.
14
<PAGE>
EBITDA. Earnings before interest, income taxes, depreciation, and
amortization ("EBITDA") decreased from $10.9 million for the three months ended
September 30, 1999 to $9.9 million for the three months ended September 30,
2000. EBITDA as a percentage of operating revenues decreased from 18.5% for the
three months ended September 30, 1999 to 17.2% for the three months ended
September 30, 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 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 financial
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, 2000 Compared to Nine Months Ended September 30,
1999.
Operating Revenues. The Company's operating revenues decreased by $2.7
million, or 1.5%, from $178.5 million for the nine months ended September 30,
1999 to $175.8 million for the nine months ended September 30, 2000. The
decrease in operating revenues was due to (i) the loss of the State of Alabama
contract which contributed $1.3 million of revenue during the nine months ended
September 30, 1999, (ii) enhanced validation procedures, which are a result of
the Company's recent system integrations and (iii) the loss of certain contracts
to service inmate facilities as a result of market competition. These decreases
were partially offset by the acquisition of Alliance Tel-Com, Inc., KR&K, Inc.,
U.S. Connect, Inc., Telecommunications, Inc., and Lake-Tel, Inc. (collectively
"Alliance") on June 1, 1999 and Firstel on September 1, 2000.
Operating Expenses. Total operating expenses decreased $7.2 million, from
$171.5 million for the nine months ended September 30, 1999 to $164.3 million
for the nine months ended September 30, 2000. Operating expenses as a percentage
of operating revenues decreased 2.6% from 96.1% for the nine months ended
September 30, 1999 to 93.5% for the nine months ended September 30, 2000. The
decrease in operating expenses as a percentage of revenues is primarily due to
the factors discussed below.
Telecommunications costs decreased by $6.0 million, from $77.7 million
for the nine months ended September 30, 1999 to $71.7 million for the nine
months ended September 30, 2000. Telecommunications costs represented 43.5% of
operating revenues for the nine months ended September 30, 1999 and 40.8% of
operating revenues for the nine months ended September 30, 2000. The decrease in
telecommunication costs as a percentage of operating revenues is primarily due
to (i) savings generated from new long distance contracts and (ii) a decline in
bad debt expense as a result of enhanced validation due to the Company's recent
system integrations.
Facility commissions increased by $2.4 million, from $53.9 million for
the nine months ended September 30, 1999 to $56.3 million for the nine months
ended September 30, 2000. Facility commissions represented 30.2% of operating
revenues for the nine months ended September 30, 1999 and 32.0% of operating
revenues for the nine months ended September 30, 2000, an increase of 1.8%.
Commission expense as a percentage of revenue for the Company's traditional
inmate business was 33.8% and 35.8% for the nine months ended September 30, 1999
and 2000, respectively. This increase is due to
15
<PAGE>
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 were $5.1 million for the nine
months ended September 30, 1999 and $5.0 million for the nine months ended
September 30, 2000. Field operations and maintenance costs represented 2.9% of
operating revenues for the nine months ended September 30, 1999 and 2.8% of
operating revenues for the nine months ended September 30, 2000, a decrease of
0.1%. This decrease was primarily due to office consolidations.
SG&A costs increased by $0.4 million, from $12.9 million for the nine
months ended September 30, 1999 to $13.3 million for the nine months ended
September 30, 2000. SG&A represented 7.2% of operating revenues for the nine
months ended September 30, 1999 and 7.6% of operating revenues for the nine
months ended September 30, 2000, an increase of 0.4%. This increase is primarily
due to increased staffing to support enhancements to the Company's information
systems and to execute new sales initiatives. Additionally, the Company spent
$0.2 million during the nine months ended September 30, 2000 for executive
search fees.
Depreciation and amortization costs decreased by $3.9 million, from $21.9
million for the nine months ended September 30, 1999 to $18.0 million for the
nine months ended September 30, 2000. Depreciation and amortization costs
represented 12.3% of operating revenues for the nine months ended September 30,
1999 and 10.3% of operating revenues for the nine months ended September 30,
2000, 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 amortization expense declines.
Operating Income. The Company's operating income increased by $4.6
million, from $6.9 million for the nine months ended September 30, 1999 to $11.5
million for the nine months ended September 30, 2000, substantially due to the
factors described above. The Company's operating income margin increased from
3.9% for the nine months ended September 30, 1999 to 6.5% for the nine months
ended September 30, 2000, primarily as a result of the factors described above.
Interest Expense. Interest expense was $14.7 million for the nine months
ended September 30, 1999, and $14.4 million for the nine months ended September
30, 2000. This decrease is primarily due to lower average debt outstanding
during the nine months ended September 30, 2000.
Net Loss. The Company's net loss decreased by $4.9 million, from $7.9
million for the nine months ended September 30, 1999 to $3.0 million for the
nine months ended September 30, 2000, primarily as a result of the factors
described above.
EBITDA. EBITDA increased by $0.5 million from $28.9 million for the nine
months ended September 30, 1999 to $29.4 million for the nine months ended
September 30, 2000. EBITDA as a percentage of operating revenues increased from
16.2% for the nine months ended September 30, 1999 to 16.7% for the nine months
ended September 30, 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 a measure of a company's
16
<PAGE>
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 financial 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.
17
<PAGE>
Liquidity and Capital Resources
The Company expects that its principal sources of liquidity will be cash
flow from operations and borrowings under the Senior Credit Facility. On August
9, 2000, the Company's Senior Credit Facility group of lenders executed an
amendment to provide an additional $7.5 million term loan facility to the
Company under the Senior Credit Facility. $5.0 million of this additional term
facility is immediately available to the Company and the remaining $2.5 million
will be available in the first quarter of 2001 if the Company achieves $40.0
million of EBITDA for the fiscal year ending December 31, 2000. All borrowings
under this additional term facility are due on December 31, 2002. The amendment
increases the interest rate on all previously existing debt balances under the
Senior Credit Facility by 0.25%. The interest rate on borrowings under the new
term facility is LIBOR plus 4.0%. The amendment increases the Company's letter
of credit facility under the revolving portion of the Senior Credit Facility
from $5.0 million to $10.0 million but does not increase the Company's total
borrowing capacity under the revolving portion of the Senior Credit Facility.
The Company negotiated this amendment to provide additional capital for new
business opportunities and to increase its working capital. The Company
anticipates that its principal uses of liquidity will be to provide working
capital, fund capital investments, and meet debt service 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 will be required of approximately
$18.3 million and $17.1 million for each of the fiscal years ending December 31,
2000 and December 31, 2001, respectively, under the terms of the Senior Notes
and the Senior Credit Facility. As of September 30, 2000, the Company had
approximately $13.7 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 $3.0 million for capital items required
to implement new contracts and contract renewals entered into by the Company,
upgrades of internal systems, and capital expenditures associated with
acquisitions in prior years. Total capital expenditures for the fiscal year
ending December 31, 2000 are expected to be $12.8 million.
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 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
18
<PAGE>
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 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.
Net cash provided by operating activities was $15.4 million for both the
nine months ended September 30, 1999, and for the nine months ended September
30, 2000. Operating income for the nine months ended September 30, 2000, before
consideration of depreciation and amortization, increased by $0.6 million, which
was offset by timing of certain cash receipts and disbursements.
Cash used in investing activities was $8.2 million for the nine months
ended September 30, 1999, as compared to $9.8 million for the nine months ended
September 30, 2000, consisting primarily of both cash outflows for
infrastructure upgrades, investments in new business and customer contract
renewals, and the payments of $2.4 million and $1.7 million, respectively, of
acquisition costs relating to the acquisitions made by the Company in current
and prior years.
Cash used in financing activities was $5.0 million for the nine months
ended September 30, 1999, as compared to $6.7 million for the nine months ended
September 30, 2000. Cash used in financing activities for the nine months ended
September 30, 2000 consisted primarily of principal repayments under the Senior
Credit Facility offset by borrowings under the additional term loan facility.
Cash used in financing activities for the nine months ended September 30, 1999
consisted primarily of principal repayments under the Senior Credit Facility,
offset by proceeds from the issuance of the First Preferred Series "A" stock and
warrants and borrowing under an additional term loan facility.
The Senior Credit Facility, as amended on August 9, 2000, consists of (a)
a $55.0 million term loan acquisition facility all of which has been borrowed
and upon which $24.4 million of scheduled principle payments had been made as of
September 30, 2000, (b) $13.0 million of additional term loan facilities of
which $10.5 million has been borrowed as of September 30, 2000, and $2.5 million
will become available by March 31, 2001 subject to the achievement of certain
financial performance being achieved as described further herein, and (c) a
$25.0 million revolving loan facility (which includes a $10.0 million letter of
credit facility) upon which $9.5 million had been borrowed as of September 30,
2000. 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 100 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
19
<PAGE>
225 to 400 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 of outstanding balances on the term loan
facilities as of September 30, 2000 are approximately $3.1 million, $13.8
million and $24.2 million during the years ended December 31, 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 of 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 September 30, 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 November 14, 2000, the Company had $14.7 million of available
borrowing capacity under the Senior Credit Facility.
As of September 30, 2000, the Company had approximately $165.8 million of
indebtedness outstanding, including the current portion, a deficit in
stockholders' equity of $46.7 million, and $0.8 million of cash.
As of September 30, 2000, the Company's indebtedness included (i) $115.0
million of 11.0% Senior Notes due 2007 (the "Senior Notes"), (ii) $50.6 million
of indebtedness under the Senior Credit Facility, and (iii) $0.2 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
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in
Financial Statements. In March 2000, SAB 101 was amended by SAB 101A which
delayed the implementation date of SAB 101 for calendar year end reporting
companies to the quarter ending June 30, 2000. In June 2000, SAB 101 was amended
a second time by SAB 101B further delaying the implementation date to no later
than the quarter ending December 31, 2000. The Company is currently evaluating
SAB 101 and does not believe SAB 101 will have a material effect on its revenues
and results of operations.
20
<PAGE>
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 SFAS No. 133 and does not believe its adoption will have
a material effect on its 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 any future results, levels of
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 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 the 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 Quarterly Report on
Form 10-Q 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.
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.
21
<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 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.
From time to time, inmate telecommunications providers are parties to
proceedings initiated by inmates, consumer protection advocates or individual
called parties alleging that excessive rates are being charged with respect to
inmate collect calls. The Company is currently named in such proceedings in
various jurisdictions. The plaintiffs in such proceedings generally seek class
action certification against all inmate telecommunications providers as
defendants, with all recipients of calls from inmate facilities as plaintiffs.
The Company recently obtained dismissal of two such proceedings and is seeking
dismissal in the other proceedings in which it is named.
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.
22
<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 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 Registration 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).
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
4.20 to the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1999 and incorporated herein by reference).
10.1 Amendment No. 4 to Second Amended and Restated Credit Agreement, dated as
of August 9, 2000, by and among the Company, the lenders (as defined therein),
and Canadian Imperial Bank of Commerce, as Administrative Agent and Document
Agent. (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000 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.
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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/ RICHARD FALCONE
Richard Falcone
Chief Executive Officer
By:/s/ KEITH KELSON
Keith Kelson
Chief Financial Officer
Date: November 14, 2000
24
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