<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0 - 22730
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Communications Central Inc.
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(Exact name of registrant as specified in its charter)
Georgia 58-1804173
-------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
1150 Northmeadow Pkwy., Suite 118, Roswell, Georgia 30076
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(Address of principal executive offices) (Zip Code)
(770) 442-7300
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
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
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
There were 6,284,222 shares of Common Stock outstanding as of May 8, 1997.
<PAGE>
COMMUNICATIONS CENTRAL INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
Page
-------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
- ------- --------------------------------
Consolidated Balance Sheets - March 31,
1997 and June 30, 1996 3 - 4
Consolidated Statements of Income - Three Months
Ended March 31, 1997 and
1996 and Nine Months Ended March 31, 1997
and 1996 5
Consolidated Statements of Cash Flows -
Nine Months Ended March 31, 1997 and 1996 6
Notes to Consolidated Financial
Statements - March 31, 1997 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------- ---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8 - 15
---------------------------------------------
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16 - 17
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Communications Central Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
Assets
Current assets:
Cash ........................................................... $ 1,550,046 $ 2,266,327
Accounts receivable, less allowance for doubtful accounts
of $1,546,910 and $2,139,889 at March 31, 1997 and
June 30, 1996, respectively .................................. 13,933,066 10,612,382
Prepaid expenses ............................................... 632,495 707,699
Other current assets ........................................... 769,253 870,815
------------ ------------
Total current assets ......................................... 16,884,860 14,457,223
Operating equipment:
Telecommunications equipment .................................. 74,853,495 73,262,895
Uninstalled equipment ......................................... 1,743,192 1,437,637
------------ ------------
76,596,687 74,700,532
Less accumulated depreciation and amortization ................ (34,615,421) (29,922,368)
------------ ------------
41,981,266 44,778,164
Leasehold improvements and office furniture and equipment,
net of accumulated depreciation and amortization of
approximately $2,897,192 and $2,161,591 at March 31, 1997
and June 30, 1996, respectively ............................... 1,208,781 1,595,312
Deferred loan costs, net of accumulated amortization of $494,303
and $243,011 at March 31, 1997 and June 30, 1996,
respectively .................................................. 232,753 260,153
Intangible assets:
Site license contracts, net ................................... 7,160,895 7,053,568
Agreements not to compete, net ................................ 809,656 1,046,450
Goodwill, net ................................................. 35,523,819 36,555,441
Other assets, net ................................................. 6,648,482 3,981,292
------------ ------------
Total assets ................................................ $110,450,512 $109,727,603
============ ============
</TABLE>
Note: The balance sheet at June 30, 1996 has been derived from the audited
financial statements of Communications Central Inc. at that date but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See notes to consolidated financial statements.
3
<PAGE>
Communications Central Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, June 30,
1997 1996
------------ ------------
(Unaudited) (Note)
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Current portion of notes payable to shareholders .......... $ - $ 8,333
Current portion of notes payable .......................... - 79,650
Accounts payable .......................................... 4,110,019 3,324,204
Accrued expenses .......................................... 3,782,037 2,878,447
Current portion of long-term debt ......................... 73,197,389 3,000,000
Accrued commissions ....................................... 1,083,568 2,637,010
Accrued interest .......................................... 867,991 634,295
Accrued compensation ...................................... 113,949 102,351
Accrued income taxes payable .............................. 578,984 328,984
------------ ------------
Total current liabilities ............................... 83,733,937 12,993,274
Long-term debt ................................................ - 70,197,389
Shareholders' equity:
Common Stock, $.01 par value
Authorized shares - 50,000,000: issued and outstanding
shares - 6,058,556 at March 31, 1997 and
6,054,556 at June 30, 1996 .............................. 60,585 60,545
Additional paid-in capital ................................ 51,480,468 50,067,385
Accumulated deficit ....................................... (24,824,478) (23,590,990)
------------ ------------
Total shareholders' equity .............................. 26,716,575 26,536,940
------------ ------------
Total liabilities and shareholders' equity .............. $110,450,512 $109,727,603
============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
Communications Central Inc.
Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
1997 1996 1997 1996
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Coin calls...................................... $ 8,060,112 $ 8,356,736 $ 26,079,504 $ 26,547,038
Non-coin calls.................................. 16,507,982 16,181,975 50,588,795 49,557,436
Other........................................... 828,166 1,249,858 1,886,631 3,071,032
------------ ------------ ------------ ------------
Total revenues............................... 25,396,260 25,788,569 78,554,930 79,175,506
Cost and expenses:
Line access charges............................. 7,302,939 9,527,084 23,085,262 27,485,178
Commissions..................................... 4,557,404 5,466,268 15,102,605 16,966,537
Service and collection.......................... 3,759,911 7,540,998 11,707,201 14,539,217
Bad debt expense................................ 3,714,185 2,608,730 9,601,422 6,268,219
Selling, general and administrative............. 2,307,953 1,378,228 6,314,412 3,681,932
Depreciation and amortization................... 3,014,167 2,717,296 9,061,723 8,906,169
Impairment loss................................. - 14,183,996 - 14,183,996
------------ ------------ ------------ ------------
Total cost and expense......................... 24,656,559 43,422,600 74,872,625 92,031,248
------------ ------------ ------------ ------------
Operating income (loss).......................... 739,701 (17,634,031) 3,682,305 (12,855,742)
Interest expense................................. 1,609,916 1,617,039 4,915,793 4,697,845
----------- ------------ ------------ ------------
Income (loss) before income tax expense......... ( 870,215) (19,251,070) (1,233,488) (17,553,587)
Income tax expense (benefit)..................... - ( 342,768) - 78,352
----------- ------------ ------------ ------------
Net income (loss)................................ $( 870,215) $(18,908,302) $( 1,233,488) $(17,631,939)
=========== ============ ============ ============
Net income (loss) per share...................... $( 0.14) $( 3.12) $( 0.20) $( 2.91)
=========== ============= ============ ============
Weighted average number of shares outstanding.... 6,055,045 6,054,556 6,054,717 6,054,556
=========== ============= ============ =============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
Communications Central Inc.
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
---------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Operating activities
Net income ............................................................... $(1,233,488) $(17,631,939)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................................ 9,061,723 9,724,283
Other ................................................................ - 13,974,998
Changes in operating assets and liabilities:
Accounts receivable ................................................ ( 3,320,684) 554,408
Prepaid expenses, other current assets and other assets ............ ( 1,945,672) ( 2,187,851)
Accounts payable and other accrued expenses ........................ 631,258 1,307,941
----------- -----------
Net cash provided by operating activities ................................ 3,193,137 5,741,840
Investing activities
Purchases of telecommunications equipment, leasehold improvements,
office furniture and equipment ......................................... ( 1,969,759) ( 5,770,058)
Acquisitions of telecommunications equipment, site licenses,
agreements not to compete and goodwill ................................. ( 27,526) ( 462,000)
Purchases of site licenses ............................................... ( 1,635,257) ( 1,338,051)
----------- -----------
Net cash used in investing activities .................................... ( 3,632,542) ( 7,570,109)
Financing activities
Payments on notes payable ................................................ ( 87,983) ( 143,750)
Payment of loan origination cost.......................................... ( 223,893) ( 358,625)
Proceeds from long-term debt ............................................. - 3,000,000
Issuance of Common Stock ................................................ 35,000 208,270
----------- -----------
Net cash provided by financing activities ................................ ( 276,876) 2,705,895
----------- -----------
Increase (decrease) in cash .............................................. ( 716,281) 877,626
Cash at beginning of period .............................................. 2,266,327 4,041
----------- -----------
Cash at end of period .................................................... $ 1,550,046 $ 881,667
=========== ===========
Supplemental disclosure
Cash paid for interest ................................................... $ 4,654,668 $ 5,108,707
=========== ===========
Cash paid for income taxes ............................................... $ - $ 250,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
COMMUNICATIONS CENTRAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
These financial statements should be read in conjunction with the Company's
audited financial statements included in the Company's Annual Report on Form
10-K filed with the Securities and Exchange Commission for the fiscal year ended
June 30, 1996. Operating results for the nine-month period ended March 31, 1997
are not necessarily indicative of the results that may be expected for the year
ending June 30, 1997.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS
-------------
GENERAL
Communications Central Inc. ("CCI" or the "Company") derives substantially
all of its revenue from calls placed from its payphone and inmate phone network.
Coin revenue is derived from calls made by depositing coins in the telephone.
Non-coin revenue is derived from calls that are placed using either a calling
card or credit card or as a collect call where the called party will be charged
for the call. The call may also be billed to a third party. The Company
realizes additional non-coin revenue from long distance carriers pursuant to
federal and state regulation as compensation for "dial-around" calls made from
its payphones. A "dial-around" call is a call initiated at a CCI payphone, but
made by utilizing a long distance carrier other than the one designated by the
Company and from which the Company derives no direct revenue.
The Company's operating expenses include line access charges, commissions,
field service and collection expenses, and selling, general and administrative
expenses. Line access charges include interconnection and local measured usage
charges paid to Local Exchange Carriers ("LEC's"), long distance transmission
charges, billing, collection and validation costs, and operator services
charges. Commissions are fees paid regularly to business operators or
governmental authorities usually based on a percentage of revenue generated by
the Company's payphones and inmate phones. Field service and collection
expenses include the costs of collecting and processing coins, maintaining and
repairing the telephones and technical support for polling, software
maintenance, and diagnostics performed on the Company's payphones and inmate
phones.
In July 1995, the Company entered into an outsourcing agreement (the
"Services Agreement") with Perot Systems Field Services Corporation ("Perot"), a
subsidiary of Perot Systems Corporation. The Services Agreement provided that
Perot would operate the Company's management information systems and manage the
field services and sales fulfillment functions of the Company's payphone
operations for a period of ten years in exchange for a monthly fee equal to the
greater of a specified percentage of CCI's revenues attributable to the
Company's payphone operations or a flat per phone charge, as well as certain
cash incentives for increasing operating performance measurements or overall
revenues on a per phone basis. The Services Agreement assumed, for purposes of
calculating CCI's aggregate monthly fee, that the Company would maintain a
minimum number of payphones. The Services Agreement did not include the
Company's inmate phone operations, which remain the responsibility of CCI.
Effective April 1, 1997, CCI and Perot Systems Corporation entered into a
new Agreement under which Perot will continue to manage the Company's management
information systems. The field services and sales fulfillment functions and
responsibilities were transferred back to CCI on April 1, 1997.
On March 14, 1997, the Company entered into an Agreement and Plan of Merger
("Agreement") with Phonetel Technologies, Inc. ("Phonetel"). The Agreement
provides that Phonetel will commence an offer to purchase all Shares of the
Company validly submitted pursuant to the associated tender offer. The entire
Agreement is outlined in the Schedule 14D-9, Solicitation/Recommendation
Statement on file with the Securities and Exchange Commission. The merger is
subject to many conditions, including the tendering of at least 75% of the
Shares outstanding on a fully diluted basis and the ability of Phonetel to
receive sufficient financing in amount to enable it to consummate the Offer and
to refinance certain indebtedness of the Company. Under the Agreement, the
merger is to take place prior to May 20, 1997.
8
<PAGE>
RESULTS OF OPERATIONS
Fiscal Quarter Ended March 31, 1997 Compared to Fiscal Quarter Ended March 31,
1996
Total revenues for the third quarter of fiscal 1997 were $25.4 million
compared to $25.8 million for the third quarter of fiscal 1996, a decrease of
$.4 million or 1.6%. Revenues were affected by an increase in "dial-around"
compensation as a result of the Telecommunications Act of 1996 (the "Telecom
Act") and the continued decrease in operator assisted calls on the Company's
network. Other revenue for the third quarter of fiscal 1997 consisted of the
recognition of $.6 million of revenue from the increase in value of certain
warrants owned by the Company. The third quarter of fiscal 1996 included
revenue of $.4 million from the Company's switch division, which was
discontinued in March, 1996, and $.6 million from the increase in value of the
aforementioned warrants.
For the third quarter of fiscal 1997, the payphone business experienced a
net decrease of 78 payphones, compared to a net increase of 652 payphones in the
third quarter of fiscal 1996. The inmate business experienced a net decrease of
118 lines for the third quarter of fiscal 1997, compared to a net decrease of 85
lines for the third quarter of fiscal 1996. The weighted average number of
installed payphones decreased to 26,110 at the end of the third quarter of
fiscal 1997 from 27,163 at the end of the third quarter of fiscal 1996, a
decrease of 3.9%. This decrease in phone count was primarily a result of the
aggressive removal of over 1,100 underperforming payphones during the end of
calendar year 1996. The weighted average number of installed inmate lines
increased to 4,693 at the end of the third quarter of fiscal 1997 from 4,614 at
the end of the third quarter of 1996, an increase of 1.7%. The increase in
inmate lines was primarily the result of increased lines in existing inmate
facilities.
The decrease in total revenues for the third quarter of fiscal 1997
reflects a 3.5% decrease in revenues from coin calls and a 2.0% increase in
revenues from non-coin calls as compared to the third quarter of fiscal 1996.
The decrease in coin revenue is primarily due to the aforementioned removal of
underperforming payphones. The Company's payphones experienced a 17% increase
in revenue per phone when compared to the same period last fiscal year. This
increase is primarily attributed to the impact of the removal program and the
additional "dial-around" compensation prescribed by the "Telecom Act". The
Company's inmate phones experienced a 18% decrease in revenue per phone on a
comparable basis, primarily as a result of the Company's new inmate direct
billing with deposit requirements policy. See a discussion of bad debts in the
"Safe Harbor" section on page 13.
During the third quarter of fiscal 1996, the Company made certain changes
in accounting estimates for legal reserves, accruals for taxes, insurance and
other expenses and write-offs of non-productive assets cumulatively totaling
$4.7 million. These non-recurring items are principally reflected in service
and collection and selling, general and administrative expenses and make it
difficult to make meaningful year-to-year comparisons.
Line access charges decreased to $7.3 million in the third quarter of
fiscal 1997 from $9.5 million in the corresponding quarter of fiscal 1996 due to
the decreased number of phones comprising the Company's network, the impact of
re-negotiated agreements, rate relief from certain service providers, and the
decrease in calling volumes. These charges represented 28.8% of total revenues
in the third quarter of fiscal 1997 as compared to 36.9% in the corresponding
quarter of fiscal 1996.
Commissions paid to customers decreased to $4.6 million in the third
quarter of fiscal 1997 compared to $5.5 million in the third quarter of fiscal
1996. These amounts represented 17.9% of total revenues in the
9
<PAGE>
third quarter of fiscal 1997 compared to 21.2% in the corresponding quarter of
fiscal 1996. The decrease was primarily due to the decreased number of phones on
the Company's network and the closing of the Company's switch division. Third
party commissions in the switch division in the third quarter of 1996 were
approximately $.2 million.
Service and collection expense decreased from $7.5 million in the third
quarter of fiscal 1996 to $3.8 million in the corresponding quarter of fiscal
1997. These amounts represented 29.2% of total revenues in the third quarter of
fiscal 1996 compared to 14.8% in the corresponding quarter of fiscal 1997. This
decrease in the third quarter of fiscal 1997 resulted primarily from the above
non-recurring adjustments.
Selling, general and administrative expenses were $2.3 million in the third
quarter of fiscal 1997 compared to $1.4 million in the corresponding quarter of
fiscal 1996. These amounts represented 9.1% of total revenues in the third
quarter of 1997 compared to 5.3% in the same quarter of 1996. The increase was
primarily attributable to the establishment of a dedicated direct sales force
for the Payphone Division during the latter half of fiscal 1996 and into fiscal
1997.
Bad debt expenses increased to $3.7 million in the third quarter of fiscal
1997 compared to $2.6 million in the same quarter of fiscal 1996. These amounts
represented 14.6% of total revenues in the third quarter of 1997 compared to
10.1% in the same quarter of fiscal 1996. The amount of the increase is
attributable primarily to high bad debt expense for the inmate lines. See the
discussion of bad debt in the "Safe Harbor" section on page 13.
Depreciation and amortization expense increased to $3.0 million in the
third quarter of fiscal 1997 from $2.7 million in the corresponding quarter of
fiscal 1996 primarily because of the non-cash amortization of the warrant
required under the 1996 Credit Agreement.
In the third quarter of fiscal 1996 an impairment loss of $14.2 million was
recognized in accordance with FAS 121. Cash flows were examined on an
acquisition by acquisition basis and included management's best estimates of
future income and expenses for each acquisition. Estimates reflected a
continued reduction in operator service provider revenue as a result of "dial
around". Where the sum of future cash flows were less than the then present
book values of the acquisitions, an impairment was recognized.
As a result of the foregoing, operating income was $.7 million in the third
quarter of fiscal 1997 compared to an operating loss of $17.6 million in the
third quarter of fiscal 1996. Earnings before interest, taxes, depreciation and
amortization ("EBITDA") increased to $3.7 million in the third quarter of fiscal
1997 compared to a $.7 million loss in the corresponding quarter of fiscal 1996.
EBITDA is not determined in accordance with Generally Accepted Accounting
Principles ("GAAP"), nor, as a result, is it included as a line item in the
Company's consolidated financial statements. EBITDA is not being presented as
an alternative to GAAP operating income or cash flows from operations as shown
on the Company's statements of cash flows. However, it is a commonly accepted
measure of performance in the telecommunications industry.
Interest expense was $1.6 million in the third quarter of fiscal 1997 as
well as in the corresponding quarter of fiscal 1996.
The Company experienced a net loss of $.9 in the third quarter of fiscal
1997 compared to a loss of $18.9 million in the corresponding quarter of fiscal
1996, or a loss of $.14 per share in the third quarter of fiscal 1997 versus a
loss of $3.12 per share in the third quarter of fiscal 1996.
10
<PAGE>
Nine Months Ended March 31, 1997 Compared to Nine Months Ended March 31, 1996
Total revenues for the first nine months of fiscal 1997 were $78.6 million
compared to $79.2 million for the comparable nine months in fiscal 1996, a
decrease of $.6 million or .8%. Revenues were affected by an increase in "dial-
around" compensation as a result of the Telecom Act and the continued decrease
in operator assisted calls on the Company's network. In addition, the Company
discontinued its switch division in March, 1996. In the first nine months of
fiscal 1996, the Company's switch division had third party revenue of
approximately $2.0 million.
During the third quarter of fiscal 1996, the Company made certain changes
in accounting estimates for legal reserves, accruals for taxes, insurance and
other expenses and write-offs of non-productive assets cumulatively totaling
$4.7 million. These non-recurring items are principally reflected in service
and collection and selling, general and administration expenses and make it
difficult to make meaningful year-to-year comparisons.
Line access charges decreased to $23.1 million in the first nine months of
fiscal 1997 from $27.5 million in the corresponding period of fiscal 1996 due to
the decreased number of phones comprising the Company's network and the impact
of re-negotiated agreements and/or rate relief from certain service providers.
These charges represented 29.4% of total revenues in the first nine months of
fiscal 1997 as compared to 34.7% in the corresponding period of fiscal 1996.
Commissions paid to customers decreased to $15.1 million in the first nine
months of fiscal 1997 compared to $17.0 million in the same period of fiscal
1996. These amounts represented 19.2% of total revenues in the first nine
months of fiscal 1997 compared to 21.4% in the corresponding period of fiscal
1996. The decrease was primarily due to the decreased number of phones on the
Company's network and the closing of the Company's switch division. Third party
commissions in the switch division in the first nine months of 1996 were
approximately $2.0 million.
Service and collection expense decreased from $14.5 million in the first
nine months of fiscal 1996 to $11.7 million in the corresponding period of
fiscal 1997. These amount represented 18.4% of total revenues in the first nine
months of fiscal 1996 compared to 14.9% in the corresponding period of fiscal
1997. This decrease was primarily a result of the above nonrecurring adjustments
made in the third quarter of fiscal 1996.
Selling, general and administrative expenses were $6.3 million in the first
nine months of fiscal 1997 compared to $3.7 million in the corresponding period
of fiscal 1996. These amounts represented 8.0% of total revenues in the first
nine months of 1997 compared to 4.7% in the same period of fiscal 1996. The
increase was attributable to the establishment of a dedicated direct sales force
for the Payphone Division during the later half of fiscal 1996 and into fiscal
1997.
Bad debt expenses increased to $9.6 million in the first nine months of
fiscal 1997 compared to $6.3 million in the same period of fiscal 1996. These
amounts represented 12.2% of total revenues in the first nine months of fiscal
1997 compared to 7.9% in the same period of fiscal 1996. The amount of the
increase is attributable primarily to higher bad debt expenses for the inmate
lines. See the discussion of bad debt in the "Safe Harbor" section on page 13.
11
<PAGE>
Depreciation and amortization expense increased to $9.1 million in the
first nine months of fiscal 1997 from $8.9 million in the corresponding period
of fiscal 1996 primarily due to the amortization of the warrant required under
the 1996 Credit Agreement.
During the first nine months of fiscal 1996, an impairment loss of $14.2
million was recognized in accordance with FAS 121. Cash flows were examined on
an acquisition by acquisition basis and included management's best estimates of
future income and expenses for each acquisition. Estimates reflected a
continued reduction in operator service provider revenue as a result of "dial
around". Where the sum of future cash flows were less than the present book
values of the acquisitions, an impairment was recognized.
As a result of the foregoing, operating income was $3.7 million for the
first nine months of fiscal 1997 compared to an operating loss of $12.9 million
in the same period of fiscal 1996. Earnings before interest, taxes,
depreciation and amortization ("EBITDA") increased to $12.7 million in the first
nine months of fiscal 1997 compared to $10.2 million in the corresponding period
of fiscal 1996. EBITDA is not determined in accordance with Generally Accepted
Accounting Principles ("GAAP"), nor, as a result, is it included as a line item
in the Company's consolidated financial statements. EBITDA is not being
presented as an alternative to GAAP operating income or cash flows from
operations as shown on the Company's statements of cash flows. However, it is a
commonly accepted measure of performance in the telecommunications industry.
Interest expense was $4.9 million for the first nine months of fiscal 1997
compared to $4.7 million in the corresponding period of fiscal 1996. The
increase from fiscal 1996 to fiscal 1997 was caused by fluctuations in the
interest rates paid.
The Company experienced a net loss of $1.2 million in the first nine months
of fiscal 1997 compared to a loss of $17.6 million in the corresponding period
of fiscal 1996, or a loss of $.20 per share for the first nine months of fiscal
1997 versus a loss of $2.91 per share in the same period of fiscal 1996.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
During fiscal 1997, the Company has financed its operations from operating
cash flows. Net cash provided by operating activities for the first nine months
of fiscal 1997 was approximately $3.2 million compared to $5.7 for the first
nine months of fiscal 1996.
The Company's working capital shows a deficit of approximately $66.9
million with a current ratio of .20 to 1 at March 31, 1997. This compares to a
working capital balance of $1.4 million and a current ratio for 1.1 to 1 at
March 31, 1996. The change in the Company's working capital is primarily a
result of reflecting the entire amount borrowed under the Credit Agreement as
current. The existing Credit Agreement requires a $12.0 million payment on July
1, 1997 and then the remaining balance is to be paid over a 2 year term. There
is no assurance that the Company can refinance the debt or meet the required
payments from internal sources. The Company's principal commitments as of March
31, 1997, consisted of a commitment under the Services Agreement to purchase $.7
million of hardware and related software from Perot, and a commitment to repay
the aforementioned bank debt. The Company believes that its current cash
balances and cash flow from operations will be sufficient to meet its working
capital and capital expenditure requirements for the rest of fiscal 1997.
However, as discussed above, the Company is required to pay $12.0 million of the
outstanding principal balance under its bank credit facility on July 1, 1997.
The Company is actively seeking to raise equity or other capital to meet its
obligation, and is also considering or pursuing various opportunities that could
result in possible business combinations or dispositions to address some or all
of its capital needs. See "Safe Harbor" statements made herein.
12
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The following "Safe Harbor Statement" is made pursuant to the Private
Securities Litigation Reform Act of 1995. Certain of the statements contained
in the body of this Report are forward-looking statements (rather than
historical facts) that are subject to risks and uncertainties that could cause
actual results to differ materially from those described in the forward-looking
statements. With respect to such forward-looking statements, the Company seeks
the protections afforded by the Private Securities Litigation Reform Act of
1995. The list set forth below is intended to identify certain of the principal
factors that could cause actual results to differ materially from those
described in the forward-looking statements included elsewhere herein. These
factors are not intended to represent a complete list of all risks and
uncertainties inherent in the Company's business, and should be read in
conjunction with the more detailed cautionary statements included elsewhere
herein.
Liquidity: In order to meets its obligations under the 1996 Credit Agreement,
- ----------
as amended, the Company is actively seeking to raise additional capital or
restructure its bank debt. In the course of such discussions, the Company was
approached by Phonetel Technologies, Inc. which resulted in a cash tender offer
for the Shares of the Company. The Agreement and Plan of Merger between the
companies includes the repayment in full of the bank debt. Should the merger
not be consummated, the Company would continue with its efforts in raising
additional capital and/or restructuring its bank debt. Management believes that
the Company's ability to raise such additional capital will significantly depend
upon the implementation and effect of the rules promulgated pursuant to the
Telecom Act, which rules could significantly impact the Company's prospective
results of operations and financial condition and the ability of the Company to
meets its obligations under the 1996 Credit Agreement, as amended.
Bad Debt: Traditionally, the Company has utilized the services of the LEC's in
- ---------
the billing and collection process for operator-assisted or direct dial (non-
coin) calls. Essentially all of the calls made from the Company's inmate phones
have been billed through large clearinghouses that in turn send the information
to the LEC's for billing and collection. Due to the Company's dependence upon
the LEC's for billing and collection, it has taken the Company as long as 24
months to determine whether an inmate account is collectible. This long
collection process makes it particularly difficult for the Company to estimate
the amount of bad debt attributable to the Company's inmate phone revenue. The
Company has witnessed an increase in the amount of bad debt for these inmate
lines. To address the issue of bad debt, the Company has implemented a program
of direct billing with deposit requirements that will enable it to bill the
called numbers directly and set tighter credit parameters. These procedures are
new for the Company and in certain states, regulatory approval may be required.
Since December 1, 1996, the Company has been able to implement the program in
states that generate approximately 76% of the Company's inmate phone revenues.
The combination of stringent credit parameters, direct billing and deposit
requirements has resulted in a decrease in inmate call volumes. However,
management believes that this decrease in call volume should be offset by the
decrease in the level of bad debt. Because of the aforementioned delay in
determining the collectibility of an account through the LEC billing, this
decrease in the level of bad debt may take up to 24 months to be realized.
Although the Company believes that the direct billing with deposit requirements
program will reduce the amount of bad debt attributable to its inmate phones, no
assurances can be given as to the success of the program.
Dial Around Compensation: The Federal Communication Commission's ("FCC")
- -------------------------
implementation of the provisions of the Telecom Act initially mandates dial
around compensation for both access code calls and 800
13
<PAGE>
subscriber calls at a flat rate of $45.85 per payphone per month, with a
transition to a per-call system at the default rate of $.35 per call beginning
October 6, 1997. On October 6, 1998, this rate will either be adjusted to equal
the local coin rate being charged at the particular payphone, or to a rate
negotiated between the Company and the carriers who are required to pay. The
initial flat-rate payment level significantly increases dial around compensation
revenues, and the Company believes that a per-call system at a $.35 level will
further increase these revenues. Effective November 8, 1996, the Company began
accruing approximately $45.85 per payphone per month (excluding inmate phones)
in dial around compensation. However, market forces and factors outside the
Company's control could substantially affect whether the corresponding cash
flows are realized. These factors include, but are not limited to, legal action
delaying, staying, modifying or even overturning provisions of the Telecom Act
(appeals are currently pending challenging the application and amount of dial
around compensation), as well as the FCC's recognition that existing regulations
do not prohibit an IXC from blocking subscriber 800 numbers from payphones
should the IXC elect to avoid paying per-call compensation on these calls.
Local Coin Rate: In ensuring "fair compensation" for all calls, the FCC
- ----------------
further determined that local coin rates from payphones should be generally
deregulated within one year, but provided for possible modifications and
exemptions from deregulation upon a detailed showing by an individual state.
The states may move to deregulation earlier than one year, but a state may also
obtain a limited exemption from deregulation by "demonstrat[ing] to the
Commission that there are market failures within the state that would not allow
market-based rates". Where deregulation is implemented, Management believes the
Company is likely to experience increases in its coin revenue per phone. The
Company currently operates in two states where the local coin rate is 35 cents.
However, given the FCC's failure to specify particular requirements for
obtaining an exemption, as well as the uncertainty of the outcome of legal
proceedings relating to the provisions of the Telecom Act and pending appeals on
this issue, the Company is unable to adequately predict the ultimate revenue
impact of local coin rate deregulation.
Other Telecom Act Provisions: In addition to the issues addressed above,
- -----------------------------
there are a significant number of other Telecom Act provisions, as implemented
by the FCC, that may have an impact upon the Company. Among the most important
are the required cessation of subsidies upon the removal of LEC payphones from
the regulated rate base by April 15, 1997, the Regional Bell Operating
Companies' ("RBOC") development of specific plans detailing their compliance
with nondiscrimination and accounting requirements and other safeguards against
subsidies and discrimination, and the RBOCs' authority to select interLATA
carriers serving their payphones in conjunction with location owners. As a
whole, the Telecom Act provisions should change the competitive framework of the
public communications industry. The Company believes that the Telecom Act will
address certain of the fundamental inequities in the payphone market and
generally lead to a more equitable competitive environment for all providers.
However, there can be no assurance that long-term positive results for the
Company will actually occur.
Billed Party Preference Proceeding: The FCC has previously issued a Second
- -----------------------------------
Notice of Proposed Rulemaking regarding "Billed Party Preference" ("BPP") and
associated call rating issues, including potential "rate benchmarks" and caller
notification requirements for 0+ and 0- interstate long distance calls. If BPP
is implemented, the billed party would bypass CCI's selected long distance
carrier and the Company would fail to receive commissions from its prescribed
carrier. Management believes that the implementation of BPP is not likely to be
achieved, since it would involve significant expense and technological changes
as evidenced by the record in the FCC proceeding. However, no assurances can
be given that BPP will not be implemented. Moreover, should "rate benchmark" or
caller notification requirements be implemented by the FCC for such operator-
assisted calling, the Company could be negatively impacted, depending upon the
specific level of the benchmark or the particular notification requirements.
Without further FCC action, for which a timetable is
14
<PAGE>
not mandated, the Company is unable to reasonably assess any potential impact
that BPP, "rate benchmarks" or caller notifications, if implemented, might have
on its payphone and inmate phone operations.
INFLATION AND SEASONALITY
The Company does not believe that inflation has had a material effect on
the Company's business in recent periods. The Company experiences seasonality
in its results of operations, with its first and fourth fiscal quarters
typically producing a greater volume of calls than its second and third fiscal
quarters.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
- ------- ---------------------
In August 1996, the Company entered into an amended and restated Credit
Agreement (the "1996 Credit Agreement"). In October 1996, an amendment was
entered into amending the terms of the 1996 Credit Agreement. The 1996 Credit
Agreement, as amended, requires the Company to repay $12.0 million of its
indebtedness thereunder on or before July 1, 1997, and to repay the remaining
$63.0 million of its indebtedness in increments of $.5 million per month
beginning on January 1, 1997 through the end of its term, which is June 30,
1999. Borrowings under the 1996 Credit Agreement, as amended, bear interest at
either a LIBOR-based or prime rate at the Company's option. In conjunction with
the 1996 Credit Agreement, as amended, the Company granted the lender warrants
to purchase up to 225,000 shares of common stock at a nominal price. The
Company claims an exemption under section 4(2) of the Securities Act of 1933
based upon the sophistication of the lender.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(A) EXHIBITS:
None
(B) REPORTS ON FORM 8-K:
None.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMUNICATIONS CENTRAL INC.
Date: May 12, 1997 /s/ C. Douglas McKeever.
-------------------------------------
C. Douglas McKeever.
Vice President - Finance
(Principal Accounting Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERIM
CONDENSED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997, AND
THE CONDENSED BALANCE SHEET AS OF MARCH 31, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,550,046
<SECURITIES> 0
<RECEIVABLES> 15,479,976
<ALLOWANCES> (1,546,910)
<INVENTORY> 1,743,192
<CURRENT-ASSETS> 16,884,860
<PP&E> 78,959,468
<DEPRECIATION> (37,512,613)
<TOTAL-ASSETS> 110,450,512
<CURRENT-LIABILITIES> 83,733,937
<BONDS> 0
0
0
<COMMON> 60,585
<OTHER-SE> 26,665,990
<TOTAL-LIABILITY-AND-EQUITY> 110,450,512
<SALES> 25,396,260
<TOTAL-REVENUES> 25,396,260
<CGS> 11,860,343
<TOTAL-COSTS> 24,656,559
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,609,916
<INCOME-PRETAX> (870,215)
<INCOME-TAX> 0
<INCOME-CONTINUING> (870,215)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (870,215)
<EPS-PRIMARY> (.144)
<EPS-DILUTED> (.144)
</TABLE>
