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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 December 31, 1996
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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
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(State or other jurisdiction of (IRS Employer
incorporation of organization) Identification No.)
1150 Northmeadow Pkwy., Suite 118, Roswell, Georgia 30076
- --------------------------------------------------------------------------------
(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
--- ---
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 6,054,556 shares of Common Stock outstanding as of January 31,
1997.
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COMMUNICATIONS CENTRAL INC.
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1996
INDEX
<TABLE>
<CAPTION>
<C> <S> <C>
Page
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
- ------- ------------------------------
Consolidated Balance Sheets - December 31, 1996 and June 30, 1996 3 - 4
Consolidated Statements of Operations - Three Months Ended December 31, 1996 and
1995 and Six Months Ended December 31, 1996 and 1995 5
Consolidated Statements of Cash Flows - Six Months Ended
December 31, 1996 and 1995 6
Note to Consolidated Financial Statements - December 31, 1996 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS 8 - 14
--------------------
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES 15
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15 - 16
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</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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COMMUNICATIONS CENTRAL INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1996
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(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash............................................................... $ 2,801,534 $ 2,266,327
Accounts receivable, less allowance for doubtful accounts
of $1,382,000 and $2,140,000 at December 31, 1996 and
June 30, 1996, respectively...................................... 12,621,551 10,612,382
Prepaid expenses................................................... 866,448 707,699
Other current assets............................................... 777,974 870,815
-------------- -------------
Total current assets............................................. 17,067,507 14,457,223
Operating equipment:
Telecommunications equipment........................................ 74,232,841 73,262,895
Uninstalled equipment............................................... 1,620,970 1,437,637
-------------- -------------
75,853,811 74,700,532
Less accumulated depreciation and amortization...................... (33,037,230) (29,922,368)
-------------- -------------
42,816,581 44,778,164
Leasehold improvements and office furniture and equipment,
net of accumulated depreciation and amortization of
approximately $2,658,000 and $2,162,000 at December 31, 1996
and June 30, 1996, respectively..................................... 1,383,660 1,595,312
Deferred loan costs, net of accumulated amortization of $443,000
and $243,000 at December 31, 1996 and June 30, 1996,
respectively........................................................ 275,207 260,153
Intangible assets:
Site license contracts, net......................................... 6,891,765 7,053,568
Agreements not to compete, net...................................... 887,198 1,046,450
Goodwill, net....................................................... 35,876,869 36,555,441
Other assets, net..................................................... 6,128,024 3,981,292
-------------- -------------
Total assets........................................................ $ 111,326,811 $ 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 note to consolidated financial statements.
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COMMUNICATIONS CENTRAL INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31, JUNE 30,
1996 1996
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LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) (Note)
Current liabilities:
Current portion of notes payable to shareholders.... $ -- $ 8,333
Current portion of notes payable.................... 22,381 79,650
Accounts payable.................................... 3,166,955 3,324,204
Accrued expenses.................................... 4,256,760 2,878,447
Current portion of long-term debt................... 18,000,000 3,000,000
Accrued commissions................................. 1,699,764 2,637,010
Accrued interest.................................... 754,988 634,295
Accrued compensation................................ 97,799 102,351
Accrued income taxes payable........................ 578,984 328,984
-------------- --------------
Total current liabilities........................... 28,577,631 12,993,274
Long-term debt........................................ 55,197,389 70,197,389
Shareholders' equity:
Common Stock, $.01 par value
Authorized shares - 50,000,000; issued and
outstanding shares - 6,054,556 at
December 31, 1996 and June 30, 1996............... 60,545 60,545
Additional paid-in capital............................ 51,445,508 50,067,385
Accumulated deficit................................... (23,954,262) (23,590,990)
-------------- --------------
Total shareholders' equity............................ 27,551,791 26,536,940
-------------- --------------
Total liabilities and shareholders' equity............ $ 111,326,811 $ 109,727,603
============== ==============
</TABLE>
See note to consolidated financial statements.
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COMMUNICATIONS CENTRAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Coin calls.................................. $ 8,684,014 $ 8,759,478 $18,019,392 $18,190,302
Non-coin calls.............................. 17,247,752 16,381,521 34,080,813 33,375,461
Other....................................... 434,846 809,610 1,058,465 1,821,174
----------- ----------- ----------- -----------
TOTAL REVENUES........................... 26,366,612 25,950,609 53,158,670 53,386,937
COST AND EXPENSES:
Line access charges......................... 7,819,638 8,439,489 15,782,323 17,958,094
Commissions................................. 5,090,050 5,687,569 10,545,201 11,500,269
Bad debt expense............................ 3,057,110 1,821,708 5,887,237 3,659,489
Service and collection...................... 3,833,051 3,167,557 7,947,290 6,998,219
Selling, general and administrative........ 2,185,470 1,461,740 4,006,459 2,303,704
Depreciation and amortization............... 3,091,230 3,130,207 6,047,556 6,188,873
----------- ----------- ----------- -----------
TOTAL COST AND EXPENSE..................... 25,076,549 23,708,270 50,216,066 48,608,648
----------- ----------- ----------- -----------
Operating income............................. 1,290,063 2,242,339 2,942,604 4,778,289
Interest expense............................. 1,656,591 1,559,841 3,305,877 3,080,806
----------- ----------- ----------- -----------
Income (loss) before income tax expense...... (366,528) 682,498 (363,273) 1,697,483
Income tax expense........................... -- 167,374 -- 421,120
----------- ----------- ----------- -----------
Net income (loss)............................ $ (366,528) $ 515,124 $ (363,273) $ 1,276,363
=========== =========== =========== ===========
Net income (loss) per share.................. $ (0.06) $ 0.09 $ (0.06) $ 0.21
=========== =========== =========== ===========
Weighted average number of shares
outstanding................................. 6,054,556 6,054,556 6,054,556 6,054,556
=========== =========== =========== ===========
</TABLE>
See note to consolidated financial statements.
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COMMUNICATIONS CENTRAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)................................ $ (363,273) $ 1,276,363
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization.................. 6,047,556 6,188,873
Changes in operating assets and
liabilities:
Accounts receivable........................... (2,009,169) (529,507)
Prepaid expenses, other current assets
and other assets............................. (1,359,750) (1,999,523)
Accounts payable and other accrued
expenses..................................... 640,399 148,188
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Net cash provided by operating
activities...................................... 2,955,763 5,084,394
INVESTING ACTIVITIES
Purchases of telecommunications
equipment, leasehold improvements,
office furniture and equipment.................. (1,247,113) (3,108,964)
Acquisitions of telecommunications
equipment, site licenses,
agreements not to compete and goodwill.......... (27,526) (462,000)
Additions to site licenses, net.................. (865,106) (1,032,481)
----------- -----------
Net cash used in investing activities............ (2,139,745) (4,603,445)
FINANCING ACTIVITIES
Payments on notes payable........................ (65,600) (100,000)
Payment of loan origination cost................. (215,210) (335,000)
Proceeds from long-term debt..................... -- 1,000,000
Issuance of Common Stock......................... -- 208,270
----------- -----------
Net cash provided by/(used in)
financing activities............................ (280,810) 773,270
----------- -----------
Increase in cash................................. 535,208 1,254,219
Cash at beginning of period...................... 2,266,327 4,041
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Cash at end of period............................ $ 2,801,535 $ 1,258,260
=========== ===========
SUPPLEMENTAL DISCLOSURE
Cash paid for interest........................... $ 3,159,625 $ 2,685,951
=========== ===========
Cash paid for income taxes....................... $ -- $ 250,000
=========== ===========
</TABLE>
See note to consolidated financial statements.
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COMMUNICATIONS CENTRAL INC.
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DECEMBER 31, 1996
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. 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 six-month period
ended December 31, 1996 are not necessarily indicative of the results that may
be expected for the year ending June 30, 1997. Certain fiscal 1996 amounts have
been reclassified to conform with the fiscal 1997 presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS
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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
recognizes 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 Companies ("LECs"), 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 currently
provides that Perot will 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 assumes, for purposes of
calculating CCI's aggregate monthly fee, that the Company will maintain a
minimum number of payphones. The Services Agreement does not include the
Company's inmate phone operations, which remain the responsibility of CCI.
CCI and Perot have begun negotiating modifications to the Services Agreement
whereby Perot would continue to manage the Company's management information
systems for the foreseeable future, and the field services and sales fulfillment
functions and responsibilities would transition back to CCI. As presently
contemplated, there are no fees that are expected to be associated with this
modification, nor is the Company's immediate cost structure expected to be
materially affected by the modification. However, the proposed modification
remains subject to continuing negotiation.
RESULTS OF OPERATIONS
Quarter Ended December 31, 1996 Compared to Quarter Ended December 31, 1995
Total revenues for the second quarter of fiscal 1997 were $26.4 million
compared to $26 million for the second quarter of fiscal 1996, an increase of
$400,000 or 1.6%. Revenues were affected by an increase in "dial-around"
compensation as a result of the Telecommunications Act of 1996 (the "Telecom
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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 second quarter of fiscal 1996, the Company's switch division had
third party revenue of approximately $671,000.
For the second quarter of fiscal 1997, the payphone business experienced a
net increase of 157 payphones, compared to a net increase of 10 payphones in the
second quarter of fiscal 1996. The inmate business experienced a net decrease
of 52 lines for the second quarter of fiscal 1997, compared to a net increase of
106 lines for the second quarter of fiscal 1996. The weighted average number of
installed payphones decreased to 20,117 at the end of the second quarter of
fiscal 1997 from 21,973 at the end of the second quarter of fiscal 1996, a
decrease of 8.4%. This decrease in phone count was primarily a result of the
aggressive removal of over 1,000 underperforming payphones during calendar year
1996. The weighted average number of installed inmate lines decreased to 4,735
at the end of the second quarter of fiscal 1997 from 4,847 at the end of the
second quarter of fiscal 1996, a decrease of 2.3%. This decrease in inmate
lines was primarily the result of the removal of low revenue.
The increase in total revenues for the second quarter of fiscal 1997
reflects a decrease of 0.9% in revenues from coin calls and an increase of 5.3%
from non-coin calls as compared to the second quarter of fiscal 1996. The
decrease in coin revenue was primarily due to the aforementioned removal of
under-performing payphones. The Company's payphones experienced a 2% increase
in revenue per phone when compared to the same quarter last year. This increase
is attributed to the impact of the removal program, the replacement of phones
with better performing units, and the additional "dial-around" prescribed by the
"Telecom Act". The Company's inmate phones experienced a 7% increase in revenue
per phone on a comparable basis, primarily as a result of increased volume on
its lines.
Line access charges decreased to $7.8 million in the second quarter of
fiscal 1997 from $8.4 million in the corresponding quarter of fiscal 1996 due to
the removal program, re-negotiated agreements with service providers, and rate
relief from certain service providers. These charges represented 29.7% of total
revenues in the second quarter of fiscal 1997 as compared to 32.5% in the
corresponding quarter of fiscal 1996.
Commissions paid to customers decreased to $5.1 million in the second
quarter of fiscal 1997 compared to $5.7 million in the second quarter of fiscal
1996. These amounts represented 19.3% of total revenues in the second quarter
of fiscal 1997 compared to 21.9% in the corresponding quarter of fiscal 1996.
The dollar decrease was primarily due to the closing of the Company's switch
division. Third party commissions in the switch division in the second quarter
of fiscal 1996 were $455,000.
Service and collection expense increased to $3.8 million in the second
quarter of fiscal 1997 from $3.1 million in the corresponding quarter of fiscal
1996, and increased as a percentage of total revenues from 12.2% to 14.5%. The
increase was primarily attributable to costs associated with the Company's
refurbishing program and its Services Agreement.
Bad debt expenses increased to $3.1 million in the second quarter of
fiscal 1997, from $1.8 million in the second quarter of fiscal 1996. Bad debt
expense now represents 11.6% of total revenue verses 7% in the second quarter of
fiscal 1996. The increase in bad debt is primarily related to the inmate
business where bad debt is approximately 23% of the inmate phone revenue for the
second quarter of fiscal 1997 compared to 14% for the second quarter of fiscal
1996. See the discussion of bad debt in the "Safe Harbor" section on page 11.
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Selling, general and administrative expenses were $2.2 million in the
second quarter of fiscal 1997 compared to $1.5 million in the corresponding
quarter of fiscal 1996, and increased as a percentage of total revenues from
5.6% to 8.3%. The increase was attributable to the building of an internal
sales and marketing organization for the payphone business and increase in the
cost of conducting business.
Depreciation and amortization expense was at $3.1 million in the second
quarter of fiscal 1997 as well as in the corresponding quarter of fiscal 1996.
As a result of the foregoing, operating income was $1.3 million or 4.9% of
total revenues in the second quarter of fiscal 1997 compared to $2.2 million or
8.6% in the second quarter of fiscal 1996. Earnings before interest, taxes,
depreciation and amortization ("EBITDA") decreased 18.5% to $4.4 million in the
second quarter of fiscal 1997 compared to $5.4 million 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 increased to $1.7 million in the second quarter of fiscal
1997 compared to $1.6 million in the second quarter of fiscal 1996, primarily
due to an increase in the rate on the outstanding debt.
As a result of the foregoing, the Company experienced a net loss of
$366,528 in the second quarter of fiscal 1997 compared to net income of $515,124
in the corresponding quarter of fiscal 1996, a $0.06 loss per share in the
second quarter of fiscal 1997 versus a $0.09 profit per share in the second
quarter of fiscal 1996.
Six Months Ended December 31, 1996 Compared to Six Months Ended December 31,
1995
Total revenues for the first six months of fiscal 1997 were $53.2 million
compared to $53.4 million for the first six months of fiscal 1996, a decrease of
$200,000 or 0.4%. 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. In addition, the Company discontinued its switch division in March
1996. In the first six month of fiscal 1996, the Company's switch division had
third party revenue of approximately $1.8 million.
Line access charges decreased to $15.8 million in the first six months of
fiscal 1997 from $18.0 million in the corresponding period of fiscal 1996 due to
the removal program, re-negotiated agreements with service providers, and rate
relief from certain service providers. These charges represented 29.7% of total
revenues in the first six months of fiscal 1997 as compared to 33.6% in the
corresponding period of fiscal 1996.
Commissions paid to customers decreased to $10.5 million in the first six
months of fiscal 1997 compared to $11.5 million in the first six months of
fiscal 1996. These amounts represented 19.8% of total revenues in the first six
months of fiscal 1997 compared to 21.5% in the corresponding period of fiscal
1996. The dollar decrease was primarily due to the closing of the Company's
switch division. Third party commissions in the switch division in the first six
months of fiscal 1996 were $967,000.
Service and collection expense increased to $7.9 million in the first six
months of fiscal 1997 from $7.0 million in the corresponding period of fiscal
1996, and increased as a percentage of total revenues from 13.1% to 14.9%. The
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increase was primarily attributable to costs associated with the Company's
refurbishing program and its Services Agreement.
Bad debt expenses increased to $5.9 million in the first six months of
fiscal 1997, from $3.7 million in the first six months of fiscal 1996. Bad debt
expense now represents 11.1% of total revenue verses 6.8% in the first six
months of fiscal 1996. The increase in bad debt is primarily related to the
inmate business. See the discussion of bad debt in the "Safe Harbor" section on
page 11.
Selling, general and administrative expenses were $4.0 million in the
first six months of fiscal 1997 compared to $2.3 million in the corresponding
period of fiscal 1996, and increased as a percentage of total revenues from 4.3%
to 7.5%. The increase was attributable to the building of an internal sales and
marketing organization for the payphone business and increase in the cost of
conducting business.
Depreciation and amortization expense was at $6.0 million in the first six
months of fiscal 1997 compared to $6.2 million in the corresponding period of
fiscal 1996. The reduction was due mainly to the March 1996 adjustments to
carrying values under FAS 121.
As a result of the foregoing, operating income was $2.9 million or 5.5% of
total revenues in the first six months of fiscal 1997 compared to $4.8 million
or 8.9% in the first six months of fiscal 1996. Earnings before interest,
taxes, depreciation and amortization ("EBITDA") decreased 17.5% to $9.0 million
in the first six months of fiscal 1997 compared to $10.9 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 increased to $3.3 million in the first six months of
fiscal 1997 compared to $3.1 million in the first six months of fiscal 1996,
primarily due to an increase in the rate on the outstanding debt and increased
borrowings.
As a result of the foregoing, the Company experienced a net loss of
$363,273 in the first six months of fiscal 1997 compared to net income of
$1,276,363 in the corresponding period of fiscal 1996, a $0.06 loss per share
in the first six months of fiscal 1997 versus a $0.21 profit per share in the
first six months 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 six months
of fiscal 1997 was approximately $3.0 million compared to $5.1 million for the
first six months of fiscal 1996.
The Company's working capital shows a deficit of approximately ($11.5)
million with a current ratio of (0.6) to 1 at December 31, 1996. This compares
to a working capital balance of $6.9 million and a current ratio of 1.8 to 1 at
December 31, 1995. The change in the Company's working capital is primarily a
result of current maturities of $18.0 million on the Credit Agreement, which
includes a $12,000,000 payment due on or before July 1, 1997. The Company's
principal commitments as of December 31, 1996, consisted of a commitment under
the Services Agreement to purchase $183,000 of software enhancements from Perot,
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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 fiscal
1997. However, as discussed in more detail below, the Company is required to
pay $12,000,000 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 this 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. The payphone industry
is continuing to consolidate in both the inmate and pay telephone segments of
the business. See "Safe Harbor" statements made herein.
In August 1996, the Company entered into an amended and restated Credit
Agreement (the "1996 Credit Agreement"). The 1996 Credit Agreement, as amended
in October 1996, requires the Company to make payments of $500,000 per month
beginning on January 1, 1997 through the end of the term, which was extended to
June 30, 1999. In addition, the 1996 Credit Agreement requires the Company to
make a $12,000,000 payment on or before July 1, 1997. Borrowings under the 1996
Credit Agreement bear interest at either a LIBOR-based or prime rate, at the
Company's option. In conjunction with the 1996 Credit Agreement, the Company
granted to the lender warrants to purchase up to 225,000 shares of common stock
at a nominal price.
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 meet its obligations under the 1996 Credit
---------
Agreement, as amended, the Company is actively seeking to raise additional
capital or restructure its 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 meet its
payment obligations under the 1996 Credit Agreement, as amended.
Bad Debt: Traditionally, the Company has utilized the services of
--------
the LECs in the billing and collection process, as essentially all of the calls
made from the Company's inmate phones were billed through large clearinghouses
that in turn sent the information to the LECs for billing and collection. Due
to the Company's dependence upon the LECs for billing and collection, it has
taken the Company up to 24 months to determine whether an 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
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bad debt to approximately 23% of the inmate phone revenue. To address the issue
of bad debt, the Company has implemented a program for direct billing with
deposit requirements that will enable it to bill the called number directly and
set credit parameters. This direct billing with deposit requirements program is
a new program 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 55% of the Company's inmate phone
revenues. Management believes that the program could result in a decrease in
call volume. However, management believes that, if the program is successful,
any reduction in call volume and therefore revenues should be more than offset
by the decrease in the level of bad debt. 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 assurance can be given as to the
success of the program.
Dial Around Compensation: The Federal Communications Commission's ("FCC")
------------------------
implementation of the provisions of the Telecom Act initially mandates dial
around compensation for both access code calls and 800 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 if the
Inter-Exchange Carrier ("IXC") wants 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 or
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 an 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. 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 the pending appeals on this issue, the Company
is unable to adequately predict the ultimate revenue impact of local coin rate
deregulation.
Page 13
<PAGE>
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 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 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 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 the 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 not mandated, the Company
is unable to reasonably assess any potential impact that BPP, rate benchmarks or
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.
Page 14
<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 million of its
indebtedness thereunder on or before July 1, 1997, and to repay the remaining
$63 million of its indebtedness in increments of $500,000 per month beginning on
January 1, 1997 through the end of the 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.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
(B) REPORTS ON FORM 8-K:
None.
Page 15
<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: February 13, 1997
/s/ Jack B. Wages, Jr.
----------------------------------
Jack B. Wages, Jr.
Controller
(Principal Accounting Officer)
Page 16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTERIM
CONDENSED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED DECEMBER 31, 1996, AND
THE CONDENSED BALANCE SHEET AS OF DECEMBER 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,801,534
<SECURITIES> 0
<RECEIVABLES> 14,003,551
<ALLOWANCES> (1,382,000)
<INVENTORY> 1,620,970
<CURRENT-ASSETS> 17,067,507
<PP&E> 78,274,501
<DEPRECIATION> (35,695,230)
<TOTAL-ASSETS> 111,326,811
<CURRENT-LIABILITIES> 28,577,631
<BONDS> 0
0
0
<COMMON> 60,545
<OTHER-SE> 27,491,246
<TOTAL-LIABILITY-AND-EQUITY> 111,326,811
<SALES> 0
<TOTAL-REVENUES> 26,366,612
<CGS> 12,909,688
<TOTAL-COSTS> 26,733,140
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (366,528)
<INCOME-TAX> 0
<INCOME-CONTINUING> (366,528)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (366,528)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
