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, 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______________________
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 (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 6,054,556 shares of Common Stock outstanding as of April 6, 1996.
COMMUNICATIONS CENTRAL INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
INDEX
Page
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
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Consolidated Balance Sheets - March 31, 1996 and June 30, 1995 3-4
Consolidated Statements of Income - Three Months Ended March 31, 1996 and
1995 and Nine Months Ended March 31, 1996 and 1995 5
Consolidated Statements of Cash Flows - Nine Months Ended
March 31, 1996 and 1995 6
Notes to Consolidated Financial Statements - March 31, 1996 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- - ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS 8-11
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12-13
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Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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COMMUNICATIONS CENTRAL INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, JUNE 30,
1996 1995
---------------- --------------
ASSETS (Unaudited) (Note)
Current assets:
Cash................................................................... $ 881,667 $ 4,041
Accounts receivable, less allowance for doubtful accounts
of $2,461,000 and $2,418,000 at March 31, 1996 and
June 30, 1995, respectively........................................... 10,081,898 10,636,305
Prepaid expenses....................................................... 887,236 1,043,924
Other current assets................................................... 858,865 317,029
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Total current assets.................................................. 12,709,666 12,001,299
Operating equipment:
Telecommunications equipment........................................... 73,444,133 72,782,885
Uninstalled equipment.................................................. 1,376,526 623,500
---------------- --------------
74,820,659 73,406,385
Less accumulated depreciation and amortization......................... (28,372,581) (16,358,051)
---------------- --------------
46,448,078 57,048,334
Leasehold improvements and office furniture and equipment,
net of accumulated depreciation and amortization of
approximately $2,463,000 and $1,325,000 at March 31, 1996
and June 30, 1995, respectively........................................ 1,165,984 1,929,654
Deferred loan costs, net of accumulated amortization of $158,000
and $37,000 at March 31, 1996 and June 30, 1995,
respectively........................................................... 320,310 82,656
Intangible assets:
Site license contracts, net............................................ 6,965,182 7,607,541
Agreements not to compete, net......................................... 1,140,242 1,528,347
Goodwill, net.......................................................... 36,908,490 37,881,651
Other assets, net....................................................... 3,819,482 4,887,261
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Total assets......................................................... $109,477,434 $122,966,743
=============== =============
Note: The balance sheet at June 30, 1995 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.
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COMMUNICATIONS CENTRAL INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, JUNE 30,
1996 1995
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LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited) (Note)
Current liabilities:
Current portion of notes payable to shareholders..................... $ 20,833 $ 162,500
Current portion of notes payable..................................... 106,200 1,054,521
Accounts payable..................................................... 3,615,653 865,112
Accrued expenses..................................................... 2,312,375 2,162,330
Accrued commissions.................................................. 2,656,105 2,478,499
Accrued interest..................................................... 654,224 1,062,141
Accrued compensation................................................. 137,885 314,990
Accrued income taxes payable......................................... (118,478) 118,430
---------------- ----------------
Total current liabilities........................................... 9,384,797 8,218,523
Notes payable to shareholders, less current portion................... -- 8,333
Notes payable, less current portion................................... 43,750 267,333
Long-term debt........................................................ 73,197,389 70,197,389
Shareholders' equity:
Common Stock, $.01 par value
Authorized shares - 50,000,000: issued and outstanding
shares - 6,054,556 at March 31, 1996 and
5,878,056 at June 30, 1995........................................ 60,545 58,780
Additional paid-in capital.......................................... 50,067,383 49,860,878
Accumulated deficit.................................................. (23,276,430) (5,644,493)
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Total shareholders' equity.......................................... 26,851,498 44,275,165
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Total liabilities and shareholders' equity.......................... $ 109,477,434 $ 122,966,743
================ ================
See notes to consolidated financial statements.
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COMMUNICATIONS CENTRAL INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, DECEMBER 31,
----------------------------------- -----------------------------------
1996 1995 1996 1995
----------------- --------------- ---------------- ---------------
REVENUES:
Coin calls............................. $ 8,356,736 $ 7,775,339 $ 26,547,038 $24,012,259
Non-coin calls......................... 16,181,975 10,967,181 49,557,436 31,260,492
Other.................................. 1,249,858 26,050 3,071,032 65,432
----------------- --------------- ---------------- ---------------
TOTAL REVENUES 25,788,569 18,768,570 79,175,506 55,338,183
COST AND EXPENSES:
Line access charges.................... 9,527,084 6,584,451 27,485,178 18,927,586
Commissions............................ 5,466,268 3,699,695 16,966,537 9,964,559
Service and collection................. 7,540,998 3,102,269 14,539,217 8,223,407
Bad debt expense....................... 2,608,730 969,679 6,268,219 2,591,094
Selling, general and
administrative........................ 1,378,228 1,132,637 3,681,932 3,182,607
Depreciation and amortization.......... 2,717,296 2,589,129 8,906,169 6,830,070
Impairment loss 14,183,996 14,183,996
----------------- --------------- ---------------- ---------------
TOTAL COST AND EXPENSE 43,422,600 18,077,859 92,031,248 49,719,323
----------------- --------------- ---------------- ---------------
Operating income (loss)................. (17,634,031) 690,711 (12,855,742) 5,618,860
Interest expense........................ 1,617,039 1,000,470 4,697,845 2,170,042
----------------- --------------- ---------------- ---------------
Income (loss) before
income tax expense...................... (19,251,070) (309,759) (17,553,587) 3,448,818
Income tax expense (benefit)............ (342,768) (82,089) 78,352 913,935
----------------- --------------- ---------------- ---------------
Net income (loss)....................... $(18,908,302) $ (227,670) $(17,631,939) $ 2,534,883
================= =============== ================ ===============
Net income (loss) per share............. $(3.12) $(0.04) $(2.91) $0.42
================= =============== ================ ===============
Weighted average number of
shares outstanding...................... 6,054,556 6,101,537 6,054,556 6,059,296
================= =============== ================ ===============
See notes to consolidated financial statements.
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COMMUNICATIONS CENTRAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
MARCH 31,
1996 1995
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OPERATING ACTIVITIES
Net income.......................................................... $ (17,631,939) $ 2,534,882
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................................... 9,724,283 6,830,070
Gain on sale of equipment........................................ -- 3,432
Other............................................................ 13,974,998 274,178
Changes in operating assets and liabilities:
Accounts receivable............................................ 554,408 (2,248,360)
Prepaid expenses, other current assets and other assets........ (2,187,851) (2,097,747)
Accounts payable and other accrued expenses.................... 1,307,941 (723,192)
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Net cash provided by operating activities........................... 5,741,840 4,573,263
INVESTING ACTIVITIES
Purchases of telecommunications equipment, leasehold improvements,
office furniture and equipment..................................... (5,770,058) (9,133,452)
Acquisitions of telecommunications equipment, site licenses,
agreements not to compete and goodwill............................. (462,000) (30,520,057)
Purchases of site licenses.......................................... (1,338,051) (1,344,673)
Proceeds from sale of equipment..................................... -- 95,350
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Net cash used in investing activities............................... (7,570,109) (40,902,832)
FINANCING ACTIVITIES
Payments on notes payable........................................... (143,750) (319,243)
Payment of loan origination cost.................................... (358,625) (44,125)
Proceeds from long-term debt........................................ 3,000,000 32,640,463
Issuance of Common Stock............................................ 208,270 238,044
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Net cash provided by financing activities........................... 2,705,895 32,515,139
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Increase (decrease) in cash......................................... 877,626 (3,814,430)
Cash at beginning of period......................................... 4,041 4,441,747
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Cash at end of period............................................... $ 881,667 $ 627,317
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SUPPLEMENTAL DISCLOSURE
Cash paid for interest.............................................. $ 5,108,707 $ 1,400,127
================== ================
Cash paid for income taxes.......................................... $ 250,000 $ 1,108,110
================== ================
See notes to consolidated financial statements.
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COMMUNICATIONS CENTRAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 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, 1995. Operating results for the nine-month period
ended March 31, 1996 are not necessarily indicative of the results that may be
expected for the year ending June 30, 1996.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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GENERAL
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 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.
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, long distance transmission charges,
billing, collection and validation costs, and operator services charges.
Commissions are fees paid regularly to business operators based on a percentage
of revenue generated by the Company's payphones and have generally increased
over prior years as competition among payphone operators for attractive payphone
locations has increased. 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 phones.
In July 1995, the Company entered into a long-term outsourcing agreement
(the "Services Agreement") with Perot Systems Field Services Corporation
("Perot"), a subsidiary of Perot Systems Corporation. The Services Agreement
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 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.
RESULTS OF OPERATIONS
Fiscal Quarter Ended March 31, 1996 Compared to Fiscal Quarter Ended March 31,
1995
Total revenues for the third quarter of fiscal 1996 were $25.8 million
compared to $18.8 million for the third quarter of fiscal 1995, an increase of
$7.0 million or 37.4%. This increase in total revenues resulted primarily from
the increased number of inmate lines added to the Company's network. The
acquisition ofRobert Cefail and Associates ("RC&A") in April 1995 have
substantially contributed to the increase in revenues compared to the third
quarter of fiscal 1995.
Page 8
Internal sales and marketing programs also contributed to the increase in
revenues compared to the third quarter of fiscal 1995. For the third quarter of
fiscal 1996, the Company installed 652 new payphones, compared to 964 new
payphones in the third quarter of fiscal 1995. The weighted average number of
installed payphones increased to 27,163 at the end of the third quarter of
fiscal 1996 from 24,428 at the end of the third quarter of fiscal 1995, an
increase of 11.2%.
The increase in total revenues for the third quarter of fiscal 1996
reflects flat revenues from coin calls when adjusted for the third fiscal
quarter charge of $607,000 to coin revenue for the underreporting of sales and
use tax and a 47.5% increase from non-coin calls as compared to the third
quarter of fiscal 1995. The increases were due to the increase in the number of
phones from the aforementioned acquisition. The payphone business experienced a
$600,000 decline in operator service provided revenue when compared to the same
quarter last year. This decline is attributed to the impact of "dial around" on
the non-coin revenue.
Line access charges increased to $9.5 million in the third quarter of
fiscal 1996 from $6.6 million in the corresponding quarter of fiscal 1995 due to
the increased number of phones comprising the Company's network. These charges
represented 36.9% of total revenues in the third quarter of fiscal 1996 as
compared to 35.1% in the corresponding quarter of fiscal 1995.
Commissions paid to customers increased to $5.5 million in the third
quarter of fiscal 1996 compared to $3.7 million in the third quarter of fiscal
1995. These amounts represented 21.2% of total revenues in the third quarter of
fiscal 1996 compared to 19.7% in the corresponding quarter of fiscal 1995. The
dollar increase was primarily due to the increased number of phones on the
Company's network; the percentage increase (as well as a portion of the dollar
increase) was primarily attributable to higher commission rates incurred on
revenues derived from the Company's inmate phone lines. As noted above, the
acquisition of RC&A in April 1995 substantially increased the portion of the
Company's installed phone base represented by inmate phones. In general, inmate
phones have higher commission structure than do payphones.
Service and collection expense increased to $7.5 million in the third
quarter of fiscal 1996 from $3.1 million in the corresponding quarter of fiscal
1995. These amount represented 29.2% of total revenues in the third quarter of
fiscal 1996 compared to 16.5% in the corresponding quarter of fiscal 1995. The
increase was due to $2.3 million in adjustments including legal reserves,
franchise taxes and includes adjustments to estimates regarding the cost of
servicing our phones.
Selling, general and administrative expenses were $1.4 million in the third
quarter of fiscal 1996 compared to $1.1 million in the corresponding quarter of
fiscal 1995, and decreased as a percentage of total revenues to 5.3% from 6.0%.
Depreciation and amortization expense increased to $2.7 million in the
third quarter of fiscal 1996 from $2.6 million in the corresponding quarter of
fiscal 1995.
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 and included
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. Most of the
impairment was in the Property, Plant, and
Page 9
Equipment account because the company's policy prior to its Initial Public
Offering was to allocate as much of the purchase price as possible to the
Property, Plant, and Equipment account.
Operating loss was $17.6 million in the third quarter of fiscal 1996
compared to operating income of $0.7 million, or 3.7% in the third quarter of
fiscal 1995. Earnings before interest, taxes, depreciation and amortization
("EBITDA") declined 127.27%, to ($.9) million in the third quarter of fiscal
1996 compared to $3.3 million in the corresponding quarter of fiscal 1995.
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 $1.6 million in the third quarter of fiscal
1996 compared to $1.0 million in the third quarter of fiscal 1995 primarily due
to increased amounts of debt outstanding related to the acquisitions discussed
above.
As a result of the foregoing, net loss was $18,908,302 in the third quarter
of fiscal 1996 compared to $227,670 in the corresponding quarter of fiscal 1995,
or a loss of $3.12 per share in the third quarter of fiscal 1996 versus a loss
of $.04 per share in the third quarter of fiscal 1995.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
The Company has historically financed its operations and acquisitions
primarily through bank borrowings, seller financing of certain acquisitions
through the issuance of subordinated convertible notes, proceeds from the
issuance of Preferred Stock prior to the Company's initial public offering,
proceeds from its initial public offering and cash flow from operations. Net
cash provided by operating activities for the first nine months of fiscal 1996
was approximately $5.7 million compared to $4.6 million for the first nine
months of fiscal 1995. Net cash used in investing activities was $7.6 million
for the first nine months of fiscal 1996 compared to $40.9 million for the first
nine months of fiscal 1995. The $33.3 million decrease in cash used in
investing activities in the third quarter of fiscal 1996 compared to the third
quarter of fiscal 1995 was due to reduced purchases of telecommunications
equipment of $3.3 million and a $30.0 million reduction in acquisition related
purchases.
As of March 31, 1996, the Company had a positive working capital balance of
$3.3 million. The Company's principal commitments as of March 31, 1996
consisted primarily of a lease on its headquarters and a commitment under the
Services Agreement to purchase $489,000 of software. The Company believes that
its current cash balances, availability under its line of credit and cash flow
from operations will be sufficient to meet its working capital and capital
expenditure requirements for fiscal 1996.
On July 21, 1995, the Company completed its negotiations with its lead
lender with respect to the amendment and complete restatement of its principal
credit agreement. The $75,000,000 Amended and Restated Credit Agreement dated
as of July 21, 1995, by and among the Company, its subsidiaries and First Union
National Bank of Georgia (the "1995 Credit Agreement") extends the term of the
facility to October 31, 1997. Borrowings under the agreement bear interest at
either a LIBOR-based or prime rate, at the Company's option. As of March 31,
1996, the Company had borrowing availability of $1.8 million under the Amended
and Restated Credit Agreement. It is expected that the credit facility will be
amended prior to fiscal year end 1996 to provide for a reduction in outstandings
as a result of management's
Page 10
intention to re-capitalize the business. The amendment could increase the costs
of the credit facility and modify its terms. There is no assurance that such re-
capitalization can take place on terms and conditions that are satisfactory to
the company. The company's management is currently exploring what financial
options are available including possible common stock, preferred stock, or debt
offerings.
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 11
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- - ------ ----------------------
11 Statement re: Computation of Per Share Earnings
(b) REPORTS ON FORM 8-K:
None.
Page 12
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 13, 1996
/s/ Jack B. Wages, Jr.
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Jack B. Wages, Jr.
Controller
(Principal Accounting Officer)
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