SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 Identification No.)
incorporation or organization)
1150 NORTHMEADOW PARKWAY, SUITE 118, ROSWELL, GEORGIA 30076
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 442-7300
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
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(Title of Class)
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant as of September 19, 1996: $43,517,121.25.
Number of shares of Common Stock outstanding as of September 19, 1996:
6,054,556.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
None, except as otherwise indicated in the list of exhibits set forth in Item 14
hereof.
1
PART I
SAFE HARBOR STATEMENT UNDER 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. In the preparation of this Report,
where such forward-looking statements appear, the Company has sought to
accompany such statements with meaningful cautionary statements identifying
important factors that could cause actual results to differ materially from
those described in the forward-looking statements. An additional statement
summarizing the principal risks and uncertainties inherent in the Company's
business is included herein under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Safe Harbor
Statement." Readers of this Report are encouraged to read these cautionary
statements carefully.
See the Glossary included as Appendix A hereto for the definitions of
certain terms used in this Report.
ITEM 1. BUSINESS.
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BACKGROUND
Communications Central Inc. ("CCI" or the "Company") owns and operates a
network of over 26,000 coin-operated payphones and inmate phones located in 41
states and the District of Columbia and believes it is the second largest
independent operator of payphones and the largest independent provider of inmate
phones in the country. The Company's payphones are located where there is
significant demand for payphone services, such as convenience stores, service
stations, grocery stores, hospitals, shopping centers and truck stops. The
payphones generate significant revenue from both coin calls and "non-coin"
calls, such as collect calls, third-party calls and credit card or calling card
calls. The Company's inmate phones are installed in approximately 560
correctional institutions, most of which are operated at the county and local
government level. All inmate phone revenue is generated from non-coin calls.
Substantially all of CCI's payphones and inmate phones are electronically linked
to the Company's centralized, proprietary management information systems that
permit the Company to monitor phone usage patterns and address potential service
and maintenance needs before they cause significant downtime or come to the
attention of the site operator or correctional institution.
2
The Company was founded in June 1986 and grew rapidly, primarily through
acquisitions, to revenues of $29.9 million for the fiscal year ended June 30,
1993. In December 1993, the Company successfully completed its initial public
offering of 2.5 million shares of Common Stock and raised over $23 million in
additional capital. Since the initial public offering, the Company has used
such capital and bank borrowings to acquire the businesses and operations of 15
companies that added more than 7,700 payphones and over 4,300 inmate phones to
the Company's operations. This Report covers the Company's fiscal year ended
June 30, 1996 ("fiscal 1996").
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 operating performance measurements or overall
revenues on a per phone basis. The Services Agreement assumes, for purposes of
calculating the 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.
Changes in regulation are ongoing for the Company with the recent passage
of the Telecommunications Act of 1996 ("Telecom Act"). On September 20, 1996,
the Federal Communications Commission ("FCC") issued its Report and Order
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implementing the payphone-specific provisions of the Telecom Act. Among its
directives, the FCC prescribed dial around compensation for all access code and
800 subscriber calls from payphones at a flat rate of $45.85 per payphone per
month for the first year, with a per-call compensation system to be implemented
by October 1, 1997, under which compensation will be paid at a rate of $.35 per
call. The FCC also ordered the deregulation of local coin rates within one year
subject to certain guidelines. These and other regulatory changes should
significantly impact the Company's operations for the foreseeable future. See
"Regulation."
3
INDUSTRY
PUBLIC PAYPHONES
In June 1984, AT&T Corporation ("AT&T") was required to divest itself of
the seven Regional Bell Operating Companies ("RBOCs"). That development,
combined with the ruling of the FCC that parties other than local exchange
carriers ("LECs") could own payphones connected to the interstate telephone
network, marked the beginning of the independent payphone industry. At that
time, the FCC also authorized state regulation of local and intrastate calls.
Since June 1984, almost all states have authorized the installation and use of
independent payphones.
Prior to the AT&T divestiture, the RBOCs could refuse to provide payphone
service to a business operator or, if service was installed, would typically
only pay minimal commissions for the right to place a payphone on the business
premises. Following the AT&T divestiture and the FCC's authorization of
payphone competition, independent payphone operators began to pay property
owners competitive commissions on coin calls made from the payphones in order to
obtain the contractual right to install the equipment on their premises.
Initially, coin revenue was the only source of revenue from these payphones
because independent operators were unable to participate in revenues from non-
coin calls. However, the operator service provider ("OSP") industry emerged
and enabled independent payphone providers to compete more effectively with the
regulated telephone companies by paying commissions to payphone owners for non-
coin calls. For the first time, independent payphone operators were able to
participate in a portion of non-coin call revenue from their payphones. With
this incremental source of revenue from non-coin calls, independent payphone
operators were able to compete more vigorously with RBOCs for site location
agreements by paying higher commissions to business operators. Today, the OSP
industry is principally dominated by long distance carriers such as AT&T, MCI
Communications Corp. ("MCI") and Sprint Corporation ("Sprint").
To date, RBOCs have been somewhat constrained in their ability to pay
higher commissions because, as a regulatory matter, they are not currently
permitted to derive revenues from interstate calls and non-coin calls made
between LATAs. However, a recent FCC order grants the RBOCs the right to choose
the long distance carrier for interLATA long distance calls in conjunction with
the location owner, which will enable them to derive revenues from these calls
in the future. See "Regulation."
INMATE PHONES
The inmate phone market emerged as a growth area in the early 1990's. Large
long distance carriers were initially reluctant to enter this market because it
presented difficult technological and administrative issues. For example, due to
security concerns, an inmate
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telephone system must be able to perform many special functions, such as
allowing specific types of calls, specialized branding, blocking of certain
calls, and other limitations as deemed appropriate by the inmate administration.
Several smaller independent companies began installing coinless payphones and
"smart phones" that enabled inmates to make collect calls without live operator
assistance and provided the special protections demanded by prison
administrations. Over time, the inmate phone market has become increasingly
competitive and commissions paid to facility owners have increased as long
distance carriers, additional independent payphone providers and LECs have
entered the market. The FCC has recently required LECs to remove their inmate
equipment from regulated accounts. Moreover, the LECs are required to remove
their inmate payphone operations from their regulated rate base pursuant to the
Telecom Act. Management believes that these developments should enable the
Company to compete more equitably for inmate services, although the regulation's
implementation is ongoing and the actual impact remains to be seen. See
"Regulation."
Many inmate phone providers focus on large correctional institutions that
are primarily run by federal and state governments. The commissions paid to
these facilities are often significant because the contracts provide a large
volume of revenue from one source. Conversely, CCI has focused on institutions
operated at the county and local government level. Relationships with these
facilities are more time consuming to develop, but enable the Company to
distinguish itself as an inmate service provider. Though these institutions
typically demand a lower commission percentage than large federal and state
entities, commission levels paid to county and local inmate facilities are
rising as this market becomes increasingly competitive.
5
PAYPHONE AND INMATE PHONE OPERATIONS
As of the end of fiscal 1996, CCI owned and operated over 26,000 payphones
and inmate phones. The following table sets forth the number of phones installed
in each state as of June 30, 1996:
Inmate
State Payphones Phones Total
- ----- --------- ------ -----
Alabama 1,447 21 1,468
Arizona --- 60 60
Arkansas 270 30 300
California --- 358 358
Colorado 380 8 388
Delaware 16 --- 16
District of Columbia 83 --- 83
Florida 4,374 212 4,586
Georgia 2,431 169 2,600
Idaho ---- 53 53
Illinois 1,048 891 1,939
Indiana 177 372 549
Iowa 12 --- 12
Kentucky 115 513 628
Louisiana 696 141 837
Maine --- 12 12
Maryland 190 115 305
Massachusetts --- 300 300
Michigan 243 147 390
Minnesota 284 61 345
Mississippi 790 --- 790
Missouri 113 7 120
Montana --- 116 116
Nebraska --- 15 15
Nevada --- 104 104
New Jersey 8 --- 8
New Mexico --- 63 63
New York --- 20 20
North Carolina 946 176 1,122
North Dakota 6 --- 6
Ohio 364 378 742
Oregon --- 23 23
Pennsylvania 440 34 474
South Carolina 432 36 468
Tennessee 2,073 483 2,556
Texas 2,005 177 2,182
Utah --- 2 2
Virginia 1,545 350 1,895
Washington --- 16 16
West Virginia 108 126 234
Wisconsin 125 34 159
Wyoming 11 22 33
-- -- --
TOTALS 20,732 5,645 26,377
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6
CCI's payphones generate revenue from both coin and non-coin calls. Coin
calls include the traditional local calls at 10 cents, 25 cents or 35 cents
(depending upon state regulations) and the "1+" long distance calls which are
marketed at a rate of four-minute increments for $1.00 at many of the Company's
payphones. Non-coin calls include calling card, credit card, collect and third-
party billed calls made from CCI's phones. Non-coin calls generate revenue from
intrastate and interstate calls placed through arrangements with various long
distance or "interexchange carriers" ("IXCs") selected by CCI. The Company
considers a variety of factors when selecting a specific long distance carrier
for use at its payphones. These factors include the financial and other
contractual arrangements between CCI and the long distance carrier, the
financial stability of the carrier, the quality of service, the location of the
payphone, the types of calls made from the location, the profitability of each
type of call under each calling alternative, the requirements of the property
owners, and applicable regulatory restrictions.
The Company also generates revenues from IXCs through the receipt of "dial
around compensation." Dial around compensation is revenue derived for the use
of the Company's payphones in two methods. The first method is when an "access
code" is dialed by an end user for the purpose of placing a call using an
alternative billing method, such as a calling card. For example, a caller may
dial "102880" or "1-800-CALL-ATT" to obtain entrance into the AT&T network to
place a call that will be handled and billed by AT&T, thus "dialing around" the
Company's presubscribed carrier. Previously, the Company was paid dial around
compensation for access code calls (using 10XXX, 950 or 800 carrier access
numbers) at a rate of $6.00 per phone per month. During 1995, the Company
experienced a change in compensation payments from AT&T and Sprint who received
authority from the FCC to begin paying at a rate of 25 cents per call in lieu of
their share of the $6.00 flat rate in the areas where access calls could be
tracked. More recently, the FCC determined that dial around compensation also
includes a second method of payphone use when end users place "subscriber calls"
to a toll-free number for purposes other than to access a carrier's network.
The FCC also recognized that existing regulations do not prohibit an IXC from
blocking subscriber 800 numbers from payphones if the IXC wants to avoid paying
per-call compensation on these calls. Examples of these calls are 1-800-FLOWERS
and toll-free 800 or 888 numbers to an end user's business office. The FCC has
recently increased the compensation level and revised the method for calculating
dial around compensation for both types of dial around calls. See "Regulation."
Dial around compensation is not paid on inmate calls since inmate phone
providers are not required under applicable laws to allow access to all long
distance carriers.
CCI's inmate phones generate non-coin revenue only. Local and long distance
services are offered to inmates on an automated collect-only basis, which deters
fraud. Calls originating from inmate facilities are handled by the Company
through the use of automated call processing technology which permits collect-
only calling. This processing equipment enables the Company to meet the specific
requirements of individual correctional facility administrators, including
limiting the length of calls and the hours of availability. At the request of
correctional
7
authorities, the Company's equipment may also provide the ability for facility
administrators to monitor calls in accordance with applicable federal and state
laws. Blocking specific telephone numbers may also be accomplished when the
institution determines that calls to such numbers may jeopardize the integrity
and security of the facility or the safety of the public. Blocking numbers is
also utilized to reduce the exposure to bad debts by prohibiting calls to
numbers where the credit limits have been reached or exceeded. Currently, the
Company utilizes the services of the LECs in the billing and collection process,
as essentially all of the calls made from the Company's inmate phones are billed
through large clearinghouses that in turn send the information to the LECs for
billing and collection. Due to the Company's dependence on the LECs for billing
and collection, it currently can take 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 bad debt for its inmate phone revenue over the past
year to approximately 15%. To address the issue of bad debt, the Company has
begun implementing a program for direct billing that will enable it to bill the
called number directly and set parameters for blocking calls based on collection
results. This direct billing program is a new program for the Company and in
certain states, regulatory approval may be required. Although the Company
believes that the direct billing program will reduce the amount of bad debt
attributable to its inmate phones, no assurance can be given as to the success
of the direct billing program
Pursuant to the Services Agreement, Perot manages all field service aspects
of the Company's payphone operations and, in that regard, assumes primary
responsibility for the field technicians and related support personnel who
install, collect, maintain and repair CCI's payphones in exchange for a monthly
fee. Each field technician is assigned a service route typically consisting of
100 to 200 payphones depending upon the locations of the payphones and the
length of the route. The routes are designed so that payphone visits and routine
service, such as cleaning, touch-up painting, keypad repair and coin box
replacement, occur regularly. Field technicians are also dispatched as soon as
practicable after problems are detected. Management believes that outsourcing
the Company's management information systems for its payphones to Perot allows
the Company to focus on growing its business by building a larger base of
quality installed phones.
MARKETING AND SALES
The Company maintains separate sales forces for its payphone and inmate
phone operations. On the payphone side of the Company's business, CCI's
operations are further divided into sales for independent and key accounts and
corporate accounts. Corporate accounts provide payphone growth and call volume,
while independent and key accounts provide better gross margins, are less
susceptible to turnover when the contract expires and have longer
8
contractual terms.
INDEPENDENT AND KEY PAYPHONE ACCOUNTS
At June 30, 1996, approximately 59% of the Company's payphone base was
represented by independent and key accounts. Independent accounts are defined
by the Company as those businesses with fewer than five payphones. Key accounts
are those with 5 to 49 payphones. The Company selects locations for its
payphones where it believes there is a demonstrated high demand for payphone
service and where the phones may be easily serviced. The Company generally does
not install a payphone unless it estimates that the location will generate
minimum levels of coin and non-coin revenue per month. For the majority of
payphone locations, the Company bases its estimates on the historical revenue
from each site. When available, CCI obtains the historical data of existing
locations from the business operator. When historical data is unavailable for a
prospective location, CCI examines store hours, other payphones in the area,
traffic patterns, data from payphones in comparable locations and other factors
to determine whether to install a payphone at a particular site.
The Company negotiates site location agreements at desirable locations by
offering commissions to business operators typically based upon percentages of
revenue. Site location agreements for independent accounts usually have five-
year to ten-year terms. Under the Company's current form of site location
agreement, CCI can generally terminate a site location agreement if it
determines that a payphone is not profitable.
CCI markets its payphones to independent accounts on a commission basis
through a network of independent marketing representatives who represent the
Company under the supervision of the Vice President, Sales and Marketing and
CCI's field sales and operating managers.
CORPORATE PAYPHONE ACCOUNTS
At June 30, 1996, corporate payphone accounts represented approximately 41%
of CCI's payphone base. The Company's marketing efforts to corporate accounts
are directed to large, multi-location entities, such as restaurant chains,
grocery stores, property management companies, hospitals, convenience store
operators, franchisers, shopping mall developers, department store chains and
oil service companies. CCI's marketing campaign to corporate accounts emphasizes
the Company's ability to offer complete coverage of all of the customer's
payphone needs, including standardized reporting, broad geographical coverage
and extensive service. Contracts with corporate account customers are negotiated
on an account-by-account basis and typically have three-year to seven-year
contract terms. To date, regulatory limitations have prevented RBOCs from being
able to provide this breadth of service to corporate account
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customers who, by definition, tend to have operations that cross RBOC operating
territories. However, a recent FCC ruling has lifted certain of these
limitations and may allow RBOCs to provide such service. See "Regulation." Among
major oil companies, CCI's corporate accounts include Conoco Inc., Crown Central
Petroleum Corporation and Racetrac Petroleum, Inc. In the convenience store
industry, CCI's corporate accounts include, among others, Flash Foods, Inc. and
E-Z Serve Corp. At June 30, 1996, the Company's largest corporate account
customer represented approximately 4% of its payphone base (exclusive of inmate
phones) and the 11 largest corporate accounts represented approximately 22% of
its payphone base.
INMATE PHONE ACCOUNTS
The Company's inmate phone marketing and sales efforts are directed by the
General Manager of the Company's inmate division. An inmate phone sales force
consisting of 10 CCI employees, supervised by sales and marketing directors for
the northern and southern regions, markets the Company's inmate phone services
to sheriffs, jail administrators and county commissioners in 36 states.
Approximately 87% of the Company's inmate phone contracts are with institutions
in Illinois, California, Virginia, Kentucky, Indiana, Ohio, Tennessee,
Massachusetts, Texas, North Carolina, Florida, Georgia, Louisiana and Maryland.
While recognizing all market segments, the sales and marketing efforts of the
inmate division are concentrated on county and local correctional institutions
where generally greater margins are produced and competition is less intense
than in the state and federal markets. To enhance service on the inmate side of
the Company's business, CCI employs 18 field technicians who only service the
Company's inmate phone base.
TECHNOLOGY
Historically, when a call is initiated at most payphones owned by a LEC,
the call is processed through a remote central office maintained by the LEC
which communicates with the caller, if necessary, and controls the payphone by
external means. By contrast, the Company's payphones are "smart" terminals and
process the functions associated with a call using a microprocessor located
within the payphone.
In addition to the microprocessor, the Company's payphones contain non-
volatile, electrically erasable, programmable read-only memory chips ("EEProm")
permitting CCI to "download" rates and option selections from the corporate
office in Atlanta, using software provided and periodically updated by the
Company's principal vendors of payphones. The information stored on the chip
includes the local, intrastate and interstate coin rates that can be charged
through CCI's payphones. The payphone is also programmed for other available
options, such as free calls for emergency numbers, special charges for certain
calls and speed dial numbers. All programmable features of CCI's payphones may
be altered on a secure basis from
10
a remote location by means of a personal computer. Specifically, each of CCI's
payphones may be monitored daily from computers at the corporate office to
determine the amount of money in the cash box, the number and types of calls
made and the service condition of the payphone, with such information being
communicated on demand from the payphone to the corporate office.
Operations are monitored by a series of computerized communications between
the payphones, operating centers and databases located at the Company's
headquarters. The Company utilizes two different non-proprietary, third-party
software systems in its payphones, Payphone Network Manager ("PNM") and
Xpressnet, to detect operating problems, remotely update rates and determine the
amount of coin collected. During its monthly processing procedures, the system
calculates the commissions payable to the various property owners and prints the
appropriate checks. The system produces an analysis of each site, including
profitability and service calls, and acts as an additional internal check on
coin collection.
Inmate telephone service is also provided with microprocessor-based
technology. The actual telephone instruments are "dumb" coinless phones that
are connected to a "smart" controller. Each instrument has the programmable
options of a payphone, as well as additional controls programmed into the inmate
systems that determine who can originate calls, the numbers that can be dialed,
when the calls can be placed and the maximum duration of the calls. Inmate
calls are typically processed as collect calls paid for by the recipient of the
call. The inmate phone technology utilized by the Company automatically
forwards inmate calls directly to a validation service, which may block the call
if the call is to an unauthorized number or if the recipient is not current on
his or her local telephone bill. All of the Company's inmate systems are
monitored daily from the Company's inmate control center in Louisville, Kentucky
to ensure operability of the phones.
The telecommunications industry has been characterized by steady
technological change, frequent new service introductions and evolving industry
standards. The Company believes that its future success will depend on its
ability to anticipate such changes and offer responsive services on a timely
basis that meet these evolving industry standards.
SUPPLIERS
The Company's principal suppliers provide phones, housings, local line
access and long distance services. In addition, pursuant to the Services
Agreement, Perot provides outsourcing services related to certain aspects of the
Company's payphone operations.
CCI generally purchases its payphone equipment from domestic manufacturers.
CCI's payphones and electronic boards are obtained primarily from Protel, Inc.
and Elcotel, Inc. To ensure customer acceptance, the housings and the phones
appear identical to those used by the LECs. Most of the Company's inmate phone
equipment is provided by Omniphone.
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Management believes there are an adequate number of vendors of payphones, inmate
phones, housings and related parts and software services to supply the industry.
CCI has identified alternative sources if supply is interrupted from any of its
primary vendors, although transitioning from the Company's existing primary
vendors to new vendors on short notice, if necessary, could be difficult and
could involve unforeseen additional expenses. Management is not aware that any
of the Company's primary vendors of phone equipment and related parts and
services are currently experiencing financial difficulties.
The Company currently purchases local line access from various major LECs
including BellSouth, Southwestern Bell, US West, and GTE. Long distance
service is provided to CCI by AT&T, MCI, and Sprint. Operator services are
provided by U.S. Long Distance Corp., Opticom Inc., Teltrust, and AT&T as well
as certain LECs in the territories in which they operate. CCI believes that it
has access to several providers of long distance service and operator services
at competitive rates and expects to have such access in the foreseeable future.
In addition, new sources of local line access are emerging as competition is
authorized for local service. However, the continuing availability of these new
sources cannot be assured.
COMPETITION
Competition in the payphone side of the Company's business consists of (i)
competition with RBOCs, LECs and other independent payphone operators for
profitable payphone locations and (ii) competition with long distance carriers
such as AT&T, MCI and Sprint (the primary providers of dial around services) for
non-coin revenue. Competition in the inmate side of the Company's business
consists primarily of competition with other inmate phone service providers,
including LECs and IXCs, for the right to provide service to correctional
facilities.
Management believes the principal competitive factors in the payphone
business in terms of obtaining payphone locations are (i) the commission
payments to a property owner, (ii) the ability to serve accounts with locations
in multiple states and territories, (iii) the quality of service and the
availability of specialized services provided to a property owner and payphone
users, and (iv) responsiveness to customer service needs. CCI believes it is
competitive in each of these areas. Independent providers such as CCI have
historically maintained an advantage over RBOCs in that they can offer business
operators commissions on coin and non-coin, local and long distance calls. To
date, RBOCs have been prohibited from obtaining revenues or commissions on
interLATA calls. However, a recent FCC ruling will allow RBOCs to choose the
interLATA carrier at their payphones, in conjunction with the location owner,
and participate in the revenue streams from this traffic in the future. See
"Regulation." In addition, while long distance carriers can currently pay
commissions to property owners for long distance calls, they usually do not
install payphone equipment at a property owner's location and, therefore, cannot
obtain revenues from coin calls, the majority of which are local calls.
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The competition for non-coin revenue by the major IXCs has had a major
adverse effect upon the revenue and profitability of the Company's payphone
division. AT&T, Sprint and MCI have undertaken substantial marketing efforts in
establishing their dial around platforms. The 1-800 CALL AT&T and 1-800 COLLECT
(MCI) access code dialing patterns have caused a dramatic reduction in the
number of non-coin calls that the Company generates through its payphones. The
financial impact is apparent. OSP revenue has been reduced from approximately
$120.00 per phone per month in fiscal 1993 to approximately $67.00 per phone per
month at the end of fiscal 1996. In 1992, the FCC first recognized the impact of
dial around calling on independent payphones by enacting a flat rate of $6.00
per payphone per month to be paid by the IXCs, based on their pro-rata share of
the long distance market. On September 20, 1996, the FCC released an order
establishing a new flat rate of $45.85 per phone per month to be paid by certain
IXCs to independent payphone providers. The flat rate will be in effect until
October 1, 1997, when all IXCs are required to transition to a per call payment
system at a rate of 35 cents per call for one year. Beginning October 1, 1998,
per call compensation is to be based on the local rate charged at the individual
payphone or at a rate agreed to between the payphone provider and the carriers.
Management believes that the FCC's revised dial around compensation plan will
provide more equitable compensation for the calls that originate at its
payphones. See "Regulation."
The Company believes that the principal competitive factors in the inmate
phone market include (i) the commissions payable to the relevant jurisdiction,
(ii) the quality of service and responsiveness to customer service needs, (iii)
the quality of the technology inherent in the provider's system and (iv) the
pricing structure for inmate calling. The inmate phone market has also become
increasingly competitive over the past several years as additional independent
payphone operators and LECs have begun providing these services. Recently, the
FCC determined that equipment used in LEC inmate operations must be removed from
regulated accounts. Moreover, the LECs are required to remove their inmate
payphone operations from their regulated rate base pursuant to the Telecom Act.
Management believes that these developments should enable the Company to compete
more equitably for inmate services, although the regulation has not been fully
implemented and the actual impact remains to be seen. See "Regulation." In
addition, certain national long distance carriers, such as MCI, are also active
providers of inmate phone services. This additional competition has had the
effect of increasing the level of commission rates.
Both the payphone and inmate phone markets are highly competitive. Certain
of the Company's competitors have greater financial and other resources than
CCI. In addition, implementation of various aspects of the Telecom Act,
particularly the payphone-specific provisions, could have material positive and
negative effects on the Company's payphone business and results of operations.
See "Regulation."
13
REGULATION
The Company's operations are significantly influenced by federal and state
regulation of payphone and inmate phone services, as well as the regulation of
related telecommunications services. Traditionally, regulation of these
services has been governed by state regulatory bodies or the FCC, based on the
intrastate or interstate nature of the service. However, in early 1996, the
Telecom Act was enacted. The Telecom Act substantially restructured the
telecommunications industry and included specific provisions regarding changes
in the regulation of payphone and inmate phone service to be implemented and
administered by the FCC on both an interstate and intrastate basis. For
example, under the Telecom Act, the FCC has the power to preempt state
regulations that are inconsistent with the FCC's legislative mandates.
The FCC is statutorily required to complete the adoption of new rules
implementing the payphone-specific provisions of the Telecom Act by November 8,
1996. The FCC's broadened authority under the Telecom Act appears to expand its
participation in payphone and inmate phone issues, yet there can be no assurance
of these changes until regulations are finalized and implemented pursuant to the
Telecom Act. On September 20, 1996, the FCC released its Report and Order
----------------
which adopted regulations to implement Section 276 of the Telecom Act as
described below. While the Report and Order confirms the FCC's more active
----------------
role with federal issues, the Company cannot effectively anticipate how strongly
the FCC will exert its authority relative to state issues until such
implementation actually occurs. In the interim, the Company continues to be
governed by both federal and state regulatory requirements as applicable.
STATE REGULATION
State public service commissions ("PSCs") have traditionally maintained
primary responsibility for regulating the rates, terms and conditions for
intrastate independent payphone services. The 49 states that currently permit
independent payphone providers to supply local and long distance payphone
service, and the District of Columbia, have adopted a variety of state-specific
regulations that govern rates charged for coin and non-coin calls as well as a
broad range of technical and operational requirements. In addition, PSC-
approved tariffs establish charges for the purchase of access lines from the
LECs and the rates paid by the Company for local and intrastate usage that may
be resold to the end user through the payphone. As a result of the
implementation of the Telecom Act, all states will be required to allow payphone
competition in the near future.
Operator services rates for non-coin local and intrastate toll calls placed
from payphones are also typically capped by the state PSCs. Most states that
permit competition for intrastate operator services regulate operational aspects
of the provision of those services in a manner
14
similar or identical to regulations adopted by the FCC pursuant to the Telephone
Operator Consumer Services Improvement Act of 1990 ("TOCSIA").
The Company's inmate operations are also governed by state-specific
requirements. Similar to payphone and/or operator services, the PSCs often
regulate the rates charged for intrastate calls placed from confinement
facilities. The operational characteristics of inmate communications systems
must also comply with the PSCs' rules.
Certain state PSCs are reviewing the charges that independent payphone
providers are required to pay for local access lines and associated services
from the LECs. State PSCs are also authorizing competition in local service.
As local competition emerges, more options should become available to the
Company to obtain local access service at competitive rates. No assurance can
be given, however, that such options will actually become available.
FEDERAL REGULATION
Although the FCC historically has been less active than the state PSCs in
regulating the provision of independent payphone service, the passage of the
payphone-specific provisions of the Telecom Act signals a potential significant
change in the FCC's role in the regulation of payphones and inmate phones.
Specifically, Section 276 of the Act requires the FCC to implement rules by
November 8, 1996 which accomplish the following:
(1) Establish a per call compensation system to ensure payphone providers
are fairly compensated for every intrastate and interstate call made from their
payphones (excluding 911 and Telecommunications Relay Services ("TRS") calls for
hearing-impaired individuals);
(2) Cease traditional interstate and intrastate subsidies for LEC payphones
from LEC regulated rate base operations;
(3) Establish nonstructural safeguards to eliminate discrimination between
RBOC and independent payphone providers;
(4) Consider the RBOCs' right to select and contract with interLATA
carriers for their own payphones, subject to: a) the FCC's finding that such
presubscription rights are in the public interest; and b) maintaining existing
contracts between location owners and interLATA carriers until their expiration;
(5) Authorize all payphone providers to choose the intraLATA carrier of
choice subject to requirements of, and contractual rights negotiated with,
location owners;
(6) Determine whether "public interest" payphones should be maintained and
under what conditions; and
(7) Preempt any state regulations which are inconsistent with the FCC's
rules adopted under Section 276.
On September 20, 1996 the FCC released its Report and Order adopting
----------------
regulations to
15
implement the above section of the Telecom Act. First, the FCC prescribed new
interim dial around compensation for independent payphone providers for both
"access code" and "subscriber 800" dial around calls, on a flat rate basis, at a
rate of $45.85 per payphone per month to be paid by certain long distance
carriers. The $45.85 per month is based on an estimated industry-wide average of
131 calls per month at $.35 per call. This interim flat-rate compensation will
be effective until October 1, 1997, and replaces all other dial around
compensation currently existing at the federal or state level. The new
compensation will be effective 30 days following publication of the Report and
----------
Order in the Federal Register, which is anticipated to be late October or early
- -----
November, 1996, and will remain effective until October 1, 1997. Beginning on
that date, all payphones (including LEC and independent provider payphones) will
transition to a per-call compensation system, with the rate initially set at
$.35 per call. The FCC determined that after October 1, 1998, the per call rate
for dial around will be the same as the local rate charged at the payphone or at
a rate negotiated between the payphone provider and the IXC. The FCC also
recognized that existing regulations do not prohibit an IXC from blocking
subscriber 800 numbers from payphones if the IXC wants to avoid paying per call
compensation on these calls. Dial around compensation is not paid on inmate
calls since inmate phone providers are not required under TOCSIA to allow access
to all long distance carriers or other toll-free numbers.
Second, the FCC decided that local coin rates should generally be
deregulated no later than October 1, 1997. Thus, the Company should be able to
set an appropriate market-based rate for its local coin calls from its payphones
at that time. State PSCs remain free to order deregulation of local coin rates
at an earlier date and are also permitted to obtain an exemption from
deregulation by demonstrating market failures within their state that would not
allow the development of market-based rates for local coin calls. The FCC's
Order is unclear regarding the specific showing states must make to obtain an
exemption.
Third, by October 1, 1997, state PSCs must take any additional action
necessary to ensure that payphone competition is promoted. These actions
include modification or elimination of existing payphone regulations that impose
market entry or exit barriers.
Fourth, the FCC required LEC payphone operations to be removed from the
regulated rate base no later than April 15, 1997. A key effect of this process
is that the LECs' regulated ratepayers are "repaid" by the deregulated payphone
business for the value of the payphones on which the LECs are no longer entitled
to earn a rate of return. The FCC determined that this repayment must be based
on the "net book value" of the LEC payphone equipment, which is the original
cost of the physical equipment, minus accumulated depreciation. Further, the
FCC required all RBOCs to file "Comparably Efficient Interconnection" ("CEI")
plans within 90 days of the date of the Order to describe their methods of
compliance with nondiscrimination and accounting requirements, as well as other
safeguards against subsidies and discrimination in favor of their own payphone
operations. The LECs must also make access lines provided to their own
payphones available to independent payphone providers on an equal basis.
16
Fifth, the FCC's order authorizes RBOCs to select the interLATA carrier
that will serve their payphones, with the selection to be made in conjunction
with location providers. This right is to be effective upon FCC approval of the
individual RBOC's "CEI" plans as described above. Existing contracts between
location providers and payphone providers or long distance carriers which were
in effect as of February 8, 1996 are grandfathered and will remain in force.
Sixth, the FCC mandated that all payphone providers be allowed to select
their intraLATA carrier of choice, and that such selection authority preempts
state regulation that may require independent providers to route intraLATA calls
to the LEC. However, the FCC did not preempt state regulations that, for public
safety reasons, require routing of "0-" calls to the LEC, provided that the
state does not direct that the LEC carry such calls when the call is determined
to be a non-emergency call.
Seventh, the FCC determined that state PSCs should administer programs for
maintaining "public interest payphones" within certain guidelines. "Public
interest payphones" are defined as "a payphone which (1) fulfills a public
policy objective in health, safety, or public welfare, (2) is not provided for a
location provider with an existing contract for the provision of a payphone, and
(3) would not otherwise exist as a result of the operation of the competitive
marketplace." Each PSC is required to complete a review of whether such
payphones are adequately provided in its state by September 20, 1998.
The above summary of pertinent provisions of the FCC's Report and Order is
----------------
not intended to be exhaustive, but illustrative in nature to describe particular
elements that the Company believes will have a material impact upon its
operations. In addition, the specific provisions of the FCC's Order are subject
to reconsideration by the agency. As such, any element of the decision is
subject to revision until the reconsideration process is completed no later than
November 8, 1996, as prescribed by Congress.
The Company believes that the FCC's implementation of this legislation will
address certain fundamental inequities in the payphone and inmate phone markets
and lead to a more equitable competitive environment for all providers.
However, there can be no assurance that the FCC's actions, as they are
implemented and effected in the business environment, will actually result in
overall positive results. Moreover, such improvement in the competitive
environment may be offset by the potential for increased competitive pressures
by RBOC and LEC payphone divisions, which may also benefit from the deregulation
mandated by the Telecom Act. Specifically, the RBOCs' ability to participate in
choosing an interLATA carrier, the appropriate valuation of RBOC asset transfers
from the regulated rate base to a nonstructural subsidiary, and the
effectiveness of actual safeguards against cross-subsidization and
discrimination are crucial issues which will affect the Company's ability to
effectively compete in the future.
17
While the provisions of the Telecom Act and the rules implementing those
provisions are anticipated to most significantly affect the Company's
operations, other pending FCC matters may also have a substantial impact.
In addition to the Telecom Act's prohibition against cross-subsidization, a
separate FCC ruling required the LECs to remove all equipment used in inmate
phone operations from the regulated rate base, effective September 2, 1996.
Management believes that this development should enable the Company to compete
more equitably with the LECs for inmate services, although the regulation's
implementation is ongoing and the actual impact remains to be seen.
The FCC has also issued a Second Notice of Proposed Rulemaking regarding
"Billed Party Preference" ("BPP") and associated call rating issues. Currently,
0+ and 0- interstate calls from payphones are sent to the long distance carrier
selected by the independent payphone provider. Under BPP, these calls would be
sent instead to the long distance carrier chosen by the party paying for the
call. The billed party would bypass the Company's selected long distance
carrier network entirely and, without the ability to capture and control the
call, the Company would not be in a position to offer location owners
commissions on operator services revenues. Previously, the FCC tentatively
concluded that a nationwide system of BPP for interstate operator-assisted calls
is in the public interest, but requested further comments specifically
addressing the costs versus the benefits of BPP. The Second Notice proposes
"rate benchmarks" and/or caller notification, such as oral rate disclosures, as
potential alternatives to BPP implementation. Comments have been filed and are
currently under consideration by the FCC.
If implemented, BPP could have an adverse impact on the Company's business.
The Company believes that implementation of BPP is not likely to be achieved,
since it would involve significant expense and technical changes as evidenced by
the record in the FCC proceeding. However, rate benchmarks or caller
notification of charges could be implemented by the FCC for interstate operator
assisted calls. Such a ruling could impact the financial performance of the
Company, depending on the specific level of the benchmark or the particular
notification requirements. There is no mandated schedule for a decision in this
docket. Therefore, without further FCC action, 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.
Actions by agencies on both the state and federal level have had, and are
expected to continue to have, both positive and negative effects on the Company.
Although management is not presently aware of any action contemplated by any
state or federal agency which would have a material adverse effect on the
Company (other than those discussed above), there is no guarantee that such an
action will not be taken.
18
EMPLOYEES
At June 30, 1996, CCI had 98 full-time employees, including 26 executive
and administrative personnel, 32 sales and customer service personnel and 40
field and operations personnel, of which 18 employees are dedicated to providing
installation, maintenance and repair services to the Company's inmate phones.
None of the Company's employees are represented by a union. Certain of the
Company's management information systems, field services and sales fulfillment
functions are handled on an outsourced basis by Perot and its employees. See
"Business-Background."
19
APPENDIX A
GLOSSARY
Access charges -- The charges paid to the LECs for the use of the local
network.
Bad Debt -- charges incurred by the consumer and billed in good faith by
the Company that are not paid due to the unwillingness or the inability of the
consumer to pay such charges.
Business Operators -- Owners of pay telephones, owners of premises on which
pay telephones are located and multi-telephone facilities such as hotels and
hospitals with which an OSP contracts to process and transmit operator assisted
long distance telephone calls. Also known as subscribers.
FCC -- Federal Communications Commission.
IXC--Interexchange Carrier -- A company that provides long distance
services between exchanges.
LATA-Local Access and Transport Area -- Geographical area defined in the
AT&T divestiture decree between which the Bell System Operating Companies are
precluded from providing service.
LEC-Local Exchange Carrier -- A company (including a Bell System Operating
Company) providing local telephone services and intraLATA long distance service.
OSP--Operator Service Provider -- A company providing operator assisted
calls.
Operator assisted -- "0-" and "0+" telephone service.
PSC--Public Service Commission -- A state regulatory body empowered to
establish and enforce rules and regulations pertinent to public utility
companies and others.
RBOC--Regional Bell Operating Company -- Any of seven regional Bell holding
companies that the AT&T divestiture decree established to serve as parent
companies for the Bell System Operating Companies.
Tariff -- The schedule of rates and regulations set by communications
companies and filed with the appropriate federal and state regulatory agencies;
the published official list of charges, terms and conditions governing provision
of a specific communications service or facility, which functions in lieu of a
contract between the Business Operator or user and the
20
supplier or carrier.
0 - telephone call -- A long distance telephone call made by dialing 0 and
using a live operator to receive the billing information and complete the call.
0 + telephone call -- A long distance telephone call made by dialing 0 plus
the telephone number, and using an operator, either live or automated, to
collect billing information and to complete the call.
1 + telephone call -- A long distance telephone call made by dialing 1 plus
the area code and telephone number which is billed directly to the owner of the
telephone from which the originating call is made.
21
ITEM 2. PROPERTIES.
- -------------------
The Company leases approximately 17,500 square feet in Roswell, Georgia,
which houses its executive offices, payphone operations, accounting, data
processing and warehouse space. The term of the lease extends through September
30, 1997 at an annual rent of approximately $122,000. In addition, the Company
leases approximately 9,900 square feet in Louisville, Kentucky, at which its
inmate phone operations are based. The term of this lease extends through April
30, 1999 at an annual rent of approximately $104,000. The Company leases
additional office and warehouse space in other locations in its operating areas.
The Company believes that its facilities are adequate to meet its needs for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
- -------------------------
From time to time, the Company is a party to routine litigation incidental
to its business. As of the date of this Report, the Company was not engaged in
any legal proceedings that are expected, individually or in the aggregate, to
have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- -----------------------------------------------------------
None.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
- ----------------------------------------------------------------------------
The Common Stock of the Company is traded on the NASDAQ National Market
under the symbol "CCIX." The Company has never declared or paid any cash
dividends on its capital stock. The Company anticipates that all of its earnings
will be retained for the development and expansion of the Company's business and
does not anticipate paying any cash dividends in the foreseeable future. The
Company's credit facility contains certain restrictive covenants which, among
other things, require the Company to maintain certain financial ratios and
prohibit the payment of dividends. The chart below sets forth the high and low
stock prices for each quarter for the two most recent fiscal years.
Quarter Ended High Low
------------- ---- ---
September 30, 1994 15 1/4 11
December 31, 1994 19 1/4 14 1/4
March 31, 1995 18 3/4 14 1/4
June 30, 1995 18 7
September 30, 1995 9 1/2 6 1/2
December 31, 1995 7 4 1/4
March 31, 1996 7 1/2 4 1/2
22
June 30, 1996 8 1/2 6 5/8
The closing sales price for the Company's Common Stock on September 20,
1996 was $6.25 per share. As of September 19, 1996, the Company had 87
shareholders of record not including approximately 4,200,000 shares held by 78
shareholders in "street name."
ITEM 6. SELECTED FINANCIAL DATA.
- --------------------------------
The following selected financial data are derived from the consolidated
financial statements of the Company. The data should be read in conjunction with
the consolidated financial statements, related notes and other financial
information included herein.
Fiscal Year ended June 30,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per share amounts)
Revenue:
Coin calls $ 35,509 $ 33,326 $22,296 $17,429 $ 7,718
Non-coin calls 66,645 47,951 23,572 12,238 4,059
Other 3,186 145 256 211 284
-------- -------- ------- ------- -------
105,340 81,422 1/ 46,124 29,878 12,061
Costs and expenses:
Line access charges 35,924 27,411 15,790 9,734 3,635
Commissions 22,299 15,112 7,001 4,957 1,835
Service and collection 19,362 12,002 6,908 5,640 3,778
Selling, general and administrative 4,779 4,634 3,929 3,000 2,140
Bad debt expense 8,575 4,640 1,768 412 136
Depreciation and amortization 11,742 9,795 5,209 3,649 1,710
Impairment loss 14,184 -- -- -- --
-------- -------- ------- ------- -------
Total costs and expenses 116,865 73,594 40,605 27,392 13,234
Operating income (loss) (11,525) 7,828 5,519 2,486 (1,627)
Interest expense 6,343 3,528 1,013 1,362 454
-------- -------- ------- ------- -------
Income (loss) before income tax expense (17,868) 4,300 4,506 1,124 (1,627)
and extraordinary item
Income tax expense 78 1,128 938 40 --
-------- -------- ------- ------- -------
Income (loss) before extraordinary item (17,946) 3,172 3,568 1,084 (1,173)
Extraordinary charge from early -- -- (789) -- --
retirement of debt
Net income (loss) $(17,946) $ 3,172 $ 2,779 $ 1,084 $(1,627)
======== ======== ======= ======= =======
Historical net income (loss) per share $(2.96) $0.52 $0.28 $(1.41) $(3.28)
======== ======== ======= ======= =======
Weighted average shares outstanding
Supplemental net income per share 2/ $(2.96) $0.52 $0.57 $0.30 --
======== ======== ======= ======= =======
OPERATING DATA:
EBITDA 3/ $ 14,401 $ 17,623 $10,728 $ 6,135 $ 537
BALANCE SHEET DATA:
Total assets $109,728 $122,967 $63,643 $30,157 $29,302
23
Current portion of notes payable and 3,088 1,271 671 2,608 3,867
long-term debt
Notes payable and long-term debt, 70,197 70,197 18,557 13,500 14,900
less current portion
Total shareholders' equity (deficit) 26,537 44,275 40,037 (3,017) (1,621)
_________________________
/1// Revenues are shown after giving effect to a $817,000 charge for sales
and use taxes and federal excise taxes assessed for prior periods. See
"Management's Discussion and Analysis of Financial Condition - Tax
Matters."
/2// Supplemental net income per share reflects securities converted into
or exercised for Common Stock upon consummation of the initial public
offering as if such conversion or exercise had occurred at the
beginning of fiscal 1993, the period immediately preceding the
Company's initial public offering.
/3// EBITDA represents earnings before interest, taxes, depreciation and
amortization and is a commonly used measure of performance in the
telecommunications industry. 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 should not be construed as an alternative
to operating income or cash provided by operating activities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS.
----------------------
RESULTS OF OPERATIONS
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 currently realizes revenue from long distance
carriers pursuant to federal and state regulation as compensation for dial
around calls made from its payphones. The FCC has recently released a decision
increasing the amount of dial around compensation payable to the Company. See
"Regulation."
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 LECs, 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
24
diagnostics performed on the Company's payphones. Service and collection
functions for the Company's payphone operations have been outsourced to Perot
pursuant to the Services Agreement.
Since completing its initial public offering in December 1993, the Company
embarked on an acquisition program, acquiring the businesses and operations of
15 companies that added over 7,700 payphones and more than 4,300 inmate phones
to CCI's operations. In fiscal 1996, the Company temporarily discontinued its
acquisition program, focusing instead on consolidating its operations and
enhancing the profitability of its existing payphone and inmate phone bases.
Subject to the availability of capital to make acquisitions, the regulatory
environment in which CCI operates and other constraints, management hopes that
the Company will be able to resume its acquisition activity in fiscal 1997,
although no assurance to that effect can be given. The reduction in acquisition
activity in fiscal 1996 is expected to reduce the Company's year-to-year growth
in terms of its weighted average number of installed payphones and inmate
phones, which is, in turn, expected to reduce revenue growth in fiscal 1997.
This reduction in revenue growth, however, may be partially offset by changes in
the Company's regulatory environment, including those that will produce
increases in the Company's dial around compensation. See "Regulation."
The Company entered into the Services Agreement with Perot in July 1995.
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 10 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 the 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.
Changes in regulation are ongoing for the Company with the recent passage
of the Telecom Act. On September 20, 1996, the FCC issued a Report and Order
----------------
implementing the payphone-specific provisions of the Telecom Act. Among its
directives, the FCC has prescribed dial around compensation for all access code
and 800 subscriber calls from payphones at a flat rate of $45.85 per payphone
per month for the first year, with a per call compensation system to be
implemented by October 1, 1997 under which compensation will be paid at a rate
of $.35 per call. The FCC also ordered the deregulation of local coin rates
within one year, subject to certain guidelines. These and other regulatory
changes will significantly impact the Company's operations for the foreseeable
future. See "Regulation."
25
FISCAL 1996 COMPARED TO FISCAL 1995
Total revenues for fiscal 1996 increased to $105.3 million from $81.4
million for fiscal 1995, an increase of 29.4%. The increase in total revenues
resulted primarily from the increased number of weighted average phones added to
the Company's phone network during fiscal 1996 from acquisitions completed prior
to fiscal 1996. The increase in total revenues reflects increases of 6.5% in
revenues derived from coin calls and 39.1% in revenues from non-coin calls. Non-
coin revenue was proportionately higher in fiscal 1996 due to the increase in
the weighted average number of the Company's inmate phones, which generate non-
coin revenue only. However, management believes that non-coin revenue from the
Company's payphones continued to be adversely affected in fiscal 1996 by
increases in dial around calls influenced by national advertising promotions of
long distance operator service providers.
In fiscal 1996, the Company installed 2,423 new payphones (unrelated to
acquisitions) down from 3,996 in fiscal 1995. Net of removals, incremental net
growth from internal sales declined by 1,174 payphones in fiscal 1996 compared
to an increase of 797 payphones in fiscal 1995. Additionally, 11 net new inmate
lines were installed that were attributable to the Company's sales and marketing
efforts during fiscal 1996 compared to 748 in fiscal 1995. An aggressive program
of removing unprofitable payphones and inmate lines decreased the weighted
average number of installed payphones to 21,319 in fiscal 1996 from 23,230 in
fiscal 1995, a decrease of 8.23%. Management does not anticipate that the
Company's weighted average number of installed payphones and inmate phones will
substantially increase in fiscal 1997.
Line access charges increased to $35.9 million in fiscal 1996 from $27.4
million in fiscal 1995 due to the increased number of average phones in the
Company's inmate division. These charges increased to 34.1% of total revenues in
fiscal 1996 as compared to 33.3% in fiscal 1995.
Commissions paid to customers increased to $22.3 million in fiscal 1996
compared to $15.1 million in fiscal 1995. These amounts represented 21.3% of
total revenues in fiscal 1996 compared to 18.6% in fiscal 1995. The dollar
increase was primarily due to the increased number of average phones in the
Company's inmate division. The percentage increase (as well as a portion of the
dollar increase) was attributable to higher commission rates paid on revenues
derived primarily from the Company's inmate phones, which comprised a larger
portion of the Company's total phone base in fiscal 1996 as compared to fiscal
1995.
Service and collection expenses increased to $19.3 million or 18.3% of
total revenues from $12.0 million or 14.7% of total revenues in fiscal 1995. The
dollar increase was due to the increased number of average phones in the
Company's inmate division.
Selling, general and administrative expenses increased to $4.7 million in
fiscal 1996 compared to $4.6 million in fiscal 1995, a decrease as a percentage
of total revenues to 4.5% from 5.7%. The percentage decrease primarily reflects
a decrease in the internal marketing efforts in first half of fiscal 1996.
26
Bad debt expense in fiscal 1996 increased to $8.6 million or 8.1% of total
revenues from $4.6 million or 5.7% of total revenues in fiscal 1995. The
increase was primarily due to the increase in the revenues attributable to
inmate phones verses payphones. The bad debt associated with the Company's
payphones has historically averaged between 6% and 8% of the affected revenue.
The Company's inmate phones, whose entire revenue is generated by non-coin
calls, is subject to bad debt which has historically averaged between 12% and
15%.
Depreciation and amortization expenses increased to $11.7 million in fiscal
1996 from $9.8 million in fiscal 1995. This increase was primarily due to an
additional depreciation expense of $2.8 million associated with the addition of
phones and related property and equipment pursuant to acquisitions made in prior
fiscal years. Also contributing to the increase was additional amortization
expenses of $1.8 million related to the amortization of goodwill and other
intangible costs associated with these acquisitions.
In the third quarter of fiscal 1996, the Company recognized an impairment
loss of $14.2 million in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Cash flows generation by payphones and
inmate lines on an acquisition by acquisition basis was determined based on the
Company's best estimates of future income and expenses including the impact of a
continued reduction in operator service provider revenue as a result of dial
around. Where the sum of future undiscounted cash flows of these long-lived
assets were less than their recorded book values, an impairment was recognized.
Approximately $12.4 million of the impairment recognized was for related
operating equipment and approximately $1.8 million was for related intangible
assets.
The preceding factors combined to produce an operating loss of $11.5
million or 10.9% of total revenues in fiscal 1996, compared to operating income
of $7.8 million or 9.6% in fiscal 1995. Earnings before interest, taxes,
depreciation and amortization ("EBITDA") declined 18.2% to $14.4 million in
fiscal 1996 compared to $17.6 million in 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 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 $6.3 million in fiscal 1996 compared to $3.5
million in fiscal 1995 primarily due to increases in the level of debt
associated with the acquisitions discussed above, as well as increases in the
interest rate on floating rate debt.
As a result of the foregoing, the Company reported a net loss of $17.9
million or $2.96 per share on 6.1 million shares outstanding in fiscal 1996,
compared to net income of $3.2 million or $.52 per share on 6.1 million shares
outstanding in fiscal 1995.
27
FISCAL 1995 COMPARED TO FISCAL 1994
Total revenues for fiscal 1995 increased to $81.4 million from $46.1
million for fiscal 1994, an increase of 76.5% The increase in total revenues
resulted primarily from the increased number of payphones added to the Company's
payphone network during fiscal 1995 from completed acquisitions. The increase in
total revenues reflect increases of 49.5% in revenues derived from coin calls
and 103.5% in revenues from non-coin calls. In addition, non-coin revenue was
higher in fiscal 1995 due to the increase in the number of the Company's inmate
phones, which generate non-coin revenue only. Management believes that non-coin
revenue from the Company's payphones was adversely affected in fiscal 1995 by
increases in dial around calls influenced by national advertising promotions of
long distance operator service providers.
Internal sales and marketing programs also contributed to the increase in
revenues compared to fiscal 1994. In fiscal 1995, the Company installed 3,996
new payphones (unrelated to acquisitions) up from 2,500 in fiscal 1994. Net of
removals, incremental net growth from internal sales in fiscal 1995 was 797
payphones compared to 1,192 payphones in fiscal 1994. In addition, 748 net new
inmate lines were installed that were attributable to the Company's sales and
marketing efforts during fiscal 1995 compared to 89 in fiscal 1994. Acquisitions
and internal growth increased the weighted average number of installed payphones
to 23,230 in fiscal 1995 from 13,217 in fiscal 1994, an increase of 75.7%.
Line access charges increased to $27.4 million in fiscal 1995 from $15.8
million in fiscal 1994 due to the increased number of payphones comprising the
Company's network. These charges decreased to 33.3% of total revenues in fiscal
1995 as compared to 34.2% in fiscal 1994.
Commissions paid to customers increased to $15.1 million in fiscal 1995
compared to $7.0 million in fiscal 1994. These amounts represented 18.6% of
total revenues in fiscal 1995 compared to 15.2% in fiscal 1994. 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 attributable to higher commission rates incurred on revenues derived
primarily from the Company's inmate phone lines.
Service and collection expenses increased to $12.0 million or 14.7% of
total revenues from $6.9 million or 15.0% of total revenues in fiscal 1994. The
dollar increase was due to the increased number of phones on the Company's
network.
Selling, general and administrative expense increased to $4.6 million in
fiscal 1995 compared to $3.9 million in fiscal 1994, but decreased as a
percentage of total revenues from 8.5% to 5.7%. The percentage decrease reflects
the operating efficiencies associated with economies of scale attributable to a
larger revenue base.
28
Depreciation and amortization expense increased to $9.8 million in fiscal
1995 from $5.2 million in fiscal 1994. The increase was due primarily to
additional depreciation expense of $2.8 million associated with the acquisition
of the phones and related property and equipment previously discussed. Also
contributing to the increase was additional amortization expense of $1.8 million
related to the amortization of goodwill and other intangible costs associated
with these acquisitions.
Operating income was $7.8 million or 9.6% of total revenues in fiscal 1995,
compared to $5.5 million or 12.0% in fiscal 1994. EBITDA grew 64.3% to $17.6
million in fiscal 1995 compared to $10.7 million in fiscal 1994. 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.
Interest expense increased to $3.5 million in fiscal 1995 compared to $1.0
million in fiscal 1994 primarily due to increases in the level of debt
associated with the acquisitions discussed above, as well as increases in the
interest rate on floating rate debt.
Income tax expense increased to $1.1 million or an effective rate of 26.2%
in fiscal 1995 compared to $938,000, or an effective rate of 14.0% in fiscal
1994, largely due to the higher level of income, not all of which could be
offset by net operating loss carryforwards.
As a result of the foregoing, the Company reported net income of $3.2
million or $.52 per share on 6.1 million shares outstanding in fiscal 1995,
compared to $3.6 million or $.73 per share on 4.9 million shares outstanding in
fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1996, the Company financed its operations from operating cash
flow and proceeds from its principal Credit Agreement (the "Credit Agreement").
Amounts outstanding under the aforementioned facility were $73.2 million at June
30, 1996, compared to $70.2 million at June 30, 1995. Net cash provided by
operating activities for fiscal 1996 was approximately $9.4 million compared to
$5.8 million for fiscal 1995.
The Company's working capital was approximately $1.4 million with a current
ratio of 1.1 to 1 at June 30, 1996. This compares to a working capital balance
of $3.8 million and a current ratio of 1.5 at June 30, 1995. The change in the
Company's working capital is primarily a result of a current maturity of $3
million on the Credit Agreement. The Company's principal commitments as of June
30, 1996 consisted of a commitment under the Services Agreement to purchase
$400,000 of software enhancements from Perot, and a commitment to repay $3
million in bank debt prior to June 30, 1997. The Company believes that its
current cash balances and cash flow from operations will be sufficient to meet
its working capital and capital expenditure
29
requirements for fiscal 1997. The Company further believes that it will be able
to raise the capital necessary to meet the terms of its Credit Agreement,
including a $12 million dollar payment due on July 1, 1997. However, should the
Company be unable to access the capital markets by July 1, 1997, it would not be
in compliance with the terms of the Credit Agreement. The Company would then
seek a waiver from the lender to allow it additional time to raise the
additional equity that is needed.
In August 1996, the Company entered into an amended and restated Credit
Agreement (the "1996 Credit Agreement"). On October 8, 1996, an amendment was
entered into amending the terms of the 1996 Credit Agreement. The 1996 Credit
Agreement, as amended, now 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 common shares at a nominal price, of which, warrants to purchase 50,000
common shares shall be canceled if the Company is successful in reducing its
outstanding balance on the 1996 Credit Agreement, as amended, to $47 million by
November 30, 1996.
In order to meet its obligations under the 1996 Credit Agreement, the
Company is actively seeking to raise an additional $20 - $30 million in equity
capital. Management believes that the Company's ability to raise such additional
equity capital will significantly depend upon the implementation by the FCC of
the rules pursuant to the Telecom Act, which could significantly impact the
Company's prospective results of operations and financial condition. The FCC's
Report and Order was released on September 20, 1996. See "Regulation." If the
- ----------------
implementation of the FCC's new payphone rules are delayed or if the net impact
of the rules on the prospective results of operations and financial condition of
the Company is adverse, the ability of the Company to raise additional equity
capital and meet its payment obligations under the 1996 Credit Agreement may be
hampered.
30
TAX MATTERS
In the third quarter of fiscal 1995, the Company established a reserve of
approximately $817,000, and charged that amount against coin revenue, to provide
for potential amounts due to certain states and the federal government for sales
and use taxes and federal excise taxes assessed for prior periods. Prior to that
time, the Company had paid such sales and use taxes on coin revenue to its
vendors of local telephone service and believed that it was not required to pay
such taxes directly because such vendors had already assessed the Company for
and paid taxes on the service. The Company became aware of the requirement to
pay such sales and use taxes directly when the Department of Revenue of the
State of Texas notified the Company of taxes due in November 1994. Thereafter,
the Company conducted an investigation of its tax accrual policies in each state
in which it conducts business to determine that it was properly reserving for
all applicable taxes under the applicable law of each state. The Company has
changed its state sales and use tax accrual and payment practices such that, in
the opinion of management, it will not be necessary for the Company to establish
similar sales and use tax reserves in future periods.
The portion of the $817,000 reserve relating to federal excise taxes was
accrued in connection with the 3% federal excise tax on all toll calls, which
the Company previously paid to its long distance telephone service vendors.
Since establishing the reserve, the Company has determined that it overpaid such
federal excise taxes through payments to its long distance telephone service
vendors by approximately $400,000. The Company reached a settlement agreement
with the Internal Revenue Service ("IRS") that netted overpayments against all
amounts assessed for prior periods. The Company is currently accruing and
paying excise taxes on a quarterly basis and management does not believe that
additional reserves for federal excise taxes will be necessary in future
periods.
INFLATION
Although the Company cannot determine the precise effects of inflation, it
does not believe inflation has had a material effect on its revenues or results
from operations during any of the periods reported.
31
"SAFE HARBOR STATEMENT"
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 an additional
$20-$30 million in equity capital. Management believes that the Company's
ability to raise such additional equity capital will significantly depend upon
the implementation by the FCC of the rules pursuant to the Telecom Act, which
could significantly impact the Company's prospective results of operations and
financial condition. The FCC's Report and Order was released on September 20,
----------------
1996. See "Regulation." Any reconsideration of the Order must be completed no
later than November 8, 1996. If the implementation of the FCC's new payphone
rules are delayed or if the net impact of the rules on the prospective results
of operations and financial condition of the Company is adverse, the ability of
the Company to raise additional equity capital and meet its payment obligations
under the 1996 Credit Agreement, as amended, may be hampered.
Bad Debt: Currently, the Company utilizes the services of the LECs in the
--------
billing and collection process, as essentially all of the calls made from the
Company's inmate phones are billed through large clearinghouses that in turn
send the information to the LECs for billing and collection. Due to the
Company's dependence on the LECs for billing and collection, it currently can
take 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 bad debt for its
inmate phone revenue over the past year to approximately 15%. To address the
issue of bad debt, the Company has begun implementing a program for direct
billing that will enable it to bill the called number directly and set
parameters for blocking calls based on collection results. This direct billing
program is a new program for the Company and in certain states, regulatory
approval may be required. Although the Company believes that the direct billing
program will reduce the amount of bad debt attributable to its inmate phones, no
assurance can be given as to the success of the direct billing program.
32
Dial Around Compensation: The FCC's implementation of the payphone-specific
------------------------
provisions of the Telecom Act began with the issuance of a Report and Order on
----------------
September 20, 1996, with one of the most important elements being the assurance
of "fair compensation" for virtually all calls from payphones. In this regard,
the FCC decision 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 rate of $.35 per call
beginning October 1, 1997. The Order states that on October 1, 1998, this rate
will either be adjusted to equal the local coin rate being charged at the
particular payphone, or to a higher or lower dial around compensation 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. However, market forces and factors outside the
Company's control could substantially affect the resulting revenue impact. These
factors include a change upon reconsideration by the FCC, as well as the FCC's
recognition that existing regulations do not prohibit an IXC from blocking
subscriber 800 numbers from payphones if the 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,
the Company is unable to adequately predict the responses of individual states
or the market and thus, the ultimate revenue impact of local coin rate
deregulation.
Other Telecom Act Provisions: There are a significant number of Telecom Act
----------------------------
provisions, as implemented by the FCC, that may have substantial impacts upon
the Company. See "Regulation." Among the most important are cessation of
subsidies upon the removal of LEC payphones from the regulated rate base by
April 15, 1997, the RBOCs' 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 significantly change the
competitive framework of the public communications industry. The Company
believes that the FCC's order will address certain of the fundamental inequities
in the payphone and inmate phone markets and lead to a more equitable
competitive environment for all providers. However, since implementation has not
yet been finalized and will be ongoing for a number of years, there can be no
assurance the FCC's actions will actually result in long-term positive results
for the Company.
33
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 any commissions from the carrier.
See "Regulation." The Company 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,
should the 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ----------------------------------------------------
The financial statements and supplementary financial information required
by this item are filed as part of this Report on pages F-1 through F-27 and page
S-1 immediately preceding the signature page to this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- --------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
To be included in a subsequent amendment to this Form 10-K Report.
ITEM 11. EXECUTIVE COMPENSATION.
To be included in a subsequent amendment to this Form 10-K Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
To be included in a subsequent amendment to this Form 10-K Report.
34
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
To be included in a subsequent amendment to this Form 10-K Report.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements
* Report of Independent Auditors
* Consolidated Balance Sheets as of June 30, 1996 and 1995
* Consolidated Statements of Operations for the Years Ended
June 30, 1996, 1995 and 1994
* Consolidated Statements of Shareholders' Equity for the
Years Ended June 30, 1996, 1995 and 1994
* Consolidated Statements of Cash Flows for the Years Ended
June 30, 1996, 1995 and 1994
* Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
* Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been
omitted.
3. Exhibits:
Exhibit
Number Description
------- -----------
3.1 Amended and Restated Articles of Incorporation./1/
3.2 Amended and Restated Bylaws of the Company./2/
4.1 Shareholders Rights Agreement dated as of July 25,
1995 between the Company and First Union National
Bank of North Carolina, as Rights Agent./2/
35
10.1 Amended and Restated Credit Agreement dated as of
August 15, 1996 by and among the Company,
Communications Central of Georgia, Inc., and
InVision Telecom, Inc., as borrowers, and First
Union National Bank of Georgia ("First Union").
10.1(a) First Amendment to the Second Amended and Restated
Credit Agreement, dated as of October 9, 1996, by
and among the Company, Communications Central of
Georgia, Inc., and InVision Telecom, Inc., as
borrowers, and First Union.
10.2(a) First Warrant Agreement dated as of August 15,
1996, between the Company and First Union.
10.2(b) First Amendment to First Warrant Agreement dated
as of October 9, 1996, between the Company and
First Union.
10.3* Communications Central Inc. 1991 Incentive Stock
Option Plan./1/
10.4* Communications Central Inc. 1993 Stock Option
Plan./1/
10.4(a) Communications Central Inc. 1993 Stock Option Plan
Amended and Restated as of October 11, 1995./9/
10.5* Communications Central Inc. Stock Option plan for
Directors./8/
10.6 Lease between Northmeadow Associates Joint Venture
and the Company dated July 25, 1988 for the
business premises located at 1150 Northmeadow
Parkway, Suite 118, Roswell, Georgia 30076./1/
10.6(a) Second Amendment to Lease between Northmeadow
Associates Joint Venture and the Company dated
October 1, 1993 for the Company Headquarters./3/
10.6(b) Third Amendment to Lease between Northmeadow
Associates Joint Venture and the Company dated
July 15, 1994 for the Company Headquarters./3/
36
10.7 Registration Rights Agreement dated as of August
15, 1996, between the Company and First Union.
10.8 Registration Rights Agreement between the Company
and certain other parties dated April 15, 1991 as
amended by First Amendment to Registration Rights
Agreement dated June 18, 1992, as amended by
Second Amendment to Registration Rights Agreement
dated November 25, 1992 as amended by Third
Amendment to Registration Rights Agreement dated
April 16, 1993./1/
10.8(a) Fourth Amendment to Registration Rights Agreement
dated February 28, 1994./4/
10.8(b) Fifth Amendment to Registration Rights Agreement
dated July 27, 1994./3/
10.11 Services Agreement between the Company and Perot
Field Services Corporation dated as of July 28,
1995 (portions redacted pursuant to a
confidentiality request)./5/
10.12* Employment Agreement dated November 6, 1995,
between Communications Central of Georgia, Inc.
and Rodger L. Johnson./6/
10.13* Stock Option Agreement dated as of November 6,
1995, between the Company and Rodger L.
Johnson./7/
10.14* Stock Option Agreement dated as of January 2,
1996, between the Company and Anthony J. Palermo.
10.15* Stock Option Agreement dated as of January 15,
1996, between the Company and C. Douglas McKeever.
11.1 Computation of Historical Earnings Per Share.
11.2 Computation of Supplemental Earnings Per Share.
37
21.0 List of Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
* Compensatory plan or arrangement or management contract required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.
/(1)/ Incorporated herein by reference to the exhibit of the same number in the
Company's Registration Statement on Form S-1 (Registration No. 33-57984).
/(2)/ Incorporated herein by reference to exhibit of the same number in the
Company's Registration Statement on Form 8-A registering certain "Rights
to Purchase Common Stock," as filed on August 7, 1995.
/(3)/ Incorporated herein by reference to exhibit of the same number in the
Company's Annual Report on Form 10-K for the year ended June 30, 1994
(File No.0-22730).
/(4)/ Incorporated herein by reference to Exhibit 10(a) of Amendment No. 1 to
the Company's Current Report on Form 8-K/A filed April 14, 1994 (File No.
0-22730).
/(5)/ Incorporated herein by reference to Exhibit 99.1 of Amendment No. 1 on
Form 8-K/A to the Company's Current Report on Form 8-K, date of earliest
event reported July 21, 1995, filed on August 25, 1995 (File No. 0-22730).
/(6)/ Incorporated herein by reference to Exhibit 99.1 on Form 8-K, date of
event reported November 6, 1995 (File No. 0-22730).
/(7)/ Incorporated herein by reference to Exhibit 99.2 on Form 8-K, date of
event reported November 6, 1995 (File No. 0-22730).
/(8)/ Incorporated herein by reference to Appebdux A of the Company's definitive
Proxy Statement for its fiscal 1994 Annual Meeting of Shareholders.
/(9)/ Incorporated herein by reference to Appendix B of the Company's definitive
Proxy Statement for its fiscal 1995 Annual Meeting of Shareholders.
(b) Forms 8-K:
None.
38
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Communications Central Inc.
Date:___________________________ By:___________________________________
Rodger L. Johnson
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: September 25, 1996 ____________________________________
Rodger L. Johnson
Chief Executive Officer and Director
(principal executive officer)
Date: September 25, 1996 ____________________________________
Jack B. Wages, Jr.
Controller
(principal financial and accounting
officer)
Date: September 25, 1996 ____________________________________
Robert C. Fisher, Jr.
Director
Date: September 25, 1996 ____________________________________
Paul R. Griffiths
Director
Date: September 25, 1996 ____________________________________
Richard W. Oliver
Director
Date: September 25, 1996 ____________________________________
Ronald C. Warrington
Director
Date: September 25, 1996 ____________________________________
Peter A. Schober
Director
39
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Communications Central Inc.
Date: September 25, 1996 By:/s/ Rodger L. Johnson
------------------------------------
Rodger L. Johnson
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: September 25, 1996 /s/ Rodger L. Johnson
---------------------------------------
Rodger L. Johnson
Chief Executive Officer and Director
(principal executive officer)
Date: September 25, 1996 /s/ Jack B. Wages, Jr.
---------------------------------------
Jack B. Wages, Jr.
Controller
(principal financial and accounting officer)
Date: September 25, 1996 /s/ Robert C. Fisher, Jr.
---------------------------------------
Robert C. Fisher, Jr.
Director
Date: September 25, 1996 /s/ Paul. R. Griffiths
---------------------------------------
Paul R. Griffiths
Director
Date: September 25, 1996 /s/ Richard W. Oliver
---------------------------------------
Richard W. Oliver
Director
Date: September 25, 1996 /s/ Ronald C. Warrington
---------------------------------------
Ronald C, Warrington
Director
Date: September 25, 1996 /s/ Peter A. Schober
---------------------------------------
Peter A. Schober
Director
Annual Report on Form 10-K
Communications Central Inc.
Years ended June 30, 1996 and 1995
Item 8
Financial Statements and Supplementary Data
Report of Independent Auditors
Board of Directors
Communications Central Inc.
We have audited the accompanying consolidated balance sheets of Communications
Central Inc. as of June 30, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended June 30, 1996. Our audit also included the
financial statement schedule in the Index at Item 14(d). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Communications Central Inc. at June 30, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects the information set forth therein.
As discussed in Note 1 to the financial statements, in 1996 the Company adopted
the Statement of Financial Accounting Standards No. 121, "Accounting For the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
Ernst & Young, LLP
Atlanta, Georgia
August 19, 1996, except for Notes 4 and 13,
as to which the date is October 8, 1996
Communications Central Inc.
Consolidated Balance Sheets
JUNE 30,
1996 1995
-------------------------------------------
ASSETS (Notes 1 and 2)
Current assets:
Cash $ 2,266,327 $ 4,041
Accounts, receivable, less allowance for doubtful accounts
of $2,140,000 and $2,418,000 at June 30, 1996 and
1995, respectively 10,612,382 10,636,305
Prepaid expenses 707,699 1,043,924
Other current assets 870,815 317,029
-------------------------------------------
Total current assets 14,457,223 12,001,299
Operating equipment:
Telecommunication equipment 73,262,895 72,782,885
Uninstalled equipment 1,437,637 623,500
-------------------------------------------
74,700,532 73,406,385
Less accumulated depreciation and amortization (29,922,368) (16,358,051)
-------------------------------------------
44,778,164 57,048,334
Leasehold improvements and office furniture and equipment,
net of accumulated depreciation and amortization of
approximately $2,162,000 and $1,325,000 at June 30,
1996 and 1995, respectively 1,595,312 1,929,654
Deferred loan costs, net of accumulated amortization of
$243,000 and $37,000 at June 30, 1996 and 1995,
respectively (Note 2) 260,153 82,656
Intangible assets (Note 1):
Site license contracts, net 7,053,568 7,607,541
Agreements not to compete, net 1,046,450 1,528,347
Goodwill, net 36,555,441 37,881,651
Other assets, net 3,981,292 4,887,261
-------------------------------------------
Total assets $109,727,603 $122,966,743
===========================================
JUNE 30,
1996 1995
--------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable to
shareholders (Note 3) $ 8,333 $ 162,500
Current portion of note payable (Note 3) 79,650 1,054,521
Accounts payable 3,324,204 865,112
Accrued expenses 2,878,447 2,162,330
Current portion of long term debt 3,000,000 -
Accrued commissions 2,637,010 2,478,499
Accrued interest 634,295 1,062,141
Accrued compensation 102,351 314,990
Accrued income taxes payable (Note 8) 328,984 118,430
----------------------------------
Total current liabilities 12,993,274 8,218,523
Notes payable to shareholders, less
current portion (Note 3) - 8,333
Note payable, less current portion
(Note 3) - 267,333
Long-term debt (Note 4) 70,197,389 70,197,389
Commitments and contingencies (Note 4) - -
Shareholders' equity (Notes 2 and 7):
Common Stock, $.01 par value:
Authorized shares - 50,000,000
Issued and outstanding shares -
6,054,556 and 5,878,056 at June
30,1996 and 1995, respectively 60,545 58,780
Additional paid-in capital 50,067,385 49,860,878
Accumulated deficit (23,590,990) (5,644,493)
--------------------------------
Total shareholders' equity 26,536,940 44,275,165
--------------------------------
Total liabilities and shareholders'
equity $109,727,603 $122,966,743
================================
See accompanying notes.
Consolidated Statements of Operations
YEAR ENDED JUNE 30,
1996 1995 1994
-----------------------------------------
Revenue:
Coin calls $ 35,509,110 $33,326,399 $22,296,118
Non-coin calls 66,644,945 47,951,407 23,572,252
Other 3,185,516 144,433 255,283
----------------------------------------
105,339,571 81,422,239 46,123,653
Costs and expenses:
Line access charges 35,923,596 27,411,215 15,790,095
Commissions 22,299,044 15,111,992 7,000,668
Service and collection 19,362,209 12,001,623 6,908,602
Selling, general and administrative 4,778,522 4,633,821 3,929,123
Bad debt expense 8,575,422 4,640,610 1,767,704
Depreciation and amortization 11,741,785 9,795,025 5,208,789
Impairment loss 14,183,996 - -
----------------------------------------
Total costs and expenses 116,864,574 73,594,286 40,604,981
----------------------------------------
Operating income (loss) (11,525,003) 7,827,953 5,518,672
Interest expense 6,343,142 3,527,644 1,012,405
----------------------------------------
Income (loss) before income tax expense and extraordinary item (17,868,145) 4,300,309 4,506,267
Income tax expense 78,352 1,127,896 937,800
----------------------------------------
Income (loss) before extraordinary item (17,946,497) 3,172,413 3,568,467
Extraordinary item, net of tax benefit of $483,721 in 1994
(Note 3) - - 789,230
---------------------------------------
Net income (loss) $(17,946,497) $ 3,172,413 $ 2,779,237
=======================================
Historical per share data (Note 1):
Income before (loss) extraordinary item $(17,946,497) $ 3,172,413 $ 3,568,467
Less warrant accretion - - 144,402
Less stock dividends - - 615,495
Less Redeemable Preferred Stock accretion - - 984,589
----------------------------------------
Income (loss) before extraordinary item attributable to common
shares (17,946,497) 3,172,413 1,823,981
Extraordinary item, net of tax benefit of $483,721 in 1994 - - 789,230
----------------------------------------
Net income (loss) attributable to common shares $(17,946,497) $ 3,172,413 $ 1,034,751
========================================
Income (loss), before extraordinary item, per common share $(2.96) $ 0.52 $ 0.50
Extraordinary item per common share - - 0.22
----------------------------------------
Net income (loss) per common share $(2.96) $0.52 $ 0.28
========================================
Weighted average shares outstanding 6,054,556 6,064,447 3,633,420
========================================
Supplemental per share data (Note 1):
Income (loss) before extraordinary item, per common share $(2.96) $0.52 $ 0.73
Extraordinary item per common share - - 0.16
----------------------------------------
Net income (loss)per common share $(2.96) $0.52 $ 0.57
========================================
Weighted average shares outstanding 6,054,556 6,064,447 4,949,938
========================================
See accompanying notes
COMMUNICATIONS CENTRAL INC.
Consolidated Statements of Shareholders' Equity
PREFERRED STOCK COMMON STOCK
-------------------------------------------------------------------------------------
ADDITIONAL ADDITIONAL
SHARES AMOUNT PAID-IN SHARES AMOUNT PAID-IN
CAPITAL CAPITAL
-------------------------------------------------------------------------------------
Balance at June 30, 1993 28,125 281 1,799,719 441,281 4,413 6,159,132
Issuance of Series E Redeemable
Preferred Stock dividend - - - - - -
Accretion of redeemable warrant - - - - - (144,402)
Accretion of Redeemable Preferred Stock - - - - - (984,589)
Conversion of notes payable to
shareholders into Common Stock - - - 99,443 995 839,005
Conversion of Redeemable
Preferred Stock into Common Stock - - - 2,193,731 21,937 15,753,082
Conversion of Preferred Stock into
Common Stock (28,125) (281) (1,799,719) 381,834 3,818 1,796,182
Termination of redemption feature of
redeemable warrants - - - - - 1,204,117
Issuance of Common Stock upon
exercise of warrants - - - 89,161 891 -
Issuance of Common Stock upon
exercise of underwriters'
over-allotment option, net of
issuance costs of $201,600 - - - 240,000 2,400 2,676,000
Issuance of Common Stock as partial
consideration for asset purchase
(Note 7) and upon initial public
offering, net of issuance costs of
$2,418,553 - - - 1,978,571 19,786 21,500,941
Net income - - - - - -
-------------------------------------------------------------------------------------
Balance at June 30, 1994 - - - 5,424,021 54,240 48,799,468
Issuance of Common Stock in
acquisition - - - 46,809 468 549,538
Issuance of Common Stock upon
exercise of options - - - 180,335 1,803 301,153
Issuance of Common Stock upon
exercise of Warrant - - - 226,891 2,269 (2,281)
Tax benefit from employees'
stock option plans - - - - - 213,000
Net income - - - - - -
-------------------------------------------------------------------------------------
Balance at June 30, 1995 - - - 5,878,056 58,780 49,860,878
-------------------------------------------------------------------------------------
Issuance of Common Stock upon
exercise of options - - - 176,500 1,765 206,505
Net income (loss) - - - - - -
-------------------------------------------------------------------------------------
Balance at June 30, 1996 - $ - $ - 6,054,556 $60,545 $50,067,383
=====================================================================================
---------------------------------------------------------
TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY
---------------------------------------------------------
Balance at June 30, 1993 (10,980,648) (3,017,103)
Issuance of Series E Redeemable
Preferred Stock dividend (615,495) (615,495)
Accretion of redeemable warrant - (144,402)
Accretion of Redeemable Preferred Stock - (984,589)
Conversion of notes payable to
shareholders into Common Stock - 840,000
Conversion of Redeemable
Preferred Stock into Common Stock - 15,775,019
Conversion of Preferred Stock into Common Stock - 1,204,117
Termination of redemption feature of
redeemable warrants - 891
Issuance of Common Stock upon
exercise of warrants -
Issuance of Common Stock upon
exercise of underwriters'
over-allotment option, net of
issuance costs of $201,600 - 2,678,400
Issuance of Common Stock as partial
consideration for asset purchase
(Note 7) and upon initial public
offering, net of issuance costs of $2,418,553 - 21,520,727
Net income 2,779,237 2,779,237
---------------------------------------------------------
Balance at June 30, 1994 (8,816,906) 40,036,802
Issuance of Common Stock in acquisition - 550,006
Issuance of Common Stock upon
exercise of options - 302,956
Issuance of Common Stock upon
exercise of Warrant - (12)
Tax benefit from employees'
stock option plans - 213,000
Net income 3,172,413 3,172,413
---------------------------------------------------------
Balance at June 30, 1995 (5,644,493) 44,275,165
---------------------------------------------------------
Issuance of Common Stock upon
exercise of options - 208,270
Net income (loss) $(17,946,497) (17,946,497)
---------------------------------------------------------
Balance at June 30, 1996 $ (23,590,990) $26,536,938
=========================================================
Communications Central Inc.
Consolidated Statements of Cash Flows
YEAR ENDED JUNE 30,
1996 1995 1994
----------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $(17,946,497) $ 3,172,413 $ 2,779,237
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 11,741,785 9,795,025 5,208,789
Loss on extinguishment of debt - - 1,272,951
Payment of loan origination costs (383,625) (44,124) (75,414)
Other - (16,336) 702
Impairment loss 14,183,996 - -
Changes in operating assets and
liabilities:
Accounts receivables 23,923 (6,690,852) (3,030,507)
Prepaid expenses, other current
assets and other assets (1,753,337) (2,462,796) (970,970)
Accounts payables 2,459,091 (1,611,327) 1,402,856
Accrued expenses 909,391 1,453,219 (532,247)
Other liabilities - 2,261,656 512,162
Accrued income taxes payable 210,555 (127,531) 458,961
----------------------------------------------
Net cash provided by operating 9,445,282 5,729,347 7,026,520
activities
INVESTING ACTIVITIES
Purchases of telecommunication
equipment, leasehold improvements and (7,496,323) (11,402,674) (6,835,028)
office furniture and equipment
Acquisitions of telecommunication
equipment, site licenses, agreements (462,000) (41,187,892) (20,929,955)
not to compete and goodwill
Purchases of site licenses (2,294,360) (1,957,274) (744,544)
Proceeds from sale of equipment 285,000 115,526 45,611
----------------------------------------------
Net cash used in investing activities (9,967,683) (54,432,314) (28,463,916)
FINANCING ACTIVITIES
Payments on long-term debt - - (22,850,200)
Payments on notes payable (423,583) (7,678,146) (2,947,369)
Proceeds from long-term debt 3,000,000 51,640,463 27,907,126
Proceeds from exercise of stock - - 891
purchase warrants
Issuance of Common Stock 208,270 302,944 23,059,847
----------------------------------------------
Net cash provided by (used in) 2,784,687 44,265,261 25,170,295
financing activities
----------------------------------------------
(Decrease) increase in cash 2,262,286 (4,437,706) 3,732,899
Cash at beginning of year 4,041 4,441,747 708,848
----------------------------------------------
Cash at end of year $ 2,266,327 $ 4,041 $ 4,441,747
==============================================
SUPPLEMENTAL DISCLOSURE
Cash paid for interest $ 6,725,240 $ 2,591,138 $ 997,000
==============================================
Cash paid for income taxes - $ 1,170,900 $ 15,000
==============================================
See accompanying notes.
Communications Central Inc.
Notes to Consolidated Financial Statements
June 30, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Communications Central Inc. (the "Company") is an independent payphone and
inmate phone operator operating in 41 states and the District of Columbia.
Revenues from the operation of payphones and inmate phones are recorded based on
equipment usage and from routing calls to operator service companies and long
distance carriers.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Communications Central of Georgia, Inc., InVision
Telecom Inc. and Central Payphone Services, Inc. Significant intercompany
accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
OPERATING EQUIPMENT
Operating equipment is stated at cost. Depreciation is computed on the
straight-line method over the estimated useful life of the assets. The estimated
useful life of all telecommunication equipment is 10 years. The Company
capitalizes as part of the cost of the telecommunication equipment the cost of
initial installation. Repairs and maintenance are expensed as incurred.
Communications Central Inc.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
The Company derives a majority of its operating revenues from commercial
customers in the United States and large long distance telecommunications
companies. Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of accounts receivable.
Accounts receivable are unsecured and the Company is at risk to the extent such
amounts become uncollectible. The Company's allowance for doubtful accounts is
based upon management's estimates and historical experience. Credit losses
relating to operator service company and long distance carrier accounts have
consistently been within management's expectations.
INTANGIBLE ASSETS
Intangible assets consist of costs allocated to agreements not to compete, site
license contracts relating to installed and acquired equipment, and goodwill,
which represents the excess of the purchase price paid for acquired equipment
over the fair value of the acquired equipment.
Amortization for agreements not to compete is computed using the straight-line
method over the life of the agreements, ranging from 3 to 7 years. Accumulated
amortization on agreements not to compete at June 30, 1996 and 1995 was
approximately $1,019,000 and $717,000, respectively. In the case of the site
licenses acquired in an acquisition, the estimated fair value of the site
license is capitalized. Amortization for site license contracts is computed
using the straight-line method over the estimated life of the contracts, ranging
from 6 to 7 years. Accumulated amortization on site license contracts at June
30, 1996 and 1995 was approximately $2,683,000 and $1,724,000, respectively.
Amortization for goodwill is computed using the straight-line method over lives
of 15 and 40 years. Accumulated amortization on goodwill at June 30, 1996 and
1995 was approximately $2,298,000 and $911,000, respectively.
Communications Central Inc.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT LOSS ON LONG-LIVED ASSETS
An impairment loss of $14.2 million during the third quarter of fiscal 1996 was
recognized in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." Cash flows generation by payphones and inmate lines
on an acquisition by acquisition basis was determined based on the Company's
best estimate of future income and expenses including the impact of a continued
reduction in operator service provider revenue as a result of "dial around."
Where the sums of future undiscounted cash flows of these long-lived assets were
less than their recorded book values, and impairment loss was recognized of
approximately $12.4 million for related operating equipment and approximately
$1.8 million for related intangible assets.
INCOME TAXES
The Company uses the liability method to account for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
NET INCOME (LOSS) PER SHARE
Historical net income (loss) per share is computed using the weighted average
number of common and common equivalent shares (when they are dilutive)
outstanding during the period. Pursuant to the requirements of the Securities
and Exchange Commission, common shares and common equivalent shares issued at
prices below the initial public offering price of $12.00 per share during the
twelve months immediately preceding the date of the filing of the Company's
Registration Statement on Form S-1 relating to the Company's public offering,
have been included in the calculation of common shares and common share
equivalents, using the treasury stock method, as if they were outstanding for
all periods presented prior to the closing of the initial public offering on
December 16, 1993. All common share and per share data, except par value per
share, have been retroactively adjusted to reflect the 1.7-for-1 stock split of
the Company's Common Stock effective October 21, 1993.
Communications Central Inc.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Supplemental net income per share is calculated in same manner as pro forma
earnings per share included in the Company's Registration Statement for its
initial public offering pursuant to requirements of the Securities and Exchange
Commission. Supplemental net income (loss) per common share is calculated using
the weighted average number of common and common equivalent shares outstanding
during the respective periods assuming that certain events, which actually
occurred effective with the Company's initial public offering on December 16,
1993, had occurred at the beginning of fiscal 1993, the period immediately
preceding the initial public offering. These events include the conversion of
Preferred Stock (redeemable and non-redeemable) into Common Stock, the
conversion of $840,000 of debt into Common Stock, the issuance of Common Stock
in connection with the exercise of warrants and the termination of the
redemption feature of the warrants.
NEW ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation." SFAS 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans and is effective
for fiscal years beginning after December 15, 1995. The Company expects to
continue to apply the accounting provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," in determining its
net income. However, beginning in fiscal 1997, additional disclosures will be
made about the estimated compensation expense under the method established by
SFAS 123.
During 1996, the Company adopted the Statement of Financial Accounting Standards
No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." An impairment loss of certain long-lived
assets was recognized in accordance with SFAS 121 as noted above.
RECLASSIFICATIONS
Certain changes in the presentation of the June 30, 1995 and 1994 amounts have
been made to conform to the June 30, 1996 presentation.
Communications Central Inc.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents, accounts receivable and accounts payable approximate fair values
due to the short maturities of these instruments. The carrying amounts reported
in the balance sheet for notes payable and long-term debt approximate fair
values. Fair values for notes payable and long-term debt are estimated based on
the present value of expected cash flows.
3. NOTES PAYABLE
JUNE 30,
1996 1995
------------------------
Unsecured notes payable to shareholders $ 8,333 $ 170,833
Note payable 79,650 1,321,854
------------------------
87,983 1,492,687
Less current portion 87,983 1,217,021
------------------------
$ - $ 275,666
========================
Communications Central Inc.
4. LONG-TERM DEBT
In July 1995, the Company entered into an agreement (the "1995 Loan") with a
bank that amended and restated the terms of the previous agreement. The 1995
Loan contains affirmative and negative covenants including provisions for
maintaining minimum consolidated net worth, interest coverage ratio, and fixed
charge coverages. In addition, it provided that the Company could not declare or
pay dividends and it restricted capital expenditures, indebtedness, third party
guarantees and asset dispositions. The 1995 Loan permitted borrowings of up to
$75,000,000. Interest is payable quarterly based upon a floating rate, as
defined in the 1995 Loan. At June 30, 1996, the rates ranged from 8.48% to
8.57%. The Company paid a facility fee of $225,000 in December 1995 pursuant to
the 1995 Loan.
In August 1996, the Company entered into an agreement that amended and restated
the 1995 Loan (the "1996 Loan"). The agreement permits borrowing of up to
$75,000,000. It requires a payment of $12,000,000 on or before July 1, 1997. The
agreement is secured by essentially all the assets of the Company including the
stock of its operating subsidiaries. The 1996 Loan further requires principal
payments of $500,000 per month beginning January 1997 through the Loan's
maturity in July 1999. In conjunction with the 1996 Loan, the Company incurred
Loan origination costs of approximately $257,000. These costs, which include
loan closing fees, legal and professional fees, are being amortized over the
life of the 1996 Loan agreement. In addition, the bank received warrant
agreements to purchase up to 225,000 common shares at a nominal price, of which
warrants to purchase 50,000 common shares can be repurchased should the
outstanding amount under the 1996 Loan be less then $47 million on November 30,
1996. The costs associated with these warrants will also be amortized over the
life of the 1996 Loan.
The above terms were modified by a letter agreement dated October 8, 1996
reflected in Note 13 - Subsequent Events.
Communications Central Inc.
4. LONG-TERM DEBT (CONTINUED)
As a result of the letter agreement the aggregate maturities of long-term debt
consists of the following:
Year ending June 30,
1997 $ 3,000,000
1998 18,000,000
1999 52,197,389
-------------
$73,197,389
=============
5. LEASE COMMITMENTS
The Company leases office space and certain equipment under operating leases.
Total rent expense for the years ended June 30, 1996, 1995, and 1994 was
approximately $587,000, $899,000, and $597,000, respectively.
Future minimum payments, by year and in the aggregate, under the noncancellable
operating leases with initial or remaining terms of one year or more consist of
the following at June 30, 1996:
Year ending June 30,
1997 $1,016,902
1998 824,284
1999 451,553
2000 0
-------------
$2,292,739
=============
Communications Central Inc.
6. PREFERRED STOCK
Upon the closing of the Company's initial public offering on December 16, 1993,
all outstanding shares of Preferred Stock were converted into shares of Common
Stock.
During 1990, the Company issued 28,125 shares of Series A Preferred Stock
("Series A") for $1,800,000. The Series A shares were converted into 381,834
shares of Common Stock upon the closing of the Company's initial public offering
on December 16, 1993.
During 1991, the Company authorized 950,566 shares of Series B Redeemable
Preferred Stock ("Series B"). On April 15, 1991, the Company issued 805,656
Series B Redeemable shares for $5,567,146 in cash, net of issuance costs of
$434,991. Cumulative dividends accruing from April 15, 1991 through April 15,
1993 were paid in the form of a Series B preferred stock dividend. Cumulative
dividends accruing from April 15, 1993 through October 1, 1994 were payable in
the form of a Series E preferred stock dividend, which was paid through December
16, 1993. The Series B shares were automatically converted on a 1.7-for-1 basis
into common shares upon the closing of the Company's initial public offering on
December 16, 1993.
In April 1992, the Company issued a stock dividend to the holders of Series B
Redeemable Preferred Stock which accrued from April 1991 in accordance with the
shareholders' agreement. Based upon the required dividend of $.67 per share per
annum and a conversion price of $7.45 per share, the Company issued 72,507
shares of Series B Redeemable Preferred Stock and transferred $621,204 from
additional paid-in capital on Common Stock to increase Series B Redeemable
Preferred Stock by $621,204.
During 1992, the Company authorized 155,000 shares of Series D Redeemable
Preferred Stock ("Series D"). On June 18, 1992, the Company issued 139,254
Series D shares as partial consideration for assets acquired (see Note 8).
Cumulative dividends accruing from June 18, 1992 through April 15, 1993 were
paid in the form of a Series D preferred stock dividend. Cumulative dividends
accruing from April 15, 1993 through October 1, 1994 were payable in the form of
a Series E preferred stock dividend, which was paid through December 16, 1993.
The Series D shares were automatically converted on a 1.7-for-1 basis into
common shares upon the closing of the CompanyOs initial public offering on
December 16, 1993.
Communications Central Inc.
6. PREFERRED STOCK (CONTINUED)
On April 16, 1993, the Company issued 16,052 shares of Series D Redeemable
Preferred Stock in conversion of $230,507 of a note payable to a shareholder.
During fiscal 1993, the Company authorized 235,000 shares of Series E Redeemable
Preferred Stock ("Series E"). On April 16, 1993, the Company issued 139,276
Series E shares for $1,982,027 in cash, net of issuance costs of $17,976.
Cumulative dividends accruing from April 16, 1993 through October 1, 1994 were
payable in the form of a Series E Preferred Stock dividend, which was paid
through December 16, 1993. The Series E shares were automatically converted 1.7-
for-1 into common shares upon the closing of the Company's initial public
offering on December 16, 1993.
In April 1993, the Company issued a stock dividend to the holders of Series B
Redeemable Preferred Stock which accrued from April 1992 in accordance with the
shareholders' agreement. The Company issued 72,507 shares of Series B Redeemable
Preferred Stock and transferred $714,382 from current earnings to increase
Series B Redeemable Preferred Stock by $714,382.
In April 1993, the Company issued a stock dividend to the holders of Series D
Redeemable Preferred Stock which accrued from June 1992 in accordance with the
shareholders' agreement. The Company issued 12,912 shares of Series D Redeemable
Preferred Stock and transferred $208,400 from current earnings to increase
Series D Redeemable Preferred Stock by $208,400.
At June 30, 1993, future redemption payments that would be required if all
outstanding Series B, Series D, and Series E Redeemable Preferred Stock were
redeemed amounted to approximately $32,000,000 at April 26, 1999. The
redeemable preferred stock was recorded at fair value on the date of issuance
less issue costs. The excess of the redemption value over the carrying value
has been accreted by periodic charges to Common Stock Additional Paid In-Capital
over the life of the issue. As noted above, all outstanding shares of Series B,
Series D, and Series E Redeemable Preferred Stock were converted into common
shares upon the closing of the CompanyOs initial public offering on December 16,
1993, at which time the accretion was discontinued.
Communications Central Inc.
6. PREFERRED STOCK (CONTINUED)
In October 1993, the Company issued a stock dividend to the holders of the
Series B, Series D, and Series E Redeemable Preferred Stock which accrued from
April 1993 in accordance with the shareholders' agreement. The Company issued
22,869 shares of Series E Redeemable Preferred Stock and transferred $423,795
from current earnings to increase Series E Redeemable Preferred Stock by
$423,795.
In December 1993, the Company issued a stock dividend to the holders of the
Series B, Series D, and Series E Redeemable Preferred Stock which accrued from
October 1993 in accordance with the shareholders' agreement. The Company issued
9,397 shares of Series E Redeemable Preferred Stock and transferred $191,700
from current earnings to increase Series E Redeemable Preferred Stock by
$191,700.
7. COMMON STOCK
During fiscal 1992, the Board of Directors issued 348,500 options to purchase
Common Stock at an exercise price of $1.18 per share. These options are
exercisable and became fully vested upon consummation of the Company's initial
public offering on December 16, 1993. The option holders exercised 172,000 of
the vested options during fiscal 1995 and 176,500 of the vested options during
fiscal 1996.
On December 16, 1993, the Company issued 1,900,000 shares of its Common Stock
upon the closing of its initial public offering for $20,381,447 in cash, net of
issuance costs of $2,418,553. Also upon consummation of the initial public
offering, the following conversions were effected: (1) $840,000 of outstanding
convertible notes payable to shareholders were converted into 99,443 shares of
Common Stock (see Note 2); (2) the outstanding warrant to purchase Common Stock
was partially exercised and converted into 79,047 shares of Common Stock (see
below); (3) 1,290,430 shares of Redeemable Preferred Stock were converted into
2,193,731 shares of Common Stock (see Note 5); and (4) 28,125 shares of
Preferred Stock were converted into 381,834 shares of Common Stock (see Note 5).
In January 1994, the Company issued 240,000 shares of its Common Stock upon the
exercise of the underwriters' over-allotment option for $2,678,400 in cash, net
of issuance costs of $201,600.
Communications Central Inc.
7. COMMON STOCK (CONTINUED)
On February 28, 1994, the Company issued 78,571 shares of its Common Stock at a
per share value of $14.50 as partial consideration for assets purchased from
Paytel of America, Inc., as more fully described in Note 8.
On June 27, 1994, the Company issued 46,809 shares at a per share value of
$11.75 as partial consideration for assets purchased from InVision, as more
fully described in Note 8.
On June 30, 1995, the Company had reserved a total of 597,834 shares of Common
Stock for future issuance upon exercise of the stock options.
In fiscal 1991, the Company issued stock purchase warrants to its bank to
purchase up to 316,188 shares of Common Stock at an exercise price of $.01 per
share, subject to adjustment in certain events. All of the warrants expire on
May 1, 2001. The warrant holders had the right to put the warrants to the
Company; however, termination of these put rights occurred automatically upon
the closing of the Company's initial public offering on December 16, 1993, and
the Company therefore transferred $1,204,117 from redeemable warrants to
additional paid-in capital on Common Stock. Upon the closing of the Company's
initial public offering, the warrant was partially exercised and converted into
79,247 shares of Common Stock (see above). During fiscal 1994, the warrant was
further exercised and converted into an additional 10,114 shares of Common
Stock. During fiscal 1995, 226,891 warrants were exercised and converted into
an additional 226,891 shares of Common Stock. An additional 136 warrants were
recovered, but not converted into Common Stock. At June 30, 1995, no warrants
to purchase shares of Common Stock remained outstanding.
On October 19, 1993, the Board of Directors approved the establishment of the
1993 Stock Option Plan. The 1993 Stock Option Plan was amended and restated as
of October 11, 1995 (the "1993 Plan") To increase the shares for issuance upon
exercise of options granted to 850,000 shares. Options are to be granted at an
exercise price per share that is not less than the fair market value on the date
of the grant. All Options granted under the 1993 Plan must be exercised no
later than the tenth anniversary of the date of the grant. During 1996, the
Company repriced 65,000 options, with exercise prices which ranged from $11.88
to $15.00, to fair market value on the date of the repricing.
Communications Central Inc.
7. COMMON STOCK (CONTINUED)
YEAR ENDED JUNE 30
1996 1995 1994
-------------------------------------------------
Outstanding, Beginning of year 287,584 204,750 -
Granted 660,000 183,500 229,750
Exercised (8,333) -
Canceled (212,584) (92,333) (25,000)
-------------------------------------------------
Outstanding, end of year 735,000 287,584 204,750
=================================================
Exercisable, end of the year 46,999 46,166 -
=================================================
Option price per share of outstanding
shares $4.50-$15.00 $11.88-$15.00 $11.88-$12.75
=================================================
Available for Grant 106,667 4,083 42,950
=================================================
On October 19, 1993, the Board of Directors established the Stock Option Plan
for Directors (the "Directors' Plan"), which provides for the grant of non-
qualified stock options to purchase up to 50,000 shares of Common Stock to
directors who are not also employees of the Company. Under the Directors' Plan,
eligible directors may elect to receive stock options in lieu of annual director
compensation. The option exercise price is defined as 50% of the fair market
value of a share on the date of grant. During fiscal 1995, 7,997 options have
been granted under the Directors' Plan. On the date of the grant of options
under the Directors' Plan at less than fair market value, the Company will, to
the extent compensation expense has not already been recorded, recognize
compensation expense ratably over the vesting period in an amount equal to the
difference between the fair market value on the date of grant and the option
exercise price.
Communications Central Inc.
8. INCOME TAXES
The components of income tax expense are as follows:
YEAR ENDED JUNE 30
1996 1995 1994
-----------------------------------
Current:
Federal $78,352 $1,127,896 $154,581
State - - -
-----------------------------------
78,352 1,127,896 154,581
Deferred:
Federal - - 255,498
State - - 44,000
-----------------------------------
$78,352 $1,127,896 $454,079
===================================
At June 30, 1996, the Company had net operating loss carryforwards ("NOLs") of
approximately $25.7 million for federal income tax purposes. These NOLs expire
in varying amounts beginning in 2002 as follows:
Year ended June 30,
2002 $ 185,000
2003 944,000
2004 3,475,000
2005 2,052,000
2006 889,000
2007 2,735,000
2008 2,285,000
2009 579,000
2010 806,000
2011 11,751,000
---------------
$25,701,000
===============
Section 382 of the Internal Revenue Code, as amended ("Section 382"), limits the
amount of federal taxable income that may be offset by the preexisting NOL's of
a corporation following a change in ownership ("Ownership Change") of the
corporation. Approximately 12.9 million of the Company's NOL's are currently
subject to limitation under Section 382 because the Company experienced an
Ownership Change in fiscal 1991 due to the issuance of convertible preferred
stock and in fiscal 1994 due to the issuance of Common Stock in the Company's
initial public offering. Based upon the Ownership Change that occurred in fiscal
1991 and 1994, the Company has estimated the NOL's subject to the Section 382
limitation will not exceed $469,000 per year. The remaining NOL of 12.8 million
can offset future taxable income without limitation.
Communications Central Inc.
8. INCOME TAXES (CONTINUED)
Income tax expense differs from the amount computed by applying the statutory
Federal income tax rates for the following reasons:
YEAR ENDED JUNE 30
1996 1995 1994
---------------------------------------
Income tax expense at statutory federal
income tax rate applied to income
before income taxes $(6,075,169) $1,462,105 $1,099,327
Increase (decrease) resulting from:
State tax expense, less federl tax
benefit (626,339) 192,870 286,456
Change in valuation allowance 6,694,557 (612,903) (939,914)
Permanent differences 85,303 85,824 8,210
Extraordinary item -- -- 483,721
---------------------------------------
$ 78,352 $1,127,896 $ 937,800
=======================================
Communications Central Inc.
8. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net effect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are as follows:
JUNE 30
1996 1995
-----------------------------
Deferred tax assets:
Net operating loss carryforwards $ 9,766,394 $5,301,131
Reserves and vacation pay 1,212,897 1,286,716
AMT credit 1,117,135 1,117,135
Book over tax 5,126,872 -
-----------------------------
Gross deferred tax assets 17,223,298 7,704,982
Valuation allowance 7,662,639 968,082
-----------------------------
Total deferred tax assets 9,560,659 6,736,900
Deferred tax liabilities:
Tax over book depreciation 8,601,976 5,957,158
Deferred bonus expense 958,683 779,742
-----------------------------
Total deferred tax liabilities 9,560,659 6,736,900
-----------------------------
Net deferred tax balance $ -- $ --
=============================
Communications Central Inc.
9. ACQUISITIONS
During the years ended June 30, 1995 and 1994 the Company acquired certain
assets of various independent payphone and inmate phone operators including:
AMOUNT
ALLOCATED TO
PURCHASE INTANGIBLES
ACQUISITION DATE SELLING COMPANY PRICE ACQUIRED
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED JUNE 30, 1995:
July 1994 Pay-Tel of Illinois $ 4,162,000 $ 778,000
July 1994 InVision Telecommunications, Inc. 4,246,000 3,770,000
August 1994 Pay Phones Plus, Inc. 5,899,000 3,358,000
November 1994 Telso, Inc. 12,590,000 7,303,000
April 1995 Robert Cefail & Associates 18,905,000 13,025,000
YEAR ENDED JUNE 30, 1994:
July 1993 Public Access, Inc. 5,750,000 550,000
February 1994 Pay-Tel of America, Inc. 11,303,000 9,129,000
March 1994 Southnet Communications Corporation 1,650,000 485,000
May 1994 American Paytel, Inc. 3,312,000 582,000
June 1994 Pay Telephone of Pennsylvania, Inc. 1,105,000 586,000
The purchase method of accounting was used to record each of the above
acquisitions. Accordingly, the purchase price was allocated to the assets
acquired based on estimated fair values at the purchase dates. Operating results
for the respective companies have been included in the Company's results of
operations from the respective purchase dates. The following represents the
unaudited pro forma results of operations for the years ended June 30, 1995,
1994, assuming the above acquisitions has occurred at the beginning of the year
preceding the year of acquisition:
YEAR ENDED JUNE 30
1995 1994
-----------------------------
Net revenues $104,929,000 $96,546,000
Income before extraordinary item 9,158,000 12,177,000
Net Income 9,158,000 11,388,000
Net income per share 1.51 2.26
Communications Central Inc.
10. EMPLOYEE SAVINGS PLAN
Effective January 1, 1993, the company formed a contributory savings plan (the
"Plan"), which qualifies under Section 401(k) of the Internal Revenue Code,
covering substantially all of its employees. The company matches 50% of
employee contributions to a maximum of 6% of employee earnings each Plan year.
Company contributions to the Plan were approximately $84,000 and $84,000 for the
years ended June 30, 1996 and 1995, respectively.
11. CONTINGENCIES
The Company is from time to time subject to claims and suits arising in the
ordinary course of its business. In the opinion of management, the ultimate
resolution of any such pending matters will not have a material effect on the
Company's financial position.
12. RELATED PARTIES
During the years ended June 30, 1995 and 1994 the Company paid consulting fees
ranging from approximately $25,000 to $40,000 per year to a shareholder which
also holds a position on the Board of Directors of the Company.
13. SUBSEQUENT EVENTS
On October 8, 1996, the Company's lender agreed to amend the 1996 Credit
Agreement to extend the maturity of the $12,000,000 payment due on November 30,
1996 to July 1, 1997, and to adjust the financial covenants accordingly. In
consideration, the Company agreed to issue to its lender warrants to purchase
75,000 shares of Common Stock at a nominal price. Its lender now holds warrants
to purchase 225,000 common shares at a nominal price with the Company having the
option to repurchase warrants for 50,000 shares should the outstanding balance
on the 1996 Loan be less than $47.5 million on November 30, 1996. The Company
still plans to raise capital during fiscal 1997, but its plans have been delayed
due to the length of time for the FCC to issue rules with regard to the
Telecommunications Act of 1996.
On September 20, 1996 the FCC adopted Docket Nos. 96-128 and 91-35,
"Implementation of the Pay Telephone Reclassification and Compensation
Provisions of the Telecommunications Act of 1996". The order adopts regulations
designed to provide fair compensation for all payphone providers. The company
is in the process of analyzing this complex ruling.