- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/A
Current Report Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
Date of Report
February 3, 1998
DAVEL COMMUNICATIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
Illinois 0-22610 37-1064777
(State or other (Commission file number) (I.R.S. Employer
jurisdiction of Identification Number)
incorporation)
1429 Massaro Boulevard, Tampa, Florida 33619
(Address of Principal Executive Offices) (Zip Code)
(813) 623-3545
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
This Form 8-K/A amends the Company's Current Report on Form 8-K (dated
February 3, 1998 and filed February 18, 1998) and the Company's Current Report
on Form 8-K/A (dated February 3, 1998 and filed April 20, 1998) by including
herein page 2 of the Form 8-K/A, which was inadvertently omitted from the
April 20, 1998 filing.
Item 7. Financial Statements and Exhibits
On February 3, 1998, the Company acquired all of the issued and outstanding
shares of common stock, $.01 par value per share (the "Common Stock"), of
Communications Central Inc. ("CCI") (including the associated rights to purchase
shares of Common Stock) at a price of $10.50 per share in cash, or approximately
$70 million in the aggregate, and assumed CCI's outstanding debt of $36.4
million (the "CCI Acquisition"). The Company also paid $1.2 million for
non-compete agreements, incurred $1 million in transaction costs and assumed
$2.6 million of unrecorded liabilities.
On October 6, 1997, CCI completed the sale of substantially all the assets of
its wholly-owned inmate phone subsidiary, Invision Telecom ("Invision"), to
Talton Holdings, Inc. The unaudited pro forma financial statements presented
herein reflect the financial results of CCI's payphone operations without giving
effect to the operations of Invision for the periods presented. The Company's
acquisition of CCI was accounted for as a purchase and, accordingly, the
purchase price was allocated to the acquired assets and assumed liabilities
based on their respective fair values. The excess of the purchase price over the
fair value of net assets acquired was attributed to goodwill, and will be
amortized over 15 years on a straight-line basis.
The Unaudited Pro Forma Combined Balance Sheets have been prepared as though the
acquisition of CCI occurred on December 31, 1997. The Unaudited Pro Forma
Combined Statements of Income have been prepared as though the acquisition of
CCI occurred on January 1, 1997. These statements do not purport to be
indicative of the results of operations which actually would have occurred had
the acquisition of CCI occurred on such dates.
(a) Financial Statements of Business Acquired.
The following audited, consolidated financial statements of CCI, together
with the applicable report of independent auditors, are filed with this
report:
(i) Consolidated Balance Sheets as of June 30, 1997 and June 30, 1996
(ii) Consolidated Statements of Income for the years ended June 30, 1997,
1996 and 1995
(iii) Consolidated Statements of Shareholders' Equity for the years ended
June 30, 1997, 1996 and 1995
(iv) Consolidated Statements of Cash Flows for the years ended June 30,
1997, 1996 and 1995
(v) Notes to Consolidated Financial Statements
2
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, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended June 30, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements 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, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming Communications
Central Inc. will continue as a going concern. As more fully described in Note
2, the Company has incurred operating losses and has a working capital
deficiency. In addition, the Company is not in compliance with certain terms of
the loan agreement with its bank. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. The financial statements
do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
Ernst & Young LLP
Atlanta, Georgia
September 19, 1997
3
Communications Central Inc.
Consolidated Balance Sheets
June 30,
--------
1997 1996
---- ----
Assets
Current assets:
Cash $ 5,403,731 $ 2,266,327
Accounts, receivable, less allowance for doubtful accounts
of $3,586,000 and $2,140,000 at June 30, 1997 and 1996,
respectively 9,275,643 10,612,382
Prepaid expenses 1,180,487 707,699
Assets held for sale 38,791,285 -
Other current assets 1,961,522 870,815
------------ ------------
Total current assets 56,612,688 14,457,223
Operating equipment:
Telecommunication equipment 63,776,675 73,262,895
Uninstalled equipment 552,721 665,415
------------ ------------
64,329,396 73,928,310
Less accumulated depreciation and amortization ( 33,418,171) ( 29,922,368)
------------ ------------
30,911,225 44,005,942
Leasehold improvement, computer equipment and software
and office furniture and equipment, net of accumulated
depreciation and amortization of approximately $3,172,000
and $2,162,000 at June 30, 1997 and 1996, respectively 2,183,441 2,367,534
Deferred loan costs,
net of accumulated amortization of $243,000 at June 30,
1996 - 260,153
Intangible assets
Site license contracts, net 3,345,221 7,053,568
Agreements not to compete, net 513,284 1,046,450
Goodwill, net 8,680,937 36,555,441
Other assets, net 2,086,523 3,981,290
------------ ------------
Total assets $104,333,299 $109,727,601
============ ============
See accompanying notes
4
June 30,
-----------------------------
1997 1996
------------ ------------
Liabilities and shareholders' equity
Current liabilities:
Notes payable to shareholders $ - $ 8,333
Note payable - 79,650
Accounts payable 4,674,064 3,324,204
Accrued expenses 4,799,916 2,878,447
Current portion of long term debt 71,697,389 3,000,000
Accrued commissions 2,009,907 2,637,010
Accrued interest 880,172 634,295
Accrued compensation 142,822 102,351
Accrued income taxes payable 578,984 328,984
------------ ------------
Total current liabilities 84,783,254 12,993,274
Long term debt - 70,197,389
Commitments and contingencies - -
Shareholders' equity
Common Stock, $.01 par value:
Authorized shares - 50,000,000
Issued and outstanding shares - 6,284,222 and 6,054,556
at June 30, 1997 and 1996, respectively 62,842 60,545
Additional paid in capital 51,483,958 50,067,383
Accumulated deficit (31,996,755) (23,590,990)
------------ ------------
Total shareholders' equity 19,550,045 26,536,938
------------ ------------
Total liabilities and shareholders' equity $104,333,299 $109,727,601
============ ============
See accompanying notes
5
Communications Central Inc.
Consolidated Statements of Operations
Year ended June 30,
-------------------
1997 1996 1995
---- ---- ----
Revenue:
Coin calls $ 34,575,398 $ 35,509,110 $ 33,326,399
Non coin calls 65,894,619 66,644,945 47,951,407
Other 3,377,759 3,185,516 144,433
------------ ------------ ------------
103,847,776 105,339,571 81,422,239
Costs and expenses:
Line access charges 31,532,544 35,923,596 27,411,215
Commissions 20,839,017 22,299,044 15,111,992
Service and collection 19,218,670 19,362,209 12,001,623
Selling general and administrative 5,868,275 4,778,522 4,633,821
Bad debt expense 17,208,408 8,575,422 4,640,610
Depreciation and amortization 12,374,243 11,741,785 9,795,025
Impairment loss - 14,183,996 -
Impairment loss on assets hold for sale 2,400,000 - -
------------ ------------ ------------
Total costs and expenses 109,441,157 116,864,574 73,594,286
------------ ------------ ------------
Operating income (loss) (5,593,381) (11,525,003) 7,827,953
Other Income, net 5,473,408 - -
Impairment loss of loan origination fees (1,155,652) - -
Interest expense (7,130,140) (6,343,142) (3,527,644)
------------ ------------ ------------
Income (loss) before income tax expense (8,405,765) (17,868,145) 4,300,309
Income tax expense - 78,352 1,127,896
------------ ------------ ------------
Net income (loss) $ (8,405,765) $(17,946,497) $ 3,172,413
============ ============ ============
Net income (loss) per common share $ (1.38) $ (2.96) $ 0.52
============ ============ ============
Weighted average shares outstanding 6,101,451 6,054,556 6,064,447
============ ============ ============
See accompanying notes.
6
Communications Central Inc.
Consolidated Statements of Shareholders' Equity
Common Stock
------------------------------------
Additional Total
Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Equity
-----------------------------------------------------------------
Balance of June 30, 1994 5,424,021 $54,240 $48,799,468 ($8,816,906) $40,036,802
Issuance of Common Stock in acquisition 46,809 468 549,538 - 550,006
Issuance of Common Stock upon exercise of options 180,335 1,803 301,153 - 302,956
Issuance of Common Stock upon exercise of warrants 226,891 2,269 (2,281) - (12)
Tax benefit from employees' stock option plans - - 213,000 - 213,000
Net income - - - 3,172,413 3,172,413
-----------------------------------------------------------------
Balance at June 30, 1995 5,878,056 $58,780 $49,860,878 ($5,644,493) $44,275,165
Issuance of Common Stock upon exercise of options 176,500 1,765 206,505 - 208,270
Net loss - - - (17,946,497) (17,946,497)
-----------------------------------------------------------------
Balance at June 30, 1996 6,054,556 $60,545 $50,067,383 ($23,590,990) $26,536,938
Issuance of Warrants - - 1,378,125 - 1,378,125
Issuance of Common Stock upon exercise of options 666 7 3,490 - 3,497
Issuance of Common Stock upon exercise of warrants 229,000 2,900 34,960 - 37,250
Net loss - - - (8,405,765) (8,405,765)
-----------------------------------------------------------------
Balance at June 30, 1997 6,284,222 $62,842 $51,483,958 ($31,996,755) $19,550,045
=================================================================
7
Communications Central Inc.
Consolidated Statements of Cash Flows
Year ended June 30,
-------------------
1997 1996 1995
---- ---- ----
Operating activities
Net income (loss) ($ 8,405,765) ($17,946,497) $ 3,172,413
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 12,374,243 11,741,785 9,795,025
Other ( 7,463) - ( 16,336)
Impairment loss - 14,183,996 -
Impairment loss on assets held for sale 2,400,000 - -
Impairment loss of loan origination fees 1,155,652 - -
Changes in operating assets and liabilities:
Accounts receivable 1,336,739 23,923 (6,690,852)
Prepaid expenses, other current assets and other assets ( 1,778,607) ( 2,136,962) (2,506,920)
Accounts payable 1,349,860 2,459,091 (1,611,327)
Accrued expenses 1,830,713 1,119,946 1,325,688
Other liabilities - - 2,261,656
------------ ------------ ------------
Net cash provided by operating activities 10,255,372 9,445,282 5,729,347
Investing activities
Purchase of telecommunication equipment, leasehold
improvements and office furniture and equipment, net ( 3,373,207) ( 7,496,323) (11,402,674)
Acquisitions of telecommunication equipment, site licenses,
agreements not to compete and goodwill - ( 462,000) (41,187,892)
Purchases of site licenses, net ( 2,230,825) ( 2,294,360) (1,957,274)
Proceeds from sale of equipment 33,300 285,000 115,526
------------ ------------ ------------
Net cash used in investing activities ( 5,570,732) ( 9,967,683) (54,432,314)
Financing activities
Payments on notes payable ( 1,587,983) ( 423,583) ( 7,678,146)
Proceeds from long term debt - 3,000,000 51,640,463
Issuance of Common Stock 40,747 208,270 302,944
------------ ------------ ------------
net cash provided by (used in) financing activities ( 1,547,236) 2,784,687 44,265,261
------------ ------------ ------------
(Decrease) increase in cash 3,137,404 2,262,286 (4,437,706)
------------ ------------ ------------
Cash at beginning of year 2,266,327 4,041 4,441,747
------------ ------------ ------------
Cash at end of year $ 5,403,731 $ 2,266,327 $ 4,041
============ ============ ============
Supplemental disclosure
------------ ----------- -----------
Cash paid for interest $ 6,388,854 $ 6,725,240 $ 2,591,138
============ =========== ===========
Cash paid for income taxes $ - $ - $ 1,170,900
============ =========== ===========
See accompanying notes.
8
Communications Central Inc.
Notes to Consolidated Financial Statements
June 30, 1997
1. Summary of Significant Accounting Policies
Description of Business
Communications Central Inc. (the "Company") is an independent payphone and
inmate phone operator operating in 42 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.
Investments
At June 30, 1997 and 1996, the Company held warrants to purchase common stock of
a vendor. The Company has classified this investment as trading. Trading
investments are held for resale in anticipation of short-term market movements.
Trading investments are stated at fair value. Gains or losses, both realized and
unrealized, are included in Other Revenue. The Company recognized a realized
gain of $1.2 million and an unrealized gain of $1.4 million in fiscal 1997.
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 the
cost of initial installation as part of the cost of telecommunication equipment.
Repairs and maintenance are expensed as incurred.
9
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.
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, 1997 and 1996 was
approximately $1,359,000 and $1,019,000, 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, 1997 and 1996 was approximately $4,891,000 and $2,683,000, 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, 1997 and
1996 was approximately $3,844,000 and $2,298,000, respectively.
Impairment of Long-Lived Assets
In March 1995, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for Impairment of Long-Lived Assets and Long-Lived
Assets To Be Disposed Of", which requires impairment losses to be recorded on
long-lived assets used in operations when indications of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. SFAS No. 121 also addresses the
accounting for long-lived assets that are expected to disposed of. The Company
adopted SFAS No. 121 in the third quarter of fiscal 1996.
Periodically, the Company assesses the appropriateness of the carrying amounts
of long-lived assets and related amortization periods based on the undiscounted
value of the
10
Communications Central Inc.
1. Summary of Significant Accounting Policies (Continued)
current and anticipated future cash flows generated by the business. If there
are indicated impairments, a write-down is recorded to the extent the carrying
amount exceeds fair value. Fair value is based on either a quoted value, if
available, or the estimated future cash flows of the business discounted at a
market rate of interest.
An impairment loss of $14.2 million during the third quarter of fiscal 1996 was
recognized in accordance with SFAS No. 121. Cash flow generation by payphones
and inmate lines, on an acquisition by acquisition basis, was calculated 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, an impairment loss
was recognized. Such losses consisted of approximately $12.4 million for
operating equipment and approximately $1.8 million for related intangible
assets.
An impairment loss on assets held for sale of $2.4 million was recognized during
the fourth quarter of fiscal 1997 in accordance with SFAS No. 121. The
impairment loss was determined based on the estimated fair value to be received
for long-lived assets to be disposed of under an August 21, 1997 Asset Purchase
Agreement with Talton Holdings, Inc. ("Talton") to purchase substantially all of
the assets of the Company's inmate division. (See Note 16.) All of the long-
lived assets of the Company's inmate division have been classified as assets
held for sale in current assets. The results of operations for the inmate
division were (millions):
1997 1996 1995
---- ---- ----
Revenue $ 46.2 $ 47.9 $ 21.1
Income/(Loss) Before Income Taxes (13.4) 1.5 3.3
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 basis 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
Net income (loss) per share is computed using the weighted average number of
common shares and , if dilutive, common equivalent shares outstanding during the
period.
11
Communications Central Inc.
1. Summary of Significant Accounting Policies (Continued)
Stock Based Compensation
During 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation", which provides an alternative to APB Opinion No. 25, "Accounting
for Stock Issued to Employees" in accounting for stock-based compensation to
employees. As permitted by SFAS 123, the Company continues to account for stock
option grants in accordance with APB Opinion No. 25 and has elected the pro
forma disclosure alternative of the effect of SFAS No. 123. Accordingly,
adoption of the standard in fiscal 1997 did not affect the Company's results of
operations or financial position.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued a new
accounting pronouncement, SFAS No. 128, "Earnings Per Share", which will change
the current method of computing earnings per share. The new standard requires
presentation of "basic earnings per share" and "diluted earnings per share"
amounts, as defined. SFAS No. 128 will be effective for the Company's quarter
ending December 31, 1997, and, upon adoption, all prior period earnings per
share data presented shall be restated to conform with the provisions of the new
pronouncement. Application earlier than the Company's quarter ending December
31, 1997 is not permitted. The Company does not expect that the adoption of the
new pronouncement will have a material impact on the Company's results of
operations.
Reclassifications
Certain changes in the presentation of the June 30, 1996 amounts have been made
to conform to the June 30, 1997 presentation.
2. Going Concern and Management's Plan
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern; they do not include
adjustments relating to the recoverability of recorded asset amounts and
classification of recorded assets and liabilities to reflect the possible future
effects if the Company is not able to continue as a going concern.
The Company reported a net loss of $8.4 million for the year ended June 30,
1997, and reported a net loss of $17.9 for the preceding year. The Company
violated certain terms and conditions of its bank 1996 Credit Agreement
resulting in the outstanding balance of $71.7 million as of June 30, 1997 being
classified a current liability. At June 30, 1997
12
Communications Central Inc.
2. Going Concern and Management's Plan (Continued)
there was a working capital deficiency of $28.2 million. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plan for addressing these conditions is as follows:
Sale of the Company's inmate operations. Pursuant to the Asset Purchase
Agreement between the Company and Talton Holdings, Inc., the Company has agreed
to sell certain assets of the inmate operations to Talton for approximately $42
million. (See Note 16) The sale is scheduled to be consummated on or about
October 31, 1997, and is contingent upon a number of items. The cash from the
sale of these assets is planned to reduce a portion of the outstanding debt and
provide working capital.
Take advantage of deregulated local coin rates. In appropriate markets, the
Company intends to increase the coin rate charged on or about October 7, 1997.
Aggressively pursue "fair compensation" as mandated in the Telecommunications
Act of 1996 for dial around calls. Through participation in industry groups and
individually, the Company will pursue compensation for dial around calls from
appropriate interexchange providers.
Renegotiate or replace the 1996 Credit Agreement. Management intends to
renegotiate the terms of the 1996 Credit Agreement with its existing lender or
replace the agreement with a new secured lender.
Although the results of these actions cannot be predicted, the Company believes
that the above steps are appropriate and, if successful, will help improve
operating results and cash flow.
3. 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.
4. Accounts Receivable and Bad Debt Expense
At June 30, 1997, the accounts receivable balance was $12.9 million with an
allowance for doubtful accounts of $3.6 million. Of that amount, $6.4 million
represents receivables
13
Communications Central Inc.
4. Accounts Receivable and Bad Debt Expense (Continued)
generated from inmate calling along with an allowance of $3.4 million. The
remaining $6.5 million represents receivables generated from the Company's pay
telephones which includes $5.7 million due from interexchange carrier's for
"dial-around compensation". In the fourth quarter of fiscal 1997, the Company
changed its estimate of bad debt expenses by recording expenses of $6.8 million
related to its inmate calling business primarily to reflect its experience with
increased levels of chargebacks for prior periods reported by LECs primarily in
the second and third quarters of fiscal 1997.
At June 30, 1996, the accounts receivable balance was $12.7 million with an
allowance for doubtful accounts of $2.1 million. Of that amount, $9.9 million
represents receivables generated from inmate calling along with an allowance of
$2.0 million. The remaining $2.8 million represents receivables from the
Company's pay telephones which includes $1.2 million due from interexchange
carriers for "dial-around compensation".
5. Notes Payable
June 30,
--------
1997 1996
---- ----
Unsecured notes payable to shareholders $ - $ 8,333
Note payable - 79,650
------- --------
- 87,983
Less current portion - 87,983
------- --------
$ - $ -
======= ========
6. Bank Debt
In July 1995, the Company entered into an agreement (the "1995 Loan") with a
bank that amended and restated the terms of a previous agreement. The 1995 Loan
contains affirmative and negative covenants including provisions for maintaining
minimum consolidated net worth, interest coverage ratios, and fixed charge
coverage. 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.
In August 1996, the Company entered into a Credit Agreement (the "1996 Credit
Agreement") that amended and restated the 1995 Loan. The 1996 Credit Agreement
permitted borrowing of up to $75,000,000 until November 30, 1996. It required a
payment of $12,000,000 on or before July 1, 1997. The 1996 Credit Agreement is
secured by essentially all of the assets of the Company including the stock of
its operating
14
Communications Central Inc.
6, Bank Debt (Continued)
subsidiaries. The 1996 Credit Agreement further requires principal payments of
$500,000 per month beginning January 1997, and $750,000 per month beginning in
January 1998, through the 1996 Credit Agreement's maturity in July 1999. In
conjunction with the 1996 Credit Agreement, 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 Credit Agreement.
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 for the amendments during fiscal year 1997, the lender received
warrant agreements to purchase up to 225,000 shares of the Company's Common
Stock at a nominal price. The cost of approximately $1.4 million associated with
these warrants will be amortized over the life of the 1996 Credit Agreement.
In June 1997, the above terms were modified by the Second Amendment to the 1996
Credit Agreement which extended the timing of the July 1, 1997 payment to
September 1, 1997 upon the payment of a principal amount of $1,500,000. The
Company was not able to repay the remaining payment due of $10,500,000 on
September 1, 1997. As a result, the Company is in default under the 1996 Credit
Agreement. In addition, the Company was not in compliance with the financial
covenants under the 1996 Credit Agreement, as amended, as of June 30, 1997.
Because of this default, the Company has recognized the impairment of deferred
loan costs of $1.2 million at June 30, 1997.
As a result of the above, all of the debt under the 1996 Credit Agreement, as
amended, is shown as current.
7. Lease Commitments
The Company leases office space and certain equipment under operating leases.
Total rent expense for the years ended June 30, 1997, 1996, and 1995 was
approximately $ 668,000 $587,000, and $899,000, 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, 1997:
15
Communications Central Inc.
7. Lease Commitments (Continued)
Year ending June 30,
1998 $1,295,000
1999 1,067,000
2000 89,000
----------
$2,451,000
==========
8. Preferred Stock
As of June 30, 1997 the Company had 2,000,000 shares of Preferred Stock
authorized and none issued and outstanding.
9. Common Stock
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123, "Accounting
for Stock-Based Compensation", requires use of option valuation models that were
not developed for use in valuing employee stock options. Under APB 25, the
Company recognizes compensation expense to the extent the exercise price of the
Company's employee stock options is less than the market price of the underlying
stock on the date of grant.
Stock Options
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 the
remaining 176,500 of the vested options during fiscal 1996.
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. Options may be granted with
different vesting terms, but generally provide for vesting
16
Communications Central Inc.
9. Common Stock (Continued)
over a three year period. 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.
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 could 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 and 1996,
7,997 and 25,402 options were granted under the Directors' Plan, respectively.
Under the Directors' Plan, on the date of the grant of options 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.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to June
30, 1995 under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1996 and 1997,
respectively; risk-free interest rates of 5.54% and 6.48%; a dividend yield of
0%; volatility factors of the expected market price of the Company's common
stock of 0.555; and a weighted-average expected life of the options of 3 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in thousands except for earnings per share
information):
17
Communications Central Inc.
9. Common Stock (Continued)
1997 1996
---- ----
Pro forma net loss ($8,818,000) ($18,386,000)
Pro forma loss per share $( 1.45) $( 3.04)
Because SFAS is applicable only to options granted subsequent to June 30, 1995,
its pro forma effect will not be fully reflected until fiscal year 1998.
A summary of the Company's stock option activity under the 1993 Stock Option
Plan, for the years ended June 30 follows:
Year ended June 30,
-------------------
1997 1996 1995
---- ---- ----
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
Outstanding, Beginning of year 735,000 $ 6.45 287,584 $ 12.60 204,750 $ 11.12
Granted 85,000 6.86 660,000 6.11 183,500 14.30
Exercised ( 666) 5.25 - - ( 8,333) 12.00
Canceled ( 2,334) 5.25 ( 212,584) 5.30 ( 92,333) 12.76
--------------------- ----------------------- --------------------------
Outstanding, end of year 817,000 $ 6.49 735,000 $ 6.45 287,584 12.60
===================== ======================= ==========================
Exercisable, end of the year 333,207 $ 7.53 67,999 $ 8.48 46,166 $ 12.08
===================== ======================= ==========================
Weighted-average fair value of options granted
during the year $ 3.76 $ 2.61
-------- ---------
Options outstanding at June 30, 1997 have a weighted average remaining
contractual life of approximately 8.17 years and are exercisable at prices
ranging from $5.25 to $15.00.
Warrants
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
79,047 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.
18
Communications Central Inc.
9. Common Stock (Continued)
In September 1996, the Company issued stock purchase warrants to it's lender to
purchase 225,000 shares of Common Stock at an exercise price of $.01 per share.
(See Note 4) The warrants were exercised and converted into 225,000 shares of
Common Stock on March 17, 1997. As of June 30, 1997 no warrants to purchase
shares of Common Stock remain outstanding.
In July 1995, the Company issued warrants to purchase 44,500 shares of Common
Stock at $8.75 per share to a vendor. During fiscal 1997, warrants to purchase
4,000 shares were exercised.
On June 30, 1997, the Company had reserved a total of 882,902 shares of Common
Stock for future issuance upon exercise of the stock options and warrants.
10. Other Income
In March 1997, the Company announced an Agreement and Plan of Merger, ("Merger
Agreement") with PhoneTel Technologies, Inc. ("PhoneTel"). On August 21, 1997,
the Company announced that its Merger Agreement had been terminated without any
shares of the Company's stock being purchased. In the fourth quarter of fiscal
1997, the Company received payments totaling $6 million from PhoneTel. As a
result of the amendment and then termination of the agreement, PhoneTel
forfeited these payments to the Company. The payments were recorded as "Other
Income", net of related expenses.
11. Income Taxes
The components of income taxes are as follows:
Year ended June 30,
-------------------
1997 1996 1995
---- ---- ----
Current:
Federal $ - $78,352 $1,127,896
State $ - - -
--------------------------------
- 78,352 1,127,896
Deferred:
Federal - - -
State - - -
--------------------------------
- 78,352 $1,127,896
--------------------------------
19
Communications Central Inc.
11. Income Taxes (Continued)
At June 30, 1997, the Company had net operating loss carryforwards ("NOLs") of
approximately $32.9 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
2012 7,212,000
-----------
$32,913,000
===========
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 $20.0
million can offset future taxable income without limitation.
Income tax expense differs from the amount computed by applying the statutory
Federal income tax rates for the following reasons:
20
Communications Central Inc.
11. Income Taxes (Continued)
Year ended June 30,
-------------------
1997 1996 1995
---- ---- ----
Income tax expense at statutory federal income tax
rate applied to income before income taxes ($2,857,960) ($6,075,169) $1,462,105
Increase (decrease) resulting from:
State tax expense, less federal tax benefit ( 336,230) ( 626,339) 192,870
Change in valuation allowance 3,086,504 6,694,557 ( 612,903)
Other 107,686 85,303 85,824
----------- ----------- ----------
$ - $ 78,352 $1,127,896
=========== =========== ==========
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,
--------
1997 1996
---- ----
Deferred tax assets:
Net operating loss carryforwards $13,641,425 $ 9,766,394
Reserves and vacation pay 1,095,360 1,212,897
AMT credit 1,117,135 1,117,135
Book over tax amortization 6,409,097 5,126,872
-------------------------
Gross deferred tax assets 22,263,017 17,223,298
Valuation allowance 10,749,143 7,662,639
-------------------------
Total deferred tax assets 11,513,874 9,560,659
Deferred tax liabilities:
Tax over book depreciation 10,481,678 8,601,976
Deferred bonus expense 1,032,196 958,683
-------------------------
Total deferred tax liabilities 11,513,874 9,560,659
-------------------------
Net deferred tax balance $ - $ -
=========================
12. Acquisitions
During the year ended June 30, 1995 the Company acquired certain assets of
various independent payphone and inmate phone operators including:
21
Communications Central Inc.
12. Acquisitions (Continued)
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
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
year ended June 30, 1995, assuming the above acquisitions has occurred at the
beginning of the year preceding the year of acquisition:
Year ended June 30, 1995
Net revenues $104,929,000
Income before extraordinary item 9,158,000
Net Income 9,158,000
Net income per share 1.51
13. 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 $83,500 and $84,000 for the
years ended June 30, 1997 and 1996, respectively.
22
Communications Central Inc.
14. Contingencies and Uncertainties of Dial Around Compensation
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.
The Federal Communications Commission ("FCC") issued an order on "dial around"
compensation ("FCC Order"), which provided an interim plan by which the
interexchange carriers ("IXC's") paid an aggregate monthly amount of $45.85 per
phone to the owners of each payphone. The Company received $1.7 million for the
partial month of November 1996 and the full month of December 1996. For the
months of January 1997, February 1997 and March 1997 the Company received an
amount of approximately $36.12 per phone per month as several of the IXC's
refused to pay while the FCC Order was being appealed. The Company has accrued
at the rate of $45.85 per phone per month through June 30, 1997. The receivable
owing from all of the IXCs at June 30, 1997 was approximately $5,700,000. Of
that amount, approximately $1,800,000 was collected in July 1997, leaving a
balance of approximately $3,900,000 remaining to be collected.
In a July 1, 1997 decision, the U.S. Court of Appeals for the District of
Columbia Circuit ("Court") reviewed certain Orders of the FCC related to the
implementation of the payphone-specific provisions of the Telecommunications Act
of 1996. Among other things, the Court remanded the issue of rates for
compensation for 800 and access code calls to independent payphone providers
("dial around compensation") back to the FCC for further consideration. Further,
in a supplemental opinion dated September 16, 1997, the Court clarified its
opinion on dial around compensation by stating that it was vacating, rather than
remanding, the FCC's previous dial around compensation rates while the FCC
further reviews the issue. The Company is continuing to analyze these complex
rulings, and attempting to determine the effect, if any, that they may have on
the Company's financial statements and results of operations.
If the FCC fails to implement a dial around compensation amount that
approximates at least the $45.85 per phone per month or 35 cents per call, then
the impact of such a ruling could have a material adverse effect on the
Company's financial position. For every dollar that the FCC changes its
compensation plan from $45.85 per phone per month, the Company's revenue from
non-coin calls could be impacted positively or negatively by approximately
$155,000 for the period from November 8, 1996 through June 30, 1997.
15. Related Parties
During the year ended June 30, 1995 the Company paid consulting fees of
approximately $25,000 per year to a shareholder who also holds a position on the
Board of Directors of the Company.
23
Communications Central Inc.
16. Subsequent Events
On August 21, 1997, the Company, InVision Telecom, Inc. (a wholly owned
subsidiary of the Company) and Talton Holdings, Inc. ("Talton") entered into an
Asset Purchase Agreement (the "Purchase Agreement") whereby Talton agreed to
purchase substantially all of the assets of the Company's inmate phone business
for approximately $42 million (subject to adjustment as provided in the Purchase
Agreement). The Purchase Agreement is scheduled to close on or about October 31,
1997 and is subject to certain closing conditions including the consent of the
Company's principal lender and the execution of satisfactory employment
agreements with certain members of InVision's management team. Upon consummation
of the Purchase Agreement and the transactions contemplated thereby, the Company
will not own any inmate phones or have any inmate phone operations.
24
Communications Central Inc.
COMMUNICATIONS CENTRAL INC.
COMPUTATION OF HISTORICAL EARNINGS PER SHARE
(In thousands, except per share amounts)
Year ended June 30, 1996
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------------
Primary and fully diluted:
Weighted average common stock
outstanding during the period 6,101 6,055 5,714 3,100 441
Net effect of dilutive stock
options and stock warrants
computed in accordance with
the treasury stock method - - 350 280 -
Dilutive effect of common stock
equivalents issued subsequent
to November 1, 1992 computed
in accordance with the
treasury stock method as
required by the SEC(1) - - - 254 552
--------------------------------------------------------------------------
Total 6,101 6,055 6,064 3,634 993
==========================================================================
Net income (loss) $(8,406) $(17,946) $3,172 $2,779 $ 1,084
Less: Accretion on redeemable
warrants - - - (144) (202)
Less: Preferred stock dividends - - - (615) (923)
Less: Accretion on redeemable
preferred stock - - - (985) (1,355)
--------------------------------------------------------------------------
Net income (loss) available for
common stock and common stock
equivalents $(8,406) $(17,946) $3,172 $1,035 $(1,396)
==========================================================================
Per share amount $ (1.38) $ (2.96) $ .52 $ .28 $ (1.41)
==========================================================================
(1) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, common stock equivalents issued at prices below the assumed initial
public offering price per share ("cheap stock") during the twelve month
period immediately preceding the initial filing date of the Company's
Registration Statement for its public offering have been included as
outstanding for all periods presented prior to the initial public offering.
25
The following unaudited, consolidated financial statements of CCI are filed
with this report:
(i) Consolidated Balance Sheets as of December 31, 1997 and June 30, 1997
(ii) Consolidated Statements of Income for the six months ended December 31,
1997 and 1996
(iii) Consolidated Statements of Cash Flows for the six months ended December
31, 1997 and 1996
(iv) Notes to Consolidated Financial Statements
26
Communications Central Inc.
Consolidated Balance Sheets
December 31, June 30,
1997 1997
------------ ------------
Assets (Unaudited) (Note)
Current assets:
Cash ....................................................... $ 4,890,771 $ 5,403,731
Accounts receivable, less allowance for doubtful accounts
of $5,247,000 and $3,586,000 at December 31, 1997 and
June 30, 1997, respectively .............................. 8,567,943 9,275,643
Prepaid expenses ........................................... 1,114,457 1,180,487
Assets held for sale........................................ - 38,791,285
Other current assets ....................................... 3,848,159 1,961,522
------------ ------------
Total current assets ..................................... 18,421,330 56,612,668
Operating equipment:
Telecommunications equipment ............................... 64,486,434 63,776,675
Uninstalled equipment ...................................... 552,721 552,721
------------ ------------
65,039,154 64,329,396
Less accumulated depreciation and amortization ............. (36,134,080) (33,418,171)
------------ ------------
28,905,074 30,911,225
Leasehold improvements and office furniture and equipment,
net of accumulated depreciation and amortization of
approximately $2,909,000 and $3,172,000 at December 31, 1997
and June 30, 1997, respectively ............................ 2,374,971 2,183,441
Intangible assets:
Site license contracts, net ................................ 3,957,063 3,345,221
Agreements not to compete, net ............................. 402,979 513,284
Goodwill, net .............................................. 8,328,638 8,680,937
Other assets, net ............................................. 2,222,635 2,086,523
------------ ------------
Total assets ............................................. $ 64,612,690 $104,333,299
============ ============
See notes to consolidated financial statements.
27
Communications Central Inc.
Consolidated Balance Sheets
December 31, June 30,
1997 1997
----------- ------------
Liabilities and shareholders' equity (Unaudited) (Note)
Current liabilities:
Accounts payable .................................... $ 4,415,383 $ 4,674,064
Accrued expenses .................................... 3,899,215 4,799,916
Current portion of long-term debt ................... 36,400,000 71,697,389
Accrued commissions ................................. 1,357,519 2,009,907
Accrued interest .................................... 244,617 880,172
Accrued compensation ................................ 162,117 142,822
Accrued income taxes payable ........................ 578,984 578,984
----------- ------------
Total current liabilities ......................... 47,057,836 84,783,254
Shareholders' equity:
Common Stock, $.01 par value
Authorized shares - 50,000,000: issued and outstanding
shares - 6,286,209 at December 31, 1997 and
6,284,222 at June 30, 1997 ........................ 62,967 62,842
Additional paid-in capital .......................... 51,549,274 51,483,958
Accumulated deficit ................................. ( 34,057,387) ( 31,996,755)
----------- ------------
Total shareholders' equity ........................ 17,554,854 19,550,045
----------- ------------
Total liabilities and shareholders' equity ........ $64,612,690 $104,333,299
=========== ============
See notes to consolidated financial statements.
28
Communications Central Inc.
Consolidated Statements of Income (Unaudited)
Six Months Ended
December 31,
-------------------------
1997 1996
----------- -----------
Revenues:
Coin calls ................................ $16,444,176 $18,019,392
Non-coin calls ............................ 19,796,890 34,080,813
Other ..................................... 2,629,395 1,058,465
----------- -----------
Total revenues ......................... 38,870,461 53,158,670
Cost and expenses:
Line access charges ....................... 10,640,187 15,782,323
Commissions ............................... 7,254,072 10,545,201
Service and collection .................... 6,588,302 7,947,290
Bad debt expense .......................... 3,230,243 5,887,237
Provision for dial-around compensation..... 1,162,510 -
Selling, general and administrative ....... 5,182,296 4,006,459
Depreciation and amortization ............. 4,291,683 6,047,556
----------- -----------
Total cost and expense ................. 38,349,293 50,216,066
----------- -----------
Operating income (loss) .................... 521,168 2,942,604
Interest expense ........................... 2,581,799 3,305,877
----------- -----------
Income (loss) before income tax expense .. ( 2,060,631) ( 363,273)
Income tax expense (benefit) ............... - -
----------- -----------
Net income (loss) .......................... ($ 2,060,631) ($ 363,273)
=========== ===========
Net income (loss) per share ................ ($ 0.33) ($ 0.06)
=========== ===========
Weighted average number of shares outstanding 6,286,209 6,054,556
=========== ===========
See notes to consolidated financial statements.
29
Communications Central Inc.
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
December 31,
--------------------------
1997 1996
------------ ----------
Operating activities
Net income ............................................................... ($ 2,060,631) ($ 363,273)
Adjustments to reconcile net income to net cash
provided by operating activities:
Assets held for sale.................................................. 38,791,285 -
Depreciation and amortization ........................................ 4,648,926 6,047,556
Changes in operating assets and liabilities:
Accounts receivable ................................................ 707,700 ( 2,009,169)
Prepaid expenses, other current assets and other assets ............ ( 1,820,606) ( 1,359,750)
Accounts payable and other accrued expenses ........................ ( 2,428,035) 640,399
----------- ----------
Net cash provided by operating activities ................................ 37,838,639 2,955,763
Investing activities
Purchases of telecommunications equipment, leasehold improvements,
office furniture and equipment ......................................... ( 1,379,312) ( 1,247,113)
Acquisitions of telecommunications equipment, site licenses,
agreements not to compete and goodwill ................................. - ( 27,526)
Additions of site licenses, net .......................................... ( 1,540,339) ( 865,106)
----------- ----------
Net cash used in investing activities .................................... ( 2,919,651) ( 2,139,745)
Financing activities
Payments on notes payable ................................................ ( 35,297,389) ( 65,600)
Payment of loan origination cost.......................................... ( 200,000) ( 215,210)
Issuance of Common Stock ................................................ 65,441 -
----------- ----------
Net cash provided by financing activities ................................ ( 35,431,948) ( 280,810)
----------- ----------
Increase (decrease) in cash .............................................. ( 512,960) 535,208
Cash at beginning of period .............................................. 5,403,731 2,266,327
----------- ----------
Cash at end of period .................................................... $ 4,890,771 $2,801,535
=========== ==========
Supplemental disclosure
Cash paid for interest ................................................... $ 3,131,672 $3,159,625
=========== ==========
Cash paid for income taxes ............................................... $ - $ -
=========== ==========
See notes to consolidated financial statements.
30
Communications Central Inc.
Notes to Consolidated Financial Statements (Unaudited)
December 31, 1997
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
These financial statements should be read in conjunction with the Company's
audited financial statements included in the Company's Annual Report on Form 10-
K filed with the Securities and Exchange Commission for the fiscal year ended
June 30, 1997. Operating results for the six-month period ended December 31,
1997 are not necessarily indicative of the results that may be expected in
future periods.
2. Sale of Inmate Assets
Pursuant to an August 21, 1997 Asset Purchase Agreement between the Company
and Talton Holdings, Inc. ("Talton"), the Company agreed to sell certain assets
of its inmate operations to Talton for approximately $42 million. The sale was
consummated as of October 1, 1997, and approximately $34 million of the proceeds
were used to reduce the Company's bank debt.
3. Provision for Dial-Around Compensation
On September 20, 1996, the Federal Communications Commission ("FCC")
adopted rules in a docket entitled In the Matter of Implementation of the Pay
Telephone Reclassification and Compensation Provisions of the Telecommunications
Act of 1996, FCC 96-388 (the "1996 Payphone Order"), implementing the payphone
provisions of Section 276 of the Telecommunications Act of 1996 ("Telecom Act").
The 1996 Payphone Order, which became effective November 7, 1996, initially
mandated dial-around compensation for both access code calls and subscriber 800
calls at a flat rate of $45.85 per payphone per month (131 calls multiplied by
$0.35 per call). Commencing October 7, 1997 and ending October 6, 1998 the
$45.85 per payphone per month rate was to transition to a per-call system at the
rate of $0.35 per call. Several parties filed petitions for judicial review of
certain of the FCC regulations including the dial-around compensation rate. On
July 1, 1997, the U.S. Court of Appeals for the District of Columbia Circuit
(the "Court") responded to appeals related to the 1996 Payphone Order
31
by remanding certain issues to the FCC for reconsideration. These issues
included, among other things, the manner in which the FCC established the dial-
around compensation for subscriber 800 and access code calls, the manner in
which the FCC established the interim dial-around compensation plan and the
basis upon which interexchange carriers ("IXCs") would be required to compensate
payphone service providers ("PSPs"). The Court remanded the issue to the FCC for
further consideration, and clarified on September 16, 1997 that it had vacated
certain portions of the FCC's 1996 Payphone Order, including the dial-around
compensation rate. Specifically, the Court determined that the FCC did not
adequately justify (i) the per-call compensation rate for subscriber 800 and
access code calls at the deregulated local coin rate of $0.35, because it did
not sufficiently justify its conclusion that the costs of local coin calls are
similar to those of subscriber 800 and access code calls; and (ii) the
allocation of the payment obligation among the IXCs for the period from November
7, 1996 through October 6, 1997.
In accordance with the Court's mandate, on October 9, 1997 the FCC adopted
and released its Second Report and Order in the same docket, FCC 97-371 (the
"1997 Payphone Order"). This order addressed the per-call compensation rate for
subscriber 800 and access code calls that originate from payphones in light of
the decision of the Court which vacated and remanded certain portions of the
FCC's 1996 Payphone Order. The FCC concluded that the rate for per-call
compensation for subscriber 800 and access code calls from payphones is the
deregulated local coin rate adjusted for certain cost differences. Accordingly,
the FCC established a rate of $0.284 ($0.350 minus $0.066) per call for the
first two years of per-call compensation (October 7, 1997 through October 6,
1999). The IXCs are required to pay this per-call amount to PSPs, including the
Company, beginning October 7, 1997. After the first two years of per-call
compensation, the market-based local coin rate, adjusted for certain costs
defined by the FCC as $0.066 per call, is the surrogate for the per-call rate
for subscriber 800 and access code calls. These new rule provisions were made
effective as of October 7, 1997.
In addition, the 1997 Payphone Order tentatively concluded that the same
$0.284 per call rate adopted on a going-forward basis should also govern
compensation obligations during the period from November 7, 1996 through October
6, 1997, and that PSPs are entitled to compensation for all access code and
subscriber 800 calls during this period. The FCC stated that the manner in which
the payment obligation of the IXCs for the period from November 7, 1996 through
October 6, 1997 will be allocated among the IXCs will be addressed in a
subsequent order.
Based on the FCC's tentative conclusion in the 1997 Payphone Order, the
Company has adjusted the amounts of dial-around compensation previously recorded
related to the period from November 7, 1996 through June 30, 1997 from the
initial $45.85 rate to $37.20 ($0.284 per call multiplied by 131 calls). As a
result of this adjustment, the provision, net of applicable commissions,
recorded in the quarter ended September 30, 1997 for reduced dial-around
compensation is approximately $1,162,510 ($.18 per share). For the period from
October 1, 1997 through December 31, 1997, the Company has recorded dial-around
compensation at the rate of $37.20 per payphone per month. The amount of dial-
around revenue recognized in the period from July 1, 1997 through October 6,
1997 is $2,221,302 and such amount will be billed after final resolution of the
allocation obligations of the IXCs as determined by the FCC.
The Company's outside federal regulatory counsel, Dickstein, Shapiro, Morin
& Oshinsky LLP, is of the opinion that the Company is legally entitled to fair
compensation under the Telecom Act for dial-around calls the Company delivered
to any carrier during the period from November 7, 1996 through October 6, 1997.
Based on the information available, the Company believes that the minimum amount
it is entitled to as fair compensation under the Telecom Act for the period from
November 7, 1996 through October 6, 1997 is $37.20
32
per payphone per month and the Company, based on the information available to
it, does not believe that it is reasonably possible that the amount will be
materially less than $37.20 per payphone per month. While the amount of $0.284
per call constitutes the Company's position of the appropriate level of fair
compensation, certain IXCs have asserted in the past, are asserting and are
expected to assert in the future that the appropriate level of fair compensation
should be lower than $0.284 per call.
33
(b) Pro Forma Financial Information.
The following unaudited, pro forma consolidated financial statements of the
Company are filed with this report:
(i) Pro Forma Condensed Consolidated Balance Sheets as of December 31,
1997
(ii) Notes to the Unaudited Pro Forma Condensed Consolidated Balance
Sheets
(iii) Pro Forma Consolidated Statements of Income for the year ended
December 31, 1997
(iv) Notes to the Unaudited Pro Forma Consolidated Statements of Income
These statements should be read in conjunction with the historical financial
statements and accompanying notes of the Company and CCI, as previously filed.
34
DAVEL COMMUNICATIONS GROUP, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997
(Unaudited)
(In thousands, except per share data)
ASSETS
------
Davel CCI Pro Forma Combined
Historical Historical Adjustments Pro Forma
---------- ---------- ----------- ---------
CURRENT ASSETS:
Cash and cash equivalents $ 2,567 $ 4,891 $ - $ 7,458
Trade accounts receivable, net 9,105 8,568 - 17,673
Note receivable 2,536 - - 2,536
Other current assets 702 4,963 - 5,665
-------- -------- -------- --------
Total current assets 14,910 18,422 - 33,332
PROPERTY AND EQUIPMENT, NET 36,738 31,280 17,298 (1) 85,316
OTHER ASSETS 1,310 14,910 48,677 (2) 64,897
-------- -------- -------- --------
Total assets $ 52,958 $ 64,612 $ 65,975 $183,545
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,501 $ 36,400 $(27,901)(3) $ 10,000
Accounts payable 1,257 4,415 - 5,672
Accrued liabilities 1,832 6,243 2,329 (4) 10,404
-------- -------- -------- --------
Total current liabilities 4,590 47,058 (25,572) 26,076
LONG-TERM DEBT 6,801 - 102,815 (5) 109,616
DEFERRED INCOME TAXES 3,597 - 6,286 (6) 9,883
SHAREHOLDERS' EQUITY 37,970 17,554 (17,554)(7) 37,970
-------- -------- -------- --------
Total liabilities and shareholders' equity $ 52,958 $ 64,612 $ 65,975 $183,545
======== ======== ======== ========
See accompanying Notes to the Pro Forma Balance Sheet
35
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
The purchase price for the CCI Acquisition was allocated as follows:
Working capital $ 8,008
Property and equipment, net 48,578
Goodwill 43,345
Identifiable intangible assets 11,583
--------
Total purchase price $111,514
========
(1) Represents adjustment to fair market value of property and equipment
acquired in the CCI Acquisition.
(2) Represents intangible assets and goodwill acquired in the CCI Acquisition.
Site license agreements are being amortized on a straight-line basis over
the estimated useful lives of 7.5 years. Goodwill is being amortized on a
straight-line basis over 15 years.
(3) Represents adjustment to reflect repayment of CCI indebtedness net of
current maturities under the $125,000 credit agreement entered into by the
Company in connection with the CCI Acquisition.
(4) Reflects liabilities assumed in the CCI Acquisition net of the payment of
accrued interest in connection with the repayment of CCI's indebtedness.
(5) Reflects increase in long-term debt related to credit agreement entered
into by the Company in connection with the CCI Acquisition. On February 3,
1998, the Company borrowed $120,000 under the $125,000 credit agreement in
order to finance the CCI Acquisition.
(6) Reflects deferred income tax assets and liabilities established as a result
of the above adjustments.
(7) Reflects elimination of CCI shareholders' equity.
36
DAVEL COMMUNICATIONS GROUP, INC.
PRO FORMA STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(Unaudited)
(In thousands, except per share data)
Davel CCI Pro Forma Combined
Historical Historical Adjustments Pro Forma
----------- ---------- ----------- ----------
REVENUES:
Coin calls 25,211 32,902 - 58,113
Non-coin calls 22,955 20,085 - 43,040
Other - 4,085 - 4,085
----------- ---------- ----------- ----------
Total 48,166 57,072 - 105,238
COSTS AND EXPENSES:
Telephone charges 9,576 13,305 - 22,881
Commissions 6,202 8,977 - 15,179
Service, maintenance and network costs 10,685 14,427 - 25,112
Selling, general and administrative 15,004 20,380 2,271 (1) 37,655
----------- ---------- ----------- ----------
Total 41,467 57,089 2,271 100,827
----------- ---------- ----------- ----------
Operating profit 6,699 (17) (2,271) 4,411
INTEREST EXPENSE (475) (3,983) (5,497)(2) (9,955)
OTHER 497 5,531 - 6,028
----------- ---------- ----------- ----------
Income from continuing operations
before income taxes 6,721 1,531 (7,768) 484
PROVISION FOR INCOME TAXES 2,459 - (1,706)(3) 753
----------- ---------- ----------- ----------
Net income (loss) from
continuing operations 4,262 1,531 (6,062) (269)
=========== ========== =========== ==========
Basic net income (loss) per share $ 0.93 $ (0.06)
=========== ==========
Diluted earnings per share $ 0.90 $ (0.06)
=========== ==========
Weighted average shares outstanding 4,600,725 4,600,725
=========== ==========
See accompanying Notes to Pro Forma Statements of Income
37
NOTES TO PRO FORMA STATEMENTS OF INCOME
(In Thousands)
(1) Reflects additional depreciation and amortization expense related to the
CCI Acquisition.
(2) Reflects additional interest expense related to the incurrence of $120,000
in long-term debt under the $125,000 credit agreement related to the CCI
Acquisition.
(3) Reflects income tax effect of the pro forma adjustments described above.
38
(c) Exhibits
None.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DAVEL COMMUNICATIONS GROUP, INC.
Date: April 21, 1998 By: /s/ Michael E. Hayes
------------------------------
Michael E. Hayes
Senior Vice President and
Chief Financial Officer
40