SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
(Mark One) [X] Quarterly report pursuant to sections 13 of 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2001
OR
[] Transition report pursuant to sections 13 of 15(d) of the Securities Exchange
Act of 1934 For the transition period from _________ to ___________
Commission file number 333-33639
EVERCOM, INC.
(Exact name of Registrant as specified in its charter)
Delaware 75-2680266
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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8201 Tristar Drive
Irving, Texas 75063
(972) 988-3737
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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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 [ ] No [X]
As of March 31, 2001, 16,033 shares of Class A common stock, par value
$0.01 per share, and 400 shares of Class B common stock, par value $0.01 per
share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Exhibits to the following documents filed with the Securities and Exchange
Commission have been incorporated by reference in Part II of this Quarterly
Report on Form 10-Q:
1. Registration Statement on Form S-4 (File No. 333-33639);
2. Quarterly Report on Form 10-Q, dated as of August 14, 1998; and
3. Quarterly Report on Form 10-Q, dated as of May 12, 1999.
EVERCOM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.............................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk....... 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................. 21
Item 2. Changes in Securities and Use of Proceeds......... 21
Item 3. Defaults Upon Senior Securities................... 21
Item 4. Submission of Matters to a Vote of Stockholders... 21
Item 5. Other Information................................. 21
Item 6. Exhibits and Reports on Form 8-K.................. 22
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EVERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2000 2001
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $4,195,034 $6,349,804
Accounts receivable, net 38,302,469 40,179,249
Refundable income taxes 258,993 258,164
Inventories 4,167,609 4,465,253
Prepaid expenses and other current assets 668,623 850,130
Deferred income tax asset 1,802,826 1,798,092
------------ ------------
Total current assets 49,395,554 53,900,692
PROPERTY AND EQUIPMENT, Net 27,069,245 26,270,774
INTANGIBLE AND OTHER ASSETS, Net 85,991,382 83,724,290
------------ ------------
TOTAL $162,456,181 $163,895,756
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $21,122,288 $21,531,746
Income taxes payable 500,000 440,997
Accrued expenses 20,430,296 21,517,439
Current portion of long-term debt 13,776,766 13,760,853
------------ ------------
Total current liabilities 55,829,350 57,251,035
LONG-TERM DEBT 152,750,000 152,312,500
OTHER LONG-TERM LIABLITIES 100,000 33,334
DEFERRED INCOME TAXES 1,802,826 1,798,092
COMMITMENTS AND CONTINGENCIES (SEE NOTES)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, Senior and First Preferred Series A, $.01 par value;
6,000 and 5,000 shares authorized, 5,925 and 5,000 shares issued
and outstanding, respectively (cumulative liquidation value of
$5,925,000 and $5,000,000 respectively) as of December 31, 2000
and March 31, 2001. 109 109
Common stock, $.01 par value; 50,000 shares authorized, 16,433 shares
issued and outstanding as of December 31, 2000 and March
31, 2001, respectively 164 164
Additional paid-in capital 25,206,414 24,987,914
Accumulated deficit (73,232,682) (72,487,392)
------------ ------------
Total stockholders' equity (deficit) (48,025,995) (47,499,205)
------------ ------------
TOTAL $162,456,181 $163,895,756
============ ============
See notes to consolidated financial statements.
EVERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Month
Period Ended
March 31,
2000 2001
------------ ------------
OPERATING REVENUE $59,385,419 $61,038,423
OPERATING EXPENSES:
Telecommunication costs 24,707,083 23,122,940
Facility commissions 18,777,906 19,637,137
Field operations and maintenance 1,731,145 1,827,166
Selling, general and administrative 4,383,422 4,814,684
Cost of equipment sales 113,573 1,008,913
Depreciation 1,966,394 2,047,224
Amortization of intangibles 4,473,958 2,928,705
------------ ------------
Total operating expense 56,153,481 55,386,769
------------ ------------
OPERATING INCOME 3,231,938 5,651,654
INTEREST EXPENSE, Net 4,897,288 4,758,201
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (1,665,350) 893,453
INCOME TAX EXPENSE 21,260 148,163
------------ ------------
NET INCOME (LOSS) ($1,686,610) $745,290
PREFERRED STOCK DIVIDENDS AND ACCRETION OF DISCOUNT 367,654 373,533
------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK ($2,054,264) $371,757
============ ============
See notes to consolidated financial statements.
EVERCOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months
Period Ended
March 31,
2000 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) ($1,686,610) $745,290
Adjustments to reconcile net income (loss) to net cash provided by
operating activities
Depreciation 1,966,394 2,047,224
Amortization of intangible assets, including deferred financing
costs and bond discount 4,736,349 3,234,821
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable (4,107,893) (2,130,354)
Inventories 91,823 (297,644)
Prepaid expenses and other assets (238,337) (379,936)
Accounts payable 3,583,532 681,782
Accrued expenses 1,209,078 1,308,165
Income taxes 137,498 (58,174)
----------- -----------
Net cash provided by operating activities 5,691,834 5,151,174
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,632,269) (2,318,053)
Cash outflows for acquisitions (372,244) (224,938)
----------- -----------
Net cash used in investing activities (3,004,513) (2,542,991)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of debt 3,000,000
Repayment of debt (4,108,012) (3,453,413)
----------- -----------
Net cash used in financing activities (4,108,012) (453,413)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,420,691) 2,154,770
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,987,732 4,195,034
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $567,041 $6,349,804
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $1,446,236 $1,596,614
=========== ===========
Cash paid for income taxes $116,235 $206,337
=========== ===========
NONCASH TRANSACTIONS:
Dividends payable $218,500 $218,500
=========== ===========
See notes to consolidated financial statements.
EVERCOM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of March 31, 2001 and for the
three-month periods ended March 31, 2000 and 2001 of Evercom, Inc. and its
subsidiaries (the "Company") have been prepared by the Company without audit.
In the opinion of management, all necessary adjustments (which include only
normal recurring adjustments) to present fairly, in all material respects, the
consolidated financial position, results of operations, and cash flows as of and
for the respective periods, have been made. Certain information and footnote
disclosures normally included in annual consolidated financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. These financial statements should be read in conjunction with the
Company's 2000 consolidated financial statements contained in its Form 10-K as
filed with the Securities and Exchange Commission on June 1, 2001.
Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," became effective as of the first quarter of 1999. This
statement requires companies to report and display comprehensive income and its
components (revenues, expenses, gains, and losses). Comprehensive income
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. For the Company,
comprehensive income is the same as net loss reported in the statements of
consolidated operations, since there were no other items of comprehensive income
for the periods presented.
Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires recognition of all derivative financial instruments as either assets or
liabilities in consolidated balance sheets at fair value and determines the
method(s) of gain/loss recognition. SFAS No. 133 is effective for fiscal years
beginning after January 1, 2001. The Company adopted SFAS No. 133 effective
January 1, 2001. The adoption of SFAS 133 did not have a material effect on the
company's financial position or results of operations.
Reclassification
Certain reclassifications have been made in the three months ended March
31, 2000 consolidated financial statements to conform to the classifications
used in the three months ended March 31, 2001.
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
December 31, March 31,
2000 2001
----------- -----------
(Unaudited)
Trade accounts receivable, net of advance payments received of $289,385
and $0 at December 31, 2000, and March 31, 2001, respectively $41,028,861 $41,692,423
Advance commissions receivable 1,654,595 1,714,833
Recoverable Universal Service Fund fees 235,817 192,969
Employees and other 453,704 192,121
----------- -----------
43,372,977 43,792,346
Less allowance for unbillable and uncollectible chargebacks (5,070,508) (3,613,097)
----------- -----------
$38,302,469 $40,179,249
=========== ===========
At December 31, 2000 and March 31, 2001, the Company had advanced
commissions to certain inmate facilities of $1,758,299 and $1,987,651
(unaudited), which are recoverable from such facilities as a reduction of earned
commissions at specified monthly amounts. Amounts included in accounts
receivable represent the estimated recoverable amounts during the next fiscal
year with the remaining balance recorded in other assets.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31, March 31,
2000 2001
----------- -----------
(Unaudited)
Leasehold improvements $944,292 $951,211
Telephone system equipment 46,285,050 47,521,892
Vehicles 430,548 430,548
Office equipment 2,727,911 2,732,903
----------- -----------
50,387,801 51,636,554
Less accumulated depreciation (23,318,556) (25,365,780)
----------- -----------
$27,069,245 $26,270,774
=========== ===========
4. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following:
December 31, March 31,
2000 2001
----------- -----------
(Unaudited)
Intangible assets:
Acquired telephone contracts $71,566,718 $72,336,018
Noncompete agreements 568,611 568,611
Deferred loan costs 9,042,247 9,042,247
Goodwill 84,730,834 84,730,834
Other intangibles 783,096 783,096
----------- -----------
166,691,506 167,460,806
Less accumulated amortization (81,221,978) (84,456,799)
----------- -----------
Total intangible assets 85,469,528 83,004,007
Deposits and other 418,150 447,465
Noncurrent portion of commission advances to facilities 103,704 272,818
----------- -----------
$85,991,382 $83,724,290
=========== ===========
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31, March 31,
2000 2001
----------- -----------
(Unaudited)
Facility commission $8,204,779 $7,586,889
Billing and collection fees 1,988,157 2,429,976
Accrued acquisition and financing costs 578,081 438,559
Accrued interest 541,530 3,397,001
Accrued excise taxes payable 1,958,017 1,941,152
Accrued dividends on preferred stock 2,142,434 2,360,934
Accrued payroll and bonuses 812,898 1,409,588
Accrued payable to joint venture partner 1,136,916 526,017
Deferred revenue 1,076,425
Other 1,991,059 1,427,323
----------- -----------
$20,430,296 $21,517,439
=========== ===========
6. LONG-TERM DEBT
The following is a summary of long-term debt:
December 31, March 31,
2000 2001
----------- -----------
(Unaudited)
Senior Notes $115,000,000 $115,000,000
Senior Credit Facility:
Revolving loan facility 13,500,000 16,500,000
Term loan acquisition facility 27,500,000 24,062,500
Additional term loan facility 5,500,000 5,500,000
Second additional term loan facility 5,000,000 5,000,000
Other 26,766 10,853
------------ ------------
166,526,766 166,073,353
Less current portion of long-term debt (13,776,766) (13,760,853)
------------ ------------
$152,750,000 $152,312,500
============ ============
Under the terms of the Senior Credit Facility, the term loan acquisition
facility is due in quarterly installments of $3,437,500 with all remaining
unpaid balances under the Senior Credit Facility due on December 31, 2002. Both
the revolving and the term loan facilities are collateralized by substantially
all of the assets of the company.
On June 30, 1998, the Company entered into an interest rate cap agreement
that has been designated as a hedge against the Company's variable interest rate
exposure under the Company's revolving and term loan agreement (the "Senior
Credit Facility"). At March 31, 2001, the interest rate cap has an aggregate
notional amount of $30.0 million, which matures in June 2001, and caps interest
on the London Interbank Offering Rate ("LIBOR") portion of the term loan, up to
the aggregate notional amount, at 7.5%, plus the applicable LIBOR margin.
7. SUBSEQUENT EVENTS
Acquisition
On May 30, 2001, the Company acquired all of the capital stock of
FortuneLinx, Inc., for shares of the Company's Class "A" Common stock equal to
approximately 6% of the Company's Common Stock on a fully diluted basis. Of the
6%, 3% was issued on May 30, 2001, and the remaining 3% will be issued twelve
months after the effective date of the acquisition if certain financial
performance objectives are achieved. Additionally, options were issued to the
sellers allowing them to purchase up to 1% of the Company's Class "A" Common
Stock on a fully diluted basis at an exercise price of $2,000 per share. In
conjunction with the closing, a note payable to a FortuneLinx shareholder in the
principal amount of $0.8 million was repaid plus accrued interest.
Equity Offering and Senior Credit Facility Amendment
On April 10, 2001, the Company's Board of Directors approved a plan to
offer to sell 12,000 shares of the Company's Class "A" Common stock for $750 per
share to the Company's existing
shareholders. The Company received $9 million of proceeds from this offering on
June 4, 2001. As part of this offer each subscribing shareholder received their
pro-rata share of warrants equal to 4.5% of the Company's fully diluted common
stock. The warrants expire on May 30, 2007 and are convertible to the Company's
Class "A" Common Stock at $750 per share.
On May 30, 2001, and in conjunction with the commitment from its existing
shareholders and other investors to purchase 12,000 shares of the Company's
Common stock for $750 per share, the Company and its Senior Credit Facility
lenders amended the Company's Senior Credit Facility. The amendment changed the
requirements and definitions of certain financial covenants through December 31,
2001 and increased the Company's ability to enter into capital lease
arrangements from $2.5 million to $5 million. Additionally, the amendment waived
the Senior Credit Facility Lender's rights to the proceeds from the May 30, 2001
issuance of common stock and waived all outstanding defaults under the Senior
Credit Facility. An amendment fee equal to 0.75% of outstanding commitments, or
$0.4 million, was paid to the Senior Credit Facility lenders to effect this
amendment. Additionally, the amendment increased all interest rates under the
Senior Credit Facility by 0.5% (50 basis points).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the financial
statements and the notes thereto contained elsewhere in this report. Certain
information contained in the discussion and analysis set forth below includes
forward-looking statements that involve risks and uncertainties. See "Special
Note regarding Forward-Looking Information".
Overview
The Company is an independent provider of collect and prepaid calling
services to local, county, state, and private correctional facilities in the
U.S. The Company derives substantially all of its revenues from its operation of
inmate telecommunications systems located in correctional facilities in 43
states and the District of Columbia.
The Company's inmate telecommunications services consist of collect and
prepaid calling services. The Company enters into multi-year agreements
(generally three to five years) with the correctional facilities, pursuant to
which the Company serves as the exclusive provider of telecommunications
services to inmates within each facility. In exchange for the exclusive service
rights, the Company pays a percentage of its revenue from each correctional
facility as a commission to that facility. Typically, the Company installs and
retains ownership of the telephones and related equipment and provides
additional services to correctional facilities that are tailored to the
specialized needs of the corrections industry and to the requirements of the
individual correctional facility, such as call activity reporting and call
blocking. The Company also generates revenues from public pay telephones that
are ancillary to its inmate telephone business.
The Company accumulates call activity data from its various installations
and bills its revenues related to this call activity through local exchange
carriers ("LECs") or through third-party billing services. In addition, the
Company accrues the related telecommunications costs for validating,
transmitting, billing and collection, and allowances for uncollectible accounts
based on historical experience.
The Company's traditional inmate business consists of collect and prepaid
services provided to correctional facilities. The Company also provides its
Solutions services, representing validation, fraud management and billing
services, to third parties. The Company provides Solutions services for the
inmate calls of a major RBOC. Under the terms of the agreement, the Company
acquires at a discount the related accounts receivable from the RBOC for the
calls that the Company processes. When the receivables are purchased, the
Company accepts responsibility for all validation, uncollectible accounts, and
billing and collections costs, with no recourse to the RBOC. However, under the
terms of the agreement, all purchased receivables must be processed and
validated through the Company's call management and billing system. The
Company's revenues from this service equal the difference between the face value
of the receivables purchased and the amount it pays the RBOC for the discounted
accounts receivable. Because the Company's revenues associated with this
contract represent only a percentage of the face value of the receivables
purchased, the associated uncollectible account expense and billing and
collection fees represent a much higher percentage of revenue as compared to the
Company's traditional inmate business. Consequently, the Company's
telecommunications costs
represent a higher percentage of revenue under this contract. There are minimal
selling, general, and administrative ("SG&A") costs associated with this
contract. The contract term is through January 31, 2003, and has no minimum
volume commitment. The Company pays no facility commissions under this
agreement. In February 2001, the RBOC notified the Company of its plans to exit
the inmate market by the end of 2002 and consequently, the Company expects its
revenues to gradually decline from this contract over the next two years. The
Company believes it is reasonable to expect that some portion of this RBOC's
customers will be converted to Evercom's traditional inmate business. The
Company also provides Solutions services to other inmate telecommunications
companies.
The Company's principal operating expenses consist of (i) telecommunication
costs; (ii) commissions paid to correctional facilities, which are typically
expressed as a percentage of either gross or net revenues, fixed for the term of
the agreements with the facilities, and in some cases are subject to monthly
minimum amounts; (iii) field operations and maintenance costs, which consist
primarily of field service on the Company's installed base of inmate telephones;
and (iv) SG&A costs.
Telecommunications Costs. The principal components of telecommunication
costs are long distance transmission costs, local access costs, third party
billing costs, and costs of uncollectible accounts. Historically, long distance
costs have consisted of charges for minutes of use purchased from interexchange
carriers ("IXCs"). The Company has also entered into agreements to lease lines
connecting urban areas and correctional facilities. Local access charges consist
of monthly line and usage charges paid to RBOCs and other LECs for
interconnection to the local network for local calls, which are computed on a
flat monthly charge plus, for certain LECs, and on a per message or per minute
usage rate based on the time and duration of the call. Third party billing
charges consist of payments to LECs and other billing service providers for
billing and collecting revenues from called parties. Expenses associated with
uncollectible accounts are a significant cost in providing inmate
telecommunications services.
Commissions. The Company pays a percentage of its revenue from each
facility to that facility as a commission. Commissions are generally set for the
duration of the Company's multi-year contract with the facility. Commission
rates are the principal basis of competition for obtaining and retaining
contracts. The Company's ability to offer increasingly attractive commission
rates to facilities depends on its ability to control its operating expenses.
Generally, contracts for larger facilities have higher commission rates, but
these higher commission rates are typically offset by lower network charges,
field maintenance, and SG&A expenses as a percentage of revenue. The commission
rates paid by the Company in its traditional inmate business have increased in
each period, from 35.8% in 2000 to 37.0% for the quarter ended March 31, 2001.
This increase is due primarily to higher facility commissions on renewals and
new business. Commission rates are expected to gradually increase as a
percentage of revenues in the future. The overall commission percentage to total
revenues of 32.2% for the quarter ended March 31, 2001 includes the effect of
the billing and collection services provided under the Company's agreement with
a major RBOC, under which no commissions are paid.
Field Operations and Maintenance. Field operations and maintenance consist
of maintenance costs associated with inmate phones and related equipment. These
costs are relatively small and more constant components of operating expenses.
Selling, General, and Administrative. SG&A expenses consist of corporate
overhead and selling expenses. These costs are also relatively small and more
constant components of operating expenses.
Results of Operations
The following table sets forth, for the three months ended March 31, 2000
and 2001, respectively, the results of operations of the Company.
Three Month
Period Ended
March 31,
2000 2001
----------------------------- -----------------------------
(Dollars in thousands)
Operating revenues $59,385 100.0% $61,038 100.0%
Operating expenses:
Telecommunication costs 24,707 41.6% 23,123 37.9%
Facility commissions 18,778 31.6% 19,637 32.2%
Field operations and maintenance 1,731 2.9% 1,827 3.0%
Selling, general and administrative 4,384 7.4% 4,815 7.9%
Cost of equipment sales 113 0.2% 1,009 1.6%
Depreciation 1,966 3.3% 2,047 3.3%
Amortization of intangibles 4,474 7.5% 2,929 4.8%
------- ------- ------- -------
Total operating expenses 56,153 94.5% 55,387 90.7%
------- ------- ------- -------
Operating income 3,232 5.5% 5,651 9.3%
Interest expense, net 4,897 8.3% 4,758 7.8%
------- ------- ------- -------
Income (loss) before income taxes (1,665) -2.8% 893 1.5%
Income tax expense 21 148 0.3%
------- ------- ------- -------
Net Income (Loss) (1,686) -2.8% 745 1.2%
======= ======= ======= =======
EBITDA $9,672 16.3% $10,627 17.4%
======= ======= ======= =======
Three Months Ended March 31, 2001 Compared to Three Months ended March 31,
2000
Operating Revenues. The Company's operating revenues increased by $1.6
million, or 3.0%, from $59.4 million for the three months ended March 31, 2000
to $61.0 million for the three months ended March 31, 2001. The increase in
operating revenues was primarily due to increased sales of software and
equipment. Operating revenues from the Company's traditional inmate business and
Solutions business were consistent for each of the three months ended March 31,
2000 and 2001.
Operating Expenses. Total operating expenses decreased $0.7 million, from
$56.1 million for the three months ended March 31, 2000 to $55.4 million for the
three months ended March 31, 2001. Operating expenses as a percentage of
operating revenues decreased 3.8% from 94.5% for the three months ended March
31, 2000 to 90.7% for the three months ended March 31, 2001. The decrease in
operating expenses as a percentage of revenues is primarily due to the factors
discussed below.
Telecommunication costs decreased by $1.6 million, from $24.7 million for
the three months ended March 31, 2000 to $23.1 million for the three months
ended March 31, 2001. Telecommunication costs represented 41.6% of operating
revenues for the three months ended March 31, 2000 and 37.9% of operating
revenues for the three months ended March 31, 2001, a decrease of 3.7%. The
percentage decrease, after considering the effect on revenue of the increased
equipment and software sales during the three months ended March 31, 2001, is
primarily due to savings generated from new long distance contracts.
Facility commissions increased by $0.8 million, from $18.8 million for the
three months ended March 31, 2000 to $19.6 million for the three months ended
March 31, 2001. Facility commissions represented 31.6% of operating revenues for
the three months ended March 31, 2000 and 32.2% of operating revenues for the
three months ended March 31, 2001, an increase of 0.4%. Commission expense as a
percentage of revenue for the Company's traditional inmate business increased
from 35.8% in the first quarter of 2000 to 37.0% in the first quarter of 2001.
This increase is due to competition for new business and increased commission
rates on renewals. Commission rates are expected to gradually increase in the
future.
Field operations and maintenance costs increased by $0.1 million, from $1.7
million for the three months ended March 31, 2000 to $1.8 million for the three
months ended March 31, 2001. Field operations and maintenance costs represented
2.9% of operating revenues for the three months ended March 31, 2000 and 3.0% of
operating revenues for the three months ended March 31, 2001, an increase of
0.1%. This increase is primarily due to higher field equipment replacements
during the three months ended March 31, 2001.
Cost of equipment sales increased by $0.9 million, from $0.1 million for
the three months ended March 31, 2000 to $1.0 million for the three months ended
March 31, 2001 due to increased sales of equipment.
SG&A costs increased by $0.4 million, from $4.4 million for the three
months ended March 31, 2000 to $4.8 million for the three months ended March 31,
2001. SG&A represented 7.4% of operating revenues for the three months ended
March 31, 2000 and 7.9% of operating revenues for the three months ended March
31, 2001, an increase of 0.5%. The increase is primarily due to increased
staffing to support enhancements to the Company's information systems and to
execute new sales initiatives.
Depreciation and amortization costs decreased by $1.4 million, from $6.4
million for the three months ended March 31, 2000 to $5.0 million for the three
months ended March 31, 2001. Depreciation and amortization costs represented
10.8% of operating revenues for the three months ended March 31, 2000 and 8.1%
of operating revenues for the three months ended March 31, 2001, a decrease of
2.7%. The decrease as a percentage of operating revenues is primarily due to
amortization expense associated with the acquisitions of inmate facility
contracts by the Company. The Company amortizes acquired inmate facility
contracts over each contract's remaining term at the acquisition date. As the
contract terms expire, the acquired inmate facility contracts become fully
amortized and amortization expense declines.
Operating Income. The Company's operating income increased by $2.4 million,
from $3.2 million for the three months ended March 31, 2000 to $5.6 million for
the three months ended March 31, 2001, substantially due to the factors
described above. The Company's operating income margin increased from 5.5% for
the three months ended March 31, 2000 to 9.3% for the three months ended March
31, 2001, primarily as a result of the factors described above.
Interest Expense, Net. Interest expense, net, consisting of interest
expense offset by interest income, decreased by $0.1 million from $4.9 million
for the three months ended March 31, 2000 to $4.8 million for the three months
ended March 31, 2001.
Net Income (Loss). The Company's net income (loss) increased by $2.4
million, from a net loss of $1.7 million for the three months ended March 31,
2000 to net income of $0.7 million for the three months ended March 31, 2001,
primarily as a result of the factors described above.
EBITDA. Earnings before interest, income taxes, depreciation, and
amortization ("EBITDA") increased by $0.9 million from $9.7 million for the
three months ended March 31, 2000 to $10.6 million for the three months ended
March 31, 2001, representing a 9.3% increase. EBITDA as a percentage of
operating revenues increased from 16.3% for the three months ended March 31,
2000 to 17.4% for the three months ended March 31, 2001, primarily due to the
factors described above. Although EBITDA is not a measure of performance
calculated in accordance with generally accepted accounting principles, the
Company has included information concerning EBITDA in this Form 10-Q because it
is commonly used by certain investors and analysts as a measure of a company's
ability to service its debt obligations and is a component of the Company's debt
compliance ratios. EBITDA should not be used as an alternative to, or be
considered more meaningful than, operating income, net income, or cash flows as
an indicator of the Company's operating income. Several of the Company's
subsidiaries are subject to state income taxes. Consequently, the Company
accrues income tax expense even in a loss period.
Liquidity and Capital Resources
The Company anticipates that its principal uses of liquidity will be to
provide working capital, meet debt service requirements, and to repay principal
under the Senior Credit Facility (as defined). Regarding working capital, the
Company received notice that one of its billing agents intends to begin
remitting funds to the Company in 44 days as compared to their historical 30 day
payment schedule. This change would reduce the Company's end of month liquidity
by approximately $8 million. The billing agent has informally and tentatively
agreed not to make this change until, at the earliest, December of 2001. The
Company expects that its principal sources of funds will be cash flow from
operations, proceeds from the new equity issued on May 30, 2001, as further
discussed herein, and borrowings under the Senior Credit Facility. The Company
anticipates that its primary capital expenditures will be for capital items
required to implement new contracts entered into by the Company, although the
Company does not have any material commitments for capital expenditures.
Management believes that cash flow from operations, borrowings on the Senior
Credit Facility and proceeds from the new equity issued on May 30, 2001 will be
sufficient to fund the requirements of the Company for at least the next twelve
months.
On May 30, 2001, the Company acquired all of the capital stock of
FortuneLinx, Inc. for shares of the Company's Class "A" Common stock equal to
approximately 6% of the Company's Common Stock on a fully diluted basis. Of the
6%, 3% was issued on May 30, 2001, and the remaining 3% will be issued twelve
months after the effective date of the acquisition if certain financial
performance objectives are achieved. Additionally, options were issued to the
sellers allowing them to purchase up to 1% of the Company's Class "A" Common
Stock on a fully diluted basis at an exercise price of $2,000 per share. In
conjunction with the closing, a note payable to a FortuneLinx shareholder in the
principal amount of $0.8 million was repaid plus accrued interest.
Equity Offering and Senior Credit Facility Amendment
On April 10, 2001, the Company's Board of Directors approved a plan to
offer to sell 12,000 shares of the Company's Class "A" Common stock for $750 per
share to the Company's existing shareholders. The Company received $9 million of
proceeds from the issuance of this new equity on June 4, 2001. As part of this
offer each subscribing shareholder received their pro-rata share of warrants
equal to 4.5% of the Company's fully diluted common stock. The warrants expire
on May 30, 2007 and are convertible to the Company's Class "A" Common Stock at
$750 per share.
On May 30, 2001, and in conjunction with the commitment from its existing
shareholders and other investors to purchase 12,000 shares of the Company's
Common stock for $750 per share, the Company and its Senior Credit Facility
lenders amended the Company's Senior Credit Facility. The amendment changed the
requirements and definitions of certain financial covenants through December
31, 2001 and increased the Company's ability to enter into capital lease
arrangements from $2.5 million to $5 million. Additionally, the amendment waived
the Senior Credit Facility Lender's rights to the proceeds from the May 30, 2001
issuance of common stock and waived all outstanding defaults under the Senior
Credit Facility. An amendment fee equal to 0.75% of outstanding commitments, or
$0.4 million, was paid to the Senior Credit Facility lenders to effect this
amendment. Additionally, the amendment increased all interest rates under the
Senior Credit Facility by 0.5% (50 basis points).
In March 1999, the Company raised $5 million of equity from its existing
shareholders and warrant holders and/or their affiliates through the issuance of
5,000 investment units at a price of $1,000 per unit. Each unit consists of one
share of newly authorized First Preferred Series "A" Stock and a warrant to
acquire one share of Common Stock for $1,000 per share. The First Preferred
Series "A" Stock is entitled to receive dividends at the applicable First
Preferred Series "A" Rate, payable quarterly commencing on April 1, 1999. Such
dividends are payable out of funds legally available therefore, are payable only
when, as, and if declared by the Board of Directors, are cumulative, and, if
undeclared or unpaid, shall bear interest at the applicable First Preferred
Series "A" Rate until paid. The First Preferred Series "A" Rate will be 8% per
annum through March 31, 2001, 10% per annum from April 1, 2001 through June 30,
2001, and thereafter will increase by 0.5% for each additional three months
period up to a maximum of 16% per annum. The First Preferred Series "A" Stock
ranks senior to all classes of the Company's common stock but ranks junior to
the Senior Preferred Stock of the Company (the "Senior Preferred Stock") with
respect to dividend rights and rights upon liquidation. The warrants have a
strike price of $1,000 per share and will expire, if not sooner exercised, on
December 31, 2007. As a result of the issuance of the First Preferred Series "A"
Stock and warrants, the Company was required to obtain a waiver from its Senior
Credit Facility group of lenders that waived the lenders' rights to the proceeds
raised by the Company from the issuance.
In conjunction with the March 1999 equity offering, the preferred dividend
rates on the original Senior Preferred Stock were modified to mirror the
preferred dividend rates on the First Preferred Series "A" Stock.
Also in March 1999 and in conjunction with the issuance of the First
Preferred Series "A" Stock and warrants, the Company amended and restated its
Senior Credit Facility. The amendment increased the Company's borrowing capacity
under the term loan facility of the Senior Credit Facility by $5.5 million,
which will bear interest at similar rates to the existing borrowings under the
Senior Credit Facility. The Company borrowed the additional $5.5 million in
March 1999 and concurrently repaid $5 million under the revolving portion of the
Senior Credit Facility.
Net cash provided by operating activities decreased by $0.5 million from
$5.7 million for the three months ended March 31, 2000, to $5.2 million for the
three months ended March 31, 2001. Operating income for the three months ended
March 31, 2001, before consideration of depreciation and amortization, increased
by $1.0 million over the three months ended March 31, 2000, which was offset by
timing of certain cash receipts and disbursements in the normal course of
business.
Cash used in investing activities was $2.5 million for the three months
ended March 31, 2001 as compared to $3.0 million for the three months ended
March 31, 2000, consisting primarily of both cash outflows for investments in
new business and customer contract renewals and payments of acquisition costs
relating to acquisitions made in prior years.
Cash used in financing activities was $0.5 million for the three months
ended March 31, 2001 as compared to $4.1 million for the three months ended
March 31, 2000, consisting primarily of principal repayments under the Senior
Credit Facility, offset by new borrowings under the Senior Credit Facility.
The Senior Credit Facility, as amended on May 30, 2001, consists of (a)
$55.0 million term loan acquisition facility all of which has been borrowed and
upon which $30.9 million of scheduled principal payments had been made as of
March 31, 2001, (b) $10.5 million of additional term loan facilities which has
been borrowed as of December 31, 2000 (availability of a $2.5 million additional
term loan expired because the Company did not achieve certain financial
performance for the year ended December 31, 2000), and (c) a $25.0 million
revolving loan facility (which includes a $10.0 million letter of credit
facility) upon which $16.5 million had been borrowed as of March 31, 2001.
Scheduled principal payments under the Senior Credit Facility bear interest, at
the option of the Company, at either (i) the Base Rate (i.e., the higher of
Canadian Imperial Bank of Commerce's ("CIBC") reference rate or the overnight
federal funds rate plus 0.5%) plus a margin that varies from 150 to 350 basis
points, depending on the Company's Total Debt to EBITDA Ratio (as defined in the
Senior Credit Facility); or (ii) the LIBOR plus a margin that varies from 275 to
450 basis points, depending on the Company's Total Debt to EBITDA Ratio.
The Senior Credit Facility requires quarterly interest payments to be made
on base rate loans and periodic interest-only payments based on the applicable
interest period on LIBOR loans, at least quarterly, in each case until maturity.
In addition, the Senior Credit Facility requires mandatory prepayments out of
the proceeds of certain equity or debt offerings, asset dispositions, receipt of
insurance proceeds not applied as provided in the Senior Credit Facility, and
receipts of funds from certain escrow accounts. Remaining scheduled principal
payments on the term loan facilities are approximately $10.3 million and $24.2
million during the years ended 2001, and 2002, respectively. All outstanding
principal and interest under the Senior Credit Facility is due December 31,
2002. The Senior Credit Facility is secured by substantially all the assets of
the Company and its subsidiaries. The Senior Credit Facility also requires the
Company to meet certain financial tests on a consolidated basis, some of which
may be more restrictive in future years. Based on the Company's current
forecast, certain of these financial tests are likely to not be met by March 31,
2002. The Company's failure to comply with its obligations under the Senior
Credit Facility, or in agreements relating to indebtedness incurred in the
future, could result in an event of default under such agreements, which could
permit acceleration of the related debt and acceleration of debt under other
financing arrangements that may contain cross-acceleration or cross-default
provisions.
On June 30, 1998, the Company entered into an interest rate cap agreement
that has been designated as a hedge against the Company's variable interest rate
exposure under the Senior Credit Facility. At March 31, 2001, the interest rate
cap has an aggregate notional amount of $30.0 million, which matures in June
2001, and caps interest on the LIBOR portion of the term loan, up to the
aggregate notional amount, at 7.5%, plus the applicable LIBOR margin.
As of May 30, 2001, without consideration of the May 30, 2001 new equity
offering discussed herein, the Company had $6.2 million of available borrowing
capacity under the Senior Credit Facility.
As of March 31, 2001 the Company had approximately $166.1 million of
long-term indebtedness outstanding including the current portion, a deficit in
stockholders' equity of $47.5 million, and $6.3 million of cash.
As of March 31, 2001, the Company's long-term indebtedness included (i)
$115.0 million of 11.0% Senior Notes due 2007 (the "Senior Notes"), (ii) $51.1
million of indebtedness under the Senior Credit Facility, and (iii) $10,853 of
other indebtedness.
The Company intends to evaluate additional acquisitions to expand its base
of installed inmate telephones and value added services and will continue to
evaluate possible acquisition opportunities. There can be no assurance that the
Company will have sufficient available capital resources to realize its
acquisition strategy. Such future acquisitions, depending on their size and the
form of consideration, may require the Company to seek additional debt or equity
financing.
Changes in Accounting Standards
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June 1998, and requires recognition of all derivative
financial instruments as either assets or liabilities in consolidated balance
sheets at fair value and determines the method(s) of gain/loss recognition. SFAS
No. 133 is effective for fiscal years beginning after January 1, 2001. The
Company adopted SFAS No. 133 effective January 1, 2001. The adoption of SFAS 133
did not have a material effect on the Company's financial position or results of
operations.
Special Note Regarding Forward-Looking Information
Certain statements in this Quarterly Report Form 10-Q constitute
forward-looking statements. These forward-looking statements are all statements
that are not statements of historical fact or that might otherwise be considered
opinion, belief, or projection. These forward-looking statements involve known
and unknown risks, uncertainties, and other factors that may cause the actual
results, levels of activity, performance, or achievements of the Company, or
industry results, to be materially different from any future results, levels of
activity, performance, or achievements. The risks, uncertainties, and other
factors to which forward-looking statements are subject include, among others,
those set forth under the caption "Risk Factors" in the Company's Form 10-K
filed on June 1, 2001, which is available from the Company, from the Securities
and Exchange Commission at prescribed rates, and at the web site www.sec.gov.
Such factors include, without limitation, the following: competitors with
greater resources; risks associated with uncollectible accounts; risks
associated with carrying a large amount of debt; risks associated with our
limited operating history and accumulated deficits; risks associated with our
dependency on facilities-based carriers; risks associated with market growth
stagnating or declining; lack of patents and possible infringement;
technological change and new services; control by principal shareholders;
changes in the telecommunications industry; availability of key personnel; and
changes in or the failure to comply with, governmental regulations. All
subsequent written or oral forward-looking statements attributable to the
company or persons acting on its behalf are expressly qualified in their
entirety by such factors.
In some cases, forward-looking statements can be identified by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or "continue" or the negative of such
terms or other comparable terminology. Although the Company believes that the
assumptions and expectations reflected in such forward-looking statements are
reasonable, as a result of the foregoing and other factors, no assurance can be
given as to future results, levels of activity, performance, or achievements,
and neither the Company nor any other person assumes responsibility for the
accuracy and completeness of such forward-looking statements. All
forward-looking statements included in the Quarterly Report on Form 10-Q are
based on information available to the Company on the date hereof, and the
Company is under no duty to update any of the forward-looking statements after
the date hereof.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes from the information reported in the
Company's Form 10-K.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time a party to legal proceedings that arise in
the ordinary course of business. Management does not believe that the resolution
of any threatened or pending legal proceedings will have a material adverse
affect on the Company.
None of the Company's internally developed call processing technology has
been patented. Accordingly, such technology and intellectual property rights
could infringe on other parties' intellectual property rights and could be
contested or challenged. The Company has received notice from two parties that
certain features of the Company's call processing technology may infringe upon
such parties' patents. Should the Company's call processor or any material
feature thereof be determined to violate applicable patents, the Company would
be required to cease using these features or to obtain appropriate licenses for
the use of such technology.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
This item is not applicable to the Registrant.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
No. Description of Exhibit
- ---------- -------------------------------------------------------
3.1 Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the
Company's Registration Statement No. 333-33639 and incorporated herein by
reference).
3.2 Bylaws of the Company (filed as Exhibit 3.2 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
3.3 Certificate of Amendment to Restated Certificate of Incorporation of the
Company, dated as of July 23, 1998 (filed as Exhibit 3.3 to the Company's
Quarterly Report on Form 10-Q, dated as of August 14, 1998 and incorporated
herein by reference).
3.4 Certificate of Amendment to Restated Certificate of Incorporation of the
Company, dated as February 11, 1999.
4.1 Indenture, dated as of June 27, 1997, between the Company and U.S. Trust
Company of Texas, N.A. (filed as Exhibit 4.1 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
4.2 Form of Note (filed as Exhibit 4.2 to the Company's Registration Statement
No. 333-33639 and incorporated herein by reference).
4.3 Form of Subsidiary Guaranty (contained in Indenture filed as Exhibit 4.3 to
the Company's Registration Statement No. 333-33639 and incorporated herein
by reference).
4.4 Registration Rights Agreement, dated as of June 27, 1997, between the
Company and the Initial Purchaser (filed as Exhibit 4.4 to the Company's
Registration Statement No. 333-33639 and incorporated herein by reference).
4.5 Registration Rights Agreement dated as of December 27, 1996, by and among
the Company and certain Holders named therein (filed as Exhibit 4.5 to the
Company's Registration Statement No. 333-33639 and incorporated herein by
reference).
4.6 Shareholders Agreement, dated as of December 27, 1996, by and among the
Company and certain Persons named therein (filed as Exhibit 4.6 to the
Company's Registration Statement No. 333-33639 and incorporated herein by
reference).
4.7 Warrant Agreement, dated as of December 27, 1996, between the Company and
CIBC Wood Gundy Ventures, Inc. (filed as Exhibit 4.7 to the Company's
Registration Statement No. 333-33639 and incorporated herein by reference).
4.8 Warrant Agreement, dated as of December 27, 1996, between the Company and
Gregg L. Engles (filed as Exhibit 4.8 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
4.9 Warrant Agreement, dated as of December 27, 1996, between the Company and
Gregg L. Engles (filed as Exhibit 4.9 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
4.10 Warrant Agreement, dated as of December 27, 1996, between the Company and
Gregg L. Engles (filed as Exhibit 4.10o the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
4.11 Warrant Agreement, dated as of December 27, 1996, between the Company and
Onyx Talton Partners, L.P. (filed as Exhibit 4.11 to the Company's
Registration Statement No. 333-33639 and incorporated herein by reference).
4.12 Warrant Agreement, dated as of December 27, 1996, between the Company and
Onyx Talton Partners, L.P. (filed as Exhibit 4.12 to the Company's
Registration Statement No. 333-33639 and incorporated herein by reference).
4.13 Warrant Agreement, dated as of December 27, 1996, between the Company and
Onyx Talton Partners, L.P. (filed as Exhibit 4.13 to the Company's
Registration Statement No. 333-33639 and incorporated herein by reference).
4.14 Warrant Agreement, dated as of December 27, 1996, between the Company and
Joseph P. Urso (filed as Exhibit 4.14 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
4.15 Warrant Agreement, dated as of December 27, 1996, between the Company and
Joseph P. Urso (filed as Exhibit 4.15 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
4.16 Warrant Agreement, dated as of December 27, 1996, between the Company and
Joseph P. Urso (filed as Exhibit 4.16 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
4.17 Warrant Agreement, dated as of December 27, 1996, between the Company and
Todd W. Follmer (filed as Exhibit 4.17 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
4.18 Warrant Agreement, dated as of December 27, 1996, between the Company and
Todd W. Follmer (filed as Exhibit 4.18 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
4.19 Warrant Agreement, dated as of December 27, 1996, between the Company and
Todd W. Follmer (filed as Exhibit 4.19 to the Company's Registration
Statement No. 333-33639 and incorporated herein by reference).
4.20 Form of Warrant Agreement, dated as of March 12, 1999 (filed as Exhibit
4.20 to the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999 and incorporated herein by reference).
4.21* Form of Warrant Agreement, dated as of May 30, 2001.
10.1*Amendment No. 5 to Second Amended and Restated Credit Agreement, dated as
of May 30, 2001, among the Company, and certain lenders named therein, and
Canadian Imperial Bank of Commerce.
- --------------------------------------------------------------------------------
* Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the period subject to this
Quarterly Report on Form 10-Q.
SIGNATURES
Pursuant to the requirement 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.
EVERCOM, INC.
By: /s/ RICHARD FALCONE
--------------------------
Richard Falcone
Chief Executive Officer
By: /s/ KEITH KELSON
--------------------------
Keith Kelson
Chief Financial Officer
Date: June 7, 2001