U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1996.
Commission File No. 0-15205
ELCOTEL, INC.
(Exact name of small business issuer in its charter)
Delaware 59-2518405
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6428 Parkland Drive, Sarasota, Florida 34243
(Address of principal executive offices) (Zip Code)
(941) 758-0389
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Title of Class
Common Stock, $.01 par value
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended March 31, 1996 were $21,462,000.
The aggregate market value of the voting stock (which consists solely of shares
of Common Stock) held by non-affiliates of the issuer as of June 10, 1996,
computed by reference to the price at which the registrant's Common Stock
as quoted by NASDAQ was sold on such date, was approximately $37,743,000.
The number of shares of the issuer's Common Stock outstanding as of
June 10, 1996 was 8,021,608.
<PAGE>
PART I
------
Item 1. Business
-----------------
Elcotel, Inc. (the "Company") designs, develops, manufactures
and markets micro-processor based public communication products
and software which provide services over both domestic and
international wireline and wireless (cellular) telephone
networks. The principal products of the Company are coin and
card operated intelligent payphones and management systems to
support payphone operators. When the Company's products are
combined with personal computer (PC) based payphone management
systems, they perform substantially the same functions as
payphones controlled by the central offices of regulated
telephone operating companies, hereinafter referred to as Local
Exchange Carriers or "LECs".
The markets for the Company's products are both domestic and
international private payphone and regulated telephone companies
providing public communications services. The Company is one of
the leaders in sales of microprocessor-based payphone products
to domestic private payphone operators. The Company's payphones
support coin, credit card and debit card applications and are
controlled internally by a microprocessor, memory chips, and
other electronic components which automatically process the
functions performed by the payphone. The microprocessor units
provide the capability to reconfigure the operational functions
of the payphones via PC controlled remote access. This PC
control capability provides the operator with a variety of
management reports in order to manage its payphone operations.
The Company's current development efforts are aimed at expanding
the product line to address both domestic and international
markets using wireline and wireless capability. The
applications to be supported by these products include
commercial credit and debit card payment processes, service
management enhancements, and retrofit upgrades for the aging
installed base of payphones being operated by the LECs and
international telephone companies. The Company is also
developing for international applications a network-based
prepaid card system for prepaid card applications.
The LECs use coin lines which have different signaling
conventions from those used by Independent Payphone Providers
("IPP"). The Company has introduced products which can be used
in conjunction with the LEC coin line signaling conventions.
The Company believes that the regulated telephone companies will
have to restructure their payphone operations since the
Telecommunications Act of 1996 (the "1996 Act") prevents Bell
operating companies from discriminating between their pay
telephones and private pay telephones. The Company believes
this restructuring may require the regulated telephone companies
to upgrade their payphone operations, may cause them to acquire
technology similar to that used by private payphone operators
1
<PAGE>
and otherwise look for ways to become more competitive. The
Company believes it can offer the regulated telephone companies
products that they may find more suited to the changing public
communications market.
Outside of North America, central office signaling is based on
periodic metering pulses. The Company has modified its base
product to conform to this international standard as well.
Development is underway to expand the capability of products
targeted for international markets and to enhance management
systems to meet large route operation requirements. In fiscal
1997, the research and development effort will be focused on
products and systems targeted for applications in the regulated
telephone company markets and developing international markets.
In fiscal 1996, the Company established an international sales,
support and business development function in an effort to
increase its focus and capabilities in international markets.
The Company's international product line was expanded. The
Company's joint marketing efforts with AT&T Network Systems
Division, now Lucent Technologies, focused on opportunities and
markets in Latin America and other developing countries.
The Company was organized in April 1985 as a Florida
Corporation, and in September 1986 changed its corporate
domicile to Delaware by merging into a newly-formed Delaware
corporation created exclusively for that purpose. All
references to the Company include its predecessor. The
Company's principal offices are located at 6428 Parkland Drive,
Sarasota, Florida 34243, and its telephone number is
(941) 758-0389.
PRODUCTS
Payphones
---------
The Company's intelligent payphones operate as integral self-standing
units of a public communications system and internally
process the functions associated with processing, call rating
and collecting data for future use in accounting and coin
management functions. By contrast, when a call is initiated at
older style payphones (typically owned by LECs), the call is
processed through a remote central office system maintained by
the LEC. The older style payphone communicates with the caller,
if necessary, and controls the payphone by external means.
The Company's payphones operate by means of electronic
assemblies of integrated circuits and other components located
within the telephone cabinet. The processing of all telephone
functions is controlled by a microprocessor "chip" which
utilizes the Company's copyrighted software operating system.
The Company's payphones communicate with a caller by human voice
messages activated by the microprocessor. The Company's
payphones have all of the usual features of LEC coin and credit
card reading telephones, as well as several additional features
available through microprocessor control.
2
<PAGE>
The Company began full marketing of its first payphone in
January 1986. Since then, the Company has introduced several
improved models and a number of software enhancements to its
various models. The Company's payphones are offered with a
housing and coin mechanism supplied by Quadrum Telecom, AT&T, or
alternative suppliers providing essentially equivalent housings
and coin mechanisms. Certain of the Company's payphone products
are being offered with an enhanced electronic coin mechanism
supplied by Mars Electronics and with similar electronic coin
mechanisms from AT&T for Western style cabinets. The Company
also offers its payphone product as a unique panel phone using a
customized cabinet and has customized designs for special
customer applications, such as airports and convention centers.
The product is available as an electronic board assembly which
the customer can install in existing Quadrum, Tatung, GTE, AT&T
or equivalent cabinets to replace the electronic board
assemblies of competitors' products. Modified versions of these
electronic board assemblies are being used in international
applications and can be used to retrofit regulated telephone
company electronics. The Company has also introduced a line of
international products that utilize cabinets designed by the
Company.
The Company's payphones contain call rating software in memory
which stores the local, intrastate and interstate rates for coin
sent-paid calls between exchanges throughout the United States.
The maximum rates which operators of privately-owned payphones
can charge for local and intrastate calls are regulated by the
various state public service commissions. See "Regulation".
The Company maintains and updates on a current basis at its
corporate offices a proprietary data base of all local,
intrastate and interstate rates. The Company programs and sells
rate center files to be downloaded by the customer to each
payphone purchased and put in service. Rates download services
are available from the Company. The rate center file (or
device) contains the then-current applicable rates for coin
calls between the exchange where the payphone is to be located
and all other exchanges throughout the United States. However,
the owner/operator of a payphone is responsible for ensuring
that the rates are kept current. Each payphone may also be
downloaded with various available options chosen by a customer,
such as free calls for emergency numbers, special charges for
certain calls, and speed dial numbers. The Company's current
models utilize a programmable memory chip (EEPROM) permitting
the downloading of rates and option selections from a personal
computer, using software and rate center files provided, and
periodically updated, by the Company.
The Company's current domestic payphone models, the Series 5 and
Olympian 5501, utilize state-of-the-art hardware and software
technology to enable them to be powered by the very low electric
current available from the telephone line, thereby requiring no
external source of power. Expensive electrical installation is
thereby avoided.
3
<PAGE>
The Company also markets international payphone products that
derive the capability to support prepaid card and coin
applications from the same technology base. These products
offer an LCD display to support multilingual messages in
languages selected by the customer through the keypad control.
The S5501 Olympian, which was introduced in fiscal 1995,
incorporates a surface mount manufacturing process to reduce
cost and, which the Company believes, improves quality and
reliability. This product provides an opportunity to address
domestic and international markets due to its ability to
function with either a standard business line or a LEC coin
line, and allows the payphone operators to program the payphone
for any one of three operating modes (smart, bright or coin
line). The S5501 Olympian board utilizes a metallic wrap around
chassis to protect against damage to the board.
The Company's current payphone products consist of:
Model 1510LP, Series 5 line-powered utilizing a hybrid
payphone housing from an independent
manufacturer (Quadrum Telecom), with certain
characteristics of both the AT&T and GTE payphone
assemblies.
Model IPT-9100, Series 5 International line-powered
payphone.
Model IPT-9110, Series 5 International line-powered
payphone with commercial credit card reader.
Model IPT-9120, Series 5 International line-powered
payphone with debit and credit card reader.
Model 1520LP, Series 5 line-powered payphone utilizing
the GTE payphone housing.
Model 1530LP, Series 5 line-powered panel phone.
Model 1550LP, Series 5 line-powered payphone utilizing
AT&T style payphone housings.
Model 1500LP, Series 5 Electronic Assembly (retrofit
kit) for customer installation in GTE or hybrid
housing.
Model 1502LP, Series 5 Electronic Assembly and Keypad
(retrofit kit) for customer installation in AT&T
housing.
Model S5501 Olympian Electronic Assembly and Keypad
for AT&T style payphone housings.
Model COT103, Card only telephone for international
applications on wireline or wireless (cellular) networks.
4
<PAGE>
The following are some of the principal features of the
Company's present line of payphone products:
- Permit monitoring of the amount of money in the cash box,
the number and types of calls made and the service
condition of the payphone; and communication of such audit
information through the voice circuitry on demand, either
at the payphone or remotely from the owner's office, upon
receipt of an owner-programmed security code.
- Contain a programmable memory chip for on-site or remote
programming and monitoring of various options, updated
rates, alarms and free phone numbers.
- Provide an internal modem to receive programming
information, and transmit audit information remotely to and
from an external modem and printer associated with a
personal computer at the owner/operator's facility.
- Provide a clock and calendar function to calculate time-of-day
discounts and control other timed functions.
- Provide up to four optional alarms which can be monitored
remotely.
- Provide the capability of downloading revisions of the
phone's software operating system, eliminating the need to
install new program chips in the phone.
- Provide debit card operation using the "103" type chip card
as well as credit card operation.
- Provide proprietary designed "answer detection" and "answer
supervision" functions for call timing and rating.
- Provide an optional credit card reading capability.
- Provide capability of working on wireless (cellular)
systems as well as wireline networks.
Payphone Network Manager ("PNM")
--------------------------------
The Payphone Network Manager is a software system developed and
sold by the Company for installation in personal computers with
specified memory and disk capacity. The system provides the
owner/operator of the Company's products the means of performing
on an automated basis, monitoring of the functional capabilities
of the various products, as well as the ability to download
software, rates and option selections. The use of such a system
is necessary for an operator with several hundred or more of
5
<PAGE>
these products to control maintenance and collection schedules,
as well as to make changes efficiently in rates, call home
numbers, and other important data maintained in each phone's
data base.
The Company has three versions of the Payphone Network Manager:
the DOS-based PNM system for both domestic and international
operations; the Microsoft Windows-based PNM Plus system with
enhanced capabilities for the domestic market; and the Microsoft
Windows-based PollQuest system, with enhanced features for the
international market. The latter two versions can support over
10,000 phones and accommodate multiple simultaneous transmission
links to the payphones. Features were incorporated to improve
the operator's management of its routes through new reporting
systems, new polling capabilities and new back office management
features.
Rate Center Files
-----------------
The Company installs an EEPROM memory device in the payphone and
sells the customer rate center files on a diskette which is
downloaded to the product after installation, using PNM or which
can be downloaded from an electronic bulletin board which the
Company maintains. During Fiscal 1996, this bulletin board
system was modified to allow the Company's customers to obtain
rate center files 24 hours per day, 7 days per week.
Service Management Program
--------------------------
The Company has introduced a Service Management Program to help
new or dependent payphone owners handle their routine
operations. This program provides software downloads, including
rate center files, and generates reports of alarm conditions
upon which the customer can then act. The Service Management
Program is offered on a monthly subscription basis and customer
choices range from a basic offering to a package of services.
WARRANTY AND SERVICE
The Company provides the original purchaser with either two or
three-year warranties on payphone products the Company manufactures.
When the Company resells products from other manufacturers, the Company
passes on the other manufacturer's warranty to its customers. In
addition, the Company's customer service engineering staff at its corporate
offices provides telephone support services without charge to customers who
have installation or operational questions. The Company also
provides field engineering support services during the
introductory phase of new products and when customers encounter
unusual problems. After the warranty expires, the Company
provides non-warranty service at its corporate offices for a
fee. The Company's distributors are also authorized to repair
products.
Owners/operators of the Company's payphones have the sole
responsibility of ensuring that rates charged for calls made
from the phone remain current. The Company provides updated
rating devices or rate center files on a bulletin board service
to permit the customer to maintain control files for each phone
and to download the rates to the phones using PNM.
6
<PAGE>
TRAINING
The Company provides training courses given at the Company's
facility or at the customer's premises on the installation,
operation, maintenance and repair of the payphones and PNM, both
domestic and international. The Company's distributors also
provide training to their customers.
PRODUCTION
The Company's current manufacturing facility occupies
approximately 16,000 square feet situated in a building leased
by the Company located in a light industrial complex. The
Company's manufacturing operations are designed so that
production volumes could be readily increased. See
"Properties."
The Company purchases all components for its electronic and
mechanical assemblies from external suppliers. These suppliers
must be approved by the Company's design engineering group and
manufacturing operations. Approval is based on quality,
delivery, performance and cost. Design engineering attempts to
utilize components available from several manufacturers, as well
as avoiding single source component restraints. However,
occasionally it is necessary to use a single source component
and the Company currently has several items in this category.
While the Company believes that it could find alternative
suppliers for its components, or in the case of single source
components, substitute other components for the ones currently
used in its electronic assemblies, the Company's operations
could be adversely affected until alternative sources or
substituted components could be obtained. During fiscal 1997,
the Company will purchase for one of its products complete
electronic board assemblies from one of its two subcontractors.
That subcontractor has entered into agreements with the
Company's suppliers and the Company will not be required to
purchase individual components for these assemblies. The
Company will continue to specify and approve all components and
will purchase the completed assemblies from the subcontractor.
All components and assemblies are identified by total inventory
value and deliveries are scheduled consistent with meeting
production schedules. Material planning and scheduling is
accomplished utilizing a basic computerized Material
Requirements Planning (MRP) system.
The Company's electronic boards are assembled by two qualified
local subcontractors. The Company believes it could use
alternate subcontractors, if necessary, with minimal
interruption to production, as the equipment required for these
assemblies is industry standard and suitable subcontractors are
available.
The Company routes all electronic assemblies through various
automated in-house tests and defect-inducing processes to
improve their quality and reliability. After testing, the
7
<PAGE>
electronic board assemblies may be installed in and tested as a
full payphone and shipped to the customer or packaged separately
and shipped for customer installation. The Company's
manufacturing and service organizations were ISO 9002 certified
in December 1995 and the Company will pursue ISO 9001
certification during fiscal 1997.
MARKETING
The markets for the Company's products are both domestic and
international public communications services. Domestically,
these services and markets represent a $5 billion market segment
according to the 1995 North American Telecommunications Market
Review and Forecast ("NATA"). NATA estimates that payphone
equipment sales in this market for 1996 and 1997 will be
approximately $391 million to $393 million for each year.
The Company's customers range from operators of small private
payphone routes to large nationally recognized LECs. Generally,
customers enter into revenue-sharing arrangements with location
owners and install the Company's payphones in such locations as
convenience stores, city sidewalks and airports. The Company
provides its customers with detailed instruction manuals for its
products, and offers training in installation and maintenance at
its corporate offices or at the customer's designated site. The
Company also offers such value-added products and services as
systems and a service management program to enhance the
customer's ability to increase its revenues.
The Company generally enters into non-exclusive sales agreements
with its customers, which include a non-exclusive license to use
the Company's proprietary operating system and PNM management
system. All purchase orders from customers are subject to
acceptance by the Company. The Company's policy is to grant
credit to customers that the Company deems creditworthy.
Products are sold by payment in advance for which the Company
grants the customer a discount, or, if the customer otherwise
qualifies, the Company provides 30 days credit. In addition,
the Company provides limited secured financing with terms
generally not exceeding 24 months and interest charged at
competitive rates.
The Company's customers are not prohibited from using and
reselling competing products and are not required to purchase a
minimum quantity of products, although the Company's pricing
schedules offer discounts for volume purchases.
The Company sells its products directly to customers and to
distributors. The Company at present has four distributors,
each with limited exclusive selling arrangements in assigned
territories. The Company's distributors currently represent
approximately 11% of its total sales.
The locations at which the Company's products are installed may
include any business, organization, institution or governmental
agency which desires to offer payphone services to customers,
employees and transients. The gross revenue generated by a
8
<PAGE>
particular product is dependent upon many variables including
location, traffic volume, duration and distance of call,
visibility, as well as volume of Zero-Plus calls (defined as
coinless calls which are charged to telephone company issued
calling cards, commercial credit cards, or collect to the
destination subscriber's phone) for which the owners/operators
receive commission compensation. The profitability of public
communications products also depends upon such other variables
as LEC line charges, usage sensitive costs, the maximum rates
permitted by state laws, compensation plans approved by the FCC,
commissions to location owners, and maintenance and insurance
costs. The 1996 Act contains provisions that might result in
increased compensation to private payphone operators.
In early fiscal 1996, the Company entered into an agreement with
Lucent Technologies (formerly known as AT&T Network Systems)
pursuant to which the Company will produce and sell to Lucent a
private labeled Olympian S5501 payphone using Lucent's payphone
housing and the Company's PNM system which Lucent will
incorporate into its payphone systems. Pursuant to the
agreement Lucent has the exclusive right to market such products
to regulated domestic independent telephone companies and to
universities, hospitals and military bases. Both companies are
marketing their respective products to the Regional Bell
Operating Companies and in international markets.
During fiscal 1996, no customer accounted for 10% or more of the
Company's sales while in fiscal 1995, one customer accounted for
approximately 13% of sales.
The Company is currently pursuing ISO 9001 certification and was
ISO 9002 certified in December 1995. The Company believes it
will become ISO 9001 certified during 1997.
Four of the Company's executive officers, and five full-time
sales representatives employed by the Company currently market
the Company's products to its customers. Sales representatives
are located regionally. The Company advertises its products
through trade publications, routinely participates in trade
shows and periodically hosts seminars for major account
customers at its corporate headquarters. The Company's sales and
marketing functions focus on four major markets: regionally
based IPP operations; regulated telephone companies; national
accounts; and international markets. The Company hosts an
annual Customer Conference for all its customers covering such
areas as current and future product development, regulatory and
industry issues, and customer service. In addition, the Company
holds a monthly conference call with selected customers and
representatives of the Company, to discuss product and service
issues and other matters of mutual concern to both the Company
and its customers.
INTERNATIONAL BUSINESS DEVELOPMENT
The Company entered the international markets for the first time
in December 1991, with a shipment of 450 Model IPT-9100
international payphones to Bolivia. Since that time, the
9
<PAGE>
Company has developed a line of coin and debit/credit card
payphones for international applications. Versions of these
products that are capable of handling coins in a variety of
currencies, and debit and credit cards, have been shipped to
Morocco, Chile, Belize, Bermuda, Guatemala, and Guam.
The Company continues to investigate opportunities in many
developing and third world countries that are expanding their
telecommunications capabilities to achieve economic growth by
funding programs aimed at improving public communications
services to the general public. These programs involve
government controlled telecommunications operations and
privately owned telephone operations, many of which are wireless
or cellular system operators certified and licensed by the
foreign governments. Many countries are moving toward
privatization of their public communications services which in
turn creates more opportunities for suppliers and manufacturers
of telecommunications equipment.
To address these international markets, the Company is expanding
its product and service capabilities and initiating a number of
marketing strategies. The Company has created a strategic
alliance with Lucent Technologies wherein both companies would
address opportunities in international markets. The Company's
products are currently being evaluated in Canada, the Ukraine,
Russia, Poland, Saudi Arabia, Korea, Singapore, and the
Philippines. The Company believes its payphones equipped with
coin or card reader capability, its network based prepaid card
system and the Company's specially designed international
management systems are adaptable to many of the developing
programs. The Company has developed products that can be
applied to wireless technology which opens additional
opportunities in those countries using wireless systems for
coverage to rural and remote areas.
PRODUCT DEVELOPMENT
The Company's research and development programs are currently
focused on developing new products and product enhancements for
the IPP market, the regulated telephone company market and
international markets and an enhanced management system for its
products. During fiscal 1996, the Company incurred
approximately $2,257,000 in Company sponsored research and
development costs for payphones, PNM and other products.
Research and development costs were $1,758,000 in fiscal 1995.
The number of employees engaged in research and development
activities increased by 20 percent in fiscal 1996.
The major development efforts in fiscal 1996 included the
development of the new Microsoft Windows-based Payphone Network
Management systems (PNM Plus and PollQuest) to address large
route operations, the enhancement of the LEC targeted
Olympian 5501 payphone and enhancement of the Card Only
Telephone, the COT-103, which is for international applications
on wireline or wireless networks. All of these products were
shipped to customers during fiscal 1996.
During fiscal 1997, development efforts will focus on further
enhancements to many of the Company's current payphones and
10
<PAGE>
network management system. Two programs for the development of
international payphones with modified cabinets were initiated in
late fiscal 1996 and are expected to be completed in fiscal
1997. These products would provide enhanced card and coin
handling capabilities required for various international
markets.
BACKLOG
The amount of the Company's backlog is subject to fluctuation
based on the timing of the receipt and completion of orders.
The Company calculates its backlog by including only items for
which there are purchase orders with firm delivery schedules.
At May 31, 1996, the backlog of all products on order from the
Company was approximately $2,544,000, compared with a backlog of
approximately $1,974,000 one year prior at May 31, 1995. The
current backlog is expected to be filled within approximately
ninety days.
PATENT AND PROPRIETARY SOFTWARE
The Company has developed, at its expense, the software and
engineering designs incorporated in its products. The Company
owns registered copyrights for its proprietary software and owns
a patent on certain aspects of its Series 5 products. This
patent relates to its line-powered product and covers certain
aspects of the power management of the payphone and the high
voltage circuits utilized in coin collection and return. This
patent will expire in 2009. There can be no assurance that the
Company's products do not infringe upon valid proprietary rights
which may be held by others. See "Legal Proceedings."
Moreover, the Company's copyrights may not protect it from
unauthorized duplication of its payphones or other products
which may be marketed without the Company's knowledge or
consent, although the Company has vigorously and successfully to
date defended its copyrights and has stopped certain other
organizations from continuing the unauthorized duplication of
the Company's payphone software. However, the copyright
registrations would not prevent a competitor from independently
creating payphones or other products which are functionally
equivalent to those of the Company. The Company licenses the
use of its proprietary software and designs through licensing
provisions in its standard sales agreement, which provisions are
designed to prevent duplication and unauthorized use of the
Company's software.
COMPETITION
The public communications industry is highly competitive. Prior
to 1984, the LECs held a monopoly in the pay telephone industry,
and they continue to have a dominant share of the public
communications market. The Company also competes with firms
that manufacture and market privately-owned payphones and other
products similar to the Company's products. In addition, there
are many other firms which have the resources and ability to
develop and market products which could compete with the
Company's products. Many existing competitors (including the
LECs) and potential competitors have financial, management and
technical resources substantially greater than those of the
Company.
11
<PAGE>
The three principal competitors currently marketing privately-owned
payphones include Protel, TeleServices Group and
Intellicall. The Company expects possible competition from
other competitors and from such competing technologies as debit
systems and wireless communications. Some telecommunications
companies, already established in the telephone industry with
substantial engineering, manufacturing and capital resources,
are positioned to enter the public communications market, some
of which are foreign manufacturers.
LECs compete with private payphone operators by making site
owner compensation arrangements more attractive for their
existing phones thus reducing the site owners' incentive to use
private pay telephones. The 1996 Act prohibits Bell operating
companies from subsidizing their payphone service directly or
indirectly from their telephone exchange service operations or
their exchange access operations. As a result, the Company
believes Bell operating companies will become more directly
competitive with private payphone operators. Accordingly, LECs
may initiate programs to retrofit their payphones to improve
operational efficiency. The Company may be in a position to
manufacture and sell retrofit kits to LECs and offer enhanced
service management capabilities with products that are currently
in development.
Competition for payphone service also affects payphone
manufacturers such as the Company. The payphone industry in
general competes with cellular or wireless communications and
other Personal Communication Services and with paging services.
The Company believes that conventional payphones compete
favorably with Cellular Mobile Radiotelephone Service (CMRS) in
many respects. While CMRS will more readily satisfy the demand
for in transit telecommunications, conventional payphones have
significant cost advantages. CMRS costs typically range from
$.15 to $.50 per minute for local calls which comprise a
significant portion of CMRS calls compared to the $.25 cost of a
local call for long periods from a payphone. In addition, the
large installed base of payphones compares to the limited but
increasing market penetration of cellular phones.
Paging services continue to grow and are competitive with
payphones for sending messages. However, display or tone and
voice paging systems alert the user of the need to return a call
which may be via a payphone.
The market for international public communications is highly
competitive, and numerous competitors are larger, better
capitalized and have greater experience in marketing their
products internationally. In addition, the Company's
international marketing efforts are subject to the risks of
doing business abroad. Consequently, there can be no assurances
that the Company's efforts in international markets will be
successful.
Although the Company expects to be subject to intense
competition in the future, the Company believes that its
products and services are currently competitive with those of
other manufacturers in such areas as equipment capability and
12
<PAGE>
quality, cost and service. Since the telecommunications
industry is subject to rapid technological change, the Company
will be required to develop enhancements, new products and
services in the future to remain competitive.
REGULATION
Products and services offered by the Company and operated by its
customers are subject to varying degrees of regulation at both
the federal and state levels. There can be no assurances that
changes in such regulation, if proposed and adopted, would not
have an adverse impact on the operations of the Company and its
customers.
In June 1984, the Federal Communications Commission ("FCC")
decided to allow the registration of privately-owned payphones
for connection to the telephone network, while permitting the
states to adopt their own regulations governing the installation
and operation of such payphones for intrastate calls. To date,
48 states and the District of Columbia have authorized the use
of privately-owned payphones with various tariff, technical and
operational requirements and restrictions. The FCC decision and
subsequent state regulations opened the market for privately-owned
payphones which was previously available only to the regulated telephone
operating companies.
Parts 15 and 68 of the FCC rules govern the technical
requirements that payphone and other telephone products must
meet in order to qualify for FCC registration and
interconnection to the telephone network. The Company has
performed those tests necessary to assure compliance with these
technical requirements and obtained FCC registration for its
various model payphones.
The National Electric Code requires that all customer premise
equipment manufactured after July 1, 1991, be certified by a
nationally recognized safety laboratory. All customer premise
equipment products manufactured by the Company since July 1,
1991 have been approved and listed by ETL Testing Laboratories.
Tariffs are established by the states for local and intrastate
coin sent-paid calls, and in many instances for Zero-Plus Calls.
Tariffs establish the maximum rates which the LECs may charge
the public communications operator for line connections and
calls. These charges may be flat rated or variable rated.
In addition to tariff restrictions, the 48 states and the
District of Columbia which currently permit privately-owned
payphones have adopted a variety of regulations which vary from
state to state, governing technical and operational
requirements. These requirements include the following:
dialtone-first capability to allow free calls to operator,
emergency, information and "800" numbers without a coin deposit;
multi-coin capability; calculation of time-of-day and weekend
discounts; prohibition of post-call charges; advisement to
13
<PAGE>
callers of additional charges for additional time before
disconnecting; provisions of certain information statements
posted on cabinets; provision of local telephone directories;
mandatory acceptance of incoming calls; reduced charges for
local calls from certain locations such as hospitals or rest
homes; and restrictions as to the location of such payphones.
The 1996 Act and the FCC, in its Notice of Proposed Rulemaking
on Section 276 of the 1996 Act, mandates compensation to payphone
providers for the large volume of currently uncompensated
interstate and intrastate subscriber 800 calls, debit card calls
and international calls. The FCC also recognized there may be a
need for a national payphone compensation rate so that consumers
would know the charges to expect when they access public
payphones.
The FCC has proposed the requirement that interexchange carriers
(IXCs) offering operator services through payphones and other
aggregator locations must disclose their rates to callers before
the call is completed and any charges have been incurred. The
FCC has proposed the establishment of benchmarks for charges of
operator service providers (OSPs), and for any associated
aggregator surcharges. The FCC has also proposed a requirement
that OSPs that charge, or allow, rates above a predetermined
benchmark level to disclose orally those rates to callers before
connecting the call.
The FCC is expected to issue final rules on these issues during
the fourth calendar quarter of 1996, although there can be no
assurance in that regard.
In addition, the Federal government and certain states have, or
are in the process of adopting, various regulations relating to
the control of public communications equipment, with
restrictions on call pricing, requirements to advise the caller
of the name of the service provider, requirements that the
caller be provided a rate quote upon request, and the
requirement for access to the carrier of the caller's choice.
The Company will monitor future changes in federal and state
regulations and may be required to modify its products to comply
with additional technical requirements or other factors which
could result in the Company's products not being in compliance
with federal and state regulations.
With respect to the use restrictions and requirements, such as
restricted locations for payphones, informational statements on
cabinets, or the provision of access to the carrier of choice,
the owner/operators of the Company's products have the sole
responsibility to determine and comply with all applicable use
requirements, including the responsibility to ensure that the
rates charged remain current and do not exceed the maximum rates
permitted by state or federal regulations for the particular
location of the product.
Most states require that owner/operators of private payphones be
certified by the state's public utility commission and file
periodic reports. As a manufacturer and seller of privately-owned
payphones, the Company does not believe that any states
currently require the Company to be certified.
The 1996 Act would eliminate certain restrictions placed on the
Bell operating companies by the final judgment that broke up the
14
<PAGE>
Bell system. Certain elements of this legislation would open up
long distance service and manufacturing to the Bell operating
companies while mandating further competition in the local
telephone exchange business. Pursuant to the 1996 Act, the Bell
operating companies are required to end practices that treat
independently owned payphones differently than those they own,
and ban cross subsidy of services by prohibiting Bell operating
companies from subsidizing their payphone service directly or
indirectly from their telephone exchange service operations or
their exchange access operations.
EMPLOYEES
As of June 10, 1996, the Company employed 131 individuals of
which 129 are full-time employees. The Company is not a party
to any collective bargaining agreement and believes that its
relations with its employees are good.
Item 2. Properties
------- ----------
The Company owns two 24,000 square foot buildings located at
6428 Parkland Drive, Sarasota, Florida. These buildings were
constructed in 1987 and 1989, respectively. The two buildings
are owned subject to mortgage indebtedness pursuant to a
promissory note with a bank.
The Company utilizes one of the 24,000 square foot buildings for
its own operations. The other 24,000 square foot facility is
leased to an electronics manufacturer under a one-year lease
agreement which expires on April 30, 1997. This agreement
provides the Company with average annual lease income of
$150,000.
In addition, the Company leases a 16,000 square foot facility in
the same industrial complex for its manufacturing operation
under a three year lease which commenced in December 1994. The
Company believes that the combination of owned and leased space
is adequate for its current needs.
Item 3. Legal Proceedings
------- -----------------
As previously reported, on August 3, 1995, one of the Company's
customers, Amtel Communications, Inc. and four related entities
("Amtel"), filed voluntary petitions for relief under Chapter 11
of the Bankruptcy Code, which were administratively consolidated
under the case name of In re ACI-HDT Supply Company, United
States Bankruptcy Court for the Southern District of California,
Administratively Consolidated Case No. 95-08253-A11.
In late 1994 and early 1995, the Company had sold Amtel on
credit approximately 3,500 payphones and related equipment. To
secure Amtel's obligations to pay the Company for the payphones
and related equipment pursuant to five promissory notes, Amtel
granted the Company a security interest in payphones sold to
Amtel and collateral assignments of agreements between Amtel and
15
<PAGE>
the owners of certain sites where those payphones had been or
were to be installed. On the date of the bankruptcy filing,
the Company was owed approximately $3,200,000 by Amtel.
On June 3, 1996, Amtel filed a proposed Disclosure Statement for
Debtors' Original Chapter 11 Plan (the "Disclosure Statement")
and the Debtors' Original Chapter 11 Plan (the "Plan"). On
June 26, 1996, at the scheduled hearing on the Disclosure
Statement, counsel for Amtel advised the Bankruptcy Court that
Amtel would not be proceeding with the Disclosure Statement and
Plan, but instead would be filing an amended disclosure
statement together with two competing plans of reorganization.
Amtel's counsel further advised that the two plans would be sent
out with a single disclosure statement and ballots for creditors
and other parties in interest to vote on and express their
respective preferences between the plans. Amtel's counsel
advised that the first plan would be based on a sale of Amtel's
payphone assets and business to PhoneTel Technologies, Inc.
("PhoneTel") for approximately $13,000,000, payable $7,000,000
in cash and $6,000,000 in publicly tradeable shares of PhoneTel
stock. The second plan would be based on a reorganization
concept, preserving Amtel as an operating concern but confirming
ownership in the lessor/investor group to be shared with Pacific
Coin, a California general partnership, which would infuse
substantial cash into the reorganized entity and would be
responsible for the operation of Amtel's payphone business. At
the conclusion of the June 26, 1996 hearing, the Bankruptcy
Court set July 19, 1996 as the deadline for filing the two plans
of reorganization and the contemplated combined disclosure
statement. The Bankruptcy Court also set August 16, 1996 as the
hearing date for approval of the new disclosure statement.
Consistent with these dates set by the court, Amtel's counsel
also advised that the debtors would attempt to achieve court
approval and confirmation of one of the plans by September or
October 1996.
Subsequent to that hearing, the Company reached an agreement in
principle with Amtel with respect to the proposed treatment of
its claims under the debtors' plan of reorganization. That
agreement in principle provides that the Company would receive
in satisfaction of all claims by the Company against Amtel and
by Amtel against the Company $1.4 million in cash plus all of
the payphones (approximately 1,350) and related equipment
currently in the Company's possession and being warehoused by
the Company pursuant to a prior Bankruptcy Court order. There
can be no assurance that this agreement in principle with
respect to the treatment of the Company's claims under the plan
will be implemented. Any plan will have to be voted upon by
creditors and will also have to be confirmed by the Bankruptcy
Court before the treatment can be implemented.
In re ACI-HDT Supply Company, debtor and related cases. Nogah
Bethlahmy, et al. plaintiffs v. Randy S. Kuhlmann, et al.
defendants. Adversary Proceeding No. 95-90809 in the United
States Bankruptcy Court, Southern District of California.
As previously reported, this putative class action was filed in
the Superior Court of the State of California for the County of
16
<PAGE>
San Diego ("State Court") but not initially served on the
Company. On November 17, 1995, the first amended complaint was
filed and served on the Company.
On December 28, 1995, a co-defendant removed the case to the
United States Bankruptcy Court for the Southern District of
California. On January 26, 1996, plaintiffs moved to remand the
case to State Court. On March 14, 1996, the Bankruptcy Court
entered an order denying the motion to remand the action to
State Court. On March 25, 1996, plaintiffs appealed that order.
That appeal is pending.
On May 20, 1996, plaintiffs filed a second amended complaint for
(1) unlawful business practices; (2) fraudulent and unfair
business practices; (3) false and misleading advertising; (4)
fraud and deceit; (5) conspiracy to defraud; (6) negligence and
negligent misrepresentation; (7) violations of California
Corporations Code Section 25110; (8) violations of California
Corporations Code Section 25400; (9) professional negligence and legal
malpractice; and (10) spoliation of evidence. The gravamen of
the complaint is that Amtel conspired with its own officers and
professionals, and with various telephone suppliers (including
the Company), to defraud investors in Amtel by operating a Ponzi
scheme. On June 12, 1996, the Company filed a motion to dismiss
the complaint. The motion is set to be heard on August 1, 1996.
The case is now in the initial stages of discovery. The Company
disputes liability and intends to defend this matter vigorously.
William Polillo, et al. v. Elcotel, Inc. (U.S. District Court
for the Northern District of Illinois, No. 96C 2275, filed
April 18, 1996). William Polillo, Cecilia Polillo and Richard
Reno filed this suit against the Company alleging that the
Company's pay telephones infringe U.S. Patent No. 4,208,549 for
a Coin Surveillance Apparatus. An Amended Complaint was filed
against the Company on May 10, 1996. The Company filed an
Answer and Counterclaim on May 28, 1996 denying infringement and
asserting a counterclaim for a declaratory judgment of
noninfringement and invalidity of the patent. On July 2, 1996,
the plaintiffs' responded to the Company's counterclaim by
denying the claims of noninfringement and invalidity. The case
is now in the initial stages of discovery. The Company believes
that it has meritorious defenses to this claim and that the
outcome of this matter will not have a material adverse effect
on the financial condition or results of operations of the
Company.
While the Company is subject to various other legal proceedings
arising in the conduct of its business, there are no pending
legal proceedings which are material to the business of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders.
------- ----------------------------------------------------
None.
<PAGE>
<TABLE>
PART II
-------
Item 5. Market for Common Equity and
- ------- Related Stockholder Matters.
-----------------------------
From December 1, 1993 to June 12, 1995, the bid and asked
quotations of the Company's Common Stock were reported by the
National Association of Securities Dealers Automated Quotation
System ("NASDAQ") under the symbol "ECTL". As of June 13, 1995,
the Company's Common Stock began being reported by the NASDAQ
National Market System under the same symbol "ECTL". The
following table sets forth the range of high and low bid
quotations or high and low sales prices for the Company's Common
Stock for each of the periods indicated as reported by NASDAQ or
the NASDAQ National Market System. Bid quotations reflect
interdealer prices, without retail markup, markdown or commission
and may not necessarily represent actual transactions.
<CAPTION>
Period High Low
- ------ ---- ---
Quarter Ended:
<S> <C> <C>
June 30, 1994 4-1/4 3-3/8
September 30, 1994 3-3/4 3
December 31, 1994 4-3/8 3-1/2
March 31, 1995 4-1/8 3-1/4
June 30, 1995 9-1/2 3-3/4
September 30, 1995 10-1/4 6-3/4
December 31, 1995 9 5-1/2
March 31, 1996 8-5/8 5
_______________________________
<FN>
The approximate number of record holders of shares of the Common
Stock of the Company outstanding as of June 10, 1996, was 415.
No cash dividends have been declared or paid on the Company's
Common Stock.
18
</TABLE>
<PAGE>
<TABLE>
Item 6. Management's Discussion and Analysis or
- ------- Plan of Operation.
---------------------------------------
The following selected financial data is qualified in its
entirety by reference to the more detailed consolidated financial
statements and notes thereto included elsewhere in this report.
<CAPTION>
Year ended March 31,
--------------------------
1996 1995 1994
------ ------ ------
(In thousands, except per share data)
<S> <C> <C> <C>
Net Sales $21,462 $25,090 $20,216
Cost of Sales $13,238 $14,776 $12,232
Profit/(Loss) before
Extraordinary Items ($ 1,291) $ 3,524 $ 2,041
Profit/(Loss) before Extraordinary
Items per Common and
Common Equivalent Share ($ .16) $ .45 $ .30
Net Profit/(Loss) ($ 1,291) $ 3,524 $ 4,002
Net Profit/(Loss) per Common and
Common Equivalent Share ($ .16) $ .45 $ .59
Weighted Average Number of
Common and Common Equivalent
Shares Outstanding 7,830 7,847 6,823
Working Capital $ 6,288 $ 5,575 $ 4,224
Total Assets $14,929 $16,225 $10,234
Long-term Obligations $ 432 $ 782 $ 950
Shareholders' Equity $10,558 $11,091 $ 6,638
</TABLE>
19
<PAGE>
Results of Operations.
- ----------------------
(Dollars in thousands)
Year ended March 31, 1996, compared to year ended March 31, 1995:
Net sales for the year ended March 31, 1996 ("fiscal 1996"),
decreased to $21,462 from $25,090 for the year ended March 31,
1995 ("fiscal 1995"), a decrease of $3,628, or approximately 15%,
principally as a result of a decrease in sales of complete
payphones and electronic assemblies of approximately 32% and 1%,
respectively, offset by an increase in miscellaneous revenues of
approximately 87%. Unit sales of complete payphones decreased by
approximately 37% while unit sales of electronic assemblies
increased by approximately 27%. There were no sales to any
customer which accounted for 10% or more during fiscal 1996.
During fiscal 1995, sales to one major customer accounted for
approximately 13% of net sales. Average selling prices of
payphones during fiscal 1996 were approximately 8% higher than in
the preceding fiscal year. Average selling prices of electronic
assemblies were approximately 22% lower than in the preceding
fiscal year due to continuation of a trade in program which began
in the prior fiscal year. The trade in program, which initially
began in conjunction with the North American Numbering Plan
("NANP"), was continued for competitive reasons to permit
customers to receive a credit for upgrading older electronic
assemblies that, either they previously purchased from the
Company or other manufacturers, for the Company's current models.
Cost of sales as a percentage of net sales increased from 59% to
62% for the comparative fiscal years principally as a result of
decreased production and decreased manufacturing cost absorption.
Research and development costs increased by $499, or
approximately 28%, from $1,758 in fiscal 1995 to $2,257 in fiscal
1996 principally due to an increase in the number of employees
engaged in research and development activities ($333) and the
increased use of consultants on certain development projects
($176). Selling, general and administrative expenses increased
by $699, or approximately 12%, from $5,791 in fiscal 1995 to
$6,490 in fiscal 1996 principally as a result of the full year
impact of personnel increases made in the prior fiscal year in
support of the Company's international sales efforts as well as
other personnel increases made within the sales and marketing
functions ($261), contractor labor costs for a specific project
($137), an increase in the Company's provision for doubtful
accounts ($503), one-time expenses incurred in connection with
the Company's listing on the NASDAQ National Market System and
related investor relations costs ($92), offset by lower sales
commissions and elimination of management bonuses due to the
Company's lower sales level and lack of profitability compared to
the prior fiscal year ($277). Interest income increased by $22,
or approximately 6%, from $394 in fiscal 1995 to $416 in fiscal
1996, principally as a result of a higher average interest rate
the Company received from its note receivable portfolio.
Interest expense increased by $92, or approximately 84%, from
$109 in fiscal 1995 to $201 in fiscal 1996 due to increased
borrowings by the Company against its line of credit facility
with its bank.
20
<PAGE>
During fiscal 1996, one of the Company's customers, to whom the
Company had sold approximately 3,500 payphones during fiscal
1995, filed for protection under Chapter 11 of the Bankruptcy
Code. On the date of the bankruptcy filing, the Company was owed
approximately $3,200. In July 1996, the Company and the debtor
reached an agreement in principle with respect to the treatment
of the Company's claims under the debtors' plan of
reorganization. See "Legal Proceedings." The agreement in
principle resulted in an allowance of approximately $1,602 against
the Company's receivable from the debtor. In addition, the Company has
incurred approximately $242 in legal and related expenses in
connection with its claim against the debtor. The total charge to the
Company's financial statements relating to this matter is $1,844.
The fiscal 1996 tax benefit is comprised of $186 of current tax
benefit and a deferred tax benefit of $675. The tax benefit was
generated as a result of the current year loss.
Year ended March 31, 1995, compared to year ended March 31, 1994:
Net sales for the year ended March 31, 1995 ("fiscal 1995"),
increased to $25,090 from $20,216 for the year ended March 31,
1994 ("fiscal 1994"), an increase of $4,874, or approximately
24%, principally as a result of an increase in sales of complete
payphones and electronic assemblies of approximately 15% and 47%,
respectively, offset by a decrease in miscellaneous revenues of
approximately 14%. Unit sales of complete payphones and
electronic assemblies increased by approximately 20% and 68%,
respectively. Sales to one major customer accounted for
approximately 13% of net sales in fiscal 1995. Sales to a
different major customer accounted for approximately 10% of net
sales in fiscal 1994. Average selling prices of payphones and
electronic assemblies in fiscal 1995 were approximately 4% and
6%, respectively, lower than in the preceding fiscal year due to
the NANP trade in program, pursuant to which customers received a
credit for trading in older electronic assemblies in connection
with the purchase of electronic assemblies that satisfied the
requirements of NANP.
Cost of sales as a percentage of net sales decreased from 61% to
59% for the comparative fiscal years principally as a result of
increased production and the resulting greater manufacturing cost
absorption.
Research and development costs increased by $739, or
approximately 73%, from $1,019 in fiscal 1994 to $1,758 in fiscal
1995 principally due to an increase in the number of employees
engaged in research and development activities ($389) and the
increased use of consultants on certain development projects
($255). Selling, general and administrative expenses increased
by $1,002, or approximately 21%, from $4,789 in fiscal 1994 to
$5,791 in fiscal 1995 principally as a result of an increase in
the number of employees supporting international sales efforts
21
<PAGE>
($219), travel expenses related to international sales efforts
($260), sales commissions related to the Company's higher sales
level compared to the prior fiscal period ($159), and spending
for marketing and advertising ($117). Interest income decreased
by $12, or approximately 3%, from $406 in fiscal 1994 to $394 in
fiscal 1995, principally as a result of the retirement of older
notes receivable for customer product purchases that had higher
interest rates. Interest expense decreased by $374, or
approximately 77%, from $483 in fiscal 1994 to $109 in fiscal
1995 due to the significant reduction in the Company's debt that
occurred during fiscal 1994.
The fiscal 1995 tax benefit is comprised of $501 of current tax
expense offset by a deferred tax benefit of $975. The deferred
tax benefit was generated as a result of the reversal of the
valuation allowance which had been provided on the Company's
deferred tax assets in the prior year. The valuation allowance
was reversed based upon the Company's belief that it is now more
likely than not that the deferred tax assets will be fully
realized. The fiscal 1994 tax provision consisted primarily of
alternative minimum taxes.
Effects of Inflation.
- ---------------------
In general, inflation and changing prices have not had a material
impact on the Company's operations.
Liquidity and Capital Resources.
- --------------------------------
(Dollars in thousands)
The Company recorded a decrease in cash of $134 for fiscal 1996
compared to a decrease in cash of $181 for fiscal 1995. During
fiscal 1996, $108 of cash was used by operations compared to
$1,675 used by operations during fiscal 1995. This change
resulted principally from a decrease in notes receivable offset
by the Company's net operating loss in fiscal 1996. During
fiscal 1996, net cash of $253 was used in investing activities
compared to $709 used during fiscal 1995. During both years,
investing activities principally represented additions to
property, plant and equipment. During fiscal 1996, net cash of
$227 was provided by financing activities consisting principally
of net long term borrowings ($393), proceeds from employee and
director exercises of stock options ($294) offset by payments
against short term working capital borrowings ($460) compared to
$2,203 provided by financing activities in fiscal 1995, which
principally represented short term working capital borrowings and
proceeds from the exercise of a warrant and employee and director
exercises of stock options.
Current assets increased by $300, or approximately 3%, from
$9,927 at March 31, 1995 to $10,227 at March 31, 1996,
predominantly from an increase in the Company's deferred tax
asset of approximately $696, an increase in inventory levels of
approximately $446 due predominantly to an increase in work-in-process
and purchased components, an increase to refundable
income taxes of approximately $330 due to overpayment of
estimated tax payments during the fiscal year, offset by a
decrease in accounts and notes receivable of approximately $917
due to reduced sales volume during the fiscal year as compared
with the prior fiscal year as well as the allowance against the Company's
receivables iwth respect to a customer in bankruptcy.
22
<PAGE>
Long term notes receivable decreased by $2,049, or approximately
76%, from $2,695 at March 31, 1995 to $646 at March 31, 1996,
predominantly from the non-discounted sale of a portion of the
Company's note portfolio and prepayment of notes by some of the
Company's customers. The long term portion of the Company's future
tax benefit increased by $443, or approximately 130%, from $339 at
March 31, 1995 to $782 at March 31, 1996. Current liabilities
decreased by $413, or approximately 9%, from $4,352 at March 31, 1995
to $3,939 at March 31, 1996, predominantly from a decrease in accounts
payable of approximately $718, a decrease in short term borrowings under
the Company's line of credit with its bank of approximately $460
offset by an increase in the current portion of long-term debt of
approximately $743. Long-term debt decreased from $782 at
March 31, 1995 to $432 at March 31, 1996 due predominantly to
refinancing the Company's mortgage note with its lender to a five
year term from a fifteen year term and achieving a lower interest
rate. Common Stock and Paid-In Capital increased by $758, or
approximately 8%, from $10,043 at March 31, 1995 to $10,801 at
March 31, 1996 due primarily to exercise of stock options by
employees and directors of the Company.
Since August 31, 1994 the Company has had a $2,000 working
capital line of credit secured by the Company's accounts
receivable, notes receivable and inventories. Interest on
amounts borrowed on the line of credit is at the bank's floating
30 day libor rate plus 2.75%. As of March 31, 1996 that rate was
8.06%. The Company borrows against and repays the line of credit
throughout the year depending upon its working capital needs and
cash generated from operations, with the outstanding amount under
the line of credit during fiscal 1996 ranging from zero to
$1,885. The Company believes its lender will renew the line of
credit when it matures on August 31, 1996.
In addition, on August 31, 1995, the Company borrowed $1,000 from
the same lender for an eighteen month term with interest at the
bank's floating 30 day libor rate plus 2.75%. As of March 31,
1996 that rate was 8.06%. The Company also refinanced its
mortgage note with its lender on the same date. The Company's
former mortgage note, in the original principal amount of $1,000
was for a 15 year term with a five year balloon with an interest
rate of prime plus one-half percent. The Company had been making
its monthly principal payments based upon a five year
amortization schedule. By refinancing the note, but not changing the
maturity date of May 23, 1999, the Company was able to lower its
interest rate to a fixed rate of 8.50% from the floating rate of
9.25% as of the closing date for the remainder of the original
five year term.
The Company believes that its anticipated cash flow from
operations will be sufficient to fund its working capital needs,
its capital expenditures and its short and long term note
obligations through March 31, 1997.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
The statements contained in this Annual Report on Form 10-KSB
which are not historical facts contain forward looking
information with respect to plans, projections or future
performance of the Company, the occurrence of which involve
certain risks and uncertainties that could cause the Company's
actual results to differ materially from those expected by the
Company, including the risk of adverse regulatory action affecting
the Company's business or the business of the Company's customers,
competition, the risk of obsolescence of its products, the ultimate
outcome of the Amtel bankruptcy proceeding, and uncertainties detailed
in the Company's filings with the Securities and Exchange Commission.
23
<PAGE>
Item 7. Financial Statements.
- ------- ---------------------
Independent Auditors' Report, page F-1.
Consolidated Balance Sheets as of March 31, 1996 and
1995, pages F-2 and F-3.
Consolidated Statements of Operations for the years
ended March 31, 1996, 1995, and 1994, page F-4.
Consolidated Statements of Shareholders' Equity for the
years ended March 31, 1996, 1995, and 1994, page F-5.
Consolidated Statements of Cash Flows for the years
ended March 31, 1996, 1995, and 1994, pages F-6 and F-7.
Notes to Consolidated Financial Statements, pages F-8
through F-21.
Item 8. Changes in and Disagreements with Accountants on
- ------- Accounting and Financial Disclosure.
------------------------------------------------
None.
<PAGE>
PART III
--------
Item 9. Directors, Executive Officers, Promoters and ControlPersons;
- ------- Compliance with Section 16(a) of the Exchange Act.
------------------------------------------------------------
<TABLE>
The following table sets forth the names and ages of all
directors and executive officers of the Company, as well as
positions and offices within the Company.
<CAPTION>
Name Age Position
---------------- --- ---------------------------
<S> <C> <C>
C. Shelton James 56 Chief Executive Officer and
Chairman of the Board
Tracey L. Gray 64 President, Chief Operating
Officer and Director
Dwight Jasmann 60 Director
Charles H. Moore 66 Director
Thomas E. Patton 55 Director
T. Raymond Suplee 49 Director
Thomas R. Wiltse 72 Director
Alvaro R. Quiros 63 Executive Vice President,
International Marketing
Ronald M. Tobin 53 Vice President, Finance
Chief Financial Officer,
Secretary and Treasurer
Hugh H. Durden 48 Vice President, Sales
Frederick O. Hawkes 50 Vice President, Engineering
and Development
Kenneth W. Noack 58 Vice President, Operations
John H. Wolaver 50 Vice President, Strategic
Marketing and Business
Development
__________________________
</TABLE>
24
<PAGE>
Mr. James has served as Chief Executive Officer of the Company
since May 1991 and has been a director of the Company since
December 1990. Mr. James is currently an investor in and
business advisor to a number of companies. While he has devoted
a substantial amount of time to the Company since May 1991, he
has also served as Executive Vice President of Fundamental
Management Corporation, an investment management company, since
April 1990, and was appointed President of that company in April
1993. He is a member of the boards of Harris Computer Systems,
NAI Technologies, Fundamental Management Corporation, CSPI and SK
Technologies, Inc. From 1980 to 1989, Mr. James had been
Executive Vice President of Gould, Inc., a diversified
electronics company, and President of Gould's Computer Systems
Division.
Mr. Gray has served as President and Chief Operating Officer of
the Company since July 1991 and has been a director of the
Company since August 1991. From June 1986 until joining the
Company, Mr. Gray had been a Vice President of the Government
Systems Division, Network Systems Division and Federal Systems
Division, respectively, of Sprint.
Mr. Jasmann has been a director of the Company since December
1993. Mr. Jasmann has been Vice President of Human Resources for
AirTouch Communications in San Francisco, a domestic and
international operator of wireless services, since January 1995.
From August 1992 to December 1994, Mr. Jasmann acted as an
international telecommunications advisor for various U.S. and
foreign telecommunications operators including Comsat Corporation
and Fax International, Inc. From February 1959 to May 1992, he
held various positions with AT&T, most recently as President and
Managing Director of AT&T Communications Pacific based in Hong
Kong. He previously served on the boards of the Pacific
Telecommunications Council in Hawaii, the Information
Communication Institute of Singapore and Philcom, a Philippines
telephone company. Mr. Jasmann is currently a director of Hello
Direct, Inc.
Mr. Moore has been a director of the Company since December 1993.
Mr. Moore has been Director of Athletics for Cornell University
since November 1994. From November 1992 to October 1994 Mr.
Moore was Vice Chairman of Advisory Capital Partners, Inc., an
investment advisory firm. From July 1988 to October 1992, Mr.
Moore served as President and Chief Executive Officer of Ransburg
Corporation, a producer of industrial coating systems and
equipment, and from August 1991 to October 1992 as Executive Vice
President of Illinois Tool Works, Inc., a multinational
manufacturer of highly engineered components and systems. Mr.
Moore is currently a director of The Turner Corporation and is
Chairman of the Audit Committee of the United States Olympic
Committee.
25
<PAGE>
Mr. Patton has been a director of the Company since July 1989.
Mr. Patton has been a partner in the Washington, D.C. law firm of
Tighe, Patton, Tabackman & Babbin, engaged in civil and criminal
business litigation, securities law enforcement matters,
corporate finance and corporate compliance, since August 1994.
From 1979 until July 1994, Mr. Patton was a partner in the
Washington, D.C. law office of Schnader, Harrison, Segal & Lewis,
engaged in civil and criminal securities litigation and general
business litigation. Mr. Patton also serves on the board of
directors of Infomation Exchange, Inc., a financial services
marketing database company.
Mr. Suplee has been a director of the Company since September
1986. Since 1982, Mr. Suplee has been the Senior Partner and
President of Suplee & Shea, P.A., a certified public accounting
firm located in Sarasota, Florida. Mr. Suplee is currently a
director of First of America Bank (Florida) and serves on its
audit committee, and is also a director of Plymouth Harbor adult
retirement facility.
Mr. Wiltse has been a director of the Company since July 1990.
Since 1985 Mr. Wiltse has been active as a private investor. For
more than thirty years, until his retirement in 1985, Mr. Wiltse
served in a variety of managerial and executive capacities with
General Motors Corporation's worldwide foundry operations.
Mr. Quiros was a founder of the Company and has served as an
executive officer since its inception and as a director from its
inception until December 1993. He has served as Executive Vice
President of the Company, responsible for international
marketing, since June 1991 and had served as President of the
Company from its inception in April 1985 until June 1991.
Mr. Tobin has served as Vice President, Chief Financial Officer,
Secretary and Treasurer of the Company since July 1992. Prior to
joining the Company he held various financial positions with
SmithKline Beecham Corporation in Philadelphia since September
1970, and most recently had been Corporate Controller of
SmithKline Beecham Clinical Laboratories in King of Prussia, PA
since February 1982.
Mr. Durden rejoined the Company in June 1991 as Vice President of
Sales after having previously served as district sales manager
for the Company from March 1987 until August 1989. From August
1989 until rejoining the Company, Mr. Durden founded and served
as Chief Executive Officer and President of two privately-held
telecommunications companies. From November 1984 until February
1987, Mr. Durden was President of Communications Central, Inc., a
privately-held operator of payphones.
26
<PAGE>
Mr. Hawkes rejoined the Company in October 1993 as Vice President
of Engineering and Development, having previously served in the
same capacity from August 1991 to April 1992. From April 1992
until October 1993, Mr. Hawkes was a consultant to Harris
Corporation and from September 1989 until May 1991, he was a
director of a product division of Harris.
Mr. Noack has served as Vice President of Operations since
January 1993, having joined the Company in July 1992 as Director
of Operations. Prior to joining the Company he was with AT&T
Paradyne Corporation in Largo, Florida since 1973, and most
recently was Vice President and Director of Operations Planning
and Materials.
Mr. Wolaver joined the Company in June 1995 as Vice President of
Strategic Marketing and Business Development. Prior to joining
the Company he was with Sprint in Kansas City since June 1990,
having served as Director, Partnership Marketing, Assistant Vice
President, Strategic Business Planning & Research, and Director,
Strategic Marketing. From June 1983 until June 1990, he held
several positions with MCI in Washington, DC, including
Director, Corporate Development and Director, Corporate
Marketing.
<TABLE>
Section 16 Compliance
- ---------------------
Based solely upon a review of certain reports required to be
filed by the Company's current or former directors and officers
and beneficial owners of more than 10 percent of the outstanding
Common Stock pursuant to Section 16(a) of the Securities Exchange
Act of 1934, the following person failed to file, on a timely
basis, reports so required to be filed during the fiscal year
ended March 31, 1996.
<CAPTION>
Number of
Transactions
Number of Not Reported on a
Name Title Late Reports TimelyBasis
-------------- ----------------------- ------------ -----------------
<S> <C> <C> <C>
Tracey L. Gray President, 1 2
Chief Operating Officer and Director
and Director
__________________
</TABLE>
27
<PAGE>
Item 10. Executive Compensation
- -------- ----------------------
<TABLE>
The following table sets forth certain information covering the
compensation paid or accrued by the Company during the fiscal
years indicated to its Chief Executive Officer and to each of its
most highly compensated executive officers whose annual salary
and bonus exceeded $100,000 during the fiscal year ended March 31, 1996
("named executive officers"):
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------- Long Term
Compensation
Annual Compensation Awards
----------------------------------------- ------
(a) (b) (c) (d) (e) (g) (i)
Fiscal Other Number
Year Annual of Securities
Ended Compensation Underlying All Other
Name and Principal Position March 31, Salary ($) Bonus ($) ($) Options <F1> Compensation ($)
- --------------------------- --------- ---------- --------- ------------ ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
C. Shelton James 1996 $78,654 0 25,000 $1,838 <F2>
Chairman of the Board and 1995 73,004 $35,450 40,000 1,555 <F2>
Chief Executive Officer 1994 73,613 40,450 20,000 1,151 <F2>
Tracey L. Gray 1996 138,039 0 25,000 3,463 <F2>
President and 1995 127,461 60,450 40,000 2,738 <F2>
Chief Operating Officer 1994 125,599 71,450 20,000 2,245 <F2>
Hugh H. Durden 1996 184,876 0 7,500 3,173 <F2>
Vice President 1995 201,859 8,100 10,000 3,369 <F2>
1994 189,661 7,538 10,000 2,144 <F2>
Alvaro R. Quiros 1996 104,000 0 7,000 2,761 <F2>
Executive Vice President 1995 102,295 0 10,000 2,404 <F2>
1994 84,298 450 0 1,740 <F2>
______________________
28
<PAGE>
<FN>
<F1> Represents options granted under the Company's 1991 Stock Option Plan.
Mr. Quiros was not granted options during the fiscal year ended
March 31, 1994.
<F2> Includes taxable portion of Company paid Group Term Life Insurance and
the Company's matching contribution to the 401(k) savings plan (see
Note Q). Group Term Life Insurance for Messrs. James, Gray, Durden and
Quiros, respectively, for Fiscal 1996 is $450, $702, $174 and $702, for
Fiscal 1995 is $450, $702, $174 and $702 and for Fiscal 1994 is $288,
$702, $174 and $702. 401(k) Savings plan matching contributions for
Messrs. James, Gray, Durden and Quiros, respectively, for Fiscal 1996
are $1,388, $2,761, $2,999 and $2,059, Fiscal 1995 are $1,105, $2,036,
$3,195 and $1,702 and for Fiscal 1994 are $863, $1,543, $1,970 and
$1,038.
</FN>
</TABLE>
29
<PAGE>
<TABLE>
Stock Option Grants
- -------------------
The following table sets forth the number of securities underlying options,
the exercise price and the expiration date for stock options granted to the
Chief Executive Officer and the named executive officers who received options
during the fiscal year ended March 31, 1996.
<CAPTION>
Option Grants in Last Fiscal Year
---------------------------------
Individual Grants
------------------
(a) (b) (c) (d) (e)
--------------------------------------------------------------------
% of
Total
Options
Granted to Exercise
Options Employees or Base
Granted in Fiscal Price Expiration
Name (#) <F1> Year ($/Sh) Date
--------------------- -------- --------- -------- ----------
<S> <C> <C> <C> <C>
C. Shelton James 25,000 11.9% $6.1875 2/20/01
Tracey L. Gray 25,000 11.9% $6.1875 2/20/01
Hugh H. Durden 7,500 3.6% $6.1875 2/20/01
Alvaro R. Quiros 7,000 3.3% $6.1875 2/20/01
<FN>
<F1> Options become exercisable one fourth each year,
cumulatively, beginning on February 20, 1997, and
expire on February 20, 2001.
</FN>
</TABLE>
30
<PAGE>
<TABLE>
Stock Option Exercises and Holdings
- -----------------------------------
The following table sets forth the number of exercisable and
unexercisable options as of March 31, 1996 and the value of such
options for the Chief Executive Officer and the named executive
officers.
<CAPTION>
AGGREGATED OPTION EXERCISE IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTIONS VALUE TABLE
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
FY-End (#) FY-End ($)
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized($) Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
C. Shelton James 40,773 $246,270 59,227/65,000 $226,714/$ 86,900
Tracey L. Gray 100,000 $490,937 20,000/65,000 $51,900/$ 86,900
Hugh H. Durden 37,500 $274,325 0/20,000 0/$ 30,325
Alvaro R. Quiros - - 2,500/14,500 $4,375/$ 13,125
</TABLE>
Directors' Compensation
- ------------------------
Directors who are not employees of the Company receive an annual
retainer fee of $5,000 per year plus $1,500 for each Board meeting
attended, and $500 for each committee meeting attended. Directors are
also reimbursed for expenses in attending Board and Board committee
meetings.
During the fiscal year ended March 31, 1996, options were granted to
the Company's non-employee directors (Messrs. Jasmann, Moore, Patton,
Suplee and Wiltse), pursuant to the Company's Directors' Stock Option
Plan, in the amount of 1,000 shares, 3,000 shares, 2,000 shares, 4,000
shares and 6,000 shares, respectively, at $5.25 per share. These
options are fully exercisable on March 31, 1997 and expire on March 31, 2001.
31
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and
- -------- Management.
---------------------------------------------------
<TABLE>
The following table sets forth, at June 10, 1996, the number and
percentage of shares of Common Stock which, according to information
supplied to the Company, are beneficially owned by: (i) each person
who is the beneficial owner of more than 5% of the Common Stock; (ii)
each of the directors, and named executive officers of the Company
individually; and (iii) all current directors and executive officers
of the Company as a group. Under rules adopted by the Securities and
Exchange Commission, a person is deemed to be a beneficial owner of
Common Stock with respect to which he has or shares voting power
(which includes the power to vote or to direct the voting of the
security), or investment power (which includes the power to dispose
of, or to direct the disposition of, the security). A person is also
deemed to be the beneficial owner of shares with respect to which he
could obtain voting or investment power within 60 days of June 10, 1996,
such as upon the exercise of options or warrants.
Number of
Name and Address Shares <F1> Percentage
- --------------------------- --------- ----- ----------
<S> <C> <C>
C. Shelton James. . . . . . 1,547,450 <F2> 19.1%
6428 Parkland Drive
Sarasota, Florida 34243
Fundamental Management Corporation 1,417,723 17.7%
4000 Hollywood Boulevard
Suite 610N
Hollywood, Florida 33021
Alvaro R. Quiros. . . . . . 556,577 <F3> 6.9%
6428 Parkland Drive
Sarasota, Florida 34243
Thomas R. Wiltse. . . . . . 400,000 <F4> 5.0%
6428 Parkland Drive
Sarasota, Florida 34243
Tracey L. Gray. . . . . . . 148,543 <F5> 1.8%
6428 Parkland Drive
Sarasota, Florida 34243
32
<PAGE>
<S> <C> <C>
T. Raymond Suplee . . . . . 28,300 <F6> 0.4%
6428 Parkland Drive
Sarasota, Florida 34243
Thomas E. Patton. . . . . . 9,000 <F7> 0.1%
6428 Parkland Drive
Sarasota, Florida 34243
Dwight Jasmann. . . . . . . 8,890 <F8> 0.1%
6428 Parkland Drive
Sarasota, Florida 34243
Charles H. Moore. . . . . . 11,100 <F9> 0.1%
6428 Parkland Drive
Sarasota, Florida 34243
Hugh H. Durden. . . . . . . 5,000 <F10> 0.1%
6428 Parkland Drive
Sarasota, Florida 34243
All directors and executive officers as
a group (13 persons) . . 2,841,309 <F11> 34.2%
_______________________________________
<FN>
<F1> Unless otherwise indicated, each shareholder has sole
voting and investment power with respect to all listed
shares.
<F2> Includes 1,417,723 shares held by Fundamental Management
Corporation, as to which shares Mr. James disclaims
beneficial ownership, and 74,227 shares which may be
issued upon exercise of stock options within 60 days.
<F3> Includes 5,000 shares which may be issued upon the
exercise of stock options within 60 days.
<F4> Includes 40,000 shares which may be issued upon the
exercise of stock options within 60 days.
<F5> Includes 35,000 shares which may be issued upon exercise
of stock options within 60 days.
<F6> Includes 26,000 shares which may be issued upon the
exercise of stock options within 60 days.
33
<PAGE>
<F7> Includes 500 shares held jointly with Mr. Patton's wife.
Includes 8,000 shares which may be issued upon the
exercise of stock options within 60 days.
<F8> Includes 6,000 shares which may be issued upon the
exercise of stock options within 60 days.
<F9> Includes 75 shares held by Mr. Moore's wife and 25 shares
held by Mr. Moore's daughter. Includes 10,000 shares
which may be issued upon the exercise of stock options
within 60 days.
<F10> Includes 5,000 shares which may be issued upon the
exercise of stock options within 60 days.
<F11> Includes a total of 1,417,723 shares held by Fundamental
Management Corporation and shares held by family members
as to which shares the respective officers and directors
disclaim beneficial ownership. Also includes 284,526
shares which may be issued upon exercise of stock options
within 60 days.
</FN>
</TABLE>
34
<PAGE>
Item 12. Certain Relationships and Related Transactions.
- -------- -----------------------------------------------
On March 27, 1996, the Company entered into an agreement with
Aditel, a Mexican corporation ("Aditel"), to create a joint
venture to operate pay phones in the Mexican Republic. As of
March 31, 1996, the Company's investment in the joint venture was
approximately $90,000. In May, 1996, the Company's investment in
the joint venture increased to approximately $290,000 representing
approximately 45 percent of the equity of the joint venture. The
Company's investments in the joint venture have consisted
principally of contributions of pay phones. Mr. Alvaro R. Quiros,
Executive Vice President , International Marketing, and a holder
of approximately 6.9 percent of the Company's Common Stock as of
June 10, 1996, is the owner of approximately 11 percent of the
equity of the joint venture.
Item 13. Exhibits and Reports on Form 8-K.
- -------- ---------------------------------
(a) Exhibits.
----------
The Exhibits are listed in the Index to Exhibits on
pages E-1 through E-3.
(b) Reports on Form 8-K.
--------------------
No reports on Form 8-K were filed during the quarter
ended March 31, 1996.
35
<PAGE>
Signatures
----------
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ELCOTEL, INC.
Dated: July 15, 1996 By: /s/ Ronald M. Tobin
-------------------------
Ronald M. Tobin
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature Title
/s/ C. Shelton James Chairman of the Board, Chief Executive Officer
- ------------------------- (Principal Executive Officer and Director)
C. Shelton James
Date: July 15, 1996
/s/ Tracey L. Gray President, Chief Operating Officer and Director
- -------------------------
Tracey L. Gray
Date: July 15, 1996
/s/ Dwight Jasmann Director
- -------------------------
Dwight Jasmann
Date: July 15, 1996
/s/ Charles H. Moore Director
- -------------------------
Charles H. Moore
Date: July 15, 1996
/s/ Thomas E. Patton Director
- -------------------------
Thomas E. Patton
Date: July 15, 1996
/s/ T. Raymond Suplee Director
- -------------------------
T. Raymond Suplee
Date: July 15, 1996
/s/ Thomas R. Wiltse Director
- -------------------------
Thomas R. Wiltse
Date: July 15, 1996
/s/ Ronald M. Tobin Vice President and Chief Financial Officer
- ------------------------- (Principal Financial and Accounting Officer)
Ronald M. Tobin
Date: July 15, 1996
36
<PAGE>
<PAGE>
[LETTERHEAD OF DELOITTE & TOUCHE LLP]
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Elcotel, Inc.
Sarasota, Florida
We have audited the accompanying consolidated balance sheets of Elcotel, Inc.
and subsidiaries (the "Company") as of March 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended March 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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, such consolidated financial statements present fairly, in
all material respects, the financial position of Elcotel, Inc. and
subsidiaries as of March 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1996 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
- -------------------------
DELOITTE & TOUCHE LLP
Tampa, Florida
July 12, 1996
F-1
<PAGE>
<TABLE>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
<CAPTION>
March 31,
----------------------------------
1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary investments $ 232 $ 366
Accounts receivable, less allowance
for doubtful accounts of $1,115
and $345, respectively 2,943 2,809
Notes receivable, less allowance
for doubtful accounts of $1,922
and $289, respectively 2,238 3,289
Inventories 2,800 2,354
Refundable income taxes 507 177
Deferred tax asset 1,332 636
Prepaid expenses and other current assets 175 296
----------- -----------
TOTAL CURRENT ASSETS 10,227 9,927
PROPERTY, PLANT AND EQUIPMENT, net 3,103 3,188
NOTES RECEIVABLE, less allowance
for doubtful accounts of $69
and $141, respectively 646 2,695
DEFERRED TAX ASSET 782 339
OTHER ASSETS 171 76
----------- -----------
$ 14,929 $ 16,225
=========== ===========
F-2
</TABLE>
<PAGE>
<TABLE>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
LIABILITIES AND SHAREHOLDERS' EQUITY (In thousands)
(Dollars in thousands)
<CAPTION>
March 31,
----------------------------------
1996 1995
----------- ----------- 1996 1995
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable, trade $ 1,030 $ 1,748
Accrued expenses and other current
liabilities 1,134 1,112
Line of credit 965 1,425
Current portion of long-term debt 810 67
----------- -----------
TOTAL CURRENT LIABILITIES 3,939 4,352
----------- -----------
LONG TERM DEBT, less current portion 432 782
COMMITMENTS AND CONTINGENCIES (see Note L)
SHAREHOLDERS' EQUITY:
Common stock, $0.01 par value:
Authorized 20,000,000 shares,
Issued 8,060,503 shares and 7,735,156
shares, respectively 81 77
Additional paid-in capital 10,720 9,966
Retained earnings/(deficit) (66) 1,225
Less cost of 52,000 shares of common
stock in treasury (177) (177)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 10,558 11,091
----------- -----------
$ 14,929 $ 16,225
=========== ===========
<FN>
See Notes to Consolidated Financial Statements
F-3
</TABLE>
<PAGE>
<TABLE>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<CAPTION>
Year ended March 31,
---------------------------------------
1996 1995 1994
<S> <C> <C> <C> ---------- --------- ---------
NET SALES $ 21,462 $ 25,090 $ 20,216
COSTS AND EXPENSES:
Cost of sales 13,238 14,776 12,232
Research and development 2,257 1,758 1,019
Selling, general and administrative 6,490 5,791 4,789
Other charges (see Note B) 1,844 - -
---------- --------- ---------
TOTAL COSTS AND EXPENSES 23,829 22,325 18,040
---------- --------- ---------
PROFIT (LOSS) FROM OPERATIONS (2,367) 2,765 2,176
---------- --------- ---------
INTEREST:
Interest income 416 394 406
Interest expense (201) (109) (483)
---------- --------- ---------
INTEREST, net 215 285 (77)
PROFIT (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (2,152) 3,050 2,099
INCOME TAX (BENEFIT)/PROVISION (861) (474) 58
---------- --------- ---------
PROFIT (LOSS) BEFORE EXTRAORDINARY ITEM (1,291) 3,524 2,041
EXTRAORDINARY ITEM:
Extinguishment of Bank Debt (net of income
taxes of $43) - - 1,961
---------- --------- ---------
NET PROFIT (LOSS) $ (1,291) $ 3,524 $ 4,002
========== ========= =========
PROFIT (LOSS) BEFORE EXTRAORDINARY ITEM PER
COMMON AND COMMON EQUIVALENT SHARE $ (0.16) $ 0.45 $ 0.30
========== ========= =========
NET PROFIT (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE $ (0.16 $ 0.45 $ 0.59
========== ========= =========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 7,830 7,847 6,823
<FN>
See Notes to Consolidated Financial Statements
F-4
</TABLE>
<PAGE>
<TABLE>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
------------------------------------------------
(Amounts in thousands)
<CAPTION>
Common Stock
-------------- Additional Retained
Shares Paid-in Earnings Treasury
Issued Amount Capital (Deficit) Stock Total
------ ------ -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1993 5,599 $ 56 $ 6,759 $ (6,301) $ (177) $ 337
ISSUANCE OF COMMON
STOCK, through private
placement 1,417 14 1,888 - - 1,902
EXERCISE OF OPTIONS 67 1 73 - - 74
ISSUANCE OF WARRANT - - 323 - - 323
NET PROFIT - - - 4,002 - 4,002
------ ----- -------- --------- -------- ---------
BALANCE, March 31, 1994 7,083 71 9,043 (2,299) (177) 6,638
EXERCISE OF OPTIONS 113 1 108 - - 109
EXERCISE OF WARRANT 539 5 749 - - 754
TAX BENEFIT FROM
EXERCISE OF OPTIONS - - 66 - - 66
NET PROFIT - - - 3,524 - 3,524
------ ----- -------- --------- -------- ---------
BALANCE, March 31, 1995 7,735 77 9,966 1,225 (177) 11,091
EXERCISE OF OPTIONS 326 4 290 - - 294
TAX BENEFIT FROM
EXERCISE OF OPTIONS - - 464 - - 464
NET LOSS - - - (1,291) - (1,291)
------ ----- -------- --------- -------- ---------
BALANCE, March 31, 1996 8,061 $ 81 $ 10,720 $ (66) $ (177) $(10,558)
====== ===== ======== ========= ======== =========
<FN> See Notes to Consolidated Financial Statements
F-5
</TABLE>
<PAGE>
<TABLE>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
<CAPTION>
Year ended March 31,
--------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit (loss) $ (1,291) $ 3,524 $ 4,002
Adjustments to reconcile net profit (loss) to net
cash(used in)/provided by operating activities:
Depreciation and amortization 363 318 390
Provision for doubtful accounts 2,392 287 464
(Gain)/Loss on disposal of equipment - 12 20
Extraordinary gain before offset of
actual costs incurred - - (2,197)
Change in operating assets and
liabilities:
Accounts receivable (956) (1,136) (107)
Notes receivable 1,530 (3,950) 1,249
Deposits - 721 (721)
Inventories (446) (319) (786)
Refundable income taxes (330) (177) -
Deferred tax asset (675) (975) -
Prepaid expenses and other
current assets 121 (205) 3
Other assets (120) (39) 23
Accounts payable, trade (718) 314 572
Accrued expenses and other
current liabilities 22 (50) (30)
Net cash flow (used in)/provided
by operating activities (108) (1,675) 2,882
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and
equipment (255) (709) (239)
Proceeds from disposal of equipment 2 - 3
Net cash flow used in investing
activities (253) (709) (236)
F-6
</TABLE>
<PAGE>
<TABLE>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(In thousands)
(continued)
<CAPTION>
Year ended March 31,
--------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock $ 294 $ 929 $ 1,976
Net (payments)/proceeds related to
short-term borrowings (460) 1,425 1,000
Proceeds from long-term borrowings 1,000 - -
Payments on long-term debt (607) (151) (6,000)
------------ ------------ ------------
Net cash flow provided by/
(used in) financing activities 227 2,203 (3,024)
------------ ------------ ------------
Net decrease in cash
and temporary investments (134) (181) (378)
Cash and temporary investments
at beginning of year 366 547 925
------------ ------------ ------------
Cash and temporary investments
at end of year $ 232 $ 366 $ 547
============ ============ ============
ADDITIONAL CASH FLOW INFORMATION:
Cash Paid During the Year for:
Interest $ 218 $ 123 $ 515
Income taxes $ 144 $ 610 $ 95
NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Warrant issued in exchange for debt $ - $ - $ 323
Deferred tax benefit from exercise of options $ 464 $ - $ -
<FN>
See Notes to Consolidated Financial Statements.
F-7
</TABLE>
<PAGE>
ELCOTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1996, 1995, AND 1994
- -------------------------------------------
(Dollars in thousands, except for share amounts)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of Business
- ------------------
The Company designs, develops and markets public
communication products.
Principles of Consolidation
- ---------------------------
The accompanying consolidated financial statements include
the accounts of Elcotel, Inc. and its wholly-owned
subsidiaries (the "Company"). All material intercompany
accounts and transactions have been eliminated in
consolidation.
Revenue Recognition
- -------------------
Revenue is recognized at the point in which title to such
goods sold passes to the customer.
Credit Policy
- -------------
Credit is granted to customers that the Company deems
creditworthy. Sales are made to customers by their payment
of cash in advance or cash on delivery, for which the
Company grants the customer a discount, or, if the customer
otherwise qualifies, the Company provides 30 days credit.
In addition, the Company provides limited secured financing
with terms generally not exceeding 24 months and interest
charged at competitive rates.
Warranty Policy
- ----------------
The original purchaser of the Company's products receives a
two or three-year warranty on products the Company manufactures.
When the Company resells products, from other manufacturers,
the Company will pass on the other manufacturers' warranty to
its customer.
F-8
<PAGE>
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 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 estimated.
Temporary Investments
- ---------------------
Temporary investments consist of short-term, highly liquid
investments which are readily convertible into cash.
Advertising
- -----------
Advertising expenses are charged to operations during the
period incurred. The Company incurred advertising expense
of approximately $90, $100 and $76 for the years ended March
31, 1996, 1995, and 1994, respectively.
Inventories
- -----------
Inventories are stated at the lower of cost (first-in,
first-out) or market.
Property, Plant and Equipment
- -----------------------------
Property, plant and equipment are recorded at cost.
Depreciation is computed by the straight-line method based
upon the estimated useful lives of the related assets, which
generally range from three years for computers to 35 years
for buildings.
Deposits
- --------
Deposits represent cash collateral related to letters of
credit in support of bid and performance bonds related to
certain Company projects.
Income Taxes
- ------------
The liability method is used in accounting for income taxes.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
F-9
<PAGE>
used for income tax purposes, and are measured using the
enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse. The deferred tax
asset is reduced by a valuation allowance when, on the basis of
available evidence, it is more likely than not that all or a
portion of the deferred tax asset will not be realized.
Net Profit (Loss) per Common and Common Equivalent Share
- -------------------------------------------------
Net loss per common share for the year ended March 31, 1996
has been computed based upon the weighted average number of
common shares outstanding. Common equivalent shares have not
been included as the effect would be antidilutive.
Net profit per common and common equivalent share for the years
ended March 31, 1995 and 1994 have been computed based upon the
weighted average number of common and common equivalent shares outstanding.
NOTE B - OTHER CHARGES
In late 1994 and early 1995, the Company sold Amtel
Communications, Inc. and four related entities ("Amtel") on
credit approximately 3,500 payphones and related equipment.
To secure Amtel's obligations to pay the Company for the
payphones and related equipment pursuant to five promissory
notes, Amtel granted the Company a security interest in
payphones sold to Amtel and collateral assignments of
agreements between Amtel and the owners of certain sites
where those payphones had been or were to be installed
(collectively, the "Collateral").
On August 3, 1995, Amtel filed voluntary petitions for relief
under Chapter 11 of the Bankruptcy Code, which were administratively
consolidated under the case name of In re ACI-HDT Supply Company, United
States Bankruptcy Court for the Southern District of California,
Administratively Consolidated Case No. 95-08253-A11. On the date of the
bankruptcy filing, the Company was owed approximately $3,200,000 by Amtel.
On June 3, 1996, Amtel filed a proposed Disclosure Statement
for Debtors' Original Chapter 11 Plan (the "Disclosure
Statement") and the Debtors' Original Chapter 11 Plan (the
"Plan"). On June 26, 1996, at the scheduled hearing on the
Disclosure Statement, counsel for Amtel advised the
Bankruptcy Court that Amtel would not be proceeding with the
Disclosure Statement and Plan, but instead would be filing
an amended disclosure statement together with two competing
F-10
<PAGE>
plans of reorganization. Amtel's counsel further advised
that the two plans would be sent out with a single
disclosure statement and ballots for creditors and other
parties in interest to vote on and express their respective
preferences between the plans. Amtel's counsel advised that
the first plan would be based on a sale of Amtel's payphone
assets and business to PhoneTel Technologies, Inc.
("PhoneTel") for approximately $13,000,000, payable
$7,000,000 in cash and $6,000,000 in publicly tradeable
shares of PhoneTel stock. The second plan would be based on
a reorganization concept, preserving Amtel as an operating
concern but confirming ownership in the lessor/investor
group to be shared with Pacific Coin, a California general
partnership, which would infuse substantial cash into the
reorganized entity and would be responsible for the
operation of Amtel's payphone business. At the conclusion
of the June 26, 1996 hearing, the Bankruptcy Court set
July 19, 1996 as the deadline for filing the two plans of
reorganization and the contemplated combined disclosure
statement. The Bankruptcy Court also set August 16, 1996 as
the hearing date for approval of the new disclosure
statement. Consistent with these dates set by the court,
Amtel's counsel also advised that the debtors would attempt
to achieve court approval and confirmation of one of the
plans by September or October 1996.
Subsequent to that hearing, the Company reached an agreement
in principle with Amtel with respect to the proposed
treatment of its claims under the debtors' plan of
reorganization. That agreement in principle provides that
the Company would receive in satisfaction of all claims by
the Company against Amtel and by Amtel against the Company
$1.4 million in cash plus all of the payphones
(approximately 1,350) and related equipment currently in the
Company's possession and being warehoused by the Company
pursuant to a prior Bankruptcy Court order. Based, in part,
upon this agreement in principle, the Company has reviewed
the carrying value of its notes receivable from Amtel and
has provided a specific allowance of $1,602 against such
notes receivable. This charge of $1,602, in addition to
approximately $242 in other costs associated with the
bankruptcy proceeding, has been included as Other Charges in
the Consolidated Statement of Operations for the year ended
March 31, 1996. The remaining balance of such notes receivable
is approximately $1,550 which amount is included in current
notes receivable. There can be no assurance that this
agreement in principle with respect to the treatment of the
Company's claims under the plan will be implemented. Any
plan will have to be voted upon by creditors and will also
have to be confirmed by the Bankruptcy Court before the
treatment can be implemented.
F-11
<PAGE>
NOTE C - RECEIVABLES:
Accounts receivable consist of the following:
March 31,
--------------------------
1996 1995
--------- ---------
Accounts receivable, trade $ 3,978 $ 3,070
Call revenue receivables 80 84
Less allowance for doubtful accounts ( 1,115) ( 345)
--------- ---------
$ 2,943 $ 2,809
========= =========
Changes in the allowance for doubtful accounts consist of the following:
Years ended March 31,
------------------------------------
1996 1995 1994
-------- -------- --------
Balance at beginning of period ($ 345) ($ 171) ($ 111)
Provision for doubtful accounts ( 822) ( 181) ( 168)
Charge-off of uncollectible accounts,
net of recoveries 52 7 108
------- ------- -------
($ 1,115) ($ 345) ($ 171)
======= ======= =======
Notes receivable are principally comprised of interest-
bearing trade notes receivable from customers with remaining
maturities of twenty-four months or less and collateralized
by operating pay stations. The notes receivable of $1,550, as
described in Note B, are included in the balance as of March 31, 1996.
Changes in the allowance for doubtful notes receivable
consist of the following:
Years ended March 31,
------------------------------------
1996 1995 1994
-------- -------- --------
Balance at beginning of period ($ 430) ($ 390) ($ 137)
Provision for doubtful notes ( 1,570) ( 106) ( 296)
Charge-off of uncollectible notes,
net of recoveries 9 66 43
------- ------- -------
($ 1,991) ($ 430) ($ 390)
======= ======= =======
F-12
<PAGE>
NOTE D - INVENTORIES:
Inventories by stage of completion are as follows:
March 31,
--------------------------
1996 1995
--------- ---------
Finished products $ 470 $ 407
Work-in-process 240 162
Purchased components 2,089 1,785
--------- ---------
$ 2,800 $ 2,354
========= =========
NOTE E - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is comprised of the following:
March 31,
--------------------------
1996 1995
--------- ---------
Land and improvements $ 372 $ 371
Buildings 2,672 2,658
Engineering and manufacturing eqt. 1,347 1,187
Furniture, fixtures and office eqt. 864 799
--------- ---------
5,255 5,015
Less accumulated depreciation
and amortization 2,152 1,827
--------- ---------
$ 3,103 $ 3,188
========= =========
Depreciation expense for the fiscal years ended March 31, 1996, 1995,
and 1994, respectively, was $255, $276, and $245.
NOTE F - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities consist of
the following:
March 31,
--------------------------
1996 1995
--------- ---------
Payroll, payroll taxes and severance $ 480 $ 573
Professional fees 100 81
Interest expense 6 23
Warranty 311 307
Taxes other than income and payroll 7 65
Customer advances 214 15
Other 16 48
--------- ---------
$ 1,134 $ 1,112
========= =========
F-13
<PAGE>
NOTE G - INCOME TAXES:
The Company's income tax (benefit) provision for the years ended
March 31, 1996, 1995 and 1994 is comprised of the following:
Years ended March 31,
------------------------------------
1996 1995 1994
-------- -------- --------
Current tax (benefit) expense:
Federal $ ( 186) $ 475 $ 95
State - 26 6
------- ------- -------
( 186) 501 101
------- ------- -------
Deferred tax benefit:
Federal ( 627) ( 848) -
State ( 48) ( 127) -
------- ------- -------
( 675) ( 975) -
------- ------- -------
Taxes on extraordinary item - - ( 43)
------- ------- -------
Net tax (benefit) provision $ ( 861) $ ( 474) $ 58
======= ======= =======
The Company's income tax benefit for fiscal 1996 differed
from the amount of tax expense as computed by applying the
statutory income tax rates to income before taxes primarily
due to the effect of the carryback of the net operating loss
generated in the current year. This carryback, while generating
a current refund receivable, also causes tax credits previously
utilized in the carryback year, to be restored for utilization
in future years. These crdits increase the deferred tax asset
on a dollar for dollar basis (i.e. 100% versus 34%).
The Company's income tax benefit for fiscal 1995 differed
from the amount of tax expense as computed by applying the
statutory income tax rates to income before taxes primarily
as a result of the elimination of the valuation reserve on
the Company's net deferred tax asset and the utilization of
net operating losses and tax credit carryforwards which had
been fully reserved at the end of the prior fiscal year.
The Company's income tax provision for fiscal 1994 differed
from the total income tax expense as computed by applying
the statutory income tax rates to income before taxes due
primarily to the utilization of net operating losses, which
were subject to a full valuation allowance at the beginning
of the year, to offset substantially all income taxes
payable. The only remaining tax expense is primarily
attributable to alternative minimum taxes.
F-14
<PAGE>
The significant components of the deferred tax assets as of
March 31, 1996 and March 31, 1995 are as follows:
March 31,
--------------------------
1996 1995
--------- ---------
Deferred tax assets:
Accounts and notes receivable reserves $ 1,170 $ 302
Inventory reserves 55 52
Warranty and other accruals 184 172
Tax credit carryforwards 583 394
NOL carryforwards 220 114
--------- ---------
2,212 1,034
--------- ---------
Deferred tax liabilities:
Property, plant and equipment 91 54
Deferred patent costs 7 5
--------- ---------
98 59
--------- ---------
Net deferred tax asset 2,114 975
Less current portion 1,332 636
--------- ---------
Net deferred tax asset,
less current portion $ 782 $ 339
========= =========
As of March 31, 1996, the Company has available net operating loss carryforwards
for state tax purposes of approximately $3,998, expiring in the years 2006 to
2008. In addition, the Company has available approximately $583 in research
and other tax credit carryforwards, expiring in varying amounts between the
years 2001 and 2008.
NOTE H - LONG TERM DEBT:
March 31,
--------------------------
1996 1995
--------- ---------
Long term debt consists of the following:
Promissory note with a bank, expiring
May 23, 1999, with interest fixed
at 8.50%. $ 631 $ 849
Promissory note with a bank, expiring
2/28/1997, with variable interest
(8.06% at March 31, 1996) 611 -
--------- ---------
Total long term debt 1,242 849
Less current portion 810 67
--------- ---------
$ 432 $ 782
========= =========
F-15
<PAGE>
The promissory note arose from refinancing a note on August 31, 1995
which was due on May 23, 1999. Interest on the previous note was
at prime plus one-half percent with monthly payments based on a fifteen
year amortization and a balloon payment after five years. Principal
payments on the new note are based on equal monthly installments over
a five year period expiring on May 23, 1999. The note is secured by
a mortgage on the Company's facility. Payments due on the note are
as follows (in thousands):
Due in fiscal 1997 $ 199
Due in fiscal 1998 199
Due in fiscal 1999 199
Due in fiscal 2000 34
-------
$ 631
=======
The Company has a $1,000 promissory note secured by the
Company's accounts receivable, notes receivable and
inventories. Interest on the note is based on the Libor
rate plus 2.75 percentage points (8.06% at March 31, 1996).
Principal payments are based on eighteen equal monthly
installments expiring on February 28, 1997.
NOTE I - LINE OF CREDIT:
The Company has a $2,000 working capital line of credit
secured by the Company's accounts receivable, notes
receivable and inventories. Interest on amounts borrowed on
the line of credit is at the Libor rate plus 2.75 percentage
points (8.06% at March 31, 1996). The balance on this
line of credit as of March 31, 1996 and 1995 was $965 and
$1,425, respectively. The Company has also used $233
against its credit line to secure a standby letter of credit
of which $21 expires in April 1996 and $212 expires in March
1997.
NOTE J - STOCK OPTIONS AND WARRANTS:
On July 2, 1991, the Company adopted a stock option plan
(the "1991 Plan") which provides for the grant of incentive
and non-qualified stock options to key employees, including
officers and directors, of the Company. The option price
per share may not be less than 100% of the fair market value
of such shares on the date such option is granted, or $ .75.
In May 1994, the Board approved, and in October 1994 the
shareholders approved, a 350,000 share increase in the
number of shares reserved under the Plan. Options to
acquire up to 1,100,000 shares of common stock may be
granted pursuant to the 1991 Plan. Options which had been
previously granted under the Company's 1986 Stock Option
Plan and 1987 Stock Option Plan were cancelled and said
Plans terminated upon adoption of the 1991 Plan.
F-16
<PAGE>
Information with respect to options under the above plans is
as follows:
Number of Option Price
Shares Per Share
----------- ------------
Outstanding at March 31, 1993 505,600 $ .75-$1.31
Granted 232,700 $ 1.36-$3.50
Exercised ( 49,367 ) $ .75
Cancelled ( 41,300 ) $ .75-$1.81
---------
Outstanding at March 31, 1994 647,633 $ .75-$3.50
Granted 319,700 $1.00-$3.625
Exercised ( 108,353 ) $ .75-$1.81
Cancelled ( 115,138 ) $1.00-$3.50
---------
Outstanding at March 31, 1995 743,842 $ .75-$3.625
Granted 193,950 $6.1875-$9.1875
Exercised ( 333,607 ) $ .75-$3.625
Cancelled ( 45,483 ) $1.36-$3.50
---------
Outstanding at March 31, 1996 558,702 $ .75-$9.1875
=========
All options outstanding, with the exception of 49,227 non-
qualified options granted to the Company's Chief Executive
Officer and 399,575 non-qualified and incentive stock
options granted to key employees and officers of the
Company, are exercisable cumulatively in three installments
of one-third each year beginning one year from the date of
grant and expire five years from the date of grant. Options
granted to the Company's Chief Executive Officer are
currently exercisable and expire July 2, 1996. Non-
qualified and incentive stock options granted to key
employees and officers of the Company on May 12, 1993,
August 8, 1994, and February 20, 1996 are exercisable
cumulatively in four installments of one-fourth each year
beginning one year from the date of grant and expire five
years from the date of grant. As of March 31, 1996, 151,685
options are exercisable. As of March 31, 1996, options to
acquire 49,971 shares were available for future grant under
the 1991 Plan.
On July 2, 1991, the Company adopted a Directors Stock
Option Plan which provides for the automatic annual grant of
non-qualified stock options to outside directors of the
Company. The option price per share may not be less than
100% of the fair market value of such shares on the date
such option is granted, or $2.00. In May 1994, the Board
approved, and in October 1994 the shareholders approved, a
75,000 share increase in the number of shares reserved under
the Plan. Options to acquire up to 175,000 shares of common
stock may be granted pursuant to the Plan. Accordingly, for
the fiscal years ended March 31, 1996, 1995, and 1994,
options to purchase 16,000 shares, 16,000 shares and 36,000
F-17
<PAGE>
shares, at an exercise price of $5.25, $3.9375 and $3.81,
per share, respectively, were granted under the Directors
Stock Option Plan. The options are exercisable commencing
one year from the date of grant and expire five years from
the date of grant. During fiscal 1996, 1995 and 1994, there
were 5,000, 5,000 and 12,000 shares exercised, respectively,
all at an option price of $2.00. As of March 31, 1996,
82,000 options are exercisable. As of March 31, 1996,
options to acquire 55,000 shares were available for future
grant under the Directors Stock Option Plan.
The Company has issued 26,000 other options to its existing
and former directors. The options have an exercise price of
$2.00 per share and expire on July 2, 1996. During fiscal
1996, there were 12,000 shares exercised at an option price
of $2.00 per share. During fiscal 1995, none of those
options were exercised. During fiscal 1994, there were
6,000 shares exercised at an option price of $2.00 per
share. There are currently 8,000 options exercisable as of
March 31, 1996.
NOTE K - RELATED PARTY TRANSACTIONS:
Legal fees amounting to approximately $73, and $199 for the
fiscal years ended March 31, 1995, and 1994, respectively,
were incurred by the Company to Schnader, Harrison, Segal &
Lewis, of which Mr. Patton, a director of the Company, was a
partner until July 1994, for legal services rendered to the
Company and its subsidiaries. These services included the
work of several partners and associates of the firm in
litigation matters, corporate and financial matters, and
other types of legal matters incident to the representation
of the Company.
During the fiscal year ended March 31, 1994, the Company
received consulting services from Fundamental Management
Corporation ("Fundamental"), the beneficial owner of
approximately eighteen percent of the Company's Common
Stock, regarding obtaining financing in connection with the
Company's discounted prepayment of its secured loan with its
former senior lender. Fundamental assisted in locating
private lenders who provided financing to the Company to
allow it to consummate the transaction. Fundamental
received a flat fee of $32 for its consulting services. In
addition, a limited partnership of which Fundamental is the
general partner, loaned $600 to the Company on a short term
basis to allow it to consummate that transaction. The $600
was borrowed on September 28, 1993, and was repaid on
November 12, 1993. The Company paid such limited
partnership $11 of interest (a rate of fifteen percent per
annum) and a fee of $9. Mr. James, Chairman and Chief
Executive Officer of the Company, is President, a director
and a stockholder of Fundamental.
F-18
<PAGE>
NOTE L - COMMITMENTS AND CONTINGENCIES:
In re ACI-HDT Supply Company, debtor and related cases.
Nogah Bethlahmy, et al. plaintiffs v. Randy S. Kuhlmann, et
al. defendants. Adversary Proceeding No. 95-90809 in the
United States Bankruptcy Court, Southern District of
California.
This putative class action was filed in the Superior Court
of the State of California for the County of San Diego
("State Court") but not initially served on the Company. On
November 17, 1995, the first amended complaint was filed and
served on the Company.
On December 28, 1995, a co-defendant removed the case to the
United States Bankruptcy Court for the Southern District of
California. On January 26, 1996, plaintiffs moved to remand
the case to State Court. On March 14, 1996, the Bankruptcy
Court entered an order denying the motion to remand the
action to State Court. On March 25, 1996, plaintiffs
appealed that order. That appeal is pending.
On May 20, 1996, plaintiffs filed a second amended complaint
for (1) unlawful business practices; (2) fraudulent and
unfair business practices; (3) false and misleading
advertising; (4) fraud and deceit; (5) conspiracy to
defraud; (6) negligence and negligent misrepresentation; (7)
violations of California Corporations Code section 25110; (8)
violations of California Corporations Code section 25400; (9)
professional negligence and legal malpractice; and (10)
spoliation of evidence. The gravamen of the complaint is
that Amtel conspired with its own officers and
professionals, and with various telephone suppliers
(including the Company), to defraud investors in Amtel by
operating a Ponzi scheme. On June 12, 1996, the Company
filed a motion to dismiss the complaint. The motion is set
to be heard on August 1, 1996. The case is now in the
initial stages of discovery. The Company disputes liability
and intends to defend this matter vigorously.
William Polillo, et al. v. Elcotel, Inc. (U.S. District
Court for the Northern District of Illinois, No. 96C 2275,
filed April 18, 1996). William Polillo, Cecilia Polillo and
Richard Reno filed this suit against the Company alleging
that the Company's pay telephones infringe U.S. Patent
No. 4,208,549 for a Coin Surveillance Apparatus. An Amended
Complaint was filed against the Company on May 10, 1996.
The Company filed an Answer and Counterclaim on May 28, 1996
denying infringement and asserting a counterclaim for a
F-19
<PAGE>
declaratory judgment of noninfringement and invalidity of
the patent. On July 2, 1996, the plaintiffs' responded to
the Company's counterclaim by denying the claims of
noninfringement and invalidity. The case is now in the
initial stages of discovery. The Company believes that it
has meritorious defenses to this claim.
The Company is subject to other legal proceedings and claims
which arise in the ordinary course of its business. In the
opinion of management, the amount of ultimate liability, if
any , with respect to these actions will not materially
affect the financial position or results of operations of
the Company.
NOTE M - MAJOR CUSTOMERS:
For the year ended March 31, 1996, there were no customers
which individually accounted for more than 10% of net sales.
During the years ended March 31, 1995 and 1994, the Company
had one customer for each of those years which accounted for
approximately 13% and 10%, respectively, of net sales.
NOTE N - CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company
to significant concentrations of credit risk consist
principally of notes receivable. In order to minimize this
risk, the Company performs ongoing credit evaluations of its
customers' financial condition and requires collateral,
primarily the phone and related enclosures. At March 31,
1996 and 1995, the Company had one customer with notes
receivable totalling approximately $1,550, net of a specific
allowance (see Note B) and $3,450, respectively.
NOTE O - EXTRAORDINARY ITEM:
The Company realized a net gain of $1,961 on extinguishment
of debt during the year ended March 31, 1994. On September
29, 1993, the Company prepaid its senior debt of $8,020 to
its secured lender with a cash payment of $5,500. In
addition, the Company gave its lender a six year warrant to
acquire up to 538,885 shares of Common Stock. Based upon an
independent valuation, these warrants have been assigned a
value of $323 in the consolidated balance sheet. The
extraordinary gain from debt extinguishment was $2,197 and
after charges for direct expenses and taxes relative to this
debt extinguishment, of $193 and $43, respectively, the
Company realized a net gain of $1,961.
F-20
<PAGE>
NOTE P - SHAREHOLDERS' EQUITY:
During the year ended March 31, 1996, shareholders' equity
decreased as a result of a net loss of $1,291, offset by the
exercise of 350,607 stock options less 25,230 shares
surrendered at prices between $.75 and $3.625 per share for
a total of $294 and $464 related to the tax benefit from exercise
of stock options.
NOTE Q - SAVINGS PLAN:
During fiscal 1994, the Company began a 401(k) savings plan
whereby eligible employees may voluntarily contribute a
percentage of their pre-tax earnings. The Company will
match 50% of the employees' contribution, up to an
additional 2% of the eligible employees' compensation. An
employee begins vesting after having completed two years of
employment with the Company, at the rate of 25% per year,
and is 100% vested after having completed five years of
employment with the Company. Total plan expense was
approximately $79, $57 and $39, respectively for the fiscal
years ended March 31, 1996, 1995 and 1994.
F-21
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description Incorporated by Reference to
- ----- ---------------------------- ------------------------------
3.1 Certificate of Incorporation Exhibit 3.1 to Registration
Statement on Form S-18, File No. 33-8565.
3.2 By-Laws (as amended). Exhibit 3.2 to Annual Report on
Form 10-K for year ended March 31, 1987.
10.1 1991 Stock Option Plan. Exhibit 10.2 to Annual Report on
Form 10-K for year ended March 31, 1992.
10.2 Directors Stock Option Plan. Exhibit 10.3 to Annual Report on
Form 10-K for year ended March 31, 1992.
10.3 Mortgage and Security Exhibit 10.6 to Annual Report on
Agreement between Registrant Form 10-KSB for year ended March 31, 1994.
and NationsBank of Florida,
N.A. dated January 20, 1994.
10.4 Loan Agreement between Exhibit 10.8 to Annual Report on
Registrant and NationsBank of Form 10-KSB for year ended March 31, 1994.
Florida, N.A. dated
May 23, 1994.
10.5 Amendment to Loan Agreement Exhibit 10.1 to Quarterly Report
and Second Amendment to on Form 10-QSB for the quarter ended
Collateral Assignment and September 30, 1995.
Security Agreement between
Registrant and NationsBank
of Florida, NA dated
August 31, 1995.Exh
E-1
<PAGE>
Exhibit
Number Description Incorporated by Reference to
- ----- ---------------------------- ------------------------------
10.6 Mortgage Note between Exhibit 10.6 to Quarterly Report on Form
Registrant and Carl G. 10-QSB for quarter ended
Santangelo, as Trustee of September 30, 1993
Elcotel Mortgage Trust dated
September 28, 1993.
(a) Mortgage Modification Exhibit 10.9(a) to Annual Report on Form
Agreement between 10-KSB for the year ended March 31, 1994.
Registrant and
NationsBank of Florida,
N.A. dated May 23, 1994.
(b) Assignment of Note and Exhibit 10.9(b) to Annual Report on Form
Mortgage between Carl G. 10-KSB for the year ended March 31, 1994.
Santangelo, as Trustee of
Elcotel Mortgage Trust and
NationsBank of Florida, N.A.
dated May 23, 1994.
(c) Mortgage Modification Exhibit 10.4 to Quarterly Report on Form
Agreement between 10-QSB for the quarter ended September 30,
Registrant and 1995.
NationsBank of Florida,
N.A. dated August 31, 1995.
10.7 Replacement Promissory Note Exhibit 10.5 to Quarterly Report on Form
between Registrant and 10-QSB for the quarter ended September 30,
NationsBank of Florida, N.A. 1995.
dated August 31, 1995.
E-2
<PAGE>
Exhibit
Number Description Incorporated by Reference to
- ----- ---------------------------- ------------------------------
10.8 Promissory Note between Exhibit 10.3 to Quarterly Report on Form
Registrant and NationsBank 10-QSB for the quarter ended September 30,
of Florida, N.A. dated 1995.
August 31, 1995.
10.9 Consolidation Promissory Note Exhibit 10.4 to Quarterly Report on Form
between Registrant and 10-QSB for the quarter ended September 30,
NationsBank of Florida, N.A. 1994.
dated August 31, 1994.
10.10 Renewal Promissory Note Exhibit 10.2 to Quarterly Report on Form
between Registrant and 10-QSB for the quarter ended September 30,
NationsBank of Florida 1995.
N.A. dated August 31, 1995.
21.1 Subsidiaries of the Included in this Report
Registrant.
23.1 Independent Auditors' Included in this Report
Consent.
27 Financial Data Schedule Included in this Report.
E-3
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
State of %
Name Incorporation Ownership
- ---------------------- ------------- ----------
LD*OS, Inc. Delaware 100%
Elcotel Hospitality
Service, Inc. Delaware 100%
Public Communication
Managers, Inc. Delaware 19.9%
Public Communication-I
Corporation Delaware 100%
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
Nos. 33-68806, 33-68808, 33-62631 and 33-62633 of Elcotel, Inc. and
subsidiaries on Forms S-8, of our report dated July 12, 1996, appearing
in the Annual Report on Form 10-KSB of Elcotel, Inc. and subsidiaries for
the year ended March 31, 1996.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
DELOITTE & TOUCHE LLP
Tampa, Florida
July 12, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 232
<SECURITIES> 0
<RECEIVABLES> 5,181
<ALLOWANCES> 0
<INVENTORY> 2,800
<CURRENT-ASSETS> 10,227
<PP&E> 3,103
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,929
<CURRENT-LIABILITIES> 3,939
<BONDS> 0
0
0
<COMMON> 81
<OTHER-SE> 10,447
<TOTAL-LIABILITY-AND-EQUITY> 14,929
<SALES> 21,462
<TOTAL-REVENUES> 21,462
<CGS> 13,238
<TOTAL-COSTS> 13,238
<OTHER-EXPENSES> 10,591
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (215)
<INCOME-PRETAX> (2,152)
<INCOME-TAX> (861)
<INCOME-CONTINUING> (1,291)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,291)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
