U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
Commission File No. 0-15205
ELCOTEL, INC.
(Exact name of registrant as specified 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
------------------------
(Registrant's telephone number, including area code)
Not Applicable
------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the 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
----- -----
The number of shares of the issuer's Common Stock outstanding as of
November 3, 1997 was 8,210,352.
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements
ELCOTEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
September 30, March 31,
1997 1997
----------- ------------
(Unaudited) (See Note)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and temporary investments $119 $1,009
Accounts receivable, net 5,955 4,678
Notes receivable 2,605 1,318
Inventories 8,846 2,733
Refundable income taxes 95 95
Deferred tax asset 692 692
Prepaid expenses and other current as 634 457
------- -------
TOTAL CURRENT ASSETS 18,946 10,982
Property, plant and equipment, net 3,763 3,184
Notes receivable, noncurrent 1,071 711
Deferred tax asset 799 799
Other assets 2,094 268
------- -------
$26,673 $15,944
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $5,454 $2,886
Acquisition payable 3,426 -
Line of credit 1,425 -
Current portion of long-term debt 199 199
------- -------
TOTAL CURRENT LIABILITIES 10,504 3,085
------- -------
Long term component of acquis. Payable 2,614 -
Long term debt, less current portion 133 232
------- -------
TOTAL LONG TERM LIABILITIES 2,747 232
SHAREHOLDERS' EQUITY:
Common Stock 83 82
Additional paid-in capital 11,161 11,160
Retained earnings 2,355 1,562
Less treasury stock (177) (177)
------- -------
13,422 12,627
------- -------
$26,673 $15,944
======= =======
<FN>
Note: The balance sheet at March 31, 1997, has been derived from the audited
consolidated financial statements.
1
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amount)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
------ ------ ------- -------
<S> <C> <C> <C> <C>
NET SALES $7,630 $6,101 $14,383 $11,652
------ ------ ------- -------
COSTS AND EXPENSES:
Cost of sales 4,175 3,781 8,013 7,035
Research and development 834 695 1,542 1,240
Selling, general and
administrative 2,036 1,168 3,731 2,648
------ ------ ------- -------
TOTAL COSTS AND EXPENSES 7,045 5,644 13,286 10,923
------ ------ ------- -------
PROFIT FROM OPERATIONS 585 457 1,097 729
INTEREST INCOME, net 60 46 123 76
------ ------ ------- -------
PROFIT BEFORE INCOME TAXES 645 503 1,220 805
INCOME TAX PROVISION 227 177 427 282
------ ------ ------- -------
NET PROFIT $418 $326 $793 $523
====== ====== ======= =======
NET PROFIT PER COMMON AND COMMON
EQUIVALENT SHARE $0.05 $0.04 $0.10 $0.06
====== ====== ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 8,377 8,310 8,339 8,294
====== ====== ======= =======
2
<FN>
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<CAPTION>
Six Months Ended
September 30,
--------------------------
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit $793 $523
Adjustments to reconcile net profit
to net cash (used in)/provided
from operations:
Depreciation and amortization 219 185
Provision for doubtful accounts 264 (333)
Change in operating assets and liabilities
(exclusive of acquisition assets):
Accounts receivable (1,541) 282
Notes receivable (1,647) (657)
Inventories (2,114) 69
Prepaid expenses and other
current assets (177) (218)
Accounts payable and accrued expenses 2,568 220
Other, net (285) (10)
------- -------
Net cash flow (used in)/provided
from operations (1,920) 61
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (298) (210)
------- -------
Net cash flow used in
investing activities (298) (210)
------- -------
3
</TABLE>
<PAGE>
<TABLE>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
(continued)
<CAPTION>
Six Months Ended
September 30,
--------------------------
1997 1996
------- -------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments)/proceeds related
to short-term borrowings 1,425 215
Payments on long-term debt (99) (433)
Issuance of common stock 2 144
------- -------
Net cash flow (provided by)/used in
financing activities 1,328 (74)
------- -------
Net decrease in cash and
temporary investments (890) (223)
Cash and temporary investments at
beginning of year 1,009 232
------- -------
Cash and temporary investments at
end of quarter $119 $9
======= =======
ADDITIONAL CASH FLOW INFORMATION:
Cash Paid During the period for:
Interest $40 $37
Income taxes 104 -
Supplemental Disclosure of Non-cash Transactions:
Acquisition of assets in exchange for
assumption of related liabilities:
Inventories 3,999 -
Equipment and tooling 500 -
Intangible Assets 1,541 -
4
<FN>
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
ELCOTEL, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except for share amounts)
(Unaudited)
NOTE A. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
The condensed consolidated balance sheet as of September 30, 1997, and
the consolidated statements of operations for the three and six month
periods ended September 30, 1997 and 1996, and the consolidated
statements of cash flows for the six month periods ended September 30,
1997 and 1996, have been prepared by the Company, without audit. In
the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows at September 30, 1997,
and for all periods presented, have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these condensed consolidated financial statements be read in
conjunction with the consolidated financial statements and notes
thereto included in the Company's Form 10-K for the fiscal year ended
March 31, 1997. The results of operations for the six month period
ended September 30, 1997, are not necessarily indicative of the results
for the full fiscal year.
NOTE B. INVENTORIES:
Inventories by stage of completion are as follows:
September 30, March 31,
1997 1997
Finished products $ 4,702 $569
Work-in-process 1,067 248
Purchased components 3,077 1,916
------- -------
$8,846 $2,733
======= =======
NOTE C. SHAREHOLDERS' EQUITY:
During the six-month period ended September 30, 1997, shareholders'
equity increased as a result of a net profit of $793, and employee
exercises of stock options at prices between $1.81 per share and $3.50
per share for a total of $2.
5
<PAGE>
NOTE D. ACQUISITION OF ASSETS:
On September 30, 1997, the Company acquired from Lucent Technologies
Inc. ("Lucent") certain assets related to Lucent's payphone
manufacturing and component parts business. The purchase price,
including estimated acquisition expenses of $150, was $6,040, subject
to adjustment based on the difference between the book value of
inventories determined pursuant to the acquisition agreement and
$3,849. Assets acquired from Lucent included inventories, machinery,
equipment, tooling and certain other assets related to the payphone
manufacturing and component parts business conducted by Lucent, as well
as a license of certain patent and other intellectual property rights
related thereto.
On October 2, 1997, the Company borrowed an aggregate of $6,850 under
the terms of bank promissory notes to finance the Lucent acquisition,
including acquisition expenses, debt issuance expenses of $57 and other
general corporate activities, including acquisition of equipment.
These notes consisted of an installment note in the principal amount of
$3,050 payable in eighty four equal monthly installments of $37, a term
note in the principal amount of $2,850 due March 31, 1998 and a term
note in the principal amount of $950 due March 31, 1998. The notes are
collateralized by the assets of the Company and bear interest at the
bank's floating 30 day Libor rate plus 2.25% (7.9% upon issuance).
Proceeds from these aforementioned notes were used to pay the purchase
price, including expenses, and the debt issuance expenses related to
the Lucent acquisition, which aggregated $6,094. At September 30,
1997, the purchase price of $6,040 was classified on the condensed
consolidated balance sheet as Acquisition Payable under current and
long term liabilities in the amounts of $3,426 and $2,614,
respectively.
A summary of the allocation of the purchase price to the assets
acquired as of September 30, 1997, based on the Company's estimates of
their fair value is set forth below.
Inventories $3,999
Equipment and tooling 500
Intangible Assets 1,541
------
Total purchase price $6,040
======
The accompanying consolidated statements of operations for the three
months and six months ended September 30, 1997 do not reflect the
effects of the Lucent acquisition. Assuming the acquisition had
occurred on April 1, 1997, the Company's net profit including pro forma
adjustments for depreciation, interest and amortization of intangible
assets for the three months ended September 30, 1997, would have
approximated $281, or a profit of $0.03 per share, as compared with the
reported net profit of $418, or a profit of $0.05 per share, excluding
pro forma adjustments, and for the six months ended September 30, 1997,
the Company's net profit including these pro forma adjustments, would
have approximated $517, or a profit of $0.06 per share, as compared
with the reported net profit of $793, or a profit of $0.10 per share,
excluding pro forma adjustments. The pro forma adjustments include an
increase in the amortization of intangible assets of $65 and $130,
respectively, for the three and six month periods, an increase in
depreciation expense of $25 and $50, respectively, for the three and
six month periods, an increase in interest expense of $121 and $245,
respectively, for the three and six month periods, and a decrease in
the income tax provision of $74 and $149, respectively, for the three
and six month periods.
6
<PAGE>
NOTE E. PROPOSED MERGER:
On August 13, 1997, the Company, Technology Service Group, Inc., a
Delaware corporation ("TSG"), and Elcotel Hospitality Service, Inc., a
Delaware corporation and a wholly-owned direct subsidiary of the
Company ("Merger Subsidiary"), entered into an Agreement and Plan of
Merger (the "Merger Agreement"). Pursuant to the Merger Agreement and
subject to the terms and conditions set forth therein, Merger
Subsidiary will be merged with and into TSG with TSG as the surviving
corporation of such merger (the "Merger"), and as a result of the
Merger, TSG will become a wholly-owned subsidiary of the Company. At
the Effective Time (as defined in the Merger Agreement) of the Merger,
each issued and outstanding share of common stock, par value $.01 per
share (the "TSG Common Stock"), of TSG will be converted into the right
to receive 1.05 shares of common stock, par value $.01 per share of the
Company. Shareholders of record as of October 22, 1997, have been
asked approve the merger at the Annual Meeting of Stockholders which
will be held on December 5, 1997.
7
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
----------------------------------------------
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in this Quarterly Report on Form 10-Q 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, changes in the international business climate, general
economic conditions, seasonality, changes in industry practices, the
outcome of the Bethlahmy class action lawsuit, and uncertainties
detailed in the Company's filings with the Securities and Exchange
Commission.
Results of Operations
- ---------------------
(Dollars in thousands)
Quarter ended September 30, 1997, compared to the quarter ended
September 30, 1996:
Net sales for the quarter ended September 30, 1997 ("second quarter
1998"), increased from $6,101 for the quarter ended September 30, 1996
("second quarter 1997") to $7,630, an increase of $1,529, or
approximately 25%, principally as a result of an increase in sales of
complete payphones of approximately 53% and an increase in sales of
electronic assemblies of approximately 14%. Unit sales of complete
payphones increased by approximately 34% and unit sales of electronic
assemblies increased by approximately 25%. Average selling prices of
payphones in the quarter were approximately 15% higher than in the same
quarter last year due to sales of phones to an international customer
with additional features which commanded a higher selling price, while
average selling prices of electronic assemblies in the quarter were
approximately 25% lower than last year due to discounts given to
qualified large quantity purchases of the Company's products. Sales to
international customers accounted for approximately 28% of net sales
for the second quarter 1998 as compared to approximately 34% for the
second quarter 1997. International sales in the second quarter 1998
increased by approximately 5% compared to the second quarter 1997.
Cost of sales as a percentage of net sales decreased to 55% for the
second quarter 1998 from 62% for the second quarter 1997, principally
as a result of higher margins on sales of international payphones as
compared with the second quarter 1997 and improved manufacturing
variances.
8
<PAGE>
Research and development costs increased by $139, or approximately 20%,
from $695 in the second quarter 1997 to $834 in the second quarter 1998
due to the hiring of additional development staff and related expenses
in support of the Company's development programs. Selling, general and
administrative expenses increased by $868, or approximately 74%, from
$1,168 in the second quarter 1997 to $2,036 in the second quarter 1998
principally as a result of a non-recurring reduction in the Company's
provision for doubtful accounts that was recorded in the second quarter
1997 due to cash collection or product return of previously reserved
amounts, the hiring of additional sales and marketing staff and
expenses in support of domestic and international initiatives and
increased costs of customer conferences. Interest income increased by
$2, or approximately 2%, from $84 in the second quarter 1997 to $86 in
the second quarter 1998. Interest expense decreased by $12, or
approximately 32%, from $38 in the second quarter 1997 to $26 in the
second quarter 1998 due to decreased borrowings under the Company's
line of credit facility with its bank.
Six months ended September 30, 1997, compared to the six months ended
September 30, 1996:
Net sales for the six months ended September 30, 1997 ("six-months
1998"), increased from $11,652 for the six months ended September 30,
1996 ("six-months 1997") to $14,383, an increase of $2,731, or
approximately 23%, principally as a result of an increase in sales of
complete payphones of approximately 60% while sales of electronic
assemblies were approximately the same as during the six-months 1997.
Unit sales of complete payphones increased by approximately 46% while
unit sales of electronic assemblies were at the same level as during
the six-months 1997. Average selling prices of payphones during the
six-months 1998 were approximately 10% higher than during the six-months 1997
due to sales of phones to an international customer with
additional features which commanded a higher selling price, while
average selling prices of electronic assemblies were at the same level
as during the six-months 1997. Sales to international customers
accounted for approximately 18% of net sales for the six-months 1998 as
compared to approximately 22% for the six-months 1997. International
sales in the six-months 1998 decreased by approximately 1% compared to
the six-months 1997.
Cost of sales as a percentage of net sales decreased to 56% for the
six-months 1998 from 60% for the six-months 1997, principally as a
result of higher margins on sales of both domestic and international
payphones as compared with last year.
Research and development costs increased by $302, or approximately 24%,
from $1,240 in the six-months 1997 to $1,542 in the six-months 1998 due
to the hiring of additional development staff and related expenses in
support of the Company's development programs. Selling, general and
administrative expenses increased by $1,083, or approximately 41%, from
$2,648 in the six-months 1996 to $3,731 in the six-months 1998
principally as a result of a non-recurring reduction in the Company's
provision for doubtful accounts that was recorded in the second quarter
1997 due to cash collection or product return of previously reserved
amounts, the hiring of additional sales and marketing staff and related
expenses in support of domestic and international initiatives and
increased costs of customer conferences. Interest income increased by
$8, or approximately 5%, from $156 in the six-months 1997 to $164 in
six-months 1998 due to an increase in the Company's note receivable
portfolio. Interest expense decreased by $39, or approximately 49%,
from $80 in the six-months 1996 to $41 in the six-months 1997 due to
decreased borrowings under the Company's line of credit facility with
its bank.
9
<PAGE>
Liquidity and Capital Resources
- -------------------------------
(Dollars in thousands)
Acquisition of Assets:
On September 30, 1997, the Company acquired from Lucent Technologies
Inc. ("Lucent") certain assets related to Lucent's payphone
manufacturing and component parts business. The purchase price,
including estimated acquisition expenses of $150, was $6,040, subject
to adjustment based on the difference between the book value of
inventories determined pursuant to the acquisition agreement and
$3,849. Assets acquired from Lucent included inventories, machinery,
equipment, tooling and certain other assets related to the payphone
manufacturing and component parts business conducted by Lucent, as well
as a license of certain patent and other intellectual property rights
related thereto.
On October 2, 1997, the Company borrowed an aggregate of $6,850 under
the terms of bank promissory notes to finance the Lucent acquisition,
including acquisition expenses, debt issuance expenses of $57 and other
general corporate activities, including acquisition of equipment.
These notes consisted of an installment note in the principal amount of
$3,050 payable in eighty four equal monthly installments of $37, a term
note in the principal amount of $2,850 due March 31, 1998 and a term
note in the principal amount of $950 due March 31, 1998. The notes are
collateralized by the assets of the Company and bear interest at the
bank's floating 30 day Libor rate plus 2.25% (7.9% upon issuance).
Proceeds from these aforementioned notes were used to pay the purchase
price, including expenses, and the debt issuance expenses related to
the Lucent acquisition, which aggregated $6,094. At September 30,
1997, the purchase price of $6,040 was classified on the condensed
consolidated balance sheet as Acquisition Payable under current and
long term liabilities in the amounts of $3,426 and $2,614,
respectively.
A summary of the allocation of the purchase price to the assets
acquired as of September 30, 1997, based on the Company's estimates of
their fair value is set forth below.
Inventories $3,999
Equipment and tooling 500
Intangible Assets 1,541
------
Total purchase price $6,040
======
The accompanying consolidated statement of operations for the three
months and six months ended September 30, 1997 do not reflect the
effects of the Lucent acquisition. Assuming the acquisition had
occurred on April 1, 1997, the Company's net profit including pro forma
adjustments for depreciation, interest and amortization of intangible
assets for the three months ended September 30, 1997, would have
approximated $281, or a profit of $0.03 per share, as compared with the
reported net profit of $418, or a profit of $0.05 per share, excluding
pro forma adjustments, and for the six months ended September 30, 1997,
the Company's net profit including these pro forma adjustments, would
have approximated $517, or a profit of $0.06 per share, as compared
with the reported net profit of $793, or a profit of $0.10 per share,
excluding pro forma adjustments. The pro forma adjustments include an
increase in the amortization of intangible assets of $65 and $130,
respectively, for the three and six month periods, an increase in
10
<PAGE>
depreciation expense of $25 and $50, respectively, for the three and
six month periods, an increase in interest expense of $121 and $245,
respectively, for the three and six month periods, and a decrease in
the income tax provision of $74 and $149, respectively, for the three
and six month periods.
Liquidity:
The Company's current assets increased by $7,964, or approximately 73%,
from $10,982 at March 31, 1997 to $18,946 at September 30, 1997,
predominantly from an increase in accounts receivable of $1,277 and an
increase of $1,287 in notes receivable (both of which resulted from the
higher level of sales), an increase of $177 in prepaid expenses and an
increase of $6,113 in inventory (approximately $4,000 of which related
to the Lucent acquisition), partially offset by a reduction in cash of
$890. Current liabilities increased by $7,419, or approximately 240%,
from $3,085 at March 31, 1997 to $10,504 at September 30, 1997
predominantly from an increase in drawing against the Company's line of
credit of $1,425, an increase in accounts payable and accrued expenses
of $2,568, and $3,426 reflecting the current amount payable for the
Lucent acquisition.
Since August 31, 1995 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%. 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 1998 ranging from $0 to $1,535. The line of credit was renewed
effective August 28, 1996 and was to mature on August 31, 1997. On
August 18, 1997, the Company's lender extended the maturity date of the
line of credit for ninety days in contemplation of the refinancing
described below.
On October 2, 1997, the Company borrowed an aggregate of $6,850 under
bank promissory notes in connection with financing the Lucent
acquisition described above. $3,050 of that bank debt is payable in 84
equal monthly installments ending October 2, 2004 and an aggregate
principal amount of $3,800 is represented by two term notes that are
due on March 31, 1998. See "Acquisition of Assets" for a more complete
description of these bank promissory notes.
On August 13, 1997, the Company entered into a Plan and Agreement of
Merger with Elcotel Hospitality Service, Inc., a direct wholly-owned
subsidiary of the Company ("EHS"), and Technology Service Group, Inc.
("TSG") pursuant to which EHS will merge into TSG, following which TSG
will become a wholly-owned subsidiary of the Company. See Note E to
the Company's financial statements. In connection with such merger,
the Company is seeking to refinance with one bank the existing bank
indebtedness of TSG to its bank and the existing bank indebtedness of
the Company to its bank. In connection with such proposed refinancing,
the Company has received a commitment from a bank for a five year $15
million revolving line of credit. The Company believes that it may
also refinance its existing mortgage indebtedness which has a maturity
date of May 1999.
11
<PAGE>
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
September 30, 1998, assuming the closing of a new loan facility with
terms consistent with the commitment for the proposed refinancing
described above.
New Accounting Pronouncements
- -----------------------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share
("SFAS 128"). SFAS 128 requires disclosure of basic earnings per share
based on income available to common stockholders and the weighted
average number of common shares outstanding during the period, and
diluted earnings per share based on income available to common
stockholders and the weighted average number of common and dilutive
potential common shares outstanding during the period. The adoption of
SFAS 128 is required for fiscal years ending after December 15, 1997,
and earlier adoption is not permitted. The adoption of SFAS 128 is not
expected to have a material effect on the Company's results of
operations or financial position.
Also, in February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 129, Disclosure
of Information about Capital Structure ("SFAS 129"). SFAS 129 requires
a Company to explain the privileges and rights of its various
outstanding securities, the number of shares issued upon conversion,
exercise or satisfaction of required conditions during the most recent
annual fiscal period, liquidation preferences of preferred stock and
other matters with respect to preferred stock. Although the statement
is effective for periods ending after December 15, 1997, the Company's
financial statement disclosures are in compliance with SFAS 129.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130"). SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is defined
as the change in equity of a business during a period from transactions
and events and circumstances from non-owner sources, and includes all
changes in equity during a period except those resulting from
investments by owners and distributions to owners. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS 130 is not expected to have a material effect on the
Company's results of operations or financial position.
Also, in June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS 131"). SFAS
131 requires public entities to report certain information about
operating segments, their products and services, the geographic areas
in which they operate, and their major customers, in complete financial
statements and in condensed interim financial statements issued to
stockholders. SFAS 131 is effective for fiscal years beginning after
December 15, 1997. The adoption of SFAS 131 is not expected to have a
material effect on the Company's results of operations or financial
position.
12
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
Nogah Bethlahmy, et al. plaintiffs v. Randy S. Kuhlmann, et
al. defendants. San Diego Superior Court Case No. 691635.
As previously reported, this putative class action was filed
in the Superior Court of the State of California for the County of San
Diego alleging that Amtel Communications, Inc. ("Amtel"), a former
customer of the Company that filed for bankruptcy, 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. See Item 3, Legal Proceedings of Part I of the Company's
Form 10-KSB for the fiscal year ended March 31, 1996 and Item I, Legal
Proceedings of Part II of the Company's Form 10-Q for the quarter ended
September 30, 1996.
On September 30, 1997, the Company's motion to dismiss the
plaintiffs' third amended complaint was granted, in part, and those
portions of the complaint were dismissed with prejudice. On October 3,
1997, the Company filed its answer to the remaining causes of action to
the plaintiffs' third amended compaint. In July 1997 plaintiffs'
motion for class certification was tentatively denied, without
prejudice, but the court has permitted the plaintiffs to obtain
additional evidence which the court may use to reconsider the court's
previous denial of plaintiffs' motion to certify the class. Discovery
is still in its initial stages. The Company disputes liability and
intends to defend this matter vigorously, although the Company cannot
predict the ultimate outcome of this litigation.
Item 5. Other Information
On October 9, 1997 the Federal Communications Commission (the
"FCC") issued an order addressing certain issues with respect to
payphone compensation previously remanded to it by the Court of
Appeals. The FCC set the per call compensation rate at $.284 per call
during the period October 7, 1997 through October 6, 1999. After that
period, the compensation rate would be whatever is charged at the phone
for a local call, less $.066, the amount the FCC determined to be the
avoided cost in completing a non-coin call. The FCC must still
determine the compensation rate for the period November 6, 1996 through
October 6, 1997 and which carriers must pay compensation for that
period. It is likely that the FCC's latest action may also be
challenged in court. The ultimate outcome with respect to per call
compensation will have a significant impact on the business and
operations of the Company's customers. Elimination or significant
reductions in the amount, or delays in the payment, of per call
compensation may reduce demand for payphones and the ability of the
Company to collect its receivables from its customers.
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
On July 10, 1997, a Current Report on Form 8-K was filed
in connection with the United States Court of Appeals
decision on appeals of certain portions of an order
issued in September, 1996 by the Federal Communications
Commision changing the regulatory regime for the
payphone industry pursuant to the Telecommunications Act
of 1996.
On August 19, 1997, a Current Report on Form 8-K was
filed in connection with the Registrant's signing of an
Agreement and Plan of Merger between the Registrant,
Elcotel Hospitality Service, Inc., a direct wholly owned
subsidiary of the Registrant ("EHS"), and Technology
Service Group, Inc. ("TSG") pursuant to which EHS would
merge into TSG and TSG would become a wholly owned
subsidiary of the Registrant.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Elcotel, Inc.
------------------------
(Registrant)
Date: November 14, 1997 By: /s/ Ronald M. Tobin
------------------------
Ronald M. Tobin
Vice President
(Principal Financial Officer and
Chief Accounting Officer)
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 119
<SECURITIES> 0
<RECEIVABLES> 8,560
<ALLOWANCES> 0
<INVENTORY> 8,846
<CURRENT-ASSETS> 18,946
<PP&E> 3,763
<DEPRECIATION> 0
<TOTAL-ASSETS> 26,673
<CURRENT-LIABILITIES> 10,504
<BONDS> 0
0
0
<COMMON> 83
<OTHER-SE> 13,339
<TOTAL-LIABILITY-AND-EQUITY> 26,673
<SALES> 14,383
<TOTAL-REVENUES> 14,383
<CGS> 8,013
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<OTHER-EXPENSES> 5,273
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41
<INCOME-PRETAX> 1,220
<INCOME-TAX> 427
<INCOME-CONTINUING> 793
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