UNITED STATES
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, 1998
Commission File No. 0-15205
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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
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(Address of principal executive offices)
(Zip Code)
(941) 758-0389
--------------------------
(Registrant's telephone number, including area code)
Not Applicable
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(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 preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
----- -----
The number of shares of the issuer's Common Stock outstanding as of
November 13, 1998 was 13,471,130.
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements
--------------------
ELCOTEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
(Dollars in thousands, except per share data)
<CAPTION>
September 30, March 31,
1998 1998
----------- ------------
(Unaudited) (See Note)
ASSETS
- ------
CURRENT ASSETS
- --------------
<S> <C> <C>
Cash and temporary investments $87 $1,655
Accounts and notes receivable,
less allowance for doubtful
accounts of $2,432 and $1,923 15,312 11,407
Inventories 17,473 9,088
Refundable income taxes 950 809
Deferred tax asset 3,732 4,141
Prepaid expenses and other current assets 1,019 1,024
------ ------
TOTAL CURRENT ASSETS 38,573 28,124
Property, plant and equipment, net of
accumulated deptreciation 5,045 4,779
Notes receivable, less allowance for
doubtful accounts of $479 and $479 199 346
Goodwill, net of accumulated
amortization of $521 and $190 23,575 23,906
Identified intangible assets, net of
accumulated amortization of
$1,122 and $498 9,560 10,203
Other assets 131 80
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$77,083 $67,438
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
- -------------------
Accounts payable and accrued expenses $11,977 $7,819
Current portion of long-term debt 71 68
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TOTAL CURRENT LIABILITIES 12,048 7,887
DEFERRED TAX LIABILITY 151 415
BORROWINGS UNDER REVOLVING CREDIT LINE 12,130 7,645
LONG TERM DEBT, less current portion 1,788 1,831
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TOTAL LIABILITIES 26,117 17,778
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STOCKHOLDERS' EQUITY:
Common Stock, $0.01 par value:
30,000,000 shares authorized
13,523,130 and 13,416,850
shares issued 135 134
Additional paid-in capital 46,587 46,384
Retained earnings 4,421 3,319
Less treasury stock (177) (177)
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TOTAL STOCKHOLDERS' EQUITY 50,966 49,660
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$77,083 $67,438
======= =======
1
<FN>
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,
------------------ ------------------
1998 1997 1998 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
NET SALES $18,808 $7,630 $34,444 $14,383
------- ------ ------- -------
COSTS AND EXPENSES:
Cost of goods sold 12,276 4,175 22,585 8,013
Research and development 1,507 834 3,001 1,542
Selling, general and
administrative expense 3,024 2,031 5,891 3,719
Amortization expense 497 5 988 12
Interest (income) expense, net 145 (60) 225 (123)
------- ------ ------- -------
TOTAL COSTS AND EXPENSES 17,449 6,985 32,690 13,163
------- ------ ------- -------
INCOME BEFORE INCOME TAXES 1,359 645 1,754 1,220
INCOME TAX EXPENSE 494 227 652 427
------- ------ ------- -------
NET INCOME $865 $418 $1,102 $793
======= ====== ======= =======
BASIC EARNINGS PER SHARE
- ------------------------
NET INCOME PER COMMON SHARE $0.06 $0.05 $0.08 $0.10
====== ===== ====== =====
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 13,456 8,185 13,430 8,184
====== ===== ====== =====
DILUTED EARNINGS PER SHARE
- --------------------------
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $0.06 $0.05 $0.08 $0.10
====== ===== ====== =====
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 13,822 8,377 13,793 8,339
====== ===== ====== =====
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,
--------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,102 $793
Adjustments to reconcile net income
to net cash used for operating activities:
Depreciation and amortization 1,524 219
Provision for doubtful accounts 206 264
Deferred tax benefit 145 -
Change in operating assets
and liabilities:
Accounts and notes receivable (3,964) (3,188)
Inventories (8,385) (2,114)
Refundable income taxes (141) -
Prepaid expenses and other
current assets 5 (177)
Accounts payable and accrued expenses 4,158 2,568
Other, net (64) (285)
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Net cash flow used for operating activities (5,414) (1,920)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (803) (298)
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Net cash flow used for investing activities (803) (298)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds under revolving credit line 4,485 1,425
Payments on long-term debt (40) (99)
Issuance of common stock 204 2
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Net cash flow provided by
financing activities 4,649 1,328
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Net decrease in cash and
temporary investments (1,568) (890)
Cash and temporary investments at
beginning of period 1,655 1,009
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Cash and temporary investments at
end of period $87 $119
======= =======
ADDITIONAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $402 $40
Income taxes 626 104
3
<FN>
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
ELCOTEL, INC. AND SUBSIDIARIES
------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)
NOTE A. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
The condensed consolidated balance sheet as of September 30, 1998 and the
consolidated statements of operations for the three and six month periods
ended September 30, 1998 and 1997, and the consolidated statements of
cash flows for the six month periods ended September 30, 1998 and 1997
have been prepared by Elcotel, Inc. (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 of the Company at
September 30, 1998, and for all periods presented, have been made.
The condensed consolidated balance sheet at March 31, 1998 has been
derived from the Company's audited consolidated financial statements as
of and for the year ended March 31, 1998.
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 Annual Report on Form 10-K for the fiscal year
ended March 31, 1998. The results of operations for the six month period
ended September 30, 1998 are not necessarily indicative of the results
for the full fiscal year.
NOTE B. ACQUISITIONS:
On December 18, 1997, the Company acquired Technology Service Group, Inc.
("TSG"), a Delaware corporation, via a merger for a total purchase price
of $35,605. On September 30, 1997, the Company acquired from Lucent
Technologies Inc. ("Lucent") certain assets related to Lucent's payphone
manufacturing and component parts business for a total purchase price of
$5,821. The accompanying consolidated statements of operations for the
three months and six months ended September 30, 1998 reflect the effects
of the TSG merger and the Lucent acquisition.
Assuming these transactions had occurred on April 1, 1997, the Company's
pro forma results of operations for the three months and six months ended
September 30, 1997 would have been as follows:
4
<PAGE>
Three Months Ended Six Month Ended
September 30, September 30,
1997 1997
---- ----
(Unaudited) (Unaudited)
Net Sales $14,714 $27,684
======= =======
Net Income $ 350 $ 330
======= =======
Basic earnings per share $0.04 $0.04
===== =====
Diluted earnings per share $0.04 $0.04
===== =====
The pro forma results of operations for the three months ended September
30, 1997 reflect pro forma adjustments that are directly attributable to
the transactions and the use of the purchase method of accounting,
include the operating results of TSG from June 28, 1997 to September 26,
1997, but do not reflect the impact of cost reductions or revenues, gross
profit and operating expenses from the Lucent assets. The pro forma
adjustments related to the TSG merger consist of an increase in
amortization of goodwill and other intangible assets of $391 due to the
increase in the basis of intangible assets and their estimated useful
lives, a decrease in depreciation of $102 due to an increase in the basis
of property and equipment and their estimated useful lives, a decrease in
deferred tax expense of $254 resulting from the allocation to deferred
tax assets and liabilities and a decrease in income tax expense of $78 to
reflect the pro forma effect on income tax expense resulting from the
acquisition. The pro forma adjustments related to the acquisition of
Lucent's assets for the three months ended September 30, 1997 include an
increase in amortization of intangible assets of $65, an increase in
depreciation of $25, an increase in interest expense of $123 and a
decrease in income tax expense of $75.
The pro forma results of operations for the six months ended September
30, 1997 reflect pro forma adjustments that are directly attributable to
the transactions and the use of the purchase method of accounting,
include the operating results of TSG from March 29, 1997 to September 26,
1997, but do not reflect the impact of cost reductions or revenues, gross
profit and operating expenses from the Lucent assets. The pro forma
adjustments related to the TSG merger consist of an increase in
amortization of goodwill and other intangible assets of $741 due to the
increase in the basis of intangible assets and their estimated useful
lives, a decrease in depreciation of $202 due to an increase in the basis
of property and equipment and their estimated useful lives, a decrease in
deferred tax expense of $133 resulting from the allocation to deferred
tax assets and liabilities and a decrease in income tax expense of $155
to reflect the pro forma effect on income tax expense resulting from the
acquisition. The pro forma adjustments related to the acquisition of
Lucent's assets for the six months ended September 30, 1997 include an
increase in amortization of intangible assets of $65, an increase in
depreciation of $25, an increase in interest expense of $123 and a
decrease in income tax expense of $75.
5
<PAGE>
NOTE C. INVENTORIES:
Inventories at September 30, 1998 and March 31, 1998 are summarized as
follows:
September 30, March 31,
1998 1998
---- ----
Finished products $ 1,015 $1,383
Work-in-process 1,507 1,545
Purchased components 14,951 6,160
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$17,473 $9,088
======= ======
NOTE D. STOCKHOLDERS' EQUITY:
Changes in stockholders' equity during the six-month period ended
September 30, 1998 are summarized as follows:
Additional
Common Paid-In Retained Treasury
Stock Capital Earnings Stock Total
----- ------- -------- -------- -------
Balance at March 31, 1998 $134 $46,384 $3,319 ($177) $49,660
Issuance of 106,281 shares upon
exercise of common stock
options at prices between
$.9524 and $5.25 per share 1 203 204
Net income for the period 1,102 1,102
---- ------- ------ ----- -------
Balance at September 30, 1998 $135 $46,587 $4,421 ($177) $50,966
==== ======= ====== ===== =======
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 Company has no items of
comprehensive income for the periods ended September 30, 1998 and
September 30, 1997; therefore, statements of comprehensive income for
such periods are not presented in the accompanying condensed consolidated
financial statements.
6
<PAGE>
NOTE E. EARNINGS PER SHARE:
Earnings per common share is computed in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"),
which the Company adopted during the third quarter of fiscal 1998. SFAS
128 requires disclosure of basic earnings per share and diluted earnings
per share. Basic earnings per share is computed by dividing net income
by the weighted average number of shares of common stock outstanding
during the period. Diluted earnings per share is computed by dividing
net income by the weighted average number of shares of common stock
outstanding and potential dilutive common shares outstanding during the
period. Earnings per share for the three and six month periods ended
September 30, 1997 has been restated to conform with SFAS 128. The
adoption of SFAS 128 did not have a significant effect on the Company's
financial statements.
The following table represents the computation of basic and diluted
earnings per common share as required by SFAS 128.
Three months ended Six months ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Basic earnings per share computation:
Net income applicable to common
shares $865 $418 $1,102 $793
------ ------ ------ ------
Weighted average common shares
outstanding (in thousands) 13,456 8,185 13,430 8,184
------ ------ ------ ------
Basic income per common share $0.06 $0.05 $0.08 $0.10
====== ====== ====== ======
Diluted earnings per share computation:
Net income applicable to common
shares $865 $418 $1,102 $793
------ ------ ------ ------
Weighted average common shares
outstanding (in thousands) 13,456 8,185 13,430 8,184
Common stock equivalents
(in thousands) 366 192 363 155
------ ------ ------ ------
Total weighted average shares
(in thousands) 13,822 8,377 13,793 8,339
------ ------ ------ ------
Diluted income per common share $0.06 $0.05 $0.08 $0.10
====== ====== ====== ======
7
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
CAUTIONARY STATEMENTS FOR PURPOSES OF THE "SAFEHARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- ------------------------------------------------------------------------
This report contains certain 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, the
integration of operations acquired in fiscal 1998, competition, the risk
of obsolescence of the Company's products, changes in the international
business climate, general economic conditions, seasonality, changes in
industry practices, the outcome of litigation, and uncertainties
detailed in the Company's filings with the Securities and Exchange
Commission.
RESULTS OF OPERATIONS
- ---------------------
(Dollars in thousands)
On December 18, 1997, the Company acquired Technology Service Group, Inc.
("TSG"), a Delaware corporation, via a merger for a total purchase price
of $35,605. On September 30, 1997, the Company acquired from Lucent
Technologies Inc. ("Lucent") certain assets related to Lucent's payphone
manufacturing and component parts business for a total purchase price of
$5,821. The accompanying consolidated statements of operations for the
three and six months ended September 30, 1998 reflect the effects of the
TSG merger and the Lucent acquisition ("fiscal 1998 acquisitions").
Quarter ended September 30, 1998 compared to the quarter ended
September 30, 1997:
- ---------------------------------------------------------------
Net sales for the quarter ended September 30, 1998 ("second quarter 1999")
increased from $7,630 for the quarter ended September 30, 1997 ("second
quarter 1998") to $18,808, an increase of $11,178, or approximately 147%,
principally as a result of; (i) an increase in sales of products to
customers in the Independent Private Payphone ("IPP") market of $1,507, or
approximately 31%, from $4,788 for the second quarter 1998 to $6,295 for
the second quarter 1999; (ii) an increase in sales of products to
customers in the Regulated Telephone ("Telco") market of $9,984, from $320
for the second quarter 1998 to $10,304 for the second quarter 1999 due to
the fiscal 1998 acquisitions; and (iii) a decrease in sales of products to
customers in the International market of $294, or approximately 14%, from
$2,161 for the second quarter 1998 to $1,867 for the second quarter 1999
due to a reduction in sales to customers in Latin American markets,
partially offset by an increase in sales to customers in the Canadian
market. Sales to international customers accounted for approximately 10%
of net sales for the second quarter 1999 as compared to approximately 28%
for the second quarter 1998.
8
<PAGE>
Cost of sales as a percentage of net sales increased to 65% for the second
quarter 1999 from 55% for the second quarter 1998 principally as a result
of the increase in sales of products to the Telco market at margins lower
than those historically achieved in the IPP market. As a result of the
increase in sales to the Telco market, the Company believes that its cost
of sales as a percentage of net sales will be higher compared to that
percentage for the Company prior to the fiscal 1998 acquisitions.
Nevertheless, the Company believes it can improve its margins from that in
the second quarter 1999 in subsequent quarters of fiscal 1999 as a result
of cost reduction initiatives and shipment of lower cost products.
Research and development costs increased by $673, or approximately 81%,
from $834 in the second quarter 1998 to $1,507 in the second quarter 1999
due to the expansion of resources to support development and engineering
activities related to technology and products acquired in connection with
the fiscal 1998 acquisitions. Selling, general and administrative
expenses increased by $993, or approximately 49%, from $2,031 in the
second quarter 1998 to $3,024 in the second quarter 1999 principally as a
result of an expansion of marketing resources to support domestic and
international initiatives, an increase in the Company's allowance for
doubtful accounts, and an increase in expenses resulting from the
acquisition of TSG. Amortization expense increased by $492 from $5 for
the second quarter 1998 to $497 for the second quarter 1999 due to
amortization of goodwill and identifiable intangible assets recorded in
connection with the fiscal 1998 acquisitions. Net interest expense
increased by $205, to $145 of net interest expense for the second quarter
1999 as compared with net interest income of $60 for the second quarter
1998, due to an increase in outstanding debt from the fiscal 1998
acquisitions and to support working capital requirements.
The effective tax rate increased from 35% for the second quarter 1998 to
36% for the second quarter 1999 due primarily to non deductible
amortization of goodwill in connection with the TSG acquisition offset by
expected research and development tax credits. The income tax expense for
the second quarter 1999 is comprised of $322 of current tax expense and a
deferred tax expense of $172, as compared to a current tax expense of $227
for the second quarter 1998.
Six months ended September 30, 1998 compared to the six months ended
September 30, 1997:
- ---------------------------------------------------------------------
Net sales for the six months ended September 30, 1998 ("six-months 1999")
increased from $14,383 for the six months ended September 30, 1997 ("six-
months 1998") to $34,444, an increase of $20,061, or approximately 139%,
principally as a result of; (i) an increase in sales of products to
customers in the Independent Private Payphone ("IPP") market of $2,065, or
approximately 21%, from $10,021 for the six-months 1998 to $12,086 for the
six-months 1999; (ii) an increase in sales of products to customers in the
Regulated Telephone ("Telco") market of $17,534 from $1,075 for the six-
months 1998 to $18,609 for the six-months 1999 due to the fiscal 1998
acquisitions; (iii) an increase in sales of products to customers in the
International market of $572, or approximately 22%, from $2,587 for the
six-months 1998 to $3,159 for the six-months 1999 due to an increase in
sales to customers in the Canadian market; and (iv) a decrease in
miscellaneous other sources of revenue of $111, or approximately 16%, from
$699 for the six-months 1998 to $588 for the six-months 1999. Sales to
9
<PAGE>
international customers accounted for approximately 9% of net sales for
the six-months 1999 as compared to approximately 18% for the six-months
1998.
Cost of sales as a percentage of net sales increased to 66% for the six-
months 1999 from 56% for the six-months 1998 principally as a result of
the increase in sales of products to the Telco market at margins lower
than those historically achieved in the IPP market.
Research and development costs increased by $1,459, or approximately 95%,
from $1,542 in the six-months 1998 to $3,001 in the six-months 1999 due to
the expansion of resources to support development and engineering
activities related to technology and products acquired in connection with
the fiscal 1998 acquisitions. Selling, general and administrative
expenses increased by $2,172, or approximately 58%, from $3,719 in the
six-months 1998 to $5,891 in the six-months 1999 principally as a result
of an expansion of marketing resources to support domestic and
international initiatives, an increase in the Company's allowance for
doubtful accounts, and an increase in expenses resulting from the
acquisition of TSG. Amortization expense increased by $976 from $12 for
the six-months 1998 to $988 for the six-months 1999 due to amortization of
goodwill and identifiable intangible assets recorded in connection with
the fiscal 1998 acquisitions. Net interest expense increased by $348, to
$225 of net interest expense for the six-months 1999 as compared with net
interest income of $123 for the six-months 1998, due to an increase in
outstanding debt from the fiscal 1998 acquisitions and to support working
capital requirements.
The effective tax rate increased from 35% for the six-months 1998 to 37%
for the six-months 1999 due primarily to non deductible amortization of
goodwill in connection with the TSG acquisition offset by expected
research and development tax credits. The income tax expense for the six-
months 1999 is comprised of $507 of current tax expense and a deferred tax
expense of $145, as compared to a current tax expense of $427 for the six-
months 1998.
Liquidity and Capital Resources
- -------------------------------
(Dollars in thousands)
The Company's current assets increased by $10,449, or approximately 37%,
from $28,124 at March 31, 1998 to $38,573 at September 30, 1998,
predominantly from an increase in accounts and notes receivable of $3,905
(related to a reduction in advances from customers and increased sales in
the latter portion of the quarter) and an increase of $8,385 in inventory
(related to an increase in purchased components to support expected sales
in the third and fourth quarter of fiscal 1999). Current liabilities
increased by $4,161, or approximately 53%, from $7,887 at March 31, 1998
to $12,048 at September 30, 1998 predominantly from an increase in
accounts payable and accrued expenses relating to the increase in
inventory levels.
On November 25, 1997, the Company entered into a restated loan agreement
(the "Loan Agreement") with its bank. Under the terms of the Loan
Agreement, the Company is able to borrow a maximum of $15,000 based on the
value of eligible collateral under a revolving line of credit that matures
on November 25, 2002. Indebtedness outstanding under the Loan Agreement
is collateralized by substantially all of the assets of the Company.
10
<PAGE>
Interest on amounts borrowed under the line of credit is payable monthly
at the bank's floating 30 day Libor rate plus 1.5% (6.875% at September
30, 1998). Financing available under the Loan Agreement was used to
refinance and retire the Company's then outstanding debt under a $2,000
working capital line of credit, a $3,050 installment note due on October
2, 2004 and term notes of $3,800 that were due on March 31, 1998. In
addition, on December 18, 1997, the Company retired TSG's outstanding bank
indebtedness of $3,970 from proceeds drawn under the Loan Agreement.
Indebtedness outstanding under the Loan Agreement approximated $12,130 and
$7,645, respectively, at September 30, 1998 and March 31, 1998. At
September 30, 1998, the Company is able to borrow up to $15,000 based on
the value of eligible collateral.
The Company believes that its anticipated cash flow from operations and
borrowings against its bank line of credit will be sufficient to fund its
working capital needs, its capital expenditures and its short and long
term note obligations through September 30, 1999.
Year 2000 Discussion
- --------------------
The Company is currently assessing the impact of Year 2000 issues on the
Company. The Year 2000 issue is the result of computer programs designed
to use two digit date codes rather than four to define the applicable
year. The risk is that programs with time-sensitive software may
recognize a year using "00" as the year 1900 rather than the year 2000
resulting in system miscalculations or system failures.
The Company has identified several general areas in which Year 2000
concerns may be material if not resolved before January 1, 2000. These
areas include 1) products and services of the Company, 2) management
information systems and other systems within the Company, and 3) third
parties that provide materials and services (including utilities) to the
Company.
The Company has established a "Validation Test Plan" to assess Year 2000
compliance of all products and services currently supported by the
Company. This test plan is designed to identify such products and
services, features of such products and services to be assessed, and the
approach and resources to be used. The test plan is also designed to
assess the Year 2000 compliance of those items in order of relative
importance to the Company. To date, approximately 50% of such products
and services have passed Year 2000 compliance testing, less than 10% have
been determined not to be compliant and the balance have not yet been
tested. The Company believes that its assessment of the Year 2000
compliance of all products and services currently supported will be
completed by the end of the third quarter of calendar 1999.
For those products and services determined not to be Year 2000 compliant,
the Company attempts to remedy such noncompliance. Depending upon the
level of such products and services determined not to be compliant, the
Company believes that such products and services can be brought into
compliance by December 31, 1999. The process of remediating all of the
tested products and services to make them Year 2000 compliant will involve
additional development costs (which cannot be quantified at this point but
which may be material) and will delay current development projects that
otherwise would be undertaken.
11
<PAGE>
The risks associated with the failure of the Company's products and
services to be Year 2000 compliant include: 1) loss of data from or an
adverse impact on the reliability of data generated by the Company's
products and services; 2) loss of functionality; 3) failure to communicate
with other non-Company user applications of its customers that may not be
Year 2000 compliant; and 4) potential litigation by customers with respect
to products and services no longer supported.
The Company purchased new software in June 1997 and based on
representations received from the vendor, the Company believes that its
management information system is Year 2000 compliant. Based on the
Company's internal testing, the Company believes that substantially all of
the Company's related operating systems are also Year 2000 compliant with
the exception of certain items which the Company does not believe are
material. The Company is in the preliminary stages of assessing the Year
2000 compliance of its other internal systems such as shipping, payroll
and EDI systems. The Company believes it will complete such assessment by
the end of the first calendar quarter of 1999. The risks associated with
failure of such systems to be Year 2000 compliant are primarily the
increase in administrative related functions and increased costs
associated with such functions. If deficiencies within these systems are
deemed to be critical, the Company would consider upgrading existing
systems or acquiring new systems. The costs related to such upgrade or
acquisition could be material. The Company believes that all critical
internal systems will be assessed and remediated by the third calendar
quarter of 1999 at a cost that has not yet been determined but which could
be material.
The Company has relationships with various third parties in the ordinary
course of business. The Company expects to assess the readiness of third
parties, especially critical suppliers and others who have material
relationships with the Company, by the second calendar quarter of 1999.
The Company will assess such readiness by sending questionnaires with
respect to the Year 2000 plans of those third parties. The Company will
identify the risks associated with third parties based on responses to
those questionnaires and will then formulate appropriate contingency
plans. The effect, if any, on the Company's results of operations from
failure of these third parties to be Year 2000 compliant is not reasonably
estimable but which could be material.
The Company has begun, but not yet completed, a comprehensive analysis of
the operational problems that would be reasonably likely to result from
the failure of the Company and certain third parties to complete efforts
necessary to achieve Year 2000 compliance on a timely basis. The
Company's Year 2000 efforts to date have been undertaken largely with its
existing engineering and information technology personnel. The Company
does not separately track the costs incurred for such efforts and such
costs are principally the related compensation costs for those personnel.
12
<PAGE>
New Accounting Pronouncements
- -----------------------------
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.
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, Employers'
Disclosures about Pensions and Other Post-retirement Benefits ("SFAS
132"). SFAS 132 revises employers' disclosures about pension and other
post-retirement benefit plans. SFAS 132 is effective for fiscal years
beginning after December 15, 1997. The standard addresses disclosure
issues and, therefore, will not affect the Company's financial position or
results of operations.
Also, in June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133
requires that gains or losses be recognized in earnings for a fair value
hedge in the period of change together with the offsetting loss or gain on
the hedged item attributable to the risk being hedged. Management does
not believe that the adoption of SFAS 133 will have a significant impact
on the Company's consolidated financial statements. This statement is
effective for all fiscal quarters of all fiscal years beginning after June
15, 1999. In accordance with SFAS 133, the Company will begin
implementing the requirements under SFAS 133 beginning in fiscal year
2000.
13
<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 28, 1998, the Company's Motion for Summary Judgment was
granted by the Court and the Court dismissed the Company from the class
action. The plaintiffs in the class action have until December 14, 1998
to file an appeal of the grant of the Company's Motion for Summary
Judgment.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
The following exhibits are filed herewith as a part of this Report
Exhibit
No. Description of Exhibit
------- ----------------------
27 Financial Data Schedule (Edgar Filing only)
(b) Reports on Form 8-K
None
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 16, 1998 By: /s/ Ronald M. Tobin
-------------------------
Ronald M. Tobin
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
15
<PAGE>
<PAGE>
INDEX TO EXHIBITS
Exhibit Method of
Number Description Filing
- ------- ----------- ----------------
27 Financial Data Schedule (Edgar Filing only) Included in this
report.
E-1
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATMENTS AS OF SEPTEMBER 30, 1998 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-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 87
<SECURITIES> 0
<RECEIVABLES> 15,312
<ALLOWANCES> (2,432)
<INVENTORY> 17,473
<CURRENT-ASSETS> 38,573
<PP&E> 5,045
<DEPRECIATION> 0
<TOTAL-ASSETS> 77,083
<CURRENT-LIABILITIES> 12,048
<BONDS> 0
0
0
<COMMON> 135
<OTHER-SE> 50,831
<TOTAL-LIABILITY-AND-EQUITY> 77,083
<SALES> 34,444
<TOTAL-REVENUES> 34,444
<CGS> 22,585
<TOTAL-COSTS> 22,585
<OTHER-EXPENSES> 9,880
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 225
<INCOME-PRETAX> 1,754
<INCOME-TAX> 652
<INCOME-CONTINUING> 1,102
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,102
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
