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, 1999
Commission File No. 0-15205
ELCOTEL, INC.
(Exact name of registrant as specified in its charter)
Delaware 59-2518405
(State or other jurisdiction of (IRS 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)
No Change
(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
----- ----
As of November 10, 1999, there were 13,499,693 shares of the Registrant's Common
Stock outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
ELCOTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts )
September 30, March 31,
1999 1999
----------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 26 $ $ 16
Accounts and notes receivable, less allowance for credit
losses of $2,010 and $1,970 10,772 12,209
Inventories 11,029 13,978
Income taxes receivable 1,995 1,997
Deferred tax asset - current portion 1,675 2,215
Prepaid expenses and other current assets 845 912
------------- -----------
Total current assets 26,342 31,327
Property, plant and equipment, net 5,554 5,064
Notes receivable, less allowance for credit losses
of $352 and $312 688 898
Identified intangible assets, net of accumulated amortization
of $2,113 and $1,541 7,162 7,734
Capitalized software, net of accumulated amortization
of $373 and $240 3,366 1,573
Goodwill, net of accumulated amortization
of $1,222 and $878 22,874 23,218
Deferred tax asset 2,532 948
Other assets 675 533
============= ===========
$ 69,193 $ 71,295
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank overdraft $ 561 $ 1,428
Accounts payable 4,328 4,186
Accrued expenses and other current liabilities 3,627 4,197
Notes and debt obligations payable within one year 12,279 823
------------- -----------
Total current liabilities 20,795 10,634
Notes and debt obligations payable after one year 64 10,355
------------- -----------
20,859 20,989
------------- -----------
Commitments and contingencies -- --
Stockholders' equity:
Common stock, $.01 par value, 30,000,000 shares authorized,
13,551,693 and 13,551,693 shares issued and outstanding 136 136
Additional paid-in capital 46,667 46,667
Retained earnings 1,757 3,680
Accumulated other comprehensive (loss):
Holding loss on marketable securities (49) -
Less - cost of 52,000 shares of common stock in treasury (177) (177)
------------- -----------
Total stockholders' equity 48,334 50,306
------------- -----------
$ 69,193 $ 71,295
============= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
ELCOTEL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
AND OTHER COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------------------- -------------------------------
1999 1998 1999 1998
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues and net sales:
Product sales $ 9,465 $ 16,091 $ 19,300 $ 28,861
Services 3,986 2,717 6,909 5,583
-------------- --------------- -------------- --------------
13,451 18,808 26,209 34,444
-------------- --------------- -------------- --------------
Cost of revenues and sales:
Cost of products sold 7,577 9,839 14,050 17,477
Cost of services 3,225 2,352 5,524 4,942
-------------- --------------- -------------- --------------
10,802 12,191 19,574 22,419
-------------- --------------- -------------- --------------
Gross profit 2,649 6,617 6,635 12,025
-------------- --------------- -------------- --------------
Other costs and expenses:
Selling, general and administrative
expenses 2,790 3,024 5,336 5,875
Engineering, research and
development expenses 1,547 1,592 2,877 3,167
Amortization 546 497 1,083 1,004
Interest expense, net 152 145 277 225
-------------- --------------- -------------- --------------
5,035 5,258 9,573 10,271
-------------- --------------- -------------- --------------
Income (loss) before income tax
(expense) benefit (2,386) 1,359 (2,938) 1,754
Income tax (expense) benefit 812 (494) 1,015 (652)
-------------- --------------- -------------- --------------
Net income (loss) (1,574) 865 (1,923) 1,102
Other comprehensive loss, net of tax:
Holding loss on marketable securities (49) - (49) -
-------------- --------------- -------------- --------------
Comprehensive income (loss) $ (1,623) $ 865 $ (1,972) $ 1,102
============== =============== ============== ==============
Income (loss) per common and common
equivalent share:
Basic $ (0.12) $ 0.06 $ (0.14) $ 0.08
============== =============== ============== ==============
Diluted $ (0.12) $ 0.06 $ (0.14) $ 0.08
============== =============== ============== ==============
Weighted average number of common and
common equivalent shares outstanding:
Basic 13,500 13,457 13,500 13,430
============== =============== ============== ==============
Diluted 13,500 13,822 13,500 13,793
============== =============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
ELCOTEL, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
----------------------------------
1999 1998
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (1,923) $ 1,102
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and amortization 1,750 1,524
Provision for credit losses 314 206
Provisions for obsolescence and warranty
expense 1,313 408
Stock option compensation 31 -
Deferred tax benefit (1,015) (27)
Changes in operating assets and liabilities:
Accounts and notes receivable 1,046 (3,964)
Inventories 1,966 (8,385)
Income taxes receivable 2 -
Prepaid expenses and other current assets 276 5
Other assets (176) (33)
Accounts payable 142 3,913
Accrued expenses and other current liabilities (931) (796)
-------------- ---------------
Net cash provided by (used for) operating activities 2,795 (6,047)
-------------- ---------------
Cash flows from investing activities
Capital expenditures (1,157) (803)
Capitalized software (1,926) (29)
-------------- ---------------
Net cash used for investing activities (3,083) (832)
-------------- ---------------
Cash flows from financing activities
Net proceeds under revolving credit
lines 1,563 4,485
(Decrease) increase in bank overdraft (867) 662
Principle payments on notes payable (398) (40)
Proceeds from exercise of common stock
options - 204
-------------- ---------------
Net cash provided by financing activities 298 5,311
-------------- ---------------
Increase (decrease) in cash 10 (1,568)
Cash, beginning of period 16 1,655
============== ===============
Cash, end of period $ 26 $ 87
============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
ELCOTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. GENERAL
The unaudited consolidated balance sheet at September 30, 1999 and the unaudited
consolidated statements of operations and other comprehensive income (loss) for
the three months and six months ended September 30, 1999 and 1998 and of cash
flows for the six months ended September 30, 1999 and 1998 have been prepared by
Elcotel, Inc. and subsidiaries (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, 1999, and for all periods presented,
have been made. The Company's unaudited consolidated financial statements for
the three months and six months ended September 30, 1998 have been reclassified
to conform with the presentation at and for the three months and six months
ended September 30, 1999.
The consolidated balance sheet at March 31, 1999 has been derived from the
Company's audited consolidated financial statements as of and for the year ended
March 31, 1999.
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 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, 1999. The results of operations for the
three months and six months ended September 30, 1999 are not necessarily
indicative of the results for the full fiscal year.
2. INVENTORIES
Inventories at September 30, 1999 and March 31, 1999 are summarized as follows:
September 30, March 31,
1999 1999
------------- -----------
Finished products $ 1,296 $ 1,875
Work-in-process 1,734 924
Purchased components 9,680 11,630
------------- -----------
12,710 14,429
Reserve for obsolescence (1,681) (451)
============= ===========
$ 11,029 $ 13,978
============= ===========
3. NOTES AND DEBT OBLIGATIONS PAYABLE
On June 29, 1999, the Company and its bank entered into a Business Loan
Agreement (the "Agreement") that provides the Company with a $2 million
revolving credit line to finance export related inventory and accounts
receivable. The export credit line matures on June 29, 2000. Interest on amounts
borrowed under the export credit line is payable monthly at the bank's floating
30 day Libor rate plus 1.5%. Indebtedness outstanding under the Agreement is
secured by substantially all of the Company's assets, including export-related
inventories and accounts receivable. The Agreement contains covenants and
conditions similar to
5
<PAGE>
those contained in the Restated Loan and Security Agreement, as amended, between
the Company and its bank dated November 25, 1997. As of September 30, 1999, the
Company had not used the $2 million export credit line.
The Company is in default of certain financial covenants contained in the loan
agreements between the Company and its bank, and as a result thereof, the bank
has the right to accelerate the maturity of the debt outstanding under such
agreements. Accordingly, debt outstanding under the terms of such agreements at
September 30, 1999 in the aggregate amount of $12,215 is classified as a current
liability. The Company is presently attempting to renegotiate the terms of the
loan agreements and believes, but cannot assure, that its efforts will be
successful. However, if the Company is unable to renegotiate the terms of the
loan agreements on terms satisfactory to the Company, the Company would be
forced to secure alternative financing arrangements. In that event, there is no
assurance that the Company's efforts to secure such alternative financing
arrangements would be successful, or that if successful, that such financing
would be on terms satisfactory to the Company.
4. STOCKHOLDERS' EQUITY
Changes in stockholders' equity for the six months ended September 30, 1999 are
summarized as follows:
<TABLE>
<CAPTION>
Holding
Additional Loss on
Common Paid-in Retained Marketable Treasury
Stock Capital Earnings Securities Stock Total
--------- ------------ ------------ -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1999 $ 136 $ 46,667 $ 3,680 $ - $ (177) $ 50,306
Net income (loss) (1,923) (1,923)
Holding loss on marketable
securities (49) (49)
========= ============ ============ ============== =========== ============
Balance, September 30, 1999 $ 136 $ 46,667 $ 1,757 $ (49) $ (177) $ 48,334
========= ============ ============ ============== =========== ============
</TABLE>
5. SUPPLEMENTAL CASH FLOW INFORMATION
A summary of the Company's supplemental cash flow information for the six months
ended September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash paid (refunded) during the period for:
Interest $ 473 $ 402
Income taxes (2) 626
Non-cash transactions:
Receipt of marketable securities to satisfy
accounts receivable resulting in an increase
in other current assets and a reduction in
accounts receivable 287 -
Unrealized loss on marketable securities
resulting in a reduction of stockholders' equity
and other current assets 78 -
Tax benefit from unrealized loss on marketable
securities resulting in an increase in current
deferred tax assets and stockholders' equity 29 -
</TABLE>
6
<PAGE>
6. EARNINGS (LOSS) PER SHARE
Earnings (loss) per common share is computed in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 requires disclosure of basic earnings (loss) per share and diluted earnings
(loss) per share. Basic earnings (loss) per share is computed by dividing net
income by the weighted average number of shares of common stock outstanding
during the period. Diluted earnings (loss) 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.
The weighted average number of shares of common stock outstanding used to
compute basic earnings (loss) per share for the three months and six months
ended September 30, 1999 was 13,499,693 shares and 13,499,693 shares,
respectively. The weighted average number of shares of common stock outstanding
used to compute basic earnings (loss) per share for the three months and six
months ended September 30, 1998 was 13,456,585 shares and 13,430,419 shares,
respectively. There were no potential dilutive common shares outstanding during
the three months and six months ended September 30, 1999 for purposes of
computing diluted earnings (loss) per share. The weighted average number of
potential dilutive common shares outstanding used in the computation of diluted
earnings (loss) per share for the three and six months ended September 30, 1998
was 365,320 shares and 362,276 shares, respectively.
7. DISCLOSURE ABOUT SEGMENTS AND RELATED INFORMATION
The Company's reportable segments are based upon the market segments that the
Company addresses. The products provided by each of the reportable segments are
similar in nature. There are no transactions between the reportable segments,
and external customers account for all sales revenue. The information that is
provided to the chief operating decision maker to measure the profit or loss of
reportable segments includes sales, cost of sales based on standards and gross
profit based on standards. Operating expenses, including depreciation,
amortization and interest are not included in the information provided to the
chief operating decision maker to measure performance of reportable segments.
The sales revenue and gross profit of each reportable segment for the three
months ended September 30, 1999 and 1998 is set forth below:
1999 1998
--------------------- ----------------------
Sales Profit Sales Profit
--------- --------- --------- ---------
Private $ 2,998 $ 1,297 $ 6,639 $ 3,450
Telephone company 7,946 2,295 10,304 2,924
International 2,507 628 1,865 607
========= ========= ========== =========
$ 13,451 $ 4,220 $ 18,808 $ 6,981
========= ========= ========== =========
7
<PAGE>
The sales revenue and gross profit of each reportable segment for the six months
ended September 30, 1999 and 1998 is set forth below:
1999 1998
----------------------- -----------------------
Sales Profit Sales Profit
---------- --------- ----------- ---------
Private $ 6,890 $ 3,149 $ 12,677 $ 6,402
Telephone company 15,393 4,646 18,609 5,255
International 3,926 1,121 3,158 1,163
---------- --------- --------- -----------
$ 26,209 $ 8,916 $ 34,444 $ 12,820
========== ========= ========= ===========
The Company does not allocate assets or other corporate expenses to reportable
segments. A reconciliation of segment profit information to the Company's
financial statements for the three months and six months ended September 30,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Total profit of reportable segments $ 4,220 $ 6,981 $ 8,916 $ 12,820
Unallocated cost of sales (1,571) (364) (2,281) (795)
Unallocated corporate expenses (5,035) (5,258) (9,573) (10,271)
----------- ----------- ----------- ----------
Income (loss) before income taxes $ (2,386) $ 1,359 $ (2,938) $ 1,754
=========== =========== =========== ==========
</TABLE>
8
<PAGE>
Information with respect to sales of products and services during the three
months and six months ended September 30, 1999 and 1998 is set forth below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Private segment:
Payphone terminals $ 1,520 $ 2,822 $ 3,063 $ 5,486
Printed circuit board control modules and kits 892 3,107 2,750 6,037
Components and assemblies 214 379 320 570
Software 77 95 157 221
Operator services 191 107 364 120
Other services 104 129 236 243
--------- --------- --------- ---------
2,998 6,639 6,890 12,677
--------- --------- --------- ---------
Telephone company segment:
Payphone terminals 679 3,398 1,438 5,271
Printed circuit board control modules and kits 2,350 912 5,057 2,285
Components and assemblies 1,222 3,513 2,575 5,833
Repair, refurbishment and upgrade services 3,691 2,481 6,309 5,220
Other 4 - 14 -
--------- --------- --------- ---------
7,946 10,304 15,393 18,609
--------- --------- --------- ---------
International segment:
Payphone terminals 2,271 877 3,507 1,690
Printed circuit board control modules and kits 79 59 136 117
Components and assemblies 157 929 281 1,351
Other - - 2 -
--------- --------- --------- ---------
2,507 1,865 3,926 3,158
--------- --------- --------- ---------
$13,451 $18,808 $26,209 $34,444
========= ========= ========= =========
</TABLE>
The Company sells its payphone products in the United States and in certain
foreign countries. The Company's international business consists of export
sales, and the Company does not presently have any foreign operations. Sales by
geographic region for the three months and six months ended September 30, 1999
and 1998 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
United States $ 10,944 $ 16,943 $ 22,283 $ 31,286
Canada 1,238 878 1,845 1,536
Latin America 848 965 1,619 1,597
Europe, Middle East and Africa 400 19 411 22
Asia Pacific 21 3 51 3
---------- ---------- ---------- ----------
$ 13,451 $ 18,808 $ 26,209 $ 34,444
========== ========== ========== ==========
</TABLE>
9
<PAGE>
8. SUBSEQUENT EVENTS
Employment Agreement
On October 15, 1999, the Company hired a new President and Chief Executive
Officer. The employment agreement between the Company and its new President and
Chief Executive Officer expires on October 11, 2002 and may be terminated
earlier by either party with 30 days prior written notice. The agreement
provides for minimum annual base compensation of $250 and incentive compensation
of up to 50% of base compensation at the discretion of the Board of Directors,
subject to a minimum of 25% of base compensation for the period beginning
October 15, 1999 and ending December 31, 2000. In addition, under the terms of
the agreement, the President and Chief Executive Officer is entitled to receive
benefits made available to other executives of the Company and reimbursement of
relocation expenses of $40.
Pursuant to the terms of the agreement, the Company issued options to the new
President and Chief Executive Officer to purchase 539,988 shares of the
Company's common stock at an exercise price of $1.67 per share. Such options
vest and become exercisable ratably at the end of each month over the term of
the employment agreement, and expire on October 15, 2004. Unvested options
expire upon termination of the agreement by the Company for cause or upon notice
of termination of the agreement by the President and Chief Executive Officer for
any reason. If the Company terminates the agreement without cause, options that
would have vested during the twelve months after such termination, or during the
remaining term of the agreement, whichever is less, immediately vest and are
thereafter exercisable until their expiration date. In addition, the options
vest upon a change in control of the Company. Further, the agreement provides
for the payment of severance compensation if the Company terminates the
agreement without cause equal to $250 unless the remaining term of the agreement
is less than 12 months in which event such amount is prorated over the remainder
of the term. The employment agreement also contains confidentiality and
non-compete provisions.
Restructuring
In November 1999, the Company formulated a restructuring plan to consolidate
manufacturing operations, resize its core business operations, reorient its
distribution strategy and begin to build operations required to introduce its
new information station terminal products and back office management software to
the marketplace. In connection with this restructuring, the Company expects to
recognize restructuring charges, consisting of the cost of estimated severance
and salary continuation arrangements, remaining liabilities related to the
closure of leased facilities and certain asset impairment losses, of
approximately $1 million during the three months ending December 31, 1999. The
Company believes, but cannot assure, that the restructuring will have the impact
of reducing costs and expenses by approximately $2 million annually. The Company
does not expect to begin to realize the full impact of the anticipated cost and
expense reductions from the restructuring until the quarter ending June 30,
2000.
----------------------------
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All dollar amounts, except per share data, in this Management's Discussion and
Analysis of Financial Condition and Results of Operations are stated in
thousands.
Forward Looking Statements
The statements contained in this report which are not historical facts contain
forward looking information regarding the Company's financial position, business
strategy, plans, projections and future performance based on the beliefs,
expectations, estimates, intentions or anticipations of management as well as
assumptions made by and information currently available to the Company's
management. Such statements reflect the current view of the Company with respect
to future events and are subject to risks, uncertainties and assumptions related
to various factors that could cause the Company's actual results to differ
materially from those expected by the Company, including competitive factors,
customer relations, the integration of operations resulting from acquisitions,
the risk of obsolescence of the Company's products, relationships with
suppliers, the risk of adverse regulatory action affecting the Company's
business or the business of the Company's customers, changes in the
international business climate, product introduction and market acceptance,
general economic conditions, seasonality, changes in industry practices, the
outcome of litigation to which the Company is a party, and other uncertainties
detailed in this report and in the Company's other filings with the Securities
and Exchange Commission.
Results of Operations
The Company reported a net loss of $1,574, or $.12 per diluted share, for the
three months ended September 30, 1999 on net sales of $13,451 as compared to net
income of $865, or $.06 per diluted share, on net sales of $18,808 for the three
months ended September 30, 1998. For the six months ended September 30, 1999,
the Company reported a net loss of $1,923, or $.14 per diluted share, on
revenues and net sales of $26,209 as compared to net income of $1,102, or $.08
per diluted share, on revenues and net sales of $34,444 for the six months ended
September 30, 1998. The Company's operating results for the three months and six
months ended September 30, 1999 have been adversely affected by industry
conditions that began to impact the Company's sales and gross profit margins in
the latter half of the Company's 1999 fiscal year ended March 31, 1999. These
conditions include among others, the consolidation of domestic public
communications providers and declining industry revenues resulting from
increasing usage of wireless services and increased volume of dial-around (toll
free and access code) calls. As a result of the prolonged continuance of these
industry conditions, the Company does not believe that its domestic revenues and
net sales from its core public communications products and services will improve
significantly in the foreseeable future.
During fiscal year 1999 and the first six months of fiscal 2000, the Company has
made a significant investment in the development of new technology, including
information station terminal products and back office management software, that
are intended to provide the capability to handle advertising, information
content and e-commerce transactions in addition to traditional payphone
capabilities. The Company believes, but cannot assure, that it will begin to
release its new information station terminal products and back office management
software to the market during the quarter ending March 31, 2000, that such
products will be accepted by the marketplace and that such products may result
in an increase to the Company's sales and revenues. However, there is no
assurance that the Company's information station terminal products and back
office management software will be successfully introduced or accepted by the
marketplace, or if they are, that revenues from such products would have a
material favorable impact on the Company's sales and revenues in the foreseeable
future or at all.
11
<PAGE>
In November 1999, the Company formulated a restructuring plan to consolidate
manufacturing operations, resize its core business operations, reorient its
distribution strategy and begin to build operations required to successfully
introduce its information station terminal products and back office management
software. In connection with this restructuring, the Company expects to
recognize restructuring charges of approximately $1 million during the three
months ending December 31, 1999. The Company believes, but cannot assure, that
the restructuring will have the impact of reducing costs and expenses by
approximately $2 million annually. The Company does not expect to begin to
realize the full impact of the anticipated cost and expense reductions from the
restructuring until the quarter ending June 30, 2000.
Three Months Ended September 30, 1999 Compared
to the Three Months Ended September 30, 1998
The following table shows certain line items in the Company's consolidated
statements of operations for the three months ended September 30, 1999 and 1998
that are discussed below together with amounts expressed as a percentage of
sales and with the change expressed as a percentage increase or (decrease).
<TABLE>
<CAPTION>
Percent Percent Percentage
1999 of Sales 1998 of Sales Change
-------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues and net sales $ 13,451 100% $ 18,808 100% (28%)
Cost of revenues and sales 10,802 80 12,191 65 (11)
Gross profit 2,649 20 6,617 35 (60)
Selling, general and administrative
expenses 2,790 21 3,024 16 (8)
Engineering, research and
development expenses 1,547 12 1,592 8 (3)
Income tax expense (benefit) (812) 6 494 3 (264)
</TABLE>
Revenues and net sales by market segment for the three months ended September
30, 1999 and 1998 together with the increase or decrease and with the increase
or decrease expressed as a percentage change are set forth below:
Increase Percentage
1999 1998 (Decrease) Change
---------- --------- ---------- -----------
Private segment $ 2,998 $ 6,639 $ (3,641) (55%)
Telephone company segment 7,946 10,304 (2,358) (23)
International segment 2,507 1,865 642 34
========== ========= ========== ===========
$ 13,451 $ 18,808 $ (5,357) (28%)
========== ========= ========== ===========
12
<PAGE>
Revenues and net sales of products and services for the three months ended
September 30, 1999 and 1998 together with the increase or decrease and with the
increase or decrease expressed as a percentage change are set forth below:
<TABLE>
<CAPTION>
Increase Percentage
1999 1998 (Decrease) Change
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Products:
Payphone terminals $ 4,470 $ 7,097 $ (2,627) (37%)
Printed circuit board control modules and kits 3,321 4,078 (757) (19)
Components and assemblies 1,593 4,821 (3,228) (67)
Software 81 95 (14) (15)
Services:
Repair, refurbishment and upgrade services 3,691 2,481 1,210 49
Operator services 191 107 84 79
Other services 104 129 (25) (19)
========== ========== ========== ===========
$ 13,451 $ 18,808 $ (5,357) (28%)
========== ========== ========== ===========
</TABLE>
The decrease in revenues and net sales to the private and telephone company
segments for the three months ended September 30, 1999 as compared to the same
period last year is primarily attributable to a decrease in volume of product
sales partially offset by an increase in the usage of repair, refurbishment and
upgrade services by the telephone company segment. The Company believes that
these fluctuations are primarily attributable to declining revenues of payphone
service providers caused by increasing usage of wireless services and higher
volume of dial-around calls. In addition, the fluctuations in sales mix among
payphone terminals, control modules and components and assemblies and continuing
downward pricing pressures contributed to the decline in revenues and net sales
in these domestic market segments. The increase in revenues and net sales to the
international segment for the three months ended September 30, 1999 as compared
to the three months ended September 30, 1998 is primarily attributable to an
increase in export volume of payphone terminals to customers in Canada and
Africa.
Cost of sales and gross profit as a percentage of net sales approximated 80% and
20%, respectively, for the three months ended September 30, 1999 as compared to
65% and 35%, respectively, for the three months ended September 30, 1998. The
decline in the gross profit percentage between such periods is principally
attributable to a number of factors including: (i) the increase in the
percentage of sales to telephone companies at margins lower than those achieved
from the private segment, (ii) downward pricing pressures in the private
segment, (iii) an increase in the obsolescence provision of $821 to reflect the
net realizable value of certain slow moving inventories, which is attributable
to the continued weakness in the domestic market; and (iv) an increase in low
margin export sales to certain international customers.
The decrease in selling, general and administrative expenses is primarily
attributable to a reduction in personnel and other operating expenses as a
result of the reorganization of selling and marketing activities at the end of
fiscal 1999 and a decline in variable selling expenses, which is related to the
decline in sales, partially offset by an increase in the provision for credit
losses of $81,000, which is related to the deterioration of the financial
position of certain customers in the private segment.
Despite the decline in revenues and net sales, the Company continued to make a
significant investment in engineering, research and development activities
associated with the development of the Company's new information terminal
products and back office management software designed to provide the capability
to handle advertising, information content and e-commerce transactions in
addition to traditional payphone
13
<PAGE>
capabilities. Total engineering, research and development expenditures,
including capitalized software, during the three months ended September 30, 1999
increased by $1,018, or approximately 64%, to $2,610 versus $1,592 for the three
months ended September 30, 1998. Capitalized software expenditures approximated
$1,063 during the three months ended September 30, 1999. During the three months
ended September 30, 1998 no software development costs were capitalized.
The Company's effective tax rate declined to approximately 34% of pre-tax income
(loss) for the three months ended September 30, 1999 from approximately 36% for
the three months ended September 30, 1998 primarily due to fluctuations in
non-deductible expenses and research and development tax credits.
Six Months Ended September 30, 1999 Compared
to the Six Months Ended September 30, 1998
The following table shows certain line items in the Company's consolidated
statements of operations for the six months ended September 30, 1999 and 1998
that are discussed below together with amounts expressed as a percentage of
sales and with the change expressed as a percentage increase or (decrease).
<TABLE>
<CAPTION>
Percent Percent Percentage
1999 of Sales 1998 of Sales Change
---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues and net sales $ 26,209 100% $ 34,444 100% (24%)
Cost of revenues and sales 19,574 75 22,419 65 (13)
Gross profit 6,635 25 12,025 35 (45)
Selling, general and administrative
expenses 5,336 20 5,875 17 (9)
Engineering, research and
development expenses 2,877 11 3,167 9 (9)
Income tax expense (benefit) (1,015) (4) 652 2 (256)
</TABLE>
Revenues and net sales by market segment for the six months ended September 30,
1999 and 1998 together with the increase or decrease and with the increase or
decrease expressed as a percentage change are set forth below:
Increase Percentage
1999 1998 (Decrease) Change
---------- ---------- ---------- -----------
Private segment $ 6,890 $ 12,677 $ (5,787) (46%)
Telephone company segment 15,393 18,609 (3,216) (17)
International segment 3,926 3,158 768 24
========== ========== ========== ===========
$ 26,209 $ 34,444 $ (8,235) (24%)
========== ========== ========== ===========
14
<PAGE>
Revenues and net sales of products and services for the six months ended
September 30, 1999 and 1998 together with the increase or decrease and with the
increase or decrease expressed as a percentage change are set forth below:
<TABLE>
<CAPTION>
Increase Percentage
1999 1998 (Decrease) Change
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Products:
Payphone terminals $ 8,008 $ 12,447 $ (4,439) (36%)
Printed circuit board control modules and kits 7,943 8,439 (496) (6)
Components and assemblies 3,176 7,754 (4,578) (59)
Software and other 173 221 (48) (22)
Services:
Repair, refurbishment and upgrade services 6,309 5,220 1,089 21
Operator services 364 120 244 203
Other services 236 243 (7) (3)
========== ========== =========== ===========
$ 26,209 $ 34,444 $ (8,235) (24%)
========== ========== =========== ===========
</TABLE>
The decrease in revenues and net sales to the private and telephone company
segments for the six months ended September 30, 1999 as compared to the same
period last year is primarily attributable to a decrease in volume of product
sales partially offset by an increase in the usage of repair, refurbishment and
upgrade services by the telephone company segment. The Company believes that
these fluctuations are primarily attributable to declining revenues of payphone
service providers caused by increasing usage of wireless services and higher
volume of dial-around calls. In addition, the fluctuations in sales mix among
payphone terminals, control modules and components and assemblies and continuing
downward pricing pressures contributed to the decline in revenues and net sales
in these domestic market segments. The increase in revenues and net sales to the
international segment for the six months ended September 30, 1999 as compared to
the six months ended September 30, 1998 is primarily attributable to an increase
in export volume of payphone terminals to customers in Canada and Africa.
Cost of sales and gross profit as a percentage of net sales approximated 75% and
25%, respectively, for the six months ended September 30, 1999 as compared to
65% and 35%, respectively, for the six months ended September 30, 1998. The
decline in the gross profit percentage between such periods is principally
attributable to a number of factors including: (i) the increase in the
percentage of sales to telephone companies at margins lower than those achieved
from the private segment, (ii) downward pricing pressures in the private
segment, (iii) an increase in the obsolescence provision of $983 to reflect the
net realizable value of certain slow moving inventories, which is attributable
to the continued weakness in the domestic market; and (iv) an increase in low
margin export sales to certain international customers.
The decrease in selling, general and administrative expenses is primarily
attributable to a reduction in personnel and other operating expenses as a
result of the reorganization of selling and marketing activities at the end of
fiscal 1999 and a decline in variable selling expenses, which is related to the
decline in sales.
Total engineering, research and development expenditures, including capitalized
software, during the six months ended September 30, 1999 increased by $1,636, or
approximately 51%, to $4,803 versus $3,167 for the same period of fiscal 1999.
Capitalized software related to the development of the Company's new information
station terminal products and back office management software designed to
provide the capability to handle advertising, information content and e-commerce
transactions in addition to traditional
15
<PAGE>
payphone capabilities approximated $1,926 during the six months ended September
30, 1999. During the six months ended September 30, 1998 no software development
costs were capitalized.
The Company's effective tax rate declined to approximately 34% of pre-tax income
(loss) for the six months ended September 30, 1999 as compared to 37% for the
six month ended September 30, 1998 primarily due to fluctuations in
non-deductible expenses and research and development tax credits.
Impact of Inflation
The Company's primary costs, inventory and labor, increase with inflation.
However, the Company does not believe that inflation and changing prices have
had a material impact on its business.
Liquidity and Capital Resources
Financing Activities. The credit lines available to the Company pursuant to the
Restated Loan and Security Agreement, as amended (the "Loan Agreement"), between
the Company and its bank include a $10 million revolving credit line to finance
the Company's domestic working capital requirements (the "working capital line")
and a $1.5 million revolving credit line to finance the Company's capital
expenditures (the "capital line"). In addition, on June 29, 1999, the Company
and its bank entered into a Business Loan Agreement (the "Export Loan
Agreement") that provides the Company with a $2 million revolving credit line to
finance export related inventory and accounts receivable (the "export line").
Indebtedness outstanding under the Loan Agreement and the Export Loan Agreement
(collectively the "Agreements") is collateralized by substantially all of the
assets of the Company. The Agreements contain covenants that prohibit or
restrict the Company from engaging in certain transactions without the consent
of the bank, including mergers or consolidations and disposition of assets,
among others. Additionally, the Agreements require the Company to comply with
specific financial covenants, including covenants with respect to cash flow,
working capital and net worth. Noncompliance with any of these covenants or the
occurrence of an event of default, if not waived, could accelerate the maturity
of the indebtedness outstanding under the Agreements.
The Company borrows funds under its revolving credit lines to finance capital
expenditures, increases in accounts and notes receivable and inventories and
decreases in bank overdrafts (as drafts clear), accounts payable and accrued
liability obligations to the extent that such requirements exceed cash provided
by operations, if any. The Company also uses the financing available under its
revolving credit lines to fund operations and payments on long-term debt when
necessary. The Company measures its liquidity based upon the amount of funds the
Company is able to borrow under its revolving credit lines, which varies based
upon operating performance and the value of collateral.
Indebtedness outstanding under the working capital and export lines cannot
exceed the value of eligible collateral, as defined in the Agreements,
consisting of accounts receivable and inventories. The working capital line
matures on November 25, 2002. The export line matures on June 29, 2000. The
capital line matures on July 31, 2000. Interest on amounts borrowed under the
revolving credit lines is payable monthly at the bank's floating 30 day Libor
rate plus 1.5% (6.668% at September 30, 1999).
At September 30, 1999 and March 31, 1999, outstanding debt under the working
capital line amounted to $6,510 and $5,185, respectively, and at September 30,
1999, the Company was able to borrow up to a maximum of $8,944 under the working
capital line based on the value of eligible collateral. The indebtedness
outstanding under the capital line amounted to $238 at September 30, 1999. At
September 30, 1999, the Company has not used the export line, but was able to
borrow up to a maximum of $2 million under the
16
<PAGE>
export line based on the value of eligible collateral. Outstanding indebtedness
under mortgage and installment notes between the Company and its bank aggregated
$5,467 and $5,833 at September 30, 1999 and March 31, 1999, respectively.
During the six months ended September 30, 1999 and 1998, net proceeds under the
Company's working capital line and capital line aggregated $1,563 and $4,485,
respectively.
Principal payments under the mortgage and installment notes between the Company
and its bank and other notes payable during the six months ended September 30,
1999 and 1998 amounted to $398 and $40, respectively.
As discussed below under "Liquidity," the Company is in default of certain
financial covenants contained in the loan agreements between the Company and its
bank, and as a result thereof, the bank has the right to accelerate the maturity
of the debt outstanding under such agreements. Accordingly, debt outstanding
under the terms of such agreements at September 30, 1999 in the aggregate amount
of $12,215 is classified as a current liability.
Operating Activities. Cash flows from operating activities for the six months
ended September 30, 1999 and 1998 are summarized as follows:
1999 1998
--------- ----------
Net income (loss) $ (1,923) $ 1,102
Non-cash charges and credits, net 2,393 2,111
--------- ----------
470 3,213
Changes in operating assets and liabilities:
Accounts and notes receivable 1,046 (3,964)
Inventories 1,966 (8,385)
Accounts payable, accrued expenses and
other current liabilities (789) 3,117
Other 102 (28)
--------- ----------
$ 2,795 $ (6,047)
--------- ----------
The Company's operating cash flow is primarily dependent upon operating results,
sales levels and related credit terms extended to customers and inventory
purchases, and the changes in operating assets and liabilities related thereto.
During the six months ended September 30, 1999, weaker operating performance
resulted in a decline in cash flows from operations, net of non-cash charges and
credits, of $2,743, to $470 from $3,213 for the six months ended September 30,
1998. However, during the six months ended September 30, 1999, the Company
generated $2,325 of cash from changes in operating assets and liabilities as
compared to the six months ended September 30, 1998 when the Company used $9,260
of cash to fund changes in operating assets and liabilities.
The Company's operating assets and liabilities are comprised principally of
accounts and notes receivable, inventories, accounts payable, accrued expenses
and other current liabilities. During the six months ended September 30, 1999,
the Company generated $1,046 and $1,966 of cash through reductions in accounts
and notes receivable and inventories, respectively, and used $789 of cash to
fund a net decrease in accounts payable, accrued expenses and other current
liabilities. In comparison, during the six months ended September 30, 1998, the
Company used $3,964 and $8,385 of cash to fund increases in accounts and notes
receivable and inventories, respectively, and generated $3,117 of cash from
increases in accounts payable, accrued expenses and other current liabilities.
17
<PAGE>
The Company's current ratio declined to 1.27 to 1 at September 30, 1999 as
compared to 2.95 to 1 at March 31, 1999 primarily due to the classification of
outstanding bank indebtedness as a current liability as a result of the default
in certain financial covenants contained in the loan agreements between the
Company and its bank. During the six months ended September 30, 1999, the
Company's current assets decreased by $4,985 (16%) and current liabilities
increased by $10,161 (96%). Working capital decreased by $15,146, to $5,547 at
September 30, 1999 from $20,693 at March 31, 1999 primarily as a result of the
reclassification of bank debt, the net loss for the period and the increase in
capital asset and capitalized software expenditures discussed below. Extension
of credit to customers and inventory purchases represent the principal working
capital requirements of the Company, and material increases in accounts and
notes receivable and/or inventories could have a significant effect on the
Company's liquidity. Accounts and notes receivable and inventories represented
in the aggregate 83% and 84% of current assets at September 30, 1999 and March
31, 1999, respectively. The Company experiences varying accounts receivable
collection periods from its three customer segments, and believes that credit
losses will not have a significant effect on future liquidity as a significant
portion of its accounts and notes receivable are due from customers with
substantial financial resources. The level of inventory maintained by the
Company is dependent on a number of factors, including delivery requirements of
customers, availability and lead time of components and the ability of the
Company to estimate and plan the volume of its business.
Investing Activities. Net cash used for investing activities during the six
months ended September 30, 1999 and 1998 amounted to $3,083 and $832,
respectively. The Company's investing activities include capital expenditures
consisting primarily of manufacturing tooling and equipment, computer equipment
and building improvements required to support operations and capitalized
software, including new product software development costs. Cash used for
capital expenditures during the six months ended September 30, 1999 and 1998
aggregated $1,157 and $803, respectively. During the six months ended September
30, 1999 and 1998, cash used to acquire software and capitalized software
development costs aggregated $1,926 and $29, respectively. The Company has not
entered into any significant commitments for the purchase of capital assets
other than manufacturing tooling in an amount of approximately $500.
Liquidity. The Company finances its operations, working capital requirements and
capital expenditures from internally generated cash flows and financing
available under the loan agreements between the Company and its bank. The
Company is in default of certain financial covenants contained in the loan
agreements. As a result thereof, the bank has the right to accelerate the
maturity of debt outstanding under the loan agreements in the aggregate amount
of $12,215 at September 30, 1999. The Company is presently attempting to
renegotiate the terms of the loan agreements and believes, but cannot assure,
that its efforts will be successful. However, if the Company is unable to
renegotiate the terms of the loan agreements on terms satisfactory to the
Company or at all, the Company would be forced to secure alternative financing
arrangements. In that event, there is no assurance that the Company's efforts to
secure such alternative financing arrangements would be successful, or that if
successful, that such financing would be on terms satisfactory to the Company.
The inability of the Company to renegotiate the terms of the loan agreements on
satisfactory terms or secure alternative financing arrangements on satisfactory
terms would have a significant adverse effect on the Company's liquidity.
Accordingly, the Company's cash flows may not be sufficient to fund its working
capital requirements, capital expenditures and debt service requirements through
September 30, 2000 unless the Company is able to successfully renegotiate the
terms of its loan agreements or secure alternative financing arrangements on
terms satisfactory to the Company.
18
<PAGE>
Year 2000 Discussion
The Company is continuing its efforts to assess the impact of Year 2000 on its
business and address Year 2000 issues. Year 2000 issues result from computer
programs designed to use two-digit date codes rather than four digits to define
the applicable year. As a result, there is a risk 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 established a "Validation Test Plan" to assess Year 2000 compliance
of all products and services currently sold or supported by the Company. This
test plan was designed to identify the products and services currently supported
by the Company, features of such products and services that required assessment,
and the approach and resources required. The Validation Test Plan was also
designed to assess Year 2000 compliance of those items in order of relative
importance to the Company. The Company believes that it has completed its Year
2000 compliance testing with respect to the products and systems it currently
sells and supports. In addition, the Company believes it has completed
substantially all Year 2000 software modifications to such products, and
believes that such products are Year 2000 compliant or Year 2000 compliant with
issues. The Company believes that products defined as Year 2000 compliant with
issues will operate properly in year 2000 if programmed and configured in
accordance with the Company's published guidelines. However, there can be no
assurance that the Company's tests pursuant to its Validation Test Plan have
detected all instances of Year 2000 noncompliance, that the cost of any future
remediation activities that may be required will not be material or that all
products and systems currently supported by the Company will, in fact, be Year
2000 compliant.
Based on the Company's Year 2000 compliance testing and remediation activities,
the only products historically sold by the Company that will not be Year 2000
compliant or compliant with issues are products the manufacture of which has
been discontinued and that are no longer supported by the Company. These
discontinued products are not Year 2000 compliant and the Company does not
intend to bring these products into compliance, and has so notified its
customers. The Company does not believe that it has an obligation to bring these
discontinued products into compliance or an obligation to replace these products
under its warranties since those products were last sold more than five years
ago. Accordingly, the Company has not recorded any liability related to these
products in its financial statements.
The Company has provided information to its customers and others about its Year
2000 compliance program. The Company's web site describes each product
historically supplied by the Company and its status as "compliant", "not
compliant", "compliant with issues" with an attached description of the issues,
or "compliance anticipated" with a projected release date.
The risks associated with the failure of the Company's products 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; (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 business 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
19
<PAGE>
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 continues to assess Year 2000 compliance of its other internal systems
such as engineering, shipping, payroll and EDI systems and is upgrading these
systems as required if deficiencies within these systems are deemed to be
critical. The costs related to such system upgrades or acquisition of new Year
2000 compliant software to date have not been material, but the costs to
complete such upgrades or acquisitions could be material. 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. The Company believes that all critical internal systems will be
assessed and remediated by the end of the calendar year.
The Company has completed an inventory and tested most of its internal computer
equipment, including personal computers, related servers and software for Year
2000 compliance. Based on the Company's testing, the Company plans to spend
approximately $100 to replace and upgrade such equipment and software to achieve
Year 2000 compliance. The Company believes that the necessary replacements and
upgrades can be completed by the end of the calendar year.
The Company has relationships with various third parties in the ordinary course
of business. The Company continues to assess the readiness of third parties,
especially critical suppliers and others that have material relationships with
the Company, by sending questionnaires, evaluating responses and identifying the
risks with respect to Year 2000 plans of those third parties. The Company will
continue to identify the risks associated with third parties based on responses
to those questionnaires and will then formulate appropriate contingency plans on
a case by case basis to mitigate such risks. The Company expects to complete its
assessment of the readiness of third parties by the end of the calendar year.
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 could be
material.
The Company has begun, but not yet completed, an 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.
The Company presently has no contingency plans for Year 2000 compliance problems
that might arise, but will develop such contingency plans as the Company
identifies situations in which Year 2000 compliance could be a problem. However,
there can be no assurance that any contingency plan will be timely or effective
to avoid a material disruption of the Company's operations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities, which establishes standards for accounting
of derivative instruments including certain derivative instruments embedded in
other contracts, and hedging activities. SFAS 133 is effective for fiscal
quarters of all fiscal years beginning after June 15, 1999. SFAS 133 requires
entities to recognize derivative instruments as assets and liabilities and
measure them at fair value, and to match the timing of gain or loss recognition
on hedging instruments with the recognition of changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or the
earnings effect of the hedged forecasted transaction. Management does not
believe that the adoption of SFAS 133 will have a significant impact on the
Company's consolidated financial statements.
20
<PAGE>
During the six months ended September 30, 1999, the Company adopted Statement of
Position 98-1, "Accounting for Costs of Computer Software Developed or Obtained
for Internal Use" ("SOP 98-1") issued by the American Institute of Certified
Public Accountants (the "AICPA"). SOP 98-1 provides guidance on accounting for
the costs of computer software developed or obtained for internal use and new
cost recognition principles and identifies the characteristics of internal use
software. The adoption of SOP 98-1 did not have a material impact on the
Company's results of operations, financial position or cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
The are no material changes with regards to quantitative and qualitative
disclosures about market risks from that set forth in the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1999.
---------------------------
21
<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 1995 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 1,
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. On December
11, 1998, the plaintiffs appealed the Court's decision to grant the Company's
Motion for Summary Judgment and the appeal is pending. The Company disputes
liability and intends to defend this matter vigorously, although the Company
cannot predict the ultimate outcome of this litigation.
Item 3. Defaults by the Company on its Senior Securities
The Company is in default of certain financial covenants contained in the loan
agreements between the Company and its bank. As a result thereof, the bank has
the right to accelerate the maturity of debt outstanding under the loan
agreements in the aggregate principal amount of $12,215 at September 30, 1999.
The Company is presently attempting to renegotiate the terms of the loan
agreements and believes, but cannot assure, that its efforts will be successful.
However, if the Company is unable to renegotiate the terms of the loan
agreements on terms satisfactory to the Company or at all, the Company would be
forced to seek alternative financing arrangements. In that event, there is no
assurance that the Company's efforts to secure such alternative financing
arrangements would be successful, or that if successful, that such financing
would be on terms satisfactory to the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The following exhibits are filed herewith as part of this report:
Exhibit
No. Description of Exhibit
------- ----------------------
10.1 Employment Agreement between Elcotel, Inc. and
Michael J. Boyle dated October 15, 1999.
27 Financial Data Schedule (Edgar Filing only)
(b) Reports on Form 8-K:
None
22
<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 15, 1999 By: /s/ William H. Thompson
----------------------------------
William H. Thompson
Senior Vice President,
Administration and Finance
(Principal Financial Officer)
By: /s/ Scott M. Klein
----------------------------------
Scott M. Klein
Controller (Principal Accounting
Officer)
23
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT is made and entered into as of October 15, 1999, by and between
ELCOTEL, INC. (hereinafter referred to as the "Company"), a Delaware
corporation, and MICHAEL J. BOYLE (hereinafter referred to as the "Executive").
R E C I T A L S
WHEREAS, the Company desires to employ the Executive, and the Executive is
desirous of accepting such employment by the Company, upon the terms and
conditions hereinafter set forth,
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT. Subject to the satisfaction of the conditions set forth in
this Section 1, the Company agrees to employ the Executive, and the Executive
agrees to render his services to the Company, as its President and Chief
Executive Officer, during the Term (as defined below). Following the next
shareholder meeting of the Company, the Executive shall be appointed to serve as
a member as the Board of Directors of the Company. The Executive shall render
his services at the direction of the Board of Directors of the Company at the
Company's principal executive offices. The Executive agrees to use his best
efforts to promote and further the business, reputation and good name of the
Company and the Executive shall promptly and faithfully comply with all
instructions, directions, requests, rules and regulations made or issued from
time to time by the Company.
2. TERM. The term of employment pursuant to this Agreement (the "Term")
shall commence on October 15, 1999 and continue until October 11, 2002; provided
that either party may terminate this Agreement by providing the other with 30
days prior written notice of such termination. Notwithstanding the foregoing,
this Agreement may be terminated by the Company in the event that "Cause" for
such termination exists as provided in Section 7 below. In the event the Company
terminates this Agreement or the Executive's employment other than for Cause,
the Company shall pay the Executive Severance Compensation as provided in
Section 3(c) hereof. In the event (a) the Company terminates this Agreement or
the Executive's employment for Cause, or (b) the Executive terminates this
Agreement or his employment for any reason, the Executive shall not be entitled
to any Severance Compensation or other compensation of any kind following the
effective date of such termination.
3. COMPENSATION. As full and complete compensation for all the Executive's
services hereunder, the Company shall pay the Executive the compensation
described below.
(A) CASH COMPENSATION.
(i) During the Term, the Company shall pay the Executive an
annual base salary of $250,000 ("Base Salary"). In the event this
Agreement is terminated prior to the expiration
<PAGE>
of the Term, the Company shall pay to the Executive, in addition to any
Severance Compensation payable under Section 3(c), any accrued but
unpaid Base Salary through the termination date.
(ii) In addition to the Base Salary, during the Term, the
Company shall pay to the Executive an annual bonus (a "Bonus") in an
amount up to 50% of the Executive's Base Salary during the relevant
bonus period as the board of directors of the Company shall determine
in its discretion, provided that the Bonus for the First Bonus Period
(as defined below) shall be not less that 25% of the Executive's Base
Salary during such First Bonus Period. A Bonus shall be paid (x) for
the period from the beginning of the Term through December 31, 2000
(the "First Bonus Period"), (y) for the 2001 calendar year, and (z) for
the period from January 1, 2002 through the end of the Term. In the
event this Agreement or the Executive's employment is terminated by the
Company or by the Executive for any reason, the Executive shall not be
entitled to any Bonus Compensation for the period in which such
termination occurs.
(B) EQUITY COMPENSATION.
(i) Concurrently with the execution and delivery of this
Agreement, the Company shall issue to the Executive, as compensation
and without cost to the Executive, options (the "Options") to purchase
539,988 shares of the Company's Common Stock, par value $0.01 per share
(the "Common Stock"), representing 4% of the shares of Common Stock
that are currently issued and outstanding. Such Options shall be issued
pursuant to a 1999 Stock Option Plan. The Options shall have an
exercise price per share equivalent to the average closing price of the
Company's Common Stock during the 20 business days prior to the
execution of this Agreement. The Options shall vest and become
exercisable as follows: 15,000 shares shall vest on the last day of
each month during the first 24 months of the Term and 14,999 shares
shall vest on the last day of each month during the next 12 months of
the Term. In all cases the Options shall be subject to termination as
provided below. The Executive shall have the right to exercise any
vested Options at any time prior to October 15, 2004 and any Options
not exercised within such deadline shall be deemed terminated and void.
The Executive shall be entitled to exercise any vested Options through
a "cashless exercise" in a broker escrow or other arrangement set forth
in the 1999 Stock Option Plan, provided that such transaction does not
adversely affect the Company.
(ii) In the event this Agreement or the Executive's employment
is terminated (x) by the Company for Cause, or (y) by the Executive for
any reason, the Options shall cease vesting as of the date that the
Company or the Executive provides notice of such termination, and any
unvested Options shall immediately terminate and become void. In the
event this Agreement or the Executive's employment is terminated by the
Company other than for Cause, the Options shall vest as and to the
extent provided in Section 3(c) hereof.
2
<PAGE>
(iii) Notwithstanding anything to the contrary otherwise
contained herein except as may be provided in Section 3(b)(iv), if at
any time during the Term the Company shall, by stock dividend, stock
split, combination, reclassification or exchange, or through merger,
consolidation or otherwise, change its shares of Common Stock into a
different number, kind or class of shares or other securities or
property, then the Board of Directors shall arrange for a successor or
surviving corporation, if any, to grant replacement options, or to
adjust the number of shares covered by the Options and the price of
each share. The determination of the Board of Directors shall be
conclusive.
(iv) Notwithstanding anything to the contrary otherwise
contained herein, if at any time during the Term, there shall be a
Change of Control (as defined below) all unvested Options shall
immediately vest in their entirety. For purposes of this provision, the
occurrence of any one or more of the following events shall be deemed
to be a "Change of Control":
(A) If any transaction occurs whereby
substantially all of the assets of the Company are
transferred, exchanged or sold to a non-affiliated third party
other than in the ordinary course of business;
(B) If a merger or consolidation involving
the Company occurs and the stockholders of the Company
immediately before such merger or consolidation do not own
immediately after such merger or consolidation at least fifty
percent (50%) of the outstanding common stock of the surviving
entity or the entity into which the common stock of the
Company is converted; or
(C) If any person (including, without
limitation, any individual, partnership or corporation), other
than Fundamental Management Corporation and its affiliates or
other than Wexford Management LLC and its affiliates, becomes
the owner, directly or indirectly, of securities of the
Company or its successor (or a parent company thereof)
representing thirty-five (35%) or more of the combined voting
power of the Company's or its successor's (or a parent's, as
the case may be) securities then outstanding.
(C) SEVERANCE COMPENSATION.
In the event the Company terminates this Agreement or the
Executive's employment other than for Cause, the Company shall pay to
the Executive as Severance Compensation $250,000, provided that in the
event the remainder of the Term is less than 12 months, such Severance
Compensation shall be prorated for the remainder of the Term. For
example, if the Company terminates this Agreement other than for Cause
with 8 months remaining in the Term, the Company shall pay the
Executive Severance Compensation of $166,667. The Executive shall also
receive as Severance Compensation (i) an immediate vesting of those
Options that would have vested during the 12 months after such
termination, or such lesser period through the end of the Term, if the
Executive's employment had not been terminated, and (ii) continuation
of medical benefits for the lesser of 12 months or the remainder of the
Term.
3
<PAGE>
4. NO OTHER COMPENSATION. Except as otherwise expressly provided herein,
or in any other written document executed by the Company and the Executive, no
other compensation or other consideration shall become due or payable to the
Executive on account of the services rendered hereunder. The Company shall have
the right to deduct and withhold from the compensation payable to the Executive
hereunder any amounts required to be deducted and withheld under the provisions
of any statute, regulation, ordinance, order or any other amendment thereto,
heretofore or hereafter enacted, requiring the withholding or deduction of
compensation.
5. BENEFITS.
(a) MEDICAL & 401K BENEFITS. The Company agrees that the Executive shall be
entitled to participate in any retirement, 401K, disability, medical, pension,
profit sharing, group insurance, or any other plan or arrangement, or in any
other benefits now or hereafter generally available to executives of the
Company, in each case to the extent that the Executive shall be eligible under
the general provisions thereof, provided that the Company shall waive any
waiting period for participation in any such plan to the extent permitted under
the plan.
(b) RELOCATION EXPENSES. The Company shall pay the Executive $40,000 as
reimbursement for moving and relocation expenses incurred by him and his
immediate family in connection with his relocation to Sarasota and his temporary
living expenses in Sarasota prior to such relocation.
6. RELOCATION. The Executive agrees to relocate to Sarasota, Florida no
later than December 31, 2000. Prior to such relocation the Executive agrees that
he shall rent a temporary residence in Sarasota and reside there in connection
with the performance of his duties under this Agreement.
7. TERMINATION FOR CAUSE. The Company, by written notice to the Executive,
may immediately terminate this Agreement and the Executive's employment
hereunder for Cause. As used herein, a termination by the Company "for Cause"
shall mean that the Executive has (i) failed or refused to perform a material
part of his duties hereunder, (ii) materially breached the provisions of
Sections 8, 9 or 10 hereof, (iii) acted fraudulently or dishonestly in his
relations with the Company, (iv) committed larceny, embezzlement, conversion or
any other act involving the misappropriation of Company funds or assets in the
course of his employment, or (v) been indicted or convicted of any felony or
other crime involving an act of moral turpitude.
8. CONFIDENTIAL INFORMATION.
(a) Executive agrees that he will not at any time or place during his
employment or after termination of such employment directly or indirectly
disclose to any person or firm other than Company or make, use or sell any
records, ideas, files, drawings, documents, improvements, equipment, customer
lists, sales and marketing techniques and devices, formulas, specifications,
research, investigations, developments, inventions, processes and data, and
without limiting the
4
<PAGE>
generality of the foregoing, anything not within the public domain (ideas in the
process of being disclosed to customers shall not be considered in the public
domain), belonging to Company, whether or not patentable or copyrightable, other
than for the sole and exclusive benefit of Company, without the prior written
consent of Company. Executive agrees that both during the course of his
employment with Company and thereafter he will keep confidential from persons
not associated with Company any and all Proprietary Information, special
techniques, and trade secrets of Company. Upon termination of his employment for
any reason whatsoever, Executive agrees to return to Company any property
belonging to it, including but not limited to any and all records, notes,
drawings, specifications, programs, data and other materials, and copies
thereof, pertaining to Company's business and generated or received by Executive
in the course of his employment duties with Company.
(b) Executive agrees that during the course of his employment with the Company
and for one year thereafter he will not directly or indirectly entice or hire
away or in any other manner persuade an employee, consultant, dealer or customer
of Company to discontinue that person's or firm's relationship with or to
Company as an employee, consultant, dealer or customer, as the case may be.
(c) Executive agrees that he will not, during the course of his employment with
the Company and for one year thereafter, engage in any employment or business
activity in which it might reasonably be expected that confidential Proprietary
Information or trade secrets of Company obtained by the Executive during the
course of his employment with Company would be utilized.
(d) The Executive recognizes and agrees that his violation of any terms
contained in paragraphs (a), (b), or (c) of this Section 8 will cause
irreparable damage to Company, the amount of which will be impossible to
estimate or determine. Therefore, Executive further agrees that Company shall be
entitled, as a matter of course, to an injunction restraining any violation or
further violation of any such covenant or covenants by Executive, his employees,
partners, agents or associates, such right to an injunction to be cumulative and
in addition to any other remedies, at law or otherwise, which Company might
have. Company hereby waives any right to require a bond in connection with
obtaining such an injunction. Executive further agrees that his violation of any
of the terms of paragraphs (a), (b), or (c) of this Section 8 during the course
of his employment with Company shall be a cause for his termination without
notice of any rights of the Executive under this Agreement. Such covenants shall
be severable, and if the same be held invalid by reason of length of time, area
covered, or activity covered, or any or all of them, shall be reduced to the
extent necessary to cure such invalidity.
9. COVENANT NOT TO COMPETE WITH COMPANY. Executive further covenants and
agrees that:
(a) During the course of his employment with Company and for one year
thereafter, Executive shall not undertake any employment or financial
involvement with, or assistance of, any person, firm, association, partnership,
corporation or enterprise which is engaged in the manufacture, design, marketing
or sale of pay phones or in any other business in which the Company is engaged
or has
5
<PAGE>
current plans to engage as of the date of termination of employment.
(b) Executive recognizes and agrees that his violation of any terms contained
in paragraph (a) of this Section 9 will cause irreparable damage to Company the
amount of which will be impossible to estimate or determine. Therefore,
Executive further agrees that Company shall be entitled, as a matter of course,
to an injunction restraining any violation or further violation of any such
covenant or covenants by Executive, his employees, partners, agents or
associates, such right to an injunction to be cumulative and in addition to any
other remedies, at law or otherwise, which Company might have. Company hereby
waives any right to require a bond in connection with obtaining such an
injunction. Executive further agrees that his violation of any of the terms of
paragraph (a) of this Section 9 during the course of his employment with Company
shall be a cause for his termination without notice of any rights of Executive
under this Agreement. Such covenants shall be severable, and if the same be held
invalid by reason of length of time, area covered, or activity covered, or any
or all of them, shall be reduced to the extent necessary to cure such
invalidity.
10. PROPRIETARY INFORMATION. Unless otherwise expressly agreed by Company
in writing, any inventions, ideas, reports, discoveries, developments, designs,
improvements, inventions, formulas, processes, techniques, "know-how," data, and
other creative ideas concerning the manufacture, design, marketing or sale of
pay phones or relating to any other business in which the Company is engaged or
has plans to engage (all of the foregoing to be hereafter referred to as
"Proprietary Information"), whether or not patentable or registrable under
copyright or similar statutes, hereinafter generated by Executive either alone
or jointly with others in the course of his employment hereunder with Company
relating or useful to the manufacture, design, marketing or sale of pay phones
by the Company or any other business in which the Company is engaged or has
plans to engage, shall be the sole property of Company. Executive hereby assigns
to Company any rights which he may acquire or develop in such Proprietary
Information. Executive shall cooperate with Company in patenting or copyrighting
any such Proprietary Information, shall execute any documents tendered by
Company to evidence its ownership thereof, and shall cooperate with Company in
defending and enforcing its rights therein. Executive's obligations under this
Section 10 to assist Company in obtaining and enforcing patents, copyrights, and
other rights and protections relating to such Proprietary Information in any and
all countries shall continue beyond the termination of his employment. Company
agrees to compensate Executive at a reasonable rate for time actually spent by
Executive at Company's request on such assistance after termination of
Executive's employment with Company. If Company is unable, after reasonable
effort, to secure Executive's signature on any document or documents needed to
apply for or prosecute any patent, copyright, or right or protection relating to
such Proprietary Information, whether because of the Executive's physical or
mental incapacity or for any other reason whatsoever, Executive hereby
irrevocably designates and appoints Company and its duly authorized officers and
agents as Executive's agent and attorney-in-fact, to act for and on his behalf
to execute and file any such application or applications and to do all other
lawfully permitted acts to further the prosecution and issuance of patents,
copyrights, or similar protections thereon with the same legal force and effect
as if executed by Executive.
6
<PAGE>
11. INDEMNIFICATION. Executive shall be indemnified by the Company with
respect to claims made against him as a director, officer and/or employee of the
Company and as a director, officer and/or employee of any subsidiary of the
Company to the fullest extent permitted by the Company's certificate of
incorporation, by-laws and the General Corporation Law of the State of Delaware.
12. NOTICES. All notices and other communications required or permitted
hereunder shall be in writing (including facsimile, telegraphic, telex or cable
communication) and shall be deemed to have been duly given when delivered by
hand, faxed or mailed, certified or registered mail, return receipt requested
and postage prepaid:
If to the Company: Elcotel, Inc.
6428 Parkland Drive
Sarasota, FL 34243
Attn: Bill Thompson, Chief Financial Officer
Fax No.: 941-751-4716
If to the Executive: Michael J. Boyle
5316 Shoreline Circle
Lake Forest, FL 32771
Fax No.: 407-302-4171
13. APPLICABLE LAW. This Agreement was negotiated and entered into within
the State of Florida. All matters pertaining to this Agreement shall be governed
by the laws of the State of Florida applicable to contracts made and to be
performed wholly therein. Nothing in this Agreement shall be construed to
require the commission of any act contrary to law, and wherever there is any
conflict between any provision of this Agreement and any material present or
future statute, law, governmental regulation or ordinance as a result of which
the parties have no legal right to contract or perform, the latter shall
prevail, but in such event the provision(s) of this Agreement affected shall be
curtailed and limited only to the extent necessary to bring it or them within
the legal requirements.
14. ENTIRE AGREEMENT; MODIFICATION; CONSENTS AND WAIVERS. This Agreement
contains the entire agreement of the parties with respect to the subject matter
hereof and supersedes any and all prior agreements or understandings, written or
oral, between the parties with respect to the subject matter hereof. No
interpretation, change, termination or waiver of or extension of time for
performance under any provision of this Agreement shall be binding upon any
party unless in writing and signed by the party intended to be bound thereby.
Except as otherwise provided in this Agreement, no waiver of or other failure to
exercise any right under or default or extension of time for performance under
any provision or this Agreement shall affect the right of any party to exercise
any subsequent right under or otherwise enforce said provision or any other
provision hereof or to exercise any right or remedy in the event of any other
default, whether or not similar.
7
<PAGE>
15. SEVERABILITY. The parties acknowledge that, in their view, the terms of
this Agreement are fair and reasonable as of the date signed by them, including
as to the scope and duration of post-termination activities. Accordingly, if any
one or more of the provisions contained in this Agreement shall for any reason,
whether by application of existing law or law which may develop after the date
of this Agreement, be determined by an arbitrator or court of competent
jurisdiction to be excessively broad as to scope of activity, duration or
territory, or otherwise unenforceable, the parties hereby jointly request such
court to construe any such provision by limiting or reducing it so as to be
enforceable to the maximum extent in favor of the Company compatible with
then-applicable law. If any one or more of the terms, provisions, covenants or
restrictions of this Agreement shall nonetheless be determined by an arbitrator
or court of competent jurisdiction to be invalid, void or unenforceable, then
the remainder of the terms, provisions, covenants and restrictions of this
Agreement shall remain in full force and effect and shall in no way be affected,
impaired or invalidated.
16. ASSIGNMENT. The Company may, at its election, assign this Agreement or
any of its rights hereunder. This Agreement may not be assigned by the
Executive.
17. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original but all of which together shall constitute one
and the same instrument.
18. ARBITRATION. The parties agree to submit any controversy, claim or
dispute of whatever nature arising between them, including without limitation,
those arising out of or relating to this Agreement or the construction,
interpretation, performance, breach, termination, enforceability or validity of
this Agreement or the arbitration provisions contained in this Agreement, for
determination solely by binding arbitration, in Tampa, Florida by one arbitrator
in accordance with the Commercial Arbitration Rules of the American Arbitration
Association. The arbitrator shall base his or her award or decision on
applicable law and judicial precedent, shall include in such award or decision
the findings of fact and conclusions of law upon which the award or decision is
based and shall not grant any relief or remedy that a court could not grant
under applicable law. The parties agree to be conclusively bound by the award or
decision of such arbitrator. Judgment on the award or decision rendered by the
arbitrator may be entered in any court having jurisdiction thereof. Employee and
the Company each hereby waive any and all rights to request or receive punitive
damages in connection with any action or proceeding related to the subject
matter of this Agreement. Employee and the Company each hereby waive all right
to trial by jury in any action or proceeding to enforce or defend any rights
under this Agreement.
19. SURVIVAL. The provisions of Sections 8 through 18 of this Agreement
shall survive any expiration or termination of this Agreement.
8
<PAGE>
IN WITNESS WHEREOF, that parties hereto have executed this Employment
Agreement as of the date first above written.
ELCOTEL, INC.
BY: /S/ C. SHELTON JAMES
--------------------
Name: C. Shelton James
Title: Chairman
MICHAEL J. BOYLE
/S/ MICHAEL J. BOYLE
--------------------
MICHAEL J. BOYLE
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS IN THE COMPANY'S FORM 10-Q FOR THE SIX
MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS. AMOUNTS IN THOUSANDS EXCEPT PER
SHARE DATA.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> SEP-30-1999
<CASH> 26
<SECURITIES> 0
<RECEIVABLES> 12,782
<ALLOWANCES> 2,010
<INVENTORY> 11,029
<CURRENT-ASSETS> 26,342
<PP&E> 10,494
<DEPRECIATION> 4,940
<TOTAL-ASSETS> 69,193
<CURRENT-LIABILITIES> 20,795
<BONDS> 64
0
0
<COMMON> 136
<OTHER-SE> 48,198
<TOTAL-LIABILITY-AND-EQUITY> 69,193
<SALES> 19,300
<TOTAL-REVENUES> 26,209
<CGS> 14,050
<TOTAL-COSTS> 19,574
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 314
<INTEREST-EXPENSE> 277
<INCOME-PRETAX> (2,938)
<INCOME-TAX> (1,015)
<INCOME-CONTINUING> (1,923)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,923)
<EPS-BASIC> (.14)
<EPS-DILUTED> (.14)
</TABLE>
